Karen Cool decided to turn her love of sport into a means ofmaking money. She was never very good at school but loved to getout and run around the oval and playing ball sports. She did apersonal trainer course when she left high school and she startedworking for Don’t have Lazy Legs Pty Ltd (Lazy).

Karen has a lot of sporting equipment she uses for her ownactivities and in her work as a personal trainer. In 2018 Karendecided to insure “all her sporting equipment that Karen Cool ownedin 2018 and into the future” with a company called Tops InsuranceLtd (Tops). Karen has continued paying premiums on this insuranceuntil the present day.

Lazy ran fitness programs in retirement villages, universities,car parks, and anywhere else they could run a fitness program thatpeople might pay. They were based in Taringa and operated in a 25km radius.

Karen worked for Lazy as a casual trainer. In 2019 Lazydesignated her to work in the Chapel Hill and Kenmore area. Karenhad direct contact with Lazy’s clients but was required in hercontract of employment to:

Clause 4.1 Karen agrees not to have contact with the clients ofLazy but for the purposes of working or promoting Lazy.

Clause 4.2 Karen agrees not to enter into personal trainingcontracts with clients of Lazy within 25 km of Taringa for a 3month period after her employment with Lazy has been terminated byeither party.

Karen felt that Lazy did not get the true love of sweat andstrength and wanted to start her own business. Karen then decidedto start her own company. She registered Cool to Stink and SweatPty Ltd (Cool) on 15 July 2019. On 15 July 2019 Karen registered arange of social media accounts in the name of Cool and Karentransferred all her sporting equipment to Cool. She effected thistransfer of the sporting equipment by signing a document oftransfer and having Mat witness it. She then included the sportingequipment of the accounts of Cool as assets owned by Cool.

If Lazy had searched the ASIC register they would have seen thatKaren was the 75% owner of Cool, but if they searched Cool’s socialmedia profile or advertisement they would not see Karen’s namementioned anywhere. The other 25% of the shares were owned byKaren’s husband Mat. The ASIC register also has Karen and Mat asdirectors of Cool.

Cool became active on social media and continued to keep Karen’sinvolvement silent. During the rest of July 2019 Karen sent socialmedia and other advertisements to all of the contacts Karen hadmade while working at Lazy telling them about Cool. The advertisingstarted to have an impact and Cool had a good number of clients tostart operation on Thursday 1 August 2019.

On 1 August Karen performed training work for Cool while alsorunning her classes with Lazy. From 1 August until Saturday 10August she told all the Lazy clients she came across of just howcool Cool was. This motivated a number to terminate theirrelationship with Lazy and become clients of Cool. This resulted inCool making $15,000 that would have otherwise gone to Lazy.

On 11 August Karen quit from Lazy and worked 100% for Cool.

Karen realized on 12 August that Cool needed to buy moreequipment and called her rich mother-in-law for a loan. Hermother-in-law, Liz, doubted Karen’s viability but agreed to lendCool $25,000 if the company constitution restricted purchases inany month to less than $10,000. Cool at this point had noconstitution and relied 100% on the Replaceable Rules. Aftergetting off the phone to Liz, Karen walked into the kitchen andtold Mat they needed a constitution. He shrugged and signed a pieceof paper setting out the constitution of Cool as a shareholder.Karen also signed the document as a shareholder. It was a fewreplaceable rules and included a limit on directors and employeesspending more than $10,000 of Cool money in any single month.

Karen rang Liz back, advising her of the constitution her andMat signed. Liz sent through a loan agreement by e-mail to haveCool repay Liz within 6 months at 3% interest. Karen sent back ane-mail agreeing to the terms and signing the e-mail as CEO ofCool.

After the money hit Cool’s accounts Karen quickly went out andpurchased $25,000 of equipment in the name of Cool from MusclesLtd. Karen signed the purchase contract as “CEO of Cool signing onbehalf of Cool”. Muscles Ltd agreed to provide Cool the equipmentand Cool would then pay Muscles the purchase price in 5 instalmentsof $5,000 each over 5 months; ie. $5,000 per month.

Liz was alarmed at Karen’s spending and asked to see theaccounts. Karen had an Excel spreadsheet with receipts, warrantiesand other documents kept in digital form in the Cloud.

On 14 August Liz looked over the accounts and asked to have anurgent meeting with Karen. Karen said she would let Liz guide herout of the mess and agreed to meet with her on Sunday 18 August tofix everything up. On 14 August Liz rang Mat who was surprised. Mattold Karen she should get out of the contract with Muscles at once.Karen and Mat called Muscles and said Karen had exceeded herauthority and they would need to reverse the contract. Muscles said“no”.

On the morning of 17 August Karen forgot to lock the front doorand a group of teenagers entered the house and took all Karen’ssporting equipment. This included everything she had purchased fromMuscles. The Queensland Police Service came and gave Karen a reportafter lunch. Karen filed a claim for the stolen sporting equipmentwith Tops Insurance Ltd in the afternoon of 17 August.

Advise on the following questions with reference to theCorporations Act 2001 (Cth) (which can you can abbreviate in youranswer to CA), and cases in the textbook.

1. Does Lazy have any legal options against Cool?

2. What is the impact of the limit on spending in Cool’sconstitution on the contract with Muscles?

3. Does Tops Insurance Ltd have to pay any money to Cool?