Reference no: EM13490772

Free Spirit Pty Ltd organises 'team building' professional development short courses in various locations around Australia. It specialises in weekend retreats that involve adventure activities that build team spirit. Many businesses pay $1,000 for each of their employees to attend a Free Spirit weekend retreat.

There are three directors of Free Spirit: Yana (Managing Director), Su (Financial Director) and William (a non-executive Director). When they started the company in February 2005 they sought advice from an accountant friend of theirs, who suggested that no director should have the capacity to bind the company to contracts worth more than $50,000.  This limitation was written into the company's Constitution.

Yana and Su control the business, and William, who is Yana's boyfriend, has little interest in the company and little knowledge about its affairs.

Each of the three directors hold 20% of the shares of the company, and there are several non-director shareholders.

Yana, Su and William regularly hold directors' board meetings. During a meeting in July 2011 the directors considered the following proposals:

• That the company should enter into a contract to purchase adventure equipment imported by Sporting Edge Pty Ltd, a company wholly owned and controlled by Yana and Su. Sporting Edge Pty Ltd is proposing to charge twice the price for adventure equipment compared with Free Spirit's current supplier.
• That the company should expand into Alaska. Yana and Su believe Alaska is a great market as there are no businesses offering team building professional development courses in Alaska yet. Neither Yana nor Su provide any financial forecasts or legal information about the proposed expansion into Alaska.

All three directors vote in favour of the above proposals. William is wary about both proposals, but a stern look across the board room from Yana silences him, and he votes in favour of the proposals.

William becomes unhappy because of his passive role in the business. William decides to show how useful he is to the company, and while Yana and Su are on a business trip to Alaska, he approaches Your Bank Ltd for a loan of $500,000 to finance Free Spirit's expansion into Alaska. William knows the bank staff because he has occasionally deposited Free Spirit's weekly takings into the company's account.

William signs a loan agreement with Your Bank Ltd, signing his name next to the words 'director of Free Spirit, for and on behalf of Free Spirit'. When the bank's accountant asked for another director to sign the agreement as well, William explained that this was not possible as both Yana and Su were unavailable, could not be contacted because they are in a remote location, and said 'financing the expansion into Alaska is urgent'. 

The bank's lending officer was reluctant to approve the loan as it was a large sum for Free Spirit but William convinced him it would be OK.

Unfortunately, the directors of Free Spirit soon find out that Alaska's government imposes heavy legal restrictions on companies operating adventure activities and Free Spirit cannot obtain the necessary government approvals to operate in Alaska. As a result, the proposed expansion into Alaska will not be able to proceed.

Because of this, and because Free Spirit is now paying to Sporting Edge Pty Ltd twice the price for adventure equipment, the company's financial situation deteriorates and it can no longer meet its repayment obligations to Your Bank. At a directors' meeting, it is decided that Free Spirit would argue that the loan contract to Your Bank was not valid as William had no authority to make it.

Part A

Task: Discuss whether any of the directors of Free Spirit Pty Ltd are in breach of any of their directors' duties.

Hints

• Consider each director separately.
• Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts.
• Identify and discuss at least two relevant cases.
• Consider whether there are any defences available to any of the directors.
  

Part B

Task:    Discuss whether Free Spirit Pty Ltd is bound to the loan contract with Your Bank Ltd.

Hints

• Discuss companies' relations with outsiders, do NOT discuss directors' duties in Part B
• Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts.
• Identify and discuss at least two relevant cases.