ACC204 Corporations Law – T1 2020 – Final Examination Paper

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Part A – Short Answer Questions – 3 Questions (10 Marks in Total)

Word Limit = 150 words per question

You have joined a new accounting firm and one of your newest clients wishes to know the following-

Question 1 (3 Marks)

Explain the legal requirements that must be satisfied for a company to pay dividends, under the
Corporations Act 2001.

There must exist sufficient net assets to pay a dividend to shareholders, which means it should
fulfil the test of the net asset, which states that the company's net assets should be positive
before and after payment of dividend. Distribution of dividend should be reasonable and fair
among shareholders as a whole. And dividend should be non-prejudicial to payables for its
payment to shareholders. Existence of sufficient profit in an entity is also a mandatory condition
for payment of dividend. And if there is any other requirement in the constitution of the
company for payment of dividend, then that must also be met under the provisions of
Corporation Act, 2001, under (section 254T).
And if a dividend is not paid according to legal requirements then penalties are imposed on
directors of the company and such illegal dividend payment is considered as an unauthorised
return of capital.
Question 2 (3 Marks)

Explain the difference between a circulating and non-circulating security interest.

The interest on a property which is being a traded-in ordinary course of business activities is
called a circulating security interest according to the PPS Act under (section 339). This interest
is linked to a circulating asset and hence its registration in the PPS register as a security asset is
also mandatory.
Examples include debt owed to the company and trading stock etc, under provisions of
Corporation Act 2001.
And on the other hand, the interest on a property which is a future property and has no present
existence or property which is yet not owned by the borrowers, such interest is called a non-
circulating security interest.
Examples of such kind of interest include an equitable mortgage (13-047), a legal mortgage (13-
040) or any equitable charge.
In case, the borrower becomes insolvent, the lender would get priority over other lenders if he
had registered the interest on PPS register as a security interest, (13-720).
Question 3 (4 Marks)

Explain the effects the common law, Automatic Self-Cleansing Filter Syndicate Co v Cunninghame (1906)
has had on members' powers over directors.

Automatic Self-Cleansing Filter Syndicate Co v Cunninghame[1906] (it is the law) states that board of
directors exercise the powers of management vested in it by the constitution and the general meeting
should not misuse this power. S 203D states that a public company may by resolution remove a director
from office despite anything in the company’s constitution or an agreement between the company and
the director or an agreement between any or all members of the company and the director. In addition,
under s 181, directors must act in the best interest of the shareholders, as a collective group. S 125(2)
states a company’s constitution may contain an objects clause that identifies and restricts the businesses
and activities in which the company may engage.Further, A shareholder cannot override the decisions of
management and hence cannot participate in the management of the entity.
Part B – Problem-Based Questions – 3 Questions (30 Marks in Total)
Word Limit = 300 words per question

Question 1 (10 Marks)

Your client’s IT director has recommended to the Board of their company that they replace the old IBM
computers with Apple IPads and Apple Macs. She argued that in the long term this would be beneficial
to the company from a cost and efficiency view. The Board of directors agreed to the change. You
subsequently discovered that she received from the Apple distributor a free trip to Apple headquarters
in San Francisco. She took the trip and was also provided with 5 days of paid accommodation in New
York for her and her family. She did not disclose any of this to the Board of directors.

Required:
Please advise the company of the above and what the company should do. In your answer please refer
to relevant common law and legislation.

Directors are stewards of the company which is a practice of managing the property of someone else
and hence they are accountable for their actions to the shareholders of the company, being their agents.
And hence they are bound to act in good faith towards the company under section (181). In the current
case, the board of directors agreed to introduce Apple IPads by replacing old IBM computers when the IT
director recommended this to the board of directors and she also insisted on its benefits in the long run.
This decision taken by directors could be considered in good faith of the company if the IT director had
no personal interest in this transaction which she did not disclose in the meeting of directors. However,
in legal jurisdictions, a director should disclose all the transactions in which he has a personal interest
and hence law does not allow him to participate and vote in the meeting which is held for the decision of
that transaction. The IT director enforces on replacing old computers with Apple I Pads because she was
offered various incentives by the apple company which includes a free trip to headquarters of Apple in
San Francisco along with 5 days paid accommodation in Newyork with her family and she did not
disclose her interest in the meeting which means that she was not acting in good faith towards the
entity under section (191-1) and also (191-3). As this decision could be very costly for the company
comparative to its benefits as extra purchasing and training cost has to be incurred by a company with
the advancement in technology. But if this decision goes wrong then the IT director would be held liable
for acting in bad faith towards the company and various legal penalties would be imposed on her under
section (191-1).

