(1). Indri runs a soil-testing business. He decides to form a company to take over the business. He is the sole shareholder and sole director. Indri sells his business to the company at an inflated price and lends the company $90,000 to help meet the cost of purchase. As security for the loan, Indri arranges a mortgage over a vacant block of land, which he transferred to the company as part of the business sale. In the first year of operation, the business makes a small profit (after paying both Indri and his 20 daughter’s wages), but by the end of 2012 it is clear that the building industry is going through a major slump. Indri becomes desperate and works even harder. While working late into the night, Indri badly lacerates his hand and needs micro-surgery. His efforts to keep the business afloat are in vain and the company is forced into liquidation. On realisation of the assets, it is found that the company has approximately $95,000 to go towards meeting creditors’ claims of $210,000:
(a) If Indri is the only secured creditor, will he get back his $90,000?
(b) Can Indri claim workers’ compensation, assuming that he is otherwise entitled to it?
(2). Mr Shifty, Ms Avoider and Mr Marginal call to make an appointment with your firm, Fees Ruthless,
solicitors. You have been asked to establish their new company (No-Tax Agents Pty Ltd). You advise
them not to bother with their own constitution, but instead to rely on the replaceable rules in the
Corporations Act. Advise who should be appointed as directors of their company in view of the
following information:
(a) Mr Shifty states that he does not want to be appointed a director or secretary. He suggests instead that:
his family company be appointed as a director; and the company not have a company secretary;
(b) Ms Avoider is currently unavailable for meetings as she has five months still to serve for her last
conviction for falsifying company accounts;
Mr Marginal is 72 years old and has Alzheimer’s disease. A trustee has been appointed to administer
his estate.
Assume that Mr Shifty’s family company subsequently goes into liquidation. In her report to ASIC, the liquidator states that the secured creditors have been repaid in full, but the unsecured creditors will not receive more than 20 cents in the dollar. The liquidator does not find any evidence of wrongdoing on the part of Mr Shifty or any of his fellow directors.
What (if any) ramifications does this have for Mr Shifty, assuming that ASIC’s records show that Mr Shifty has, over the last nine months, had a similar track record with two other small, proprietary companies?
(3). Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) which distributes and sells yachting clothing and equipment. As well as a warehouse and attached shop, Sailaway owns a large block of waterfront land which it uses for storage. Alan is also the chairman and majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land for subdivision into hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase. It already has a large overdraft and has no unencumbered assets to use as security for another loan. Alan organised a loan of $1.5 million to Broadacres from ABC Finance Ltd (ABC Finance) on the basis that Sailaway would guarantee the loan by executing a mortgage over its waterfront land. Alan signed the mortgage documents as a director of Sailaway and forged Bill’s signature as the other signatory. Tom, the local manager of ABC Finance, had been involved in earlier dealings with Sailaway and knew that its business did not include property development. However, Tom was away at the time the documents and the transactions were organised by a relieving manager who did not ask any questions about Sailaway’s involvement.
Broadacres is now in financial difficulties and has defaulted on the loan from ABC Finance. ABC Finance is seeking to enforce its rights under the mortgage against Sailaway.
Advise Sailaway whether it is bound by the mortgage.
(4). Andy, Bob and Chris were old school friends. Bob and Chris were running a surf shop together. The business was having financial difficulties. Andy had recently inherited a lot of money and Bob and
Chris asked him to lend the business $100,000 to enable them to buy sufficient stock for the summer season. Andy wanted to help his friends but also wanted to ensure that he would get his money back.He agreed to lend Bob and Chris the money in return for a payment of $10,000 per year out of the gross returns of the shop. The terms of the loan also provided that Bob and Chris would consult Andy about any major contracts entered into by the business and gave him a right to inspect the accounts at regular intervals.
Discuss whether or not a partnership exists between Andy, Chris and Bob.
Would it make any difference if the terms of the loan provided for Andy to be paid $10,000
per year out of the profits of the business?
