Question

Game Pty Ltd is a company that operates a large sports store. Sally and Rob are the directors.

Sally’s daughter, Kelly, is a talented marathon runner. Kelly’s ambition is to represent Australia at the 2021 Olympic Games in Tokyo. Sally thinks Kelly would be a good brand ambassador for Game Pty Ltd.

Sally asks Rob to prepare a contract between Kelly and Game Ltd under which Game Ltd agrees to pay Kelly $50,000 per year for four years in return for six in-store appearances per year, and a further $50,000 bonus if she is selected for the Olympic team in 2021. Game Pty Ltd is also allowed to use photographs of Kelly in its advertisements.

Rob is concerned about this commercial deal. He knows that at a sportsperson, similar to Kelly’s reputation, would not expect to earn such a high commercial fee for a similar deal. Rob, however, does not wish to harm his long -standing friendship with Sally and does not voice any concern.

The agreement is approved at the company’s board meeting in September 2016, with all the directors (including Sally) voting in favour of it. The shareholders of the company are unaware of this contract.

Some six months later, there is direct evidence to show that the finance committed by Game Pty Ltd to this sponsorship deal with Kelly has put a large strain on the company’s cashflow.

(a)Advise whether any of the directors (Sally and Rob) of Game Pty Ltd have breached their duties under the relevant provisions of the Corporations Act 2001 (Cth); [10 marks] and

(b)Assume breaches of law have been identified for both Sally and Rob. If so, discuss whether any legal defences will help them avoid liability [10 marks]; and

(c) Advise ASIC of the potential consequences of the breach of the Corporations Act by both directors, Sally and Rob [10 marks]. Your answer must make specific reference to the facts.

Answer 1

Corporations Act 2001:

Businesses in Australia are regulated by various provisions in this act and imposes fiduciary duties on companies and directors. They have to follow the following regulations:

• Avoid conflicts
• Act properly
• Act in good faith
• They should use no inappropriate information
• To not misuse their power

a

Rob, the director, acted inappropriately as under Sec 180 of the act states to perform with diligence and care was not followed. His friendship with Sally overturned his judgment on the high commercial fee. This was wrong. He should have acted in part of the company and negotiated adequately and not involve his material interest.

Sally has used his power to benefit his daughter, which is a third party. So he failed under the Sec. 181 of the Corporations Act, 2001.

b.

Legal defences that would help them in avoiding liabilities are:

Sec. 588H and The rule of the statutory business judgment under Sec. 180 (2) of the Corporations Act, 2001 could be used. They protect directors from liabilities related to diligence and care.

c.

Potential consequences are:

• May face jail time up to 5 years
• Company may be disqualified from operating
• Fine up to $200,000
• May have to clear the company's debts

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