2 BLO 2205 Corporate Law Assignment Sample
Here’s the best sample of 2 BLO 2205 Corporate Law Assignment, written by the expert.
Issue
In the given case, there was an issue related to the excess forward book orders of $25 million over three years due to wrong estimation. But actual order book value was $15 million over three years. The estimation of these orders was based on the poorly researched consultant’s report provided to Bob Brown, Austin Retails commercial sales manager. This report was prepared by DB Consultants but Bob Brown did not query and suggest the correction. Apart from this, the underwriter of the firm namely Dendy Securities Ltd did not query for the wrong report and did not provide advice. In addition, the share offering was fully subscribed as there was no need to make the contractual promise to Austin Retail under the underwriting agreement. Moreover, another issue was related to increase in general retail advertising for the goods made by Austin Retail during lodging of the prospectus to show more expenses. The firm also issued the shares with a premium of 25c that made the issue price to $3.75. But after three months of share issue, there was collapsed in forward orders to $7 million over two years. It also resulted in decline of share price to $2.50. It caused the issue for the institutional, professional and retail investors who are anxious for the future of the firm and ant to recover their losses.
Rules
According to Corporation act 2001, it is general rule in framing the prospectus is to invite the public to take shares on the faith of disclosures made in the prospectus. It needs to make disclosures in the prospectus with strict and scrupulous accuracy. All the disclosures should be based on fact and no fact should be omitted that could affect the nature or quality of the privileges and advantages in inducing the share purchasing. So, it is right of the investors to get the right information regarding the true nature of the firm’s venture in prospectus. Section 65 of the act also states that a statement provided in a prospectus should be considered untrue if there is any misstatement in the form. The prospectus can be considered as misleading if it presents the statements having untrue information. In the case of Derry vs Peek, the directors of Tramway issues prospectus having misstatements. The shareholders sued the directors of the firm for damage for fraud. However, the court declared that the directors are not liable in fraud due to their honest belief regarding the true statements in the prospectus. It needs to prove whether there is a fraud if the false representation is made in the prospectus knowingly and without belief in its truth and recklessly.
According to Corporation act, it is liability of the individuals including directors, promoters or even the company to pay compensation to the investors who subscribe the shares of the firm on faith of prospectus for any loss or damage. It may be due to the untrue statement given in prospectus. This section of the act is related to the determination of the reasons behind the misstatements of the facts in the prospectus. If the director of the firm authorizes the issue of the prospectus then it is not necessary to determine whether the director sees the prospectus or not. The purpose of this section is to protect the rights of the shareholders who have invested in the firm on the basis of the wrong disclosures made in the prospectus. This section is applicable for the following conditions:
- The firm has issued a prospectus to invest individuals to subscribe its shares or debentures.
- Any untrue statement is made in prospectus.
- The person, who has claimed for the damage or loss, has subscribed the shares offered by the prospectus.
- It is also required to determine whether the individual has subscribed for the shares based on the untrue information provided in the prospectus.
- It is also required to determine whether the individual has suffered from the loss or damage on subscribing the shares of the firm.
In order to determine the accountability of individual for the liability under section 62 as follows:
- The person, who is director of the firm at the time of issuing the prospectus;
- The individual who authorises himself as the director;
- The person who authorises the issue of prospectus;
- The person who promotes the prospectus
In the case of Edington vs. Fitzmaurice, the firm issued a prospectus to invite the subscriptions for debentures. In this prospectus, the firm provided wrong information regarding the purpose of issuing the debentures like purchasing of horses and vans and trade development. But the real purpose of issuing debentures was to pay the liabilities. Based on this information, a person purchased the debentures of the firm. The firm became insolvent that caused a big loss for the person. He filed the case against the firm and director for fraud. The court declared that the director was liable for the fraud as the investor made the investment based on the wrong information given in prospectus. In this case, the director was liable for the loss as he has misrepresented and made wrong misstatements in the prospectus. The object mentioned in the prospectus was opposite of the actual object of issuing debentures.
