Part B: Corporations Law Question

i. Read the two alternative Contracts Law questions below and choose one question to answer.

ii. answer your chosen question using the IRAC method.

iii. Your answer must be supported by relevant law and cases decided by Australian courts (preferably the High Court) and/or scholarly articles. A minimum of 3 references are required for this part of the report.

iv. Your references must be listed in a Reference list at the end of the Part B question.

Part B: Corporations Law questions 

Option 2

Joytronics Pty Ltd (Joytronics) operates a retail store where it sells electronics kits, components, semiconductors, enclosures, batteries & chargers, power supplies, test equipment, tools, speakers, and car audio and stereo equipment and accessories.

Felix, Gregg and Mercedes are the only shareholders and directors. Felix reports every day to Joytronics’ main store in Sydney’s CBD and manages the company’s daily operations. Mercedes is a non-executive director and she has no active hand in managing or operating Joytronics. Gregg, who dropped out of school at a young age and did not compete his high school certificate, but who is very knowledgeable about Joytronics’ particular product range, is in charge of the company’s warehouse.

Since Joytronics opened its Sydney store seven years ago until the end of 2018, the store has done very well and consistently earned profits. Unfortunately, a rival business, Primepoint Car and Audio, opened a store down the street from Joytronics’ store. In the last six months, Joytronics’ business suffered and the store has not been as profitable as before.

Felix believes that Joytronics should move to larger store but in a different area in Sydney. Acting alone and without asking either Gregg or Mercedes, he scouts around for a new warehouse store. The first warehouse that he inspects in Parramatta greatly impresses him and he decides that that is where the story should relocate. The selling price of the warehouse though is a bit steep and is above Joytronics’ budget. Felix does not think this is an issue – after all, if it opens in that area of Parramatta, Joytronics would be the only store of its kind in the area and it will have a captured market.

Felix calls a board meeting and announces to Gregg and Mercedes that relocating from Sydney to Parramatta is the right move for the company, that this is the answer to all of the company’s problems, and that the warehouse premises he found is ideal for their needs.

Felix further tells Greg and Mercedes: “But we can’t delay because another company wants to buy this warehouse!” What Felix doesn’t tell his co-directors is that this warehouse is the only property he inspected. But Gregg and Mercedes are so caught up in Felix’s excitement that they agree to his proposal. In reality, Mercedes was unsure about moving the store in the first place and she feels that they need sufficient time to look at their other options. On the other hand, Gregg, who is ignorant about financial matters, agrees with Felix’s recommendation.

Joytronics then proceeds to buy the warehouse and sets up its business therein, opening its new Parramatta store after three months. Unfortunately, due to several factors outside the company’s control, the store does not do very well and is not profitable. Mercedes and Gregg are stressed out about their obligations as directors of Joytronics if the company’s financial situation grows steadily worse. Mercedes and Gregg come to you for legal advice.

(a) Explain to Mercedes the following:

(i) What is her legal position with regard to breaches (if any) of her general law or statutory duty of care and diligence as a director?

(ii) Was her decision to agree to the purchase of the new premises protected by s 180 (2) of the Corporations Act 2001 (Cth)?

(iii) Is she liable for breaching s 588G of the Corporations Act 2001 (Cth) if Joytronics becomes insolvent.

(b) Explain to Gregg his position in respect of any breaches of his duty of care and any possible liability for insolvent trading if Joytronics becomes insolvent.