Reference no: EM133281948

Case: Tom owns 250 hectares of undeveloped land near a small country town on the Central Coast of NSW that she thinks might be suitable site for an amusement park. She forms a company with her friend Lorelle called House of Horror Pty Ltd ('HH Pty Ltd'), with each of them as directors. The company has no formal constitution. They invite Tom's husband Benny to become a director also Tom owns 50% of the voting shares, Lorelle owns 30% of the voting shares and Benny owns 20% of the voting shares in HH Pty Ltd. Tom transfers 200 hectares of his land to HH Pty Ltd as consideration for his shares, based on a fair market value of that land as assessed by an independent land valuer. Lorelle contributes $1.5m and Benny contributes $1m as consideration for their shares.

Tom contacts an old friend, Diana, to design the amusement park for them. Diana's company, Wowser Pty Ltd ('Wowser'), undertakes considerable engineering and architectural design work in coming up with a blueprint for a premium quality amusement park on the property owned by HH Pty Ltd. Wowser's confidential report to HH Pty Ltd notes in a footnote that the amusement park would be likely to be considerably more profitable if there was a hotel or resort nearby. Tom tells Diana that he hadn't really considered that possibility and thanks her for the idea.

Tom then contacts his friend Kim to see if she would be interested in working with her to develop a hotel on the 50 hectares she still owns. She mentions the plan to Benny on the phone when they next speak (he is in the US checking out another competitor amusement park), and he says 'that sounds like a great idea. The hotel will draw weekend groups and corporate events to the park. It is a pity that we cannot afford to do it, but I guess with Kim's money and expertise this plan could really work. Sorry, got to go now, the mega rollercoaster waits for no man.'

Tom and Kim form a company, Five K Pty Ltd ('Five K'), with them each as directors and as equal shareholders. There are no other shareholders but Diana agrees to act as Chair of the company for a director's fee of $75,000 per annum. The company has no formal constitution but Tom and Kim each sign a document in which they undertake that they will not sell their shares to anyone else without the first gaining the consent of the other. Tom transfers the 50 hectares of land to Five K (again at fair market value) as consideration for his shares and Kim contributes $2m as consideration for her shares. They borrow $40m from the Lake Macquarie Banking Corporation ('LMBC') to help finance the development but in order to get this Tom has to personally provide to LMBC a guarantee for $5m of the loan secured against his shares in HH Pty Ltd.

Tom formally notifies Benny and Lorelle that he is a director and 50% shareholder of Five K Pty Ltd. He mentions in passing to Kim that she is a director and 50% shareholder of HH Pty Ltd.

Question 1: Building of the amusement park is about to commence and Wowser Pty Ltd has not been paid for its services. Lorelle and Benny are now privately of the view that the multi-million dollar fee claimed by WOWSER Pty Ltd is much too high. They want to argue that the contract claimed by WOWSER Pty Ltd is unenforceable. The letter from Tom that WOWSER Pty Ltd claims imposes contractual obligations on HH Pty Ltd is on HH Pty Ltd letterhead and is signed by Tom, with the title Managing Director appearing below his printed name. There is no corporate seal on the letter, nor any other documentation. Diana and her lawyer attest that in a meeting when the letter was exchanged Benny said nothing when Tom handed over the letter and said 'Here this covers everything. This is really exciting, let's get cracking with getting this thing designed and built.' Benny does not contest this recollection.
Advise Diana.

Question 2: After another year, the success of Five K Pty Ltd is so great that Tom decides to invest some of the profits in developing a helicopter charter business to take hotel guests and other tourists on sightseeing flights. The new business will be a separate division of Five K Pty Ltd. Diana agrees in an email to Tom that this is a good idea, even though it will result in a reduction in the level of dividends that Five K Pty Ltd will generate for the next few years as the helicopter charter business is built up. Kim is incensed. She relies on the dividends from Five K Pty Ltd to fund her very active social life, which she can see being severely restricted if the dividends are not available. She appeals to Diana, but she refuses to see her until the next board meeting, scheduled for 5 months away. Kim sends a letter to Tom in which she says 'This is not what I invested my money for, this is supposed to be a hotel development. You know that I hate helicopters and that I need the dividends to fund my philanthropic activities. You guys are ganging up on me because you resent my public profile and I don't like it.'

Advise Kim on the rights she may have under the Corporations Act, the remedies she might seek and on her chances of success in respect of them.