Case Study -
BuildFaster Pty Ltd ("BF") is a large proprietary company, which operates a building and construction business across Southern Australia ("SA") and Northern Territory ("NT"). The company manufactures and installs a patented modular construction system, which allows building residential houses and small commercial buildings faster, more economical, energy efficient and environmentally friendly than any competitor in SA and NT.
The buildings by BF are well insulated against cold and heat, as well as cyclone and termite proof. All that is needed to construct a BF building is a flat piece of land; there is even an "outback solar kit" with photovoltaic panels and battery storage that allows running a normal four-person household with all modern comforts without being connected to the main electricity grid.
BF has a board comprising three directors: Grant "Big Boss" Jackson is the company founder, his son Bob Jackson, who is in charge of manufacturing, and Gerard Stone, a qualified accountant and family friend. Gerard also acts as company secretary. Olivia Jackson, Grant's daughter, is not a formally appointed director, but as office manager and head of administration, she regularly attends board meetings.
In the last 12 month business for BF was good, and in the wake of the Paris climate agreement concluded in December 2015, the BF board sees a vast growth potential for energy efficient, affordable housing in other remote parts of Australia, in particular in Queensland and Western Australia.
To expand their operations into other Australian states, the company would need to increase its manufacturing capacity as well as growing its work force predominantly for selling and installing the buildings. To do this BF would have to borrow a large amount of money (AUD 4-5 million). However, at a board meeting in mid-December 2015 the board decided (2-1) not to proceed with the expansion at that time, and to reconsider the matter mid next year. Bob and Olivia were both keen to seize the moment and were rather unhappy about this decision to delay the expansion plans.
Olivia took the business plan for the expansion to a bank manager in Adelaide to find out whether a bank would be prepared to provide a loan. The bank manager was impressed with the business plan and told Olivia that he would be prepared to recommend a loan to BF to support the expansion. Excited, Olivia managed to convince Bob to join her in co- signing on behalf of BF a loan agreement and a mortgage contract over BF's factory in Darwin to secure the loan of AUD 4 million on 21 December 2016.
Without the knowledge of the other two directors, Bob and Olive then used the loaned funds to set up new BF offices in Mount Isa, Townsville, Rockhampton, Port Hedland, Geraldton and Esperance and to hire multiple sales staff for each office. Unfortunately, just three months later most of the borrowed money had been spent, but the new offices had hardly sold a house and been total failures.
After failing to make the March 2016 repayments on the loan when it fell due, Bob finally told Grant and Gerard what had happened. On 4 April 2016, the bank sent a formal letter to BF's registered office in Darwin seeking total repayment of the loan which was in default (the bank was contractually entitled to "call" the entire loan when repayments were not paid when they fell due), and indicating that the bank will repossess the factory if the loan is not repaid within two weeks.
The two directors who never approved of the expansion plans nor the loan have today (6 April 2016) co-signed a letter to the bank for and on behalf of BF, stating that BF is not liable to repay the loan and that the mortgage contract is void because the company never approved of the transactions.
The directors are all of the view that if BF is liable to repay the bank loan, then the company is unable to meet all of its debts as and when they become due and payable.
(a) Is BF bound by the loan agreement and the mortgage contract signed by Olivia and Bob?
If more information would be required to provide a complete answer, state what that information is and why it would be relevant.
(b) If BF was liable to repay the loan, what should the directors do? Why?
Grant Jackson holds 60% of BF's shares, while Bob Jackson, Olivia Jackson and Gerard Stone hold each 5% of BF's shares. Various persons associated with the Jackson family hold the remaining BF shares. Samantha Jackson (neé Pollock), the first wife of Grant, but not the mother of Bob and Olivia, owns 3% of the shares and is rather disgruntled when she learns about the loan, the failed business expansion and the financial problems this all causes to BF. Fearing that the value of her shares is about to evaporate, Samantha is determined to get some money back from Grant and his children, who have amassed significant wealth over the last 30 years, while she - apart from some dividend payments - has "missed out" after Grant had divorced her.
(c) Assuming BF was liable to repay the loan, what can Samantha do based on the Corporations Act 2001 to get some more money from the Jackson family and their family accountant?
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