1.a) Legal advice to ASIC regarding ME Enterprises Pty Ltd
Issue
M.E. Enterprises Pty Ltd a registered company, after investigations by ASIC and complains by supplies was found to be in liquidity problems. The company had liabilities that exceeded its assets. This was evident in two instances where in the May 2017 ME Enterprises Pty Ltd faced financial challenges in paying its suppliers. This was also repeated in in June of 2017 when the Australian Taxation Office demanded payment of company taxes.
During this period one of the directors Liam a non-executive director had been diagnosed with cancer and was unaware of the non-payments in May and June of 2017 to both the suppliers and the Australian Taxation Office. The other director Peta is the one who is involved in the day to day running of the business. The payments in the organization had been delegated to employees who ensured that creditors are paid on time.
Rule
According to the Corporation Act 2001 a company is defined as a separate legal entity with a distinct legal existence. This existence is separate from its directors and employees (Farrar, J., 2011). A company also has the capacity of an individual like to enter into contracts, own assets, sue and be sued.
Under certain circumstances directors of the company are personally liable. Some of these circumstances include the following.
Areas suffered when a business becomes broke
One of the most important duties of a director in an organization is ensuring that the business does not engage in transactions when it’s insolvent. A business is declared insolvent when it’s unable to pay its debts on time. This is evident when creditors and legal authorities start demanding to take action. In this particular case the directors are liable.
Losses incurred due to directors negligence
Directors who are responsible for the day to day running of the business are held responsible if losses occur due to their negligence. This can be due to actions of commission or omission (Deegan, C. and Rankin, M., 2016). For instance, entering into illegal contracts or falling to report insolvency to shareholders and relevant authorities.
Regulatory inaction towards directors
This mostly applies in instances, where directors are directly liable if the fail honoring laws being administered by other agencies like the Australian Taxation Office (Tomasic, R., 2016). Directors have a legal obligation to ensure PAYG (Pay As You Go) is paid.
Analysis
In this particular case from the issues and the rule, there is a case of negligence and breach of contract by one of the directors Peta who is involved in the day to day running of the business. She is found liable for not taking adequate action as evidenced by Lord Hardwicke in the case of Charitable v Sutton. He said a director may be guilty of acts of omission or commission. He noted that by a director accepting directorship he or she should take due diligence in executing his or her mandate.
Conclusion
There was evidence of Peta failing to perform her duties diligently by preventing the business from being insolvent, hence accuring debts to creditors and also failing to honor the company’s tax obligations to Australian Taxation Office. The ASIC should bring civil action against Peta, the director who was involved in the day to day operations of the company. Liam should not be affected with either civil or criminal action as he is a non-executive director and was undergoing treatment during the May –June 2017.
b. Penalties ASIC would press on Peta and Laim
ASIC would not press any legal charges and penalties to Liam as he was a non-executive director during the period of the breach of contract. On the other hand Peta was actively involved in the day to day operations of the company (Deegan, C. and Rankin, M., 2016). According to the case of Charitable v Sutton, he should have taken due diligence to ensure the business wasn’t insolvent and was able to pay its taxes. In this regard the following penalties will be pressed on Liam.
2.a) Conflict of interest contract between Gnosis Records and Banger
Issue
Cloud-Tech Pty Ltd is limited company with three shareholders, Alexandra, James and Simone who are also directors of the company. Alexandra enters into a contract with another company Gnosis Records against the other director’s consent using a different company Banger Pty Ltd. She secretly steals Cloud-Tech clients, contacts them, but they decline her offer making the other two directors very angry.
Rule
This is a criminal case because Alexandra deliberately stole from her fellow shareholders. According to the Corporations Act 2001 directors can be held personally liable if they breach the company’s contract. This can be outlined in the following key responsibilities of directors.
Analysis
In reference to the Perry’s Case e of Re Montrotier Asphalte Company directors are advised from not engaging in businesses that are in conflict with their companies (Joseph, P., 2013). In this particular case Cloud-Tech should take criminal action towards Alexandra for personally entering into another legal contract behind Cloud-Tech back disguised as Banger Pty Ltd. Cloud-Tech should seek for maximum penalty against Alexandra for not acting in good faith. Her actions could have also crippled Cloud-Tech making it insolvent.
b. Alexandra’s use of Cloud-Tech’s client list
According to the Corporation Act 2001, Cloud-Tech should seek criminal charges against Alexandra for first stealing and contacting Cloud-Tech clients behind their back. This will ensure that the contacted clients gain their confidence back to the company (Brock, D. et. al, 2012). Alexander did act in good faith and also didn’t have the company’s best interest with her actions. If her actions could have succeeded Cloud-Tech could have been declared bankrupt. Alexandra’s actions were criminal and breached on the contract they had agreed as directors.
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