BLW 3103 COMPANY LAW CAT 1 and 2 out of 30 marks.

RaceTech plc is engaged in the business of designing and manufacturing high-performance

racing cars. It wishes to build a racetrack upon which it can test its prototype models, and to that
end, it creates a subsidiary company called RaceTrack Ltd. A suitable piece of land on which to
build the testing track is located and RaceTrack purchases it using capital borrowed from
RaceTech. However, shortly thereafter, the directors of RaceTrack (all of whom are also
directors of RaceTech) discover that the land does not have planning permission and so
RaceTrack agrees to sell the land to SkyCorp Ltd, a local construction company. However,
several days later, a member of the local council indicates to the directors of RaceTrack that,
should it apply for planning permission, it would certainly be granted. Accordingly, before sale
of the land to SkyCorp is completed, RaceTrack transfers ownership of the land to RaceTech,
and argues that the contract with SkyCorp is no longer valid as it no longer owns the land.
RaceTrack successfully applies for planning permission.

RaceTech decides that it wishes to expand into the consumer car market and, to this end, it
created another subsidiary called SpeedShift Ltd. The articles of SpeedShift provide that only
directors nominated by RaceTech may sit on its board and, accordingly, all the directors of
SpeedShift are either persons nominated by RaceTech, or are actually also directors of
RaceTech. SpeedShift engages in research and development on a new car and this is funded
exclusively by issuing shares that are purchased by RaceTech (with the result that SpeedShift
becomes a wholly owned subsidiary). However, more capital is required, but the directors of
RaceTech refuse to provide SpeedShift with any more capital and instead order the board of
SpeedShift to cut back on its research and development. Accordingly, the directors of SpeedShift
agree to cut back on research into the car’s safety features. SpeedShift completes designing a
new car and it is manufactured and sold to the public. However, the car turns out to be unsafe
due to a defect in the car’s brakes and numerous accidents occur. Those who suffered injury and
loss due to the defective cars initiate proceedings against SpeedShift but, by this time, SpeedShift
has entered insolvent liquidation, and has insufficient funds to meet any liability.

Advise the parties above of any potential liability they might face.