Question

QUESTION THREE Sally has decided to go into business to make and sell organic, home-made playdough that is safe for children if they eat it. Business is going well and she incorporates the business, calling it Funtime Pty Ltd (‘Funtime’). Sally appoints herself as the Managing Director, and her husband Brad as a second director. To ensure her privacy, the registered office of the company is the address of her accountant’s firm (a common service the firm provides for its clients). Sally works out that she needs $50,000 to renovate her kitchen at home and buy equipment so that she can make industrial quantities of play dough; $10,000 to buy plastic tubs and labels; and $25,000 to launch a marketing campaign blitz. She tells her family she needs more than $85,000 in capital for the company to be successful in the longer term. Ten of her family members join as shareholders and she issues them each with $20,000 in ordinary shares. Sally is working more than full-time on this venture and draws up a contract to ensure she can earn a salary, at $100,000 per annum, to fairly compensate her for her labour. Sally enters into many contracts with suppliers to obtain supplies, including with Flashy Ltd (‘Flashy’) for $25,000 to purchase online advertising and brochures. Also, she enters into a contract with Glamour Designs Pty Ltd (‘Glamour Designs’) to completely renovate her kitchen (and bathroom) at a cost of $75,000 in three monthly instalments. She explains to representatives of both companies that she is authorised to sign the contracts on behalf of the company. Sally takes out a business loan of $50,000 from the Which Banking Group Ltd (‘WBG’) on behalf of Funtime. She does not disclose to the bank that she is drawing a wage from the company but does agree to secure the loan against Funtime's capital equipment and inventory. On the loan documents Sally signs her name and carefully forges Brad’s signature as he was out of town that day. After nine months in business, the money is almost gone, and Sally is finding it hard to make ends meet. She misses the second payment instalment with Glamour Designs, and is unable to pay a month later when a follow up notice arrives. On 1 October 2020, Sally receives a statutory demand addressed to Funtime from Glamour Designs requiring “immediate payment” for the works done to date on her home. The statutory demand was sent by post to Sally’s home address and is accompanied by a signed letter enclosing a copy of the contract, but there are no specific details of how much is owing on the demand itself. Sally is beside herself with worry, and is not sure how she can find the money to pay all of her creditors. She doesn’t want to worry Brad, as he has already explained that he finds the monthly directors’ meetings pointless. Brad simply agrees with whatever Sally wants to do and is fond of saying, “do whatever you like, this is your company not mine”. Also, with his full-time job working for Flashy, he never had time to read the documentation relating to quotes. Although he did thank Sally for providing business with Flashy, as his boss gave him a surprise $2,500 bonus for securing the work.

REQUIRED: Respond to the above case study problem and answer all questions. Refer to relevant cases and statutory law in your answers as appropriate.

a) Explain to Sally whether the loan contract between Funtime and WBG is legally enforceable.

b) Advise Sally about Funtime’s options in responding to the statutory demand issued by Glamour Designs.

c) Advise Sally whether she or Brad have breached their duties as company directors, and whether any valid defences apply. (Assume all events took place in 2020).

Answer 1