Question 2 (8 Marks)

A shareholder in the company that owns 5% of the shares issued by the company has been complaining
lately, that the directors had refused to pay dividends for the past 4 years and is concerned that in that
time they have awarded themselves with bonuses.

Required:
Please advise the company of the above and what the company should do. In your answer please refer
to relevant case law and legislation.

Shareholders cannot enforce the payment of dividend although there exist enough funds
because dividend payment depends on the discretion of directors who are agents of the
company and work for the best interest of the company so they are given the right to decide the
appropriate timing of distribution of dividend from the profits of the company after filtering
retained earnings.
This decision of dividend declaration is taken by the board of directors as a whole and hence
they should exercise this power in good faith.
In the present case, a shareholder had not received a dividend from the past four years and he is
claiming that directors are not distributing the dividend because they are using funds in
distributing bonus which is not an indication of good faith by them and hence in this case they
are held liable to the shareholder for their actions. But the shareholder has only 5% shares in
the company which indicates that he is not a major shareholder and if he files a suit against
directors then directors might take the protection of business judgement rule in court where
they could prove that the decision of not distributing dividend was for the best interest of the
company and in good faith under section (180) So there are chances that they would not be
held liable for their decisions and the mutual decision of not declaring dividend for the past four
years. Hence for proving them wrong, the shareholder needs strong bad intention or fraud by
them in the entity.
The claim of a shareholder could also be considered valid if the company has distributed any
amount of dividend in other shareholders or major shareholders in past 4 years, then the person
having 5% shares has equal right to get the dividend otherwise shareholders of an entity have
"no right" to decide the declaration and distribution of dividend
Question 3 (12 Marks)

Lastly, your client has heard about how the COVID lockdown has been affecting many of his suppliers,
and that several of them are going into liquidation. He knows that some of his transactions with them
might be at risk so he wants to know what does “voidable antecedent transaction” mean?

Required:

Provide at least four (4) types of transactions with their corresponding legislative provision as an
example.

Payment of money or transfer of property, or any transactions from the net assets of the
company to any related or unrelated third party by the company at the time when the company
is insolvent or another cause detriment to the company is called a voidable transaction.
Here liquidator is assigned the duty to distribute the company's assets on a fair basis among all
creditors and any unfair transactions before the appointment of a liquidator are considered
void. As when business is going to liquidate, then all its operations need to be stopped at least 6
months before liquidation because if any company would continue its operations even after
liquidation then directors of the company would be held liable for misusing assets of the
company.

Types of Voidable antecedent Transactions:

Following are the four examples of antecedent transaction along with their relevant legal
sections:
1) Any transaction in which unfair preference is given to some parties , is considered void
and has no legal existence. This can include distribution of unfair loans which is violated
by the ASIC Act.

2) Transactions for which no commercial substance is present such as Money Laundering

and strong acts are made in Australia to fight the money laundering issues such as the
AML/CTF Act.

3) Companies which are going into liquidation must stop trading. Carrying on trade under
these circumstances may lead to wrongful trading. This may affect shareholders or
creditors' returns according to provisions of Corporate Governance rules under (section
588FA of the Act).

4) The company which is involved in sanctioning unfair loans under the jurisdictions of
Corporation Act 2001, such transactions are also considered as voidable antecedent
transactions.

Other than above, such transactions also include any uncommercial transactions, any
transactions related to directors of company, made with no valid and reasonable basis.