Question

Question 2 ( 25 marks) Phil is managing director of LightsBright Pty Ltd. Phil has accepted a large order for electrical fittings from CheepCheep Pty Ltd on behalf of LightsBright. The order has been delivered to CheepCheep as per the agreed terms, however CheepCheep have not paid their $75 000 invoice. CheepCheep is in serious financial difficulty and this was well known or suspected across the industry. Consequently, at the time the order was made, CheepCheep was known generally as a bad credit risk in the industry. Phil was aware of this, however he is a good friend of Robert, the managing director of CheepCheep. Phil decided to provide the order in any event. CheepCheep has now been placed into liquidation and has still not paid the debt owed to LightsBright Pty Ltd. Required Using the IRAC legal problem solving process give your conclusion on whether: (a) Phil, the managing director of LightsBright Pty Ltd be held personally liable for the unpaid debt, and if so why? ( 15 marks) (b) Could Robert, the managing director of CheepCheep Pty Ltd be held personally liable for the unpaid debt, and if so why? ( 5 marks) (c) Will the ‘business judgment rule’ be relevant to either Phil or Robert in these circumstances? (5 marks) According to Australian law

Answer 1

• First you need to understand the statement quoted in the question, there are two characters. Phil, managing Director of Lights Bright and Robert, managing director of CheepCheep.
• Secondly, you need to understand the meaning of IRAC, what does this abbreviation stands for. IRAC basically stands for: Issue, Rule, Application/Analysis, Conclusion. This is a legal concept and used mostly by lawyers to solve complex cases.

1. ISSUE : In the IRAC legal problem, Issue arises when some legal ambiguity are presented against the facts. Because of many complexities in the legal system, changes in some fact can have a big impact on the Issue raised. The Issue raised by every lawyer can be different based on same facts, because every one has a different mind set to think on legal system and facts presented. It totally depends upon you that how fast can you raise any issue after reading facts.
2. RULE : It is something how can the issue be resolved. Rule is something which we all follow. It could be common law that was passed by legislature. There are rules with the help of which issue can be raised. It helps in making correct decision with facts in hand.
3. Application/Analysis : It is basically why the issue is resolved like what part of the Rules solved our issues.The word Application makes it clear that we need to apply Rules and raise authentic Issues. This part of IRAC utilizes all the Rules mentioned in Rules Section and try to explain why a specific Rule applies to the Issue raised. This help in solving the Issue to the next level.
4. Conclusion : It is the final decision made by the facts and matter of law to be decided by the judge. It tells that specific rules applied to the issue raised did really worked or not. There could be possibility of arriving at wrong conclusion : (A) Raising wrong issues. (B) Raising right issues but applies wrong rules.

All four components of IRAC legal problem are inter related. One is linked to other in many ways. For arriving at a Right conclusion in shortest time possible, lawyer needs to think very intelligently in short span of time.

Now coming down to the questions asked:

First you need to understand there is no details given of contracts signed between two parties. We need to take some hypothetical cases here.

Issue: There is an issue of payment not being paid of $75000 to Lights Bright by CheepCheep, because CheepCheep was suffering from some financial instability from some time.

Rule : The rule says that CheepCheep is liable to pay the total amount to Lights Bright if they have received the total order they gave. They need to pay the total amount in the given duration, described in the contract terms. There could be certain conditions as per contract terms (try to think as many as possible).

Application/Analysis : Lights Bright can file a case against CheepCheep for not paying its due amount. If the issue raised are legally right, government/legislation will help you in getting your money back.

Now everything is clear to you, try giving conclusions to the statements asked above,

(a) Phil, the managing director of Lights Bright Pty Ltd be held personally liable for the unpaid debt, if in any case he is not able to recover $75000 from CheepCheep in specific time period provided by company, because he knew the financial condition of CheepCheep and it is bad credit risk in market too, he gave the order on behalf of his friendship. He is Managing Director there, not the owner. If the loss occur to the company, owner have to bear the loss.

(b) Robert, the managing director of CheepCheep Pty Ltd be held personally liable for the unpaid debt because if he knew that he cannot repay the order amount now, there is no point ordering the products. It could be a step by Robert to take advantage of his friendship intentionally by ordering products and not paying for it because it already have the status of bad credit risk in market.

(c) The business judgement rule requires the directors, company officers and seniors serving their company with due diligence and care. There are certain pre-requisite to rely on this rule. These are:- Serving Company for a good purpose, there is nothing to be done for some personnel profit, the decision they make is in interest of the entire corporation. Here we can see no one of the both are relevant to this rule because they did not cleared the pre-requisite. Phil was completing the order which was not in favor of his corporation and Robert was not serving the company for a good purpose.