Reference no: EM133281953
Case: Swansea Media ("SM") is a Pty Ltd company with 20 non-employee shareholders and 40 employee shareholders and annual revenue of $45 million. The CEO and Executive Chairman of SM is Lee. The other 4 directors of SM are all executives within the company however they typically defer to Lee. Steven is the company secretary of SM and reports directly to Lee. The company's constitution adopts Corporations Act s 198A but also provides that no contract may be executed by the company involving a value in excess of $5 million without receiving approval by the members in a general meeting. This is a legal provision in the constitution derived from the original family nature of the company.
On 1 July 2022, Lee pursues an aggressive expansion project that will allow SM to expand its business into Brisbane and Melbourne. Firstly, Lee goes about setting up a new subsidiary company (SM2 Pty Ltd) that will carry on the trading operations of SM in Brisbane and Melbourne. Lee appoints himself as the only director and shareholder of this new company in documents filed with ASIC. As part of this process, Lee takes out a lease over another floor in the building where SM trades. The lease runs for 10 years and will cost the subsidiary company at least $9 million which SM guarantees. The lease will commence on 1 September 2022.
Secondly, Lee negotiates a new loan contract on behalf of SM with the Westminster Bank of Australia for $13 million. Aside from assisting with the expansion plans, the loan will also allow SM to pay off some outstanding invoices which SM had trouble paying due to a short- term cash flow crisis during the first quarter of 2022. Lee does not seek member approval for this loan. Lee signs the loan contract "for and on behalf of Swansea Media Pty Ltd". He signs the lease contract (Lee Lam, director SM2 Pty Ltd). Lee is unable to reach Steven (who is overseas).
During November 2022, the company's financial position becomes even more difficult. The $13 million loan includes several restrictive covenants which have made SM's operations more difficult. Most of SM's assets are secured under a prior bank loan and cannot therefore be used to obtain further finance to support the ongoing operation of the business. In addition, the
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landlord of SM2 Pty Ltd has made a demand on SM's guarantee for unpaid rent. Lee has been too embarrassed to tell the other directors of these problems. On 1 December 2022, it becomes apparent that Lee's expansion plan is a disaster and he admits to the board of directors of SM what he has done. The board members are furious at being deceived by Lee.
Question: Advise the Board of Directors of SM as to their legal rights and obligations under the Corporations Act 2001 (Cth) and the general law. Follow the HIRAC method.