Question

Karen Cool decided to turn her love of sport into a means of making money. She was never very good at school but loved to get out and run around the oval and playing ball sports. She did a personal trainer course when she left high school and she started working for Don’t have Lazy Legs Pty Ltd (Lazy).

Karen has a lot of sporting equipment she uses for her own activities and in her work as a personal trainer. In 2018 Karen decided to insure “all her sporting equipment that Karen Cool owned in 2018 and into the future” with a company called Tops Insurance Ltd (Tops). Karen has continued paying premiums on this insurance until the present day.

Lazy ran fitness programs in retirement villages, universities, car parks, and anywhere else they could run a fitness program that people might pay. They were based in Taringa and operated in a 25 km radius.

Karen worked for Lazy as a casual trainer. In 2019 Lazy designated her to work in the Chapel Hill and Kenmore area. Karen had direct contact with Lazy’s clients but was required in her contract of employment to:

Clause 4.1 Karen agrees not to have contact with the clients of Lazy but for the purposes of working or promoting Lazy.

Clause 4.2 Karen agrees not to enter into personal training contracts with clients of Lazy within 25 km of Taringa for a 3 month period after her employment with Lazy has been terminated by either party.

Karen felt that Lazy did not get the true love of sweat and strength and wanted to start her own business. Karen then decided to start her own company. She registered Cool to Stink and Sweat Pty Ltd (Cool) on 15 July 2019. On 15 July 2019 Karen registered a range of social media accounts in the name of Cool and Karen transferred all her sporting equipment to Cool. She effected this transfer of the sporting equipment by signing a document of transfer and having Mat witness it. She then included the sporting equipment of the accounts of Cool as assets owned by Cool.

If Lazy had searched the ASIC register they would have seen that Karen was the 75% owner of Cool, but if they searched Cool’s social media profile or advertisement they would not see Karen’s name mentioned anywhere. The other 25% of the shares were owned by Karen’s husband Mat. The ASIC register also has Karen and Mat as directors of Cool.

Cool became active on social media and continued to keep Karen’s involvement silent. During the rest of July 2019 Karen sent social media and other advertisements to all of the contacts Karen had made while working at Lazy telling them about Cool. The advertising started to have an impact and Cool had a good number of clients to start operation on Thursday 1 August 2019.

On 1 August Karen performed training work for Cool while also running her classes with Lazy. From 1 August until Saturday 10 August she told all the Lazy clients she came across of just how cool Cool was. This motivated a number to terminate their relationship with Lazy and become clients of Cool. This resulted in Cool making $15,000 that would have otherwise gone to Lazy.

On 11 August Karen quit from Lazy and worked 100% for Cool.

Karen realized on 12 August that Cool needed to buy more equipment and called her rich mother-in-law for a loan. Her mother-in-law, Liz, doubted Karen’s viability but agreed to lend Cool $25,000 if the company constitution restricted purchases in any month to less than $10,000. Cool at this point had no constitution and relied 100% on the Replaceable Rules. After getting off the phone to Liz, Karen walked into the kitchen and told Mat they needed a constitution. He shrugged and signed a piece of paper setting out the constitution of Cool as a shareholder. Karen also signed the document as a shareholder. It was a few replaceable rules and included a limit on directors and employees spending more than $10,000 of Cool money in any single month.

Karen rang Liz back, advising her of the constitution her and Mat signed. Liz sent through a loan agreement by e-mail to have Cool repay Liz within 6 months at 3% interest. Karen sent back an e-mail agreeing to the terms and signing the e-mail as CEO of Cool.

After the money hit Cool’s accounts Karen quickly went out and purchased $25,000 of equipment in the name of Cool from Muscles Ltd. Karen signed the purchase contract as “CEO of Cool signing on behalf of Cool”. Muscles Ltd agreed to provide Cool the equipment and Cool would then pay Muscles the purchase price in 5 instalments of $5,000 each over 5 months; ie. $5,000 per month.

Liz was alarmed at Karen’s spending and asked to see the accounts. Karen had an Excel spreadsheet with receipts, warranties and other documents kept in digital form in the Cloud.

On 14 August Liz looked over the accounts and asked to have an urgent meeting with Karen. Karen said she would let Liz guide her out of the mess and agreed to meet with her on Sunday 18 August to fix everything up. On 14 August Liz rang Mat who was surprised. Mat told Karen she should get out of the contract with Muscles at once. Karen and Mat called Muscles and said Karen had exceeded her authority and they would need to reverse the contract. Muscles said “no”.

On the morning of 17 August Karen forgot to lock the front door and a group of teenagers entered the house and took all Karen’s sporting equipment. This included everything she had purchased from Muscles. The Queensland Police Service came and gave Karen a report after lunch. Karen filed a claim for the stolen sporting equipment with Tops Insurance Ltd in the afternoon of 17 August.

Advise on the following questions with reference to the Corporations Act 2001 (Cth) (which can you can abbreviate in your answer to CA), and cases in the textbook.

1. Does Lazy have any legal options against Cool?

2. What is the impact of the limit on spending in Cool’s constitution on the contract with Muscles?

3. Does Tops Insurance Ltd have to pay any money to Cool?

Answer 1

Answer:

Introduction

There are stipulated rules and provisions that guide the governance of companies. These rules and regulations enable companies to handle disputes among them and their employee, contractors, clients and suppliers.

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Step-by-step explanation

Question 1

Lazy have a legal option against cool. A legal option is the right to purchase or require another to perform upon agreed-upon terms.

Lazy and Karen Cool had a contract that required Cool not to enter into personal training contracts with Lazy clients three months after she terminated her employment contract with Lazy.

Karen Cool founded Cool to Stink and Sweat Pty Ltd (Cool) on 15 July 2019, while still working for Lazy Legs Pty Ltd. On 1^st August Karen performed training work for Cool while running her classes with Lazy. From 1^st August to 10^th August, she contacted Lazy clients marketing her Cool Company. On 11^th August she quit Lazy and started working for Cool immediately. All these actions went against her signed contract with Lazy Company.

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Question 2

Cool's ltd constitution, signed by Mat and Karen both as shareholders, had a few replaceable rules and also provided a spending limit of $10,000 to its directors or employees. Karen Cool went ahead and purchased equipment worth $25,000 from Muscles ltd. This exceeded the Cool's ltd stipulated spending limit, even though they, (Karen and Muscle ltd) had to settle on $5,000 monthly installments for five months.

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Question 3

A property insurance claim can be rejected if the owner of the property did not take precaution to prevent damage or loss. In the case of Karen, she forgot to lock (negligence) her house and her equipment was stolen. Tops insurance ltd has a right not to pay the claim.