Aardvark Holdings Pty Ltd (“Aardvark”) is a company incorporated in 2014. It is the holding company of a group of subsidiary companies. The subsidiaries operate a variety of different businesses. One particular subsidiary is Better Nominees Pty Ltd (“Better”), which was incorporated in 2016, was established for the sole purpose of being the trustee of a trust, the Charlie Trust Fund (“Charlie”). Better (as trustee for Charlie) operates a dry-cleaning business on land owned by Aardvark. However, there is no separate lease agreement with Charlie and no rent appears to be paid. The sole beneficiary of Charlie is Aardvark. Aardvark has 6 directors: Delta (the managing director), Eric (the chair and Delta’s husband), Fox, Gideon, Hannah and Indigo. Each of the directors, except for Gideon and Hannah, owns one voting share in Aardvark. Gideon and Hannah own two and three shares respectively. The company’s head office is in Melbourne. All its directors and shareholders live in Melbourne, except for Gideon, who lives in Sydney. Aardvark follows the replaceable rules, with one exception. There is a clause that states that Aardvark cannot enter into any loan, or provide a security for any loan, in excess of $500,000 without the approval of the general meeting. Better’s directors are the same as Aardvark’s, but it does not appear to hold board meetings: the directors merely sign resolutions (which they term “circulating resolutions of Better”) when they are meeting at the board meetings of Aardvark. The dry-cleaning business is operated by Juliet, an employee of Aardvark. Neither Charlie nor Better have their own bank accounts: all revenue from the business is placed into Aardvark’s bank account, and all expenses are paid by Aardvark. These receipts and payments are booked as revenue and expenses of Aardvark, and there are no separate management accounts for Charlie. At the end of every financial year, the accountant for the group, Kilo Accountants, drafts minutes of supposed meetings of Better, which declare trust distributions 2 from Charlie to Aardvark equal to the profits from the dry-cleaning business. However, Kilo Accountants does not prepare separate accounts for Charlie. One of the customers of the dry-cleaning business, a wealthy entertainer known only as “Lim-Ah”, sues the business. Lim-Ah claims that the business damaged his very expensive clothes, valued at $500,000. The statement of claim is served on Delta, who immediately discusses this with Juliet. Juliet states that Lim-Ah does not have a case, as he had been warned of the dangers of the treatment on his clothes. After protracted negotiations with Lim-Ah’s lawyers, Mike November, it is agreed that Better (as trustee for Charlie) will pay a settlement amount of $400,000, inclusive of legal costs. The settlement contract is in the name of Better but, at the instigation of Mike, Aardvark is added as a party to the contract and Delta signs on behalf of Aardvark. Delta approaches Aardvark’s bankers, Oscar Banking Corp (Oscar), to ask about a loan. This is to cover not only the $400,000, but also $50,000 in legal and an additional $200,000 to cover the working capital of the dry-cleaning business, as several customers have stopped coming due to the litigation. Oscar does not want the loan in the name of Better, but would rather that Aardvark borrow the money, on security of the land on which the business is being operated. Delta calls an emergency board meeting, giving 4 day’s notice, via SMS on everyone’s mobile phone, saying that there is an emergency an everyone needs to meet. She does not explain exactly what will occur in the board meeting. Delta, Eric, Fox and Indigo attend in person. Hannah does not see the SMS and therefore does not attend. Gideon dials in on his mobile and is put on speaker phone by Delta. Gideon is angry at the proposal, as he does not want the land exposed to this liability. He says that the business should just be shut down. During the meeting, Delta constantly puts her phone on “mute”, so she can talk to the others without Gideon knowing. Before the vote is cast, she deliberately cuts Gideon off, claiming that her phone was low on battery. The board votes unanimously (with only Indigo abstaining) for the finance. Delta and Juliet attend the offices of Oscar the next week and sign the loan documents “on behalf of Aardvark”. Papas, the loan officer of Oscar, knows about the provision Aardvark’s constitution, requiring general meeting approval, but assumes this was obtained. He does not ask any questions. Gideon and Hannah are angry with the contract and call a general meeting. The notice is posted to all shareholders the day after the board meeting, with the meeting to be held at Gideon’s home in Sydney 3 weeks (21 days) after the board meeting. Gideon, Hannah and Indigo all attend, and vote to rescind the contract. They send notifications to this effect to the other shareholders and Gideon contacts Papas to state that the loan and mortgage have been rescinded. The following day, the Oscar Corp lodges the mortgage with ASIC as a charge under the Personal Property Securities Act. Your client is Indigo, who approaches you after finding out that the charge has been registered. You need to advise Indigo on whether Aardvark will be held liable for the any the loan from Oscar, the settlement amount payable to Lim-Ah or any other debts of Better. In particular, you need to advise as to whether the charge could be valid.
Thank you
