Law case study 2000 words

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LAW205 Commercial and Corporate Law for Accountants Semester 1, 2016

Assignment 2 – Case Study (Problem Solving Task)

The due date for submission of this assignment is midday, Monday, 16 May 2016. Assignments must be submitted online via Learnline. No other form of submission, including email, will be accepted. The word limit is 2,000 words (10% margin allowed, under or over).

Lexicon Pty Ltd Lexicon Pty Ltd ("LX") is a large proprietary company, which operates a building and construction business across Queensland and Northern Territory ("NT"). The company

manufactures and installs a patented modular construction system, which allows building

residential houses and small commercial buildings faster, more economical, energy efficient and

environmentally friendly than any competitor in Queensland and NT. The buildings by LX are

well insulated against cold and heat, as well as cyclone and termite proof. All that is needed to

construct a LX building is a flat piece of land; there is even an "outback solar kit" with

photovoltaic panels and battery storage that allows running a normal four-person household with

all modern comforts without being connected to the main electricity grid.

LX has a board comprising three directors: Grant "Big Boss" Jackson is the company founder, his

son Bob Jackson, who is in charge of manufacturing, and Gerard Stone, a qualified accountant

and family friend. Gerard also acts as company secretary. Olivia Jackson, Grant's daughter, is not

a formally appointed director, but as office manager and head of administration she regularly

attends board meetings.

In the last 12 month business for LX was good, and in the wake of the Paris climate agreement

concluded in December 2015, the LX board sees a vast growth potential for energy efficient,

affordable housing in other remote parts of Australia, in particular in South Australia and Western

Australia.

To expand their operations into other Australian states, the company would need to increase its

manufacturing capacity as well as growing its work force predominantly for selling and installing

the buildings. To do this LX would have to borrow a large amount of money (AUD 3-4 million).

However, at a board meeting in mid-December 2015 the board decided (2-1) not to proceed with

the expansion at that time, and to reconsider the matter mid-next year. Bob and Olivia were both

keen to seize the moment and were rather unhappy about this decision to delay the expansion

plans.

Olivia took the business plan for the expansion to a bank manager in Brisbane to find out whether

a bank would be prepared to provide a loan. The bank manager was impressed with the business

plan and told Olivia that he would be prepared to recommend a loan to LX to support the

expansion. Excited, Olivia managed to convince Bob to join her in co-signing on behalf of LX a

loan agreement and a mortgage contract over LX's factory in Darwin to secure the loan of AUD 4

million on 21 December 2015.

Without the knowledge of the other two directors, Bob and Olivia then used the loaned funds to

set up new LX offices in Port Augusta, Whyalla, Port Hedland, Geraldton and Esperance and to

hire multiple sales staff for each office. Unfortunately, just three months later most of the

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borrowed money had been spent, but the new offices had hardly sold a house and been total

failures.

After failing to make the March and April 2016 repayments on the loan when it fell due, Bob

finally told Grant and Gerard what had happened. On 2 May 2016, the bank sent a formal letter to

LX’s registered office in Darwin seeking total repayment of the loan which was in default (the

bank was contractually entitled to "call" the entire loan when repayments were not paid when they

fell due), and indicating that the bank will repossess the factory if the loan is not repaid within two

weeks.

The two directors who never approved of the expansion plans nor the loan have today (4 May

2016) co-signed a letter to the bank for and on behalf of LX, stating that LX is not liable to repay

the loan and that the mortgage contract is void because the company never approved of the

transactions.

(a) Is LX bound by the loan agreement and the mortgage contract signed by Olivia and Bob? (60% of marks)

(If more information would be required to provide a complete answer, state what that

information is and why it would be relevant.)

Grant Jackson holds 60% of LX's shares, while Bob Jackson, Olivia Jackson and Gerard Stone

each hold 5% of LX's shares. Various persons associated with the Jackson family hold the

remaining LX shares. Samantha Jackson (neé White), the first wife of Grant, but not the mother of

Bob and Olivia, owns 3% of the shares and is rather disgruntled when she learns about the loan,

the failed business expansion and the financial problems this all causes to LX. Fearing that the

value of her shares is about to evaporate, Samantha is determined to get some money back from

Grant and his children, who have amassed significant wealth over the last 30 years, while she –

apart from some dividend payments - has "missed out" after Grant had divorced her.

(b) Assuming LX was liable to repay the loan what, if anything, can Samantha do based on the Corporations Act 2001 (Cth) to get some more money from the Jackson family

and their family accountant? (40% of marks)

In your answers be sure to cite specific legislation and/or cases in support of your statements, propositions and contentions. There may not necessarily be one ‘right answer’ - references to legislation or cases which support your reasoning will make your answer more persuasive and will also demonstrate your knowledge, understanding and ability to apply legal principles and concepts.