As per the Corporation act 2001, there is provision for the criminal liability for misstatement in the prospectus. The individual who has authorised the issue of prospectus with wrong information should be liable for his/her action as fine and imprisonment are major penalties for the culprit.
Besides of this, the Corporation act 2001 also explains the duties of directors or other officers, who exercise their powers and discharge their duties with care and diligence. Section 180 of the Corporation act (2001) states that the director needs to make proper decisions in good faith and for a specific purpose. At the same time, there should not be any personal interest of director in the subject matter of the judgement. Additionally, the director needs to inform about the subject matter of the judgement on which they believe to be proper. It is required for the director to make the judgement in the best interests of the firm.
On the other hand, the director has also defence of general liability in such case. A director or the person accountable for the prospectus will not be liable for non-compliance with the requirements of prospectus in the following conditions:
It is required for the director to prove:
- He/she does not have knowledge of the matter that is not disclosed in the prospectus.
- He is noncompliant raised from the honest mistake of fact on his level.
- If he/she withdraws his consent to be the director and if there is no consent and authority provided by the director in the issue of the prospectus.
- If the director does not have knowledge regarding the issue of the prospectus and if he becomes aware, he needs to give the public notice.
- If the director is ignorant of the untrue statement in the prospectus.
- The director can protect himself if he proves that he has a reason behind making any judgement in issuing prospectus.
- It needs to prove the material information does not solely determine the investment decision.
It is the prime responsibility of the person who authorizes the issue of prospectus, to provide the true state of affairs of the firm in the prospectus and not provide any fraudulent picture to the public.
Application
With the application of the Corporation act (2001), it can be stated that investors may get the liability for their damage or loss due to misstatement in the prospectus. From the case, it can be determined that the company issued a prospectus to invest individuals to subscribe its shares. It made untrue statement in prospectus to induce the buying behaviour of the investors to subscribe the shares of the company. The information related future order book was untrue. Company ignored the right data to make appropriate information in the prospectus. Even the sales manager of the firm and director ignored the errors in estimation of these orders. It means the untrue statements are made in prospectus. In addition, the investors who are intended to claim for the loss have also subscribed the shared offered by the prospectus. At the same time, the investors can prove that they have taken decisions for the investment in the firm based on the given information in prospectus. In addition, these investors are also suffered from the loss because the share price of the firm has fallen from $3.75 to $2.5. In relation to this, the court also declared in the case of Hedley Byrne and Co vs Heller and Partners that investors who rely on the negligent misstatement of the firm and incurred loss in their investment are entitled to the damage. Apart from this, the duties of director also make the directors of the firm liable for their actions as they provided misstatement in the prospectus that caused loss to the investors.
Under the Corporations Act 2001, Austin Retail Ltd and any other parties can defence on the position that the material information was not solely determine the outcome of the decision of the investor. However, this information can be considered by the investors while making investment decision. For instance, in the case of De La Cour v. Clinton, the court stated that the misstatement was not material and the plaintiffs did not sustain any loss or damage due to untrue or inaccurate statement in the prospectus. apart from this, they can prove that the loss to the firm was not due to the any statement in prospectus as they need to prove that all the losses were due to the changing external environment as the new entrants and competitors are causing high competition for the firm that are affecting its financial performance.
Conclusion
On the basis of the above discussion, it can be stated that there are more chances for the investors to get the damages due to loss on the investment made based on the misstatement in prospectus. The investors made their investment decisions on the basis of the material information given in prospectus. At the same time, the firm also provided such information to induce the investors to make decisions to subscribe its shares. The penalties in terms of fine can be the most appropriate in this case as it is the fault of the director to fulfil the damages. On the other hand, it can also be summarized from the case that the director of the firm can defence their position by proving their information being true in the prospectus or unawareness regarding any misstatement of the information. At the same time, the directors of the firm can also prove that they had no intention to make fraudulent practice in providing statement in the prospectus.
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