Question

Sam, Bruce, Wilson and Angelica run a chain of pizza restaurants as a partnership business in Melbourne. They set up a proprietary company which purchases the partnership business, and shares in the company are issued to Sam, Bruce, Wilson and Angelica. Sam receives 40% of the shares, Bruce receives 40% of the shares, Wilson receives 10% of the shares and Angelica receives 10% of the shares. Sam, Bruce, Wilson and Angelica are each appointed directors of the company. The company enters into a secured loan of $800,000 with a XYZ bank (the loan is secured using the company’s assets, namely three pizza restaurant locations which it owns) to buy new pizza ovens for and renovate its restaurants. Sam and Bruce have had many arguments with Wilson, because they want to control the direction of the business without Wilson’s input. Angelica’s sister owns a competing chain of pizza restaurants, and Sam and Bruce find out that Angelica is giving her sister information about the company (its secret pizza sauce recipe and expansion plans, which are frequently discussed at directors’ meetings). Also, Angelica takes no interest in the company (apart from attempting to get information to benefit her sister). Therefore, Sam and Bruce want to remove both Angelica and Wilson from the business. Sam and Bruce pass a special resolution to amend the company’s constitution so that shareholders who own 80% of the shares or more can compulsorily acquire the shares of minority shareholders. They engage an accounting firm to ensure that the holdings of the minority shareholders are independently valued, because they want to fairly compensate the minority shareholders. They then seek to buy out Wilson and Angelica, but Wilson and Angelica do not want to sell their shares in the company. Unfortunately for Sam and Bruce, shortly after they pass the special resolution to compulsorily acquire the minority shareholdings, there is an outbreak of a new respiratory virus called the H3-G5 virus and the government orders that all restaurants need to close down for two months. The company is now in extreme financial difficulties, and it cannot pay for its daily supply of stock and its staff’s wages. Question 2(c) [15 marks] The directors of the company want to know: • whether they can keep trading during this period and whether there are any consequences if they do continue to trade?

Answer 1

The directors of the company are responsible for representing and promoting the interests of the company. They have to follow a wide range of important duties, including to act in compliance with the company’s constitutional documents and in a way that promotes the success of the company for the benet of its members as well as its stakeholders. If a director of a company breaches his or her duties, they could face civil action and, in some cases, criminal sanction as well as they can be expelled from the partnership in some of the circumstances which is stated under law. Infringement of directors’ duties and resulting legal action can have signicant consequences for the director, company, shareholders and creditors.

In addition to the statutory duties, directors also have a responsibility to consider or act in the interests of the company’s creditors, especially when insolvency is possible, and to uphold the condentiality of the company’s affairs.

So in the above case the directors of the company Wilson and Angelica had performed against the interest of the partnership which is a major failure of duties by the directors and they cannot keep trading during this period.

Consequences if they do continue to trade:-

a)The power of expulsion must be stated in a contract between the partners.

b) Government can take legal actions on the firm

c) Government may impose heavy penalties on the firm

d) Reputation of the firm in the market will go down and thus leading to boycott by the market.