BTW2220 – Answering Company/Trusts/business law problems : ‘IRAC’ method method A logical way to demonstrate your understanding or business law principles in answering problemstyle questions is to use the ‘IRAC method’.: I Issue(s) – identify the issue(s) R: Rule – explain the relevant legal rule, using relevant cases and/or legislation. Explain the legal principles/criteria/rules in YOUR words to show your understanding of them. A: Application – apply the law to the facts of the problem stating how the facts do or do not satisfy the legal tests/criteria and comparing/contrasting the facts of your problem to the fact *(and outcomes) of relevant cases. This will justify your.. C Conclusion: draw a conclusion (your opinion) on that issue , then move to the next issue to repeat the process. issue, rule , application, conclusion, issue rule, application, conclusion, I R A C etc etc.
What does the IRAC method look like in an full answer – well this is something you are expected to have mastered in the prerequisite units. Students articulating form TAFE TAFE are (and have been) encouraged to write a full answer to tutorial problem(s) early in semester and obtain feedback form your Tutor/Unit adviser about your method as well as the contents of your answer. However, as requested, I have now created the beginnings of a ‘sample answer’ for a hypothetical problem, and I have annotated it to clarify what I mean by ‘identify issue(s); ‘explain the law’, ‘apply the law to the facts’ and ‘draw a conclusion’. The sample question is a simple one and I have tried to make the sample answer brief –you should consider ways in which this ‘sample’ answer’ could be improved.
The problem:
Fred Flubber has been running a business for many years in which he manufactures rubber wares. Late last year, Fred’s accountant recommended that he form a company to carry on that business. A new company was duly registered with the name “Flubber’s Rubber Pty Ltd”, with Fred as the sole director and the major shareholder. Fred is the sole shareholder, owning 1000 shares with an issue price of $1, but paid to 20 2 0 cents. Fred also received 50,000 , $1 shares in payment for his business’ assets. In July this year, Fred ordered $1 M of raw rubber from the wholesaler for his business, as Fred has done on many occasions. When the manufacturer confirmed details of the invoice, Fred said that it needed to be made out to his company, Flubber’s Rubber Pty ltd. Unfortunately this involve has remained unpaid. The manufacturer ins now suing both Flubber’s Rubber Pty Ltd and Fred, claiming that claiming if Flubber’s Rubber Pty Ltd won’t or cannot pay, then Fred should be personally liable for the debt – as he both ran the company and owned all the shares in it. Advise Fred orf the extent (if any) to which he is liable for this debt.
Below is a sample answer to this problem. You may well disagree with some or all of the conclusion – but the important thing about an answer to this problem is that it raises ra ises the issues discussed below as these are raised by the problem set; AND that for each issue the answer must explain the relevant law and apply that law to the problem’s facts (where important facts are missing, consider all alternatives) and then draw a conclusion on that issue (and an overall – BRIEF- conclusion at the end of the answer). © J O’Relly
One solution, using ‘IRAC method’ described above. Please note, this is intended as a sample answer, not a perfect, ‘Model answer’. [This answer has been prepared in Exam style (no case citations)] identify all areas/issue to be disucsse disucsse d inthe solution identify first issue explain law, using cases and/or legislation apply each legal point/ test/criteria test/c riteria to the facts of problem, so you can draw a con conclusion clusion on ea ch point conclusion on (fir (fir st) issue explain law, using cases (and/or legislation) apply the law to the facts of problem conclusion on 2nd issue
explain law apply the law to the the facts of proble proble m conclusion(s) on 3rd issue
Fred Fred orde red the rub ber on behalf of the bus iness. That That bus iness now operates a s a company, company, taher than as a sole tradership. tradership. In determin determin ing Fred’s potential personal personal liability, we we must con sider the natu re of co mpanies and a lso the typ e of com company pany h ere, in order to ascertain Fred’s personal liability as a director and/or as a shareholder Firstly I will discuss Fred’s Fred’s po ssible liability liability be ing a d irector irector of Flubber’s Rubber Pty Ltd. This involves the nature of compan compan ies ies as ‘separate legal entities’ entities’ and the existen existen ce of the ‘corporate vei l’. Since Since Fred’s Fred’s Flubber Pty Ltd was was registered as a company, company, it e xists xists as a s eparate eparate legal entity capable of making contracts in the same way that a human being (natural person ) may may make make co ntracts and then s ue or be sued on those contracts. This recognised by s124(1) s124(1) Corporations Act, which gives every registered company the full legal capacity capacity of natura l person . For For Fred, th is means that Fred’s F lubber Pty Pty Ltd Ltd had the legal capacity to form the contract with the rubber manufacturer, and then it is the company., Fred’s Flubber Pty Pty Ltd, that is legally repons ible ible to fulfil fulfil that contract (or be sued for breach breach of contract). Th is is similar to Salomon v Salomon & Co Ltd where Mr Salomon was held to be separate form the company which he ran and of which he owned nearly all the shares. Fred may be the sole director and run the company, company, but in the eyes if the law, Fred is s eparate to his company company an d he is NOT automatically responsible for debts like this rubber purchase debt. Although he operates and runs the company, like all company directors and managers, he is protected from personal res ponsibility ponsibility for the co mpany ’s actions by a protective barrier known as the ‘corporate veil’ - unless there are g rounds t o lif liftt that veil. This means t hat as a director, Fred is NOT responsible for for this d ebt of the company companyunless identify 2nd there are grounds to lift the corporate veil. issue For lift lift ing of the corporate veil, there mus t be certain certain circu mstan ces to allow the veil to be lifted either at common law or under legislation. At common law, grounds for lift lift ing the corporate veil include where a co mpany was created t o commit commit fraud (eg Re where the Darby) , or to avoid a legal obligation (eg Gilford Gilford Motor Co v Horne) , or where company company h as be en knowingly knowingly involved in breaches of director’s dut ies. In In this scenario, there are no facts to indicate that any of these circumstances existed, so unlike Re Darby or Gilford ’s case, there are no grounds to lift the veil at common identify 3rd law. The only possible relevant s tatutory grounds for lifting lifting the veil under issue Corporations Act here might be insolvent trading. S588G prohibits company directors from allowing the company to incur new debts at a time when the company is unable to pay existing existing deb ts as they fall due (ie ‘ insolvent’, a95A), or if incur ring ring suc h new debt(s) debt(s) would ma ma ke the co mpany ins olvent. On the facts , we we are only told that F lubber’s Rubber Rubber Pty Ltd Ltd (‘FR’)has n ot paid the $1M invoice - we have insufficient insufficient facts to decide whether the company was was enga ging in inso lvent trading trading , so we cannot be s ure either either way. If there were facts that FR was was insolvent, then as in [use a case as a comparison], comparison], Fred Fred would be p ersonally liab liab le for for th e ins olvent trading debt under s588J,K and M. Without such facts, Despite being a director, Fred would identify 4th not b e personally personally liab liab le for for t h is $1M debt, only FR (the co mpany ) would would be liab le. issue Being a s hareholder of FR, Fred may b e liable liable to con tribute money t o FR to pay repeat outstan ding debts if FR is would would up. Since FR is is a limited propr ietary ietary limited process company, company, the l iability of Fred as a shareholder is limited limited to ... On the facts , this (I,R,A,C) means th at ..........
... then at end : overall overa ll conclusion conclusion - make sure sure you have ANSWERED the specific que que stion a sked. © J O’Relly
© J O’Relly
