Michael, Scottie and Dennis are students who are keen to make some money in their spare time in order to kick-start their future.

QUESTION

Michael, Scottie and Dennis are students who are keen to make some money in their spare time in order to kick-start their future. Michael owns a small van, Scottie has a lawnmower and Dennis has a computer. They thought about starting a lawn mowing service business and decided to establish a company, Skippy Pty Ltd, to launch their dream business with everyone as equal shareholders and directors in the company.

Dennis prints flyers for the business and the three business partners dropped them in the local neighbourhood mailboxes and distributed at the train and bus stations. It did not take long for them to develop a stream of regular clients, and it suddenly became a lucrative business. Because of the increase in the demand, Scottie decides to purchase on a loan a state-of-the –art lawn mower for $100,000 from a company called RodMow. Scottie told RodMow that he was the Head of Operations as well as a director of Skippy Pty Ltd. Scottie did not inform nor consult Michael and Dennis about this purchase.

As the business continued to grow, Dennis then hatched a plan to develop a separate business with some of their existing clients and started channelling some of their income to his other business.

The company’s business suddenly slowed and their profits dried up. As a result, Skippy was unable to service its loan with RodMow for the lawn mower that Scottie ordered. RodMow are now demanding Skippy to pay for the lawn mower.

Answer the following questions with reference to specific provisions of the Corporations Act 2001 (Cth) and case law:

Advise Michael and Scottie if they can lodge a complaint against Dennis for breaches in the Corporations Act.

If the contract between RodMow and Scottie was signed just before they registered the company, are Dennis and Michael liable for the payment of lawn mower? Can RodMow rely on the fact that Scottie represented himself as the Director and Head of Operations in the company? Explain your answer

ANSWER

Breaches of the Corporations Act: Liability and Complaints in Skippy Pty Ltd

Introduction

In the scenario presented, Michael, Scottie, and Dennis established Skippy Pty Ltd as equal shareholders and directors in order to start a lawn mowing service business. However, issues have arisen within the company, including unauthorized purchases and diversion of income. This essay aims to provide advice to Michael and Scottie regarding potential breaches of the Corporations Act 2001 (Cth) by Dennis. Additionally, it will address the liability of Michael and Dennis for the payment of the lawn mower purchased by Scottie from RodMow.

Breach of the Corporations Act by Dennis

Duty of Care and Diligence: Directors of a company owe a duty of care and diligence to act in the best interests of the company. This duty requires directors to exercise their powers and discharge their duties with reasonable care and skill. If Dennis’s diversion of income to his other business harmed Skippy Pty Ltd’s profitability, he may be in breach of this duty.

Duty to Act in Good Faith: Directors are obligated to act in good faith in the best interests of the company and for a proper purpose. Dennis’s plan to develop a separate business using Skippy Pty Ltd’s clients and channeling income to that business may constitute a breach of this duty, as it diverts resources and opportunities away from Skippy Pty Ltd.

Related Party Transactions: The Corporations Act regulates transactions between a company and its directors or their related entities. If Dennis directed Skippy Pty Ltd’s income towards his other business without proper disclosure and approval, it may be considered a related party transaction in breach of the Act. Directors are required to act in the company’s best interests and avoid conflicts of interest.

Based on the above provisions, Michael and Scottie can potentially lodge a complaint against Dennis for breaches of the Corporations Act. They may consider seeking legal advice and exploring options such as initiating legal proceedings or applying for derivative action on behalf of the company.

Liability for the Payment of the Lawn Mower

Pre-registration Contracts: Section 131 of the Corporations Act deals with the liability of a company for pre-registration contracts. According to this provision, a company is not bound by a pre-registration contract unless it adopts the contract after its registration. As the contract between RodMow and Scottie was signed just before the company’s registration, the liability for the payment of the lawn mower does not automatically extend to Michael and Dennis.

Representations by Scottie: RodMow may seek to rely on the fact that Scottie represented himself as the Director and Head of Operations of Skippy Pty Ltd. However, the representation alone may not be sufficient to hold Michael and Dennis liable for the contract. Liability would typically be limited to the person who entered into the contract, which, in this case, is Scottie. RodMow should have exercised due diligence and verified the authority of Scottie to bind the company.

Conclusion

In conclusion, Dennis may be in breach of the Corporations Act for diverting Skippy Pty Ltd’s income to his other business, which could be seen as a breach of his duties as a director. Michael and Scottie can potentially lodge a complaint against Dennis for these breaches. Regarding the liability for the payment of the lawn mower, as the contract was signed just before the company’s registration, Michael and Dennis may not be automatically liable. RodMow should have verified Scottie’s authority to bind the company. Legal advice should be sought to assess the specific circumstances and determine the best course of action.