Reference no: EM131013579 , Length: 2200 Words

You just need to do assignment also please follow the instructions given below.

Andrew, Samira and Boris are the only directors and only employees of Perfect Holidays Limited (PHL). Andrew is managing director, Boris is chief financial officer and Samira is responsible for marketing. They each own 5% of the shares in PHL and the remaining 85% are owned by Young & Super Limited (YSL), a superannuation fund. Each share entitles the holder to one vote in general meeting. PHL has never issued dividends and since 2010 PHL has had no success in its efforts to raise further funds by selling additional shares.

PHL's only business involves running a large tourist park beside a beach on the Central Coast of NSW. PHL's only assets are the land on which the tourist park is located, the buildings located on that land and the goodwill in the business. PHL generates revenue by hiring out cabins and camp sites in the park, mainly to families who stay at the park during their holidays.

PHL has a constitution that only contains three terms: first, it states that Andrew, Samira and Boris can remain directors for as long as they choose; second, it states that new directors can only be appointed to the board with the unanimous agreement of the current directors; third, it states that, in addition to any requirements in the Corporations Act 2001 (Cth), the company's constitution can only be changed if all of the current directors agree to the change.

In January 2010 PHL paid $2 million to purchase the tourist park business, buildings and the land on which the park is located. Also in January 2010, PHL borrowed $1.6 million from East Bloc Bank (EBB) at market interest rates. The loan was secured by a mortgage over the land.

Up to (and including) August 2015, PHL made regular $5,000 monthly repayments to EBB in accordance with the loan agreement. In August 2015 there was a sudden drop in property values in the area and the value of the land and buildings in the tourist park fell to $1 million. This made the manager of the local branch of the EBB nervous and he then approached Andrew and demanded that PHL increase the regular monthly repayments to $30,000 per month.

Andrew wanted to maintain a good relationship with the bank in case PHL needed further credit in future. He asked Boris whether PHL could afford to pay $30,000 per month in loan repayments and Boris assured him that PHL could do so easily. Boris was lazy, did not know anything about accounting and had not kept proper financial records for PHL since the time PHL was formed. When the company was formed Boris pretended he had accounting qualifications and Andrew and Samira believed him without asking to see evidence of his qualifications. From the beginning, Andrew has given Boris all of the responsibility for monitoring the financial health of PHL and Andrew has trusted Boris' financial accounts completely.

Based on Boris' advice, on 31 August 2015 Andrew signed (on behalf of PHL) a deed that varied the loan agreement with EBB, such that the monthly repayments increased from $5,000 per month to $30,000 per month. The bank did not lend PHL any additional funds in exchange for PHL's agreement to pay the funds back more quickly and the bank did not make any promises to PHL to extend further credit in future.

When Samira learned Andrew had signed these agreements, she became very worried. On 2 September 2015 she told Andrew and Boris that, given her knowledge of PHL's projected occupancy rates, she could not see how PHL could make the increased repayments to EBB and stay solvent. Samira reminded the other two directors that, apart from EBB, no financial institution had been willing to lend money to PHL in the past.

Andrew told Samira she was worrying too much. Andrew had substantial personal wealth and he told Boris and Samira he was happy to make unsecured interest-free loans to PHL to cover any short-term cash-flow issues. Andrew also told them that on the previous day (1 September 2015) he had signed a contract on behalf of PHL with Tony, a local builder and entrepreneur, to design and build a major new attraction for the park: a giant waterslide that ended in the ocean. Andrew predicted this new attraction would dramatically increase occupancy rates and improve income over the summer. Boris and Samira were pleased Tony had agreed to design and build the waterslide for a very moderate price but they were worried about the wisdom of paying someone with relatively little experience to design and build the slide.

In October and November 2015 Andrew made two interest free loans to PHL, and PHL was able to use this money to pay almost all of the debts which fell due during those months, including the debt repayments to EBB and periodic payments to Tony.

Tony designed and built the water slide in record time and it was completed by 30th November 2015. Unfortunately on 1 December 2015 the water slide was destroyed by strong waves during a major storm. On the following day Andrew notified Boris and Samira that ‘in light of recent events' he was not willing to lend any more money to PHL.

By this time, YSL has lost faith in Andrew and Boris as Directors. YSL believes PHL has the potential to be very profitable and YSL would be willing to buy considerably more shares in PHL if PHL was properly managed. YSL has a good relationship with Samira and knows that Samira is also tired of working with Andrew and Boris and would like to work with more competent fellow directors.

On 3 December 2015 YSL comes to see you for advice and asks:

1. Would it be possible for YSL to use the voting power attached to its shares in PHL (and/or its cooperative relationship with Samira) to achieve two things: first, to remove Andrew and Boris from the board of directors and second, to replace Andrew and Boris with other directors?

2. If Andrew and Boris were removed from the board, would PHL be likely to succeed if it took legal action against Andrew for breaching section 180 of the Corporations Act? If successful in such legal action, what remedy would PHL likely receive?

3. If Andrew and Boris were removed from the board, would PHL be likely to succeed if it took legal action against Andrew for breaching his statutory duty to prevent insolvent trading?

Please provide YSL with advice in relation to the above questions.

Note: YSL has already been advised that both the original loan agreement between PHL and EBB and the deed varying that loan agreement are both legally binding contracts between PHL and EBB. YSL has also already been advised that the contract between PHL and Tony and the loan agreements between Andrew and PHL are also legally binding on PHL.

PHL has also already received advice regarding whether Andrew has breached a number of other directors' duties, including the duty to act in good faith and in the best interests of the corporation; the duty to act for a proper purpose; the duty to avoid conflicts of interest; and the duty not to misuse position or information.

YHL has also received advice about the pros and cons of having PHL wound up as a company. Given that YSL has already obtained advice in relation to the matters described in this ‘Note', please do not provide any advice in relation to those matters in your assignment (you will receive no marks for it if you do). You should instead focus on answering the questions listed in 1, 2 and 3 above.