Module Code: 2105AFE

Module Subject: INTRODUCTION TO BUSINESS LAW – PROBLEM SOLVING ASSIGNMENT

Word Limit: Your answer to the Hypothetical ILAC Question must be no longer than 2000 words.

HYPOTHETICAL ILAC QUESTION: (25 marks)

Suzie is a high-net-worth entrepreneur who owns several successful businesses selling high end makeup and fashion products. She has a long-standing professional relationship with Bill, her accountant, whose firm manages the tax affairs of her businesses. The physical toll of running several businesses has meant that she is looking for passive investments to grow her wealth, but not add to her gruelling management duties. In short, she is looking to invest profits from her business portfolio into other investments but take no part in management. She proposes several ideas to Bill, but Bill declines to give her any advice other than to ‘proceed carefully’. As a member of CPA, Bill is required to decline providing investment advice, which in this case would require a financial planning degree or similar certification. Noting Suzie’s disappointment, Bill agrees to undertake some research so he can find someone with the appropriate skills. Several days pass and Bill contacts Suzie via phone to let her know that he has a couple of names of appropriate investment advisers. He notes that, whilst he was unable to perform full background research, the names provided claim to provide all of the services she would require, and he has heard ‘positive things’ about the firm involved. However, he mentions that given the importance and size of the investments she was about to make, she should ‘make a few more inquiries of her own’ in relation to the firm.

Suzie is thrilled, and quickly contacts one of the names provided. She trusts Bill’s judgement and therefore does not conduct any further inquiries. She contacts Bert’s Brainiac Accountants, one of the recommendations by Bill, and is relieved to hear she will be assigned the managing partner, Bert Brain. Bert looks over the documentation and financial accounts that she provides and discusses at length some possible investment options. Bert is well connected with several friends at venture capital firms and therefore has several promising start-up businesses on his books.  Cat Bowtie Emporium Pty Ltd (CBE) is a particularly promising option having recently had articles featured in several national newspapers. Bert mentions CBE’s financials are sound, and it is ‘ready to explode’. Suzie believes there is a natural link with her other businesses, as her clients would want their cats to be as well dressed as they are. She says she would be interested to invest and instructs Bert to set up a meeting and complete further research on the company.

Suzie meets with the founders of CBE and having received a positive report from Bert, she quickly agrees to invest. Whilst sales are initially quite promising, CBE is losing money rapidly. The profit margins on the bowties are quite low and given the niche/ specific nature of the goods, the marketing budget is quite high to maintain sales. Suzie is put in a position where she must invest further funds in the business, or the company will fail. Despite several cash injections from Suzie, the company inevitably fails, and Suzie loses her entire investment (approximately $10,000,000). In a further blow to Suzie, she has widely advertised her involvement in CBE and given the spectacular failure of CBE, her reputation has greatly diminished. This has affected other investment opportunities as she is now seen as someone who was ‘lucky’ with her initial success, rather than someone possessing genuine business expertise. This loss of reputation has caused Suzie to start taking anti-depressants, which have helped, but have also exacerbated other health issues.

Suzie is angry, especially with the advice she received. She has since learned Bert does not possess the relevant certification/ education to provide investing advice of the kind he provided to her. It would seem that Bert has so far managed to avoid poor outcomes due to his connections in the industry. Aside from Bert’s lack of education, the report on CBE was incomplete and did not adequately account for sales slowing down after the initial marketing campaign. However, it did mention concerns about the high operational costs of the business relative to other start-up businesses with similar revenue. Suzie skimmed over the report, but missed this warning in Bert’s report as it was contained in the appendices far away from the more comprehensive business and financial analysis.

Suzie is now coming to you for advice on whether she has a claim in negligence against Bert. Please restrict your answer to discussion of the Civil Liability Act 2003 (Qld)and the supporting common law that was discussed in the Week 5 and 6 (Torts Law Parts 1 and 2) lectures and associated workshops.

 

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