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Problem Assignment 77947 COSEC 2021 Spring
Requirement:
You are expected to research a specified topic, reading and interpreting case and statute law,
analyzing the effect and operations of these laws on companies and their stakeholders. You are also
expected to report on corporate legal issues using a Report format (refer to Podcast which discusses
what this means).
Objectives: This task addresses subject learning objectives 1, 2 and 4.
This task contributes to the development of the graduate attributes 1.0, 2.0 and 3.0.
Weight: 20%
Length 2,250 words
Submission:
The assignment of 2250 words is due as stated in the subject outline.
It must be submitted through Turnitin.
Question
Consider the following facts:
Wayne Enterprises Pty Ltd (WEPL) is a company incorporated in 2000. It is the holding company of
a large industrial group with a significant number of entities, in such diverse fields as property
investment, manufacturing, chemicals and security. The subsidiaries range from wholly owned
subsidiaries to joint venture entities with different partners. One particular subsidiary is called
Toole & Sons Pty Ltd (“T&S”), which operates a chain of high-end grocery stores. WEPL owns 52%
of T&S, having invested into the business when Patrick Toole, the founder, needed more capital to
expand. The current CEO of T&S is Thomas Toole, the son of Patrick, who inherited the remaining
48% when his father passed away.
WEPL has three main shareholders, Edward, Bruce and the Wayne Foundation. The Wayne
Foundation is a charitable trust that has a number of philanthropic programs. Edward and Bruce
each own 35 voting shares in WEPL (amount to 35% of the shareholding each), while the Wayne
Foundation owns 30 voting shares (amounting to 30% of the shareholding). WEPL has 5 directors:
Alfred (the chair and also the former adviser to Bruce’s parents when they were alive), Lucius (the
managing director and also the chair of the Wayne Foundation), Selina (the finance director and
Bruce’s wife), James and Leslie. Bruce is keenly involved in the business of WEPL, regularly attends
board meetings, and Selina and Lucius look to him for guidance.
The company’s head office is in a huge office building (called the Wayne Tower) in Sydney. All its
directors and shareholders live in Sydney, except for Edward, who lives in Melbourne.
WEPL follows the replaceable rules, with one exception. There is a clause that states that WEPL
cannot enter into any transaction or loan, or guarantee any loan, where the value of the
transaction, loan or guarantee amount is in excess of $10,000,000 without the approval of the
general meeting. As a general rule, Bruce and the Wayne Foundation vote in favour of any
transaction in excess of this amount, so the clause has been frequently ignored in recent times.
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Formally, T&S’s directors are the same as WEPL’s but with the addition of Thomas. However, it
does not appear to hold board meetings: Thomas and Lucius decide on all matters in relation to
T&S and the board invariably consents to any decisions at board meetings of WEPL. This is because,
when WEPL has invested into T&S, Bruce had agreed with Patrick Toole (as mentioned above, the
original founder of T&S, now deceased) that T&S would be “an equal partnership” between WEPL
and the Toole family. That being said, on paper, T&S is heavily integrated into WEPL: its employees
are formally employed by Batcave Enterprises Pty Ltd, the employment company of the WEPL
group, while all money earned by T&S is deposited into the bank account of WEPL, and all expenses
are paid out of this bank account. At the end of every month, there is a “true up” where accounts
are determined and the difference between cash deposits and cash expenses are charged as debits
or credits to the intercompany loan account between WEPL and T&S—this account is currently in
credit, meaning that T&S owes WEPL $588,811.
T&S does not pay any dividends. Accounts are prepared on a monthly basis and, if any profit is
showing, then 50% is paid to Thomas as a salary, while 50% is paid to WEPL as a management fee.
Therefore, at the end of every month, T&S would have a nil profit. It has only ever run a loss once
in its 11-year history, when Patrick was running the company, and neither Patrick drew a salary nor
WEPL charged any management fee until the loss was recouped.
Thomas wants to expand the business of T&S by opening up a series of convenience stores, which
move away from the gourmet roots of T&S. Therefore, to this end, he approaches Lucius and asks
that T&S borrow $15,000,000 from WEPL. Lucius instructs Selina to approach the bankers of WEPL,
the Gotham City Bank (“GCB”), in order to obtain the loan. GCB is willing to loan the funds to WEPL,
but not to T&S. Selina speaks with Bruce, who agrees that the loan will be taken out with the
borrowers being WEPL and T&S; that is, both are jointly and severally liable for the loan. Thomas,
Selina and Bruce attend the meeting and sign the loan documentation and the guarantees. When
the loan officer, Harley, queries Selina as to whether this was approved by the board and/or the
general meeting, Selina says that it is, and points to the fact that Bruce, with Wayne Foundation,
are the major shareholders. Harley makes no further inquiries, although she is a little suspicious.
She pushes through the loan as it is nearing month end and she needs her bonus to be paid in order
to put a deposit down on a new apartment. The loan includes a provision that any amount owing
will be a charge that can be registered under the Personal Property Securities Act 2009.
Alfred receives a notification of the registration of the charge and questions Selina and Lucius about
it. Lucius was not aware that WEPL would be the borrower and tells Alfred as much. Therefore,
Alfred calls a board meeting, giving 3 days’ notice, calling all directors to discuss the arrangement.
All directors attend via video-link. Alfred controls the meeting and who can speak, and he regularly
cuts off anyone who is speaking too much. After 30 minutes, he cuts off the video link to Selina. He
votes to reject the loan and this vote is carried, with James and Leslie voting with Alfred.
At the insistence of Bruce, Lucius calls a general meeting to provide approval of the loan documents:
he hands a notice to Bruce and mails a notice to Edward, formally calling the meeting 21 days after
the date the notice is mailed. The notice provides a full summary of the guarantee amounts. The
meeting is held in Bruce’s home, the Wayne Manor. Only Lucius (as the representative of Wayne
Foundation) and Bruce attend, as Edward is stuck in Melbourne. No provision is made for Edward
to attend via video link. Additionally, none of the directors (other than Lucius) are told of the
meeting.
The funds are drawn down by T&S (as a co-borrower) and used to fund the construction of new
supermarkets. However, the building contractor, Joker Enterprises, embezzles most of the money
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taken and no supermarkets are built. T&S is left with a significant debt and no assets to show for
it. Reluctantly, Thomas and Lucius appoint a voluntary administrator. The GCB wants to call in its
loan, and letters are sent to WEPL, as the joint borrower under the facility. WEPL claim that the
loan was not entered into correctly and, therefore, it was not liable for any repayments.
Your client is Bruce, who approaches you for assistance on relieving WEPL from this debt. You need
to advise Bruce on whether, and to what extent, WEPL will be held liable for the liabilities to GCB,
either directly or as an investor in T&S, either under the loan contract or otherwise.
Guidance
Students need to consider a range of topics. This question is focused on the topics in Weeks 1 to 6.
Therefore, students should consider any issue that could arise in any of the topics covered in these
Weeks.