Is abc bound under the loan contract

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Reference no: EM13229904

Question 1.

ABC Pty Ltd operates three children's clothing stores in Victoria. On 8th August 2009 Sammy was appointed to the position of Managing Director for a period of two years. ASIC was notified of her appointment. At the end of the two year period she was not formally reappointed but she continued to act as Managing Director. Under the terms of her original appointment she was not to commit the company to borrowing more than $20,000. Any transactions greater than that required the approval of the board of directors. On 30th September 2011 Sammy purportedly acting on behalf of ABC signed a loan contract with Elderado Bank for the company to be lent $30,000. This was not referred to the board. The bank was not aware of the contents of Sammy's contract nor the advice of Sammy's original appointment to ASIC in 2009. The Board has refused to accept liability on the loan and the bank has commenced recovery proceedings. Is ABC bound under the loan contract?

Question 2

Plant Well Pty Ltd ("Plant Well") operates a nursery growing and selling garden plants. Charlie, Delta and Eric are the only directors and shareholders of Plant Well. Charlie manages the day-to-day operations of the company.  Delta, whose formal education finished at the age of 14, is in charge of the nursery.  Eric is a non-executive director and does not take an active part in the management operations of the company.

Recently a competing business opened near the nursery and, as a result, Plant Well's profits have dropped.  Charlie thinks that Plant Well should move to larger premises in a different area.  Without consulting either Delta or Eric, Charlie starts looking for new premises. He decides the first place he inspects is perfect, although the price is more than Plant Well can comfortably afford. Charlie does not think this will be a problem because there is no competition nearby and he expects that profits will recover immediately. 

Charlie calls a Board meeting and tells Delta and Eric that moving will solve all the company's problems and that the property he has seen is perfect for Plant Well.  He does not tell them that he has only looked at this one property.  He tells them that they will have to act quickly as there is another interested buyer.  He is so enthusiastic that both Delta and Eric agree to the proposal even though Eric has some doubts, feeling that they are being rushed into making a decision without being given time to consider other alternatives.  Delta agrees to the proposal without really understanding the financial implications.

Plant Well purchases the new premises and moves into them, but because of continuing dry weather, its profits remain low. Eric is becoming worried about his obligations as a director, especially if Plant Well's financial position deteriorates any further.

(a) Now advise  Eric about any possible liability he may have for insolvent trading under s 588G if Plant Well becomes insolvent.

(b) Advise Delta as to her position in respect of:

i. any breaches of her duty of care; and

ii. any possible liability for insolvent trading under s 588G if Plant Well becomes insolvent.

Reference no: EM13229904

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