(a). As stated in the context that indri is the owner of the soil testing business. It is learnt that he is both the sole director and shareholder of the company. As stated in the context that he is sole director of the company, in accordance with the companies act 2006 he has managed to undertake the responsibilities of the business and holding discussion with the company secretary under the companies act 2006. As per the rule of stated in the section 11(1) of the company Directors Disqualification act 1986 it states that the directors of the company should not be under the situation where they are in Bankrupt condition. The company in which Indri holds the position of director is a sole proprietor company and Indri has given a loan of about $90,000 to the company and it was learn in the meeting that Indri sold his soil testing business to incur the cost of purchase. As the Indri is the sole director of the company but though the company has another identity where the shares, funds and assets of the companies cannot be regarded as his own. So indri provided the company with loan by keeping his vacant block of land under mortgage for security reasons. It was learnt that during the initial stages the company was generating profit, however, from the year 2012 it was learnt the company started incurring loss and was in liquidation situation.
It was learnt that Indri is considered as the only creditor who is secured and has the legal right to get back his $90,000 from company under the “consumer’s credit act section 75”. However, it was learn that if the companies moves to the court and ask for some time, perhaps court can grant the appeal of the company under the “Bankruptcy Act 1914”. According to the company act 2006, it states that the company will be granted time to pay off their debt to the creditors but this can only be possible after a proper investigation is conducted. However, Indri being a creditor has to wait to get back his due amount of money (Al-Hawamdeh et al., 2013).
(b). A worker can claim for compensation from the company when he fall ill by doing the work of the company during the course of employment. The company is held “Vicarious Liable” on the occurrence of such event as the employees are employed during the course of employment. In such event the company is under the liability to compensate the workers. It is evident that if the workers falls ill or meets with some unforeseen circumstances during the course of employment has the right to claim for compensation. However, it is learnt that Indri is the only director of the company and the organisation is currently under the proprietorship so Indri cannot claim for the compensation of workers. In the current scenario, it is learnt that due to high pressure in work Indri fell ill and had to undergo microsurgery operation and the insurance company will be compensating Indri for his surgery rather than claiming for the compensation under the workman compensation act being the sole director of the company.
Section “201 G” of the “corporation act 2001” describes the replaceable rules for the appointment of the director by the company under the company’s act of managing directors 201 J. Such rules forms the basis of replaceable rule under the corporation act 2001 subsection 135 and 136. The case study reflects that Miss Avoider has been busy for a period of five month due to the conviction of accounts and Mr. Marginal who has been suffering from unstable mental condition due to the contamination of Alzheimer’s and he cannot be considered for the director post due to his unsound mind. In such a situation is best for the company to appoint Mr. Shifty as the director of the company as it has been clearly stated that Mr shifty does not want to be the director of the company but he wants the responsibility to be shouldered by some other person of his family members. On the other hand, it is observed that none of his family members is eligible to be the director of the company and he is the only person who can be appointed as the director of the company. It must also be considered under the replaceable rules of the corporation act Mr. Shifty can appoint other person as a director of the company on the basis of 201 H. As per the rules Miss Avoider can be appointed as the director to carry on the responsibility of the company after the expiration of five years (Ashraf, 2012).
Under the “Corporation Act 2001 ASIC” it is mandatory for the companies to maintain every record which has been clearly stated in the “Section 286 (1)”. It also states that financial records should be maintained by the company to determine the financial position of the organisation. Under “Section 9” of the “Corporation Act 2001” cheques, bill of exchange, promissory notes for payment and vouchers of the transaction should be recorded and preserved accordingly. Section 288 states that financial transaction can be maintained in electronic format. It also states that the balance sheet should also be supported by financial transactions like balance sheet, profit and loss account, depreciation, income tax, business tax, superannuation tax etc should form a part of such balance sheet. It is advisable for the company to maintain the list of customer’s files, creditors record along with stock listing should be kept under observation so that it can be used in future to determine the financial aspects when the organisation is incurring profit or loss. According to the assumption it is noticed that Mr.Shifty’s is incurring loss in his business and the creditors are claiming for their debts however ASIC is under obligation to maintain a record and obtain when required.
