Sem 4 Assignment 2

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Assignment 2
Question 1 1. The maintenance of capital doctrine is developed to prohibit a company from reducing its share capital because a reduction in capital would reduce the pool of funds available to the company to pay its creditors. Section 254T provides that dividends are only payable out of profits. This provision ensures that capital is not return to shareholders in the form of dividend. The term “profit” is not defined in the Corporation Act. In Re Spanish Prospecting Co Ltd (1911), it was stated “profits” implies a comparison between the states of a business at 2 specific dates usually by an interval of a year which means the gain made by the business during the year. Section 259A prohibits a company directly acquiring its own shares. However, there are exceptions where: (a) The buy-back of a share is in accordance with s 257A; (b) The buy-back is under a court order; (c) A company takes security over its shares under approved employee share scheme.

2. The dividend on ordinary shares is uncertain and variable (high when the company does well, poor or non-existent when it does badly). Preference shareholders get a fixed dividend which, if not paid, usually accrues until it can be. Each ordinary share usually carries a voting right. Preference shares do not usually carry a voting right unless dividends fall into arrears. In the event of a winding up, preference shares are usually repayable at par value, and rank above the claims of ordinary shareholders (but behind bank and trade creditors). Preference shares may be issued with the right of conversion into ordinary shares. These are called convertibles. Two advantages of equity finance over debt finance: (a) The company only pays dividends if it has profits available and the amount distributed can be divided by the directors. (b) The company does not have to pay interest and low gearing which enables the company to operate without the fear of inability to meet its debt obligations.

3. A fixed charge attaches to specific property owned by the borrower. The borrower is prevented from disposing of the asset without the lender’s consent. Floating charges are charges which float above specific categories of assets such as inventory. The company is free to dispose of these assets in the future. The two reasons it is important for a lender to ensure its charge is registered are: (a) Where a company creates a registrable charge, it must register the charge under s 262 of the Corporations Law. ASIC will enter the charge on its register maintained

under Chapter 2K of the Corporations Law. (b) To enable a potential creditor to know whether the company has already given a charge over these assets.

4. A disclosure document is a document issued by a company when it seeks to raise funds by inviting applications or offers for its securities. The disclosure document discloses relevant information to enable investors to make informed investment decisions. A disclosure document is needed when an offer for the issue of securities is made (s 706) or when an offer for sale of securities (s 707) in the circumstances described in s 707(2) and (3). Section 708 and 708AA contain specific exemptions that indicate which offers of securities do not need disclosure to investors. Two of these exemptions are small scale offerings and offers to senior managers or their relatives.

Question 2 (a) The issue is whether Buggy as a director of Stoke Limited did not act in good faith and in the best interests of the company. Directors are under a fiduciary duty to act in good faith and in the best interests of the company. Under section 181(1)(a), a director or other officer are required to exercise their powers and discharge their duties in good faith and in the best interests of the corporation. The good faith aspect of both the fiduciary and statutory duties requires directors to genuinely believe that they are acting in the best interest of the company and that a reasonable director...
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