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Gary Growl, a businessman, bought a pet store business for $500,000. He then formed a company called Lassie Ltd and sold the pet store business for $650,000 to Lassie Ltd. The directors are Gary Growl’s friends, being Willy Woof, Peter Purr and Bonnie Bark. Willy Woof is the Managing Director of Lassie Ltd. There are 100 partly paid up shares issued, 25 held by Gary Growl and 75 held by Mary Meow.
In Lassie Ltd’s constitution there are rules that provide that Gary Growl is to be the General Manager of the company. It also has an objects clause that restricts its activities to the breeding and selling of dogs and goods and services associated with dogs.
Willy Woof considers cats are becoming more popular as more people live in apartments. He signs an agreement with Feline Fertility Pty Ltd whereby Lassie Ltd will acquire 300 cats per year for sale through its stores.
Willy Woof also visits the state of Victoria and comes across a very suitable shop location. He wants to sign a 5 year lease with Hot Ltd on behalf of Lassie Ltd to establish a shop on the site but the other directors do not want him to do this and pass a resolution that the constitution be amended by the inclusion of a provision that “the establishment of any store outside the state of Western Australia requires the approval of all the directors.”
The sale of cats in Lassie Ltd’s stores is causing such disruption from the dogs barking that the Board of Directors of Lassie Ltd decide that the new arrangement cannot continue. They advise Feline Fertility Pty Ltd that their contract is terminated on the grounds that it is invalid and unenforceable because the company’s constitution does not permit the company to trade in cats.
Willy Woof considers that it was Gary Growl ‘s poor management that was the cause of the failure to successfully sell cats. He demotes Gary to the position of sales manager. Gary is considering suing Lassie Ltd to be reinstated to his general manager’s job on the grounds that Lassie Ltd has breached its constitution.
Mary Meow is concerned about the propriety of the sale of the pet store business by Gary Growl to Lassie Ltd at an inflated price. Mary Meow wants the directors to take action against Gary Growl.
REQUIRED:
With reference to the Corporations Act 2001 (Cth) and case law, you are required to answer the following questions:
(i) Is the cat contract with Feline Fertility Pty Ltd enforceable? Your answer should include an analysis of the reason put forward by Lassie Ltd for terminating the contract.
[4 Marks]
(ii) Will Lassie Ltd’s constitution prevent Willy Woof from entering into a lease with Hot Ltd?
[4 Marks]
(iii) Do you consider a court would order the reappointment of Gary as General Manager on the grounds he has put forward?
[4 Marks]
(iv) Gary has a clause in his employment contract with Lassie Ltd that he must not compete with the company’s business during his appointment or after termination of his appointment. After leaving Lassie Ltd, Gary sets up a company called ‘Poodle Pty Ltd’ to sell different types of dogs. Lassie Ltd brings an action seeking to restrain Gary and Poodle Pty Ltd from engaging in a competing business. Gary argues that Poodle Pty Ltd is a separate legal entity and it can do what it likes. Discuss whether Lassie Ltd is likely to be successful in its action.
[5 Marks]
(v) Advise Gary of his responsibilities and any liability arising from the incorporation of Lassie Ltd and his sale of the pet store business to that company.
[8 Marks]
(vi) Two years after Lassie Ltd started trading, there was a real decline in the demand for dogs and Lassie Ltd went into liquidation. Lassie Ltd still owes $50,000 to a company called Doggy Pty Ltd. Advise Doggy Pty Ltd as to whether it might be able to recover any amount from Lassie Ltd, its directors or its shareholders?
[5 Marks]
TOTAL: 30 MARKS
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