QUESTION THREE Sally has decided to go into business to make andsell organic, home-made playdough that is safe for children if theyeat it. Business is going well and she incorporates the business,calling it Funtime Pty Ltd (‘Funtime’). Sally appoints herself asthe Managing Director, and her husband Brad as a second director.To ensure her privacy, the registered office of the company is theaddress of her accountant’s firm (a common service the firmprovides for its clients). Sally works out that she needs $50,000to renovate her kitchen at home and buy equipment so that she canmake industrial quantities of play dough; $10,000 to buy plastictubs and labels; and $25,000 to launch a marketing campaign blitz.She tells her family she needs more than $85,000 in capital for thecompany to be successful in the longer term. Ten of her familymembers join as shareholders and she issues them each with $20,000in ordinary shares. Sally is working more than full-time on thisventure and draws up a contract to ensure she can earn a salary, at$100,000 per annum, to fairly compensate her for her labour. Sallyenters into many contracts with suppliers to obtain supplies,including with Flashy Ltd (‘Flashy’) for $25,000 to purchase onlineadvertising and brochures. Also, she enters into a contract withGlamour Designs Pty Ltd (‘Glamour Designs’) to completely renovateher kitchen (and bathroom) at a cost of $75,000 in three monthlyinstalments. She explains to representatives of both companies thatshe is authorised to sign the contracts on behalf of the company.Sally takes out a business loan of $50,000 from the Which BankingGroup Ltd (‘WBG’) on behalf of Funtime. She does not disclose tothe bank that she is drawing a wage from the company but does agreeto secure the loan against Funtime's capital equipment andinventory. On the loan documents Sally signs her name and carefullyforges Brad’s signature as he was out of town that day. After ninemonths in business, the money is almost gone, and Sally is findingit hard to make ends meet. She misses the second payment instalmentwith Glamour Designs, and is unable to pay a month later when afollow up notice arrives. On 1 October 2020, Sally receives astatutory demand addressed to Funtime from Glamour Designsrequiring “immediate payment” for the works done to date on herhome. The statutory demand was sent by post to Sally’s home addressand is accompanied by a signed letter enclosing a copy of thecontract, but there are no specific details of how much is owing onthe demand itself. Sally is beside herself with worry, and is notsure how she can find the money to pay all of her creditors. Shedoesn’t want to worry Brad, as he has already explained that hefinds the monthly directors’ meetings pointless. Brad simply agreeswith whatever Sally wants to do and is fond of saying, “do whateveryou like, this is your company not mine”. Also, with his full-timejob working for Flashy, he never had time to read the documentationrelating to quotes. Although he did thank Sally for providingbusiness with Flashy, as his boss gave him a surprise $2,500 bonusfor securing the work.
REQUIRED: Respond to the above case study problem and answer allquestions. Refer to relevant cases and statutory law in youranswers as appropriate.
a) Explain to Sally whether the loan contract between Funtimeand WBG is legally enforceable.
b) Advise Sally about Funtime’s options in responding to thestatutory demand issued by Glamour Designs.
c) Advise Sally whether she or Brad have breached their dutiesas company directors, and whether any valid defences apply. (Assumeall events took place in 2020).
