Recall that Retrofit Pty Ltd took up Samantha’s family’s offer to invest $900,000 (on conditions) by way of preference shares in the company. In accordance with their wishes, Julian made Samantha a director to represent their interests on the board. Having sorted out the issues with Tom and Andy, Julian started work on fitting out the new office and warehouse and expanding into the café business. Prospects were looking favourable and Julian was feeling upbeat.

Unfortunately, over the past several months, Julian and Samantha’s relationship has faltered. They have separated and a divorce looks inevitable. Additionally, the café is not doing as well as hoped and Julian is no longer keen on being in the café business. Julian has set up a meeting to give you an update and seek some advice.

Samantha is annoyed that Julian and Bev proposed $150,000 bonuses for themselves. She believes it will reduce the profits and reduce the dividends to her family. Recall that the trustee of Samantha’s family’s trust holds $300, 000 in preference shares in Retrofit Pty Ltd. Under the terms of the issue, the preference shareholders get 5.5 per cent dividends every year, non‐cumulative. The shares are to be repaid in 5 years’ time.

Samantha is aware that the shares were preference shares but she did not note that the dividends were non‐cumulative. She trusted Bev, her mother‐in‐law.

Julian and Bev come to see you and ask if they can pay themselves bonuses of $150,000 each. You note that Julian has not drawn a commercially realistic salary for the past two years.

Julian and Bev do not think Samantha deserves a bonus as she has not contributed to the profitability of the business and she has a full‐time job. They are not comfortable with Samantha being in meetings and think she has nothing to add. Can they exclude her?

If the bonuses are paid, with the company’s present financial situation, no dividends will be payable to the ordinary shareholders and it will be difficult to pay the preference shareholders.

You have perused the management accounts for the company and they show that the 6‐month profits will be down and it may not be possible to pay the fixed rate of dividends to the preference shareholders — nor would it be in the best interests of the company.

Julian wants to know if they can reduce the rate of dividends to the preference shareholders from 5.5 per cent to 2 per cent.

Samantha’s family do not want to see the return from their investment affected and want to make sure that the dividends are maintained, as well as protect the capital invested.

Samantha’s family wants to stop Julian and Bev altering the constitution to reduce the dividend rate.

Samantha is also aware that Bev and Julian have been misusing company property for their own benefit, causing the company to lose value and putting the assets of the company at risk. She believes that the company should take legal action against them.

She has pushed this in the board meetings but naturally Julian and Bev have always outvoted her and refused to take legal action.Because of this, Samantha’s family now refuses to contribute any more of the balance of $600,000 to the company.

Issues

During the meeting, Julian has a number of questions relating to important issues surrounding the future of his business. The issues arising include the following.

Is there any problem with Julian and Bev each taking a $150, 000 bonus?

Is there any problem with changing the company constitution to reduce the dividend rate for preference shareholders or to pay a dividend to ordinary shareholders, but not to preference shareholders?

Can Samantha take action against Julian and Bev or does the decision of the majority director’s win

ISSUES TO BE DISCUSSED IN GROUPS IN WORKSHOP

Look at what the officers have done to the affairs of the company.

Do you think any member is being treated unfairly? Why?

From the opposite perspective, do you think any member is being unfair in their dealings with the others?

Question

Recall that Retrofit Pty Ltd took up Samantha’s family’s offer to invest $900,000 (on conditions) by way of preference shares in the company. In accordance with their wishes, Julian made Samantha a director to represent their interests on the board. Having sorted out the issues with Tom and Andy, Julian started work on fitting out the new office and warehouse and expanding into the café business. Prospects were looking favourable and Julian was feeling upbeat.

Unfortunately, over the past several months, Julian and Samantha’s relationship has faltered. They have separated and a divorce looks inevitable. Additionally, the café is not doing as well as hoped and Julian is no longer keen on being in the café business. Julian has set up a meeting to give you an update and seek some advice.

Samantha is annoyed that Julian and Bev proposed $150,000 bonuses for themselves. She believes it will reduce the profits and reduce the dividends to her family. Recall that the trustee of Samantha’s family’s trust holds $300, 000 in preference shares in Retrofit Pty Ltd. Under the terms of the issue, the preference shareholders get 5.5 per cent dividends every year, non‐cumulative. The shares are to be repaid in 5 years’ time.

Samantha is aware that the shares were preference shares but she did not note that the dividends were non‐cumulative. She trusted Bev, her mother‐in‐law.

Julian and Bev come to see you and ask if they can pay themselves bonuses of $150,000 each. You note that Julian has not drawn a commercially realistic salary for the past two years.

Julian and Bev do not think Samantha deserves a bonus as she has not contributed to the profitability of the business and she has a full‐time job. They are not comfortable with Samantha being in meetings and think she has nothing to add. Can they exclude her?

If the bonuses are paid, with the company’s present financial situation, no dividends will be payable to the ordinary shareholders and it will be difficult to pay the preference shareholders.

You have perused the management accounts for the company and they show that the 6‐month profits will be down and it may not be possible to pay the fixed rate of dividends to the preference shareholders — nor would it be in the best interests of the company.

Julian wants to know if they can reduce the rate of dividends to the preference shareholders from 5.5 per cent to 2 per cent.

Samantha’s family do not want to see the return from their investment affected and want to make sure that the dividends are maintained, as well as protect the capital invested.

Samantha’s family wants to stop Julian and Bev altering the constitution to reduce the dividend rate.

Samantha is also aware that Bev and Julian have been misusing company property for their own benefit, causing the company to lose value and putting the assets of the company at risk. She believes that the company should take legal action against them.

She has pushed this in the board meetings but naturally Julian and Bev have always outvoted her and refused to take legal action.Because of this, Samantha’s family now refuses to contribute any more of the balance of $600,000 to the company.

Issues

During the meeting, Julian has a number of questions relating to important issues surrounding the future of his business. The issues arising include the following.

Is there any problem with Julian and Bev each taking a $150, 000 bonus?
Is there any problem with changing the company constitution to reduce the dividend rate for preference shareholders or to pay a dividend to ordinary shareholders, but not to preference shareholders?
Can Samantha take action against Julian and Bev or does the decision of the majority director’s win

ISSUES TO BE DISCUSSED IN GROUPS IN WORKSHOP

Look at what the officers have done to the affairs of the company.
Do you think any member is being treated unfairly? Why?
From the opposite perspective, do you think any member is being unfair in their dealings with the others?

Accepted Answer

The question is asking about the legality and fairness of certain actions taken by the directors of…