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 1

Sparkling Pty Ltd (Sparkling) operates three children’s clothing shops in Tasmania. On 8 August 2007, Sarah was appointed to the position of Managing Director of Sparkling for a period of two years. A return was lodged with ASIC indicating her appointment as a director on that date. Sarah was not formally reappointed after 8 August 2009, but she has continued to act as Managing Director. No return was lodged following the expiration of her period of office. The terms of Sarah’s appointment, which were set out in a contract between her and Sparkling, included a restriction to the effect that she was not to commit the company to borrowing transactions in excess of $20,000. Any such transaction was to remain subject to the approval of the board of directors.

On 20 December 2010 Sarah, purportedly acting on behalf of Sparkling, signed a loan contract with Costello Bank, pursuant to which the Bank agreed to lend the company $30,000 in order to establish a eucalypt plantation. The transaction was not referred to the Board.

The Bank was not aware of either:

 the contents of Sarah’s contract; or

 the return lodged by Sparkling at the time of Sarah’s appointment.

The Board has since discovered the loan contract and has stopped all repayments on the loan. The Bank has called in the loan and is suing Sparkling for the principal together with all outstanding interest.

(a) What do you think the outcome of this case will be?

(b) What do you think the outcome of this case should be?

(c) Would the outcome of this case be different if:

(i) the loan was for refurbishment of two of Sparkling’ clothing shops; and

(ii) the bank’s loan officer knew Sarah had fallen out of favour with the Board and was negotiating a new job?