Question 1

Alex is the managing director of Smart Engineering Pty ltd. Alex accepted a very large order, the value of $100,000 for the supply of steel cables to Shifty Sellers Pty Ltd. The order was placed by Max, the director of Shifty Sellers Pty Ltd. The order was delivered, on credit, to Shifty Sellers Pty Ltd which later failed to pay for the steel cables. It appears that Max was well known as a bad credit risk within the engineering industry, including by Alex. Shifty Sellers Pty Ltd went into liquidation without ever paying Smart Engineering Pty Ltd for the steel cables. Meanwhile, Alex borrowed $500,000 from Eastpac Bank ltd on behalf of Smart Engineering Pty Ltd to exploit expanding the company’s business into China. The company had very low cash reserves at the time of taking up this bank loan and, due to the economic downturn in China, the company has made a loss for the past 6 months. Many expert commentators did warn that the Chinese economy is now slowing after the boom of the last decade. Betty, who is the wife of Alex and also a non-executive director of Smart Engineering Pty Ltd, is happy to leave the management of the company into the safe hands of Alex who, in her opinion, ‘has a better business brain’ and understanding of the Chinese market than her. Besides, Alex speaks Mandarin and travels to China regularly for business. Betty signed the bank loan document in her capacity as company director despite having a sneaky feeling that Smart Engineering Pty Ltd has some difficulty paying its bills. Shortly thereafter, one of the cheques issued by Smart Engineering Pty Ltd to pay its electricity bill ‘bounced’ (ie. the cheque was retuned by the bank as unpaid). Better, however, is very hopeful that Alex will turn the company’s business around in another 12 months’ time and make enormous profits. The reason she is hopeful is because Betty tells herself that China is a big market and that, in her view, everyone doing business in China makes a fortune there and that financial success in that large market is more or less guaranteed.

Advise fully, with reference to legal authority (relevant case law and/or relevant statutory provisions under the Corporations Act 2001 (Cth)) whether:

(a) Can Max be held liable for the unpaid debt of Shifty Seller Pty Ltd? [5 marks];

(b) Can Betty be liable for repayment of the $500,000 loan to Eastpac Bank Ltd? [15 marks];

(c) Have Alex and Betty breached any duties owned to Smart Engineering Pty Ltd under the Corporations Act 2001 (Cth)? In answering this part of the question, do not repeat the content of your answer under part (b) of the question. [10 marks]