However, it is found that ASIC’s if performs a detailed investigation and observes that Mr. Shifty has no fault than the creditors cannot claim for their debt from the company. On the other hand maintaining a track record with the other small proprietor company cannot be checked as per the ASIC record as it is the rule of the corporation act that small scale companies and proprietor companies should kept under the ASIC record. So if the business suffers from any unforeseen circumstances then it cannot be investigated due to the lack of evidence and record (Nahar, 2015).
According to the case study it is known that Alan and Bill are the shareholders and directors of Sail way Pvt Ltd. The company is under the partnership form of business run by two members. It is also noted that Alan holds the position of chairman and shares of another company which is named as Broad acres pvt ltd. Alan has equal share of responsibility in both the organisation but recently it was seen that Broad acres needs money. In order to get the required fund Alan took a loan of $1.5 million from ABC finance and presented Sail way pvt ltd as the guarantor for the loans by taking a forge signature of bill. He also kept waterfront land of Sail Pvt ltd in the form of mortgage without the permission of Bill. However it is considered as a wrongful act since the assets of the partnership business is jointly held by both Alan and Bill and involves the decision of both members (Mason, 2012).
In the present case Alan performs a breach of contract under the partnership act which is punishable under the law. He is also liable to be held as guilty for taking a forged signature, which is an offence of breach of trust and is punishable under the law.
However, difficulties of Broad acres have started coming up when the ABC financing started claiming the rights of mortgage in the form of creditors. In this situation Sail way pvt ltd cannot be entirely held responsible as it bound by mortgage as Bill who is also the another director of the company is unaware of the mortgage and loan taken by the Alan from ABC financing company. Perhaps the company is not bound to give the mortgage property to the creditor whereas Alan is personally liable for his acts and he is under obligation to pay loan to ABC finance by himself. The companies act 1956 states that if Alan is unable to pay the loan of the mortgage then his company will be sealed by the government or because of the forgery conducted by him is punishable under the law (Keay, 2015).
According to the consumer credit act section 75 ABC finance can claim for their debt from Alan who is partially responsible and will be sued in the court of law because of his act of forgery which has jeopardise the company existence. The act requires that Partnership Company is bound to follow rules in order to facilitate proper functioning of the organisation. However, it is noted to gain unnecessary advantage of one company Broad acres pvt ltd Alan has kept risk of another organisation where Bill who is innocent has been harmed and he has the right to sue Alan for his act of negligence of tort. Hence, the act of forgery is considered as one of the main reason for damaging the business.
According to the case study, it states that a partnership is formed between Andy, Bob and Chris where a contract for deal is formed between the trios who are need for money in order to accumulate stock of the organisation. However, it was noted in the contract for business that Andy will be financing but the account details of the company are to be given to him. It also states that before performing any act of business, it has to be consulted from him and a payment of $10,000 per annum should be given to him. It is also states that if any breach of contract is performed than it can ask for penalty or even sue Bob and Chris in accordance with the law.
Andy is not only the partner of the company he is also the creditor of Chris and Bob and in order to generate profit three of the friends are performing the business activities. The law states that breaching of rules cannot be negotiated in such scenario Andy can act as a creditor for reforming the act under the company’s act 2006. The act also provides him with facilities to sue both Chris and Bob lawfully. In addition to this, if the terms are fulfilled than Andy will get more revenues because of the rule of the business as he will be considered as the decision maker and along with this, he will enjoy profits generated by the company in greater amount, which will be more than the amount from Bob and Chris. This is due to the financial stability of the organisation and the power of authority, which is more than his friends are. Therefore, in this scenario Andy can do any such activity which will help in maintaining the stability of the business in order to generate the profit for the business along with his own personal purpose (Lowry, 2012).
Such authority makes his role different from the other business partner. It is also noteworthy to determine that he can gain a profit of $10,000 per annum, which forms the part of the condition in accordance with the financial contact, which is made between his friends. The contract also states that the directorship and the shareholding aspect of the business is shared between the three members. However, in this case if the business occurs to be in loss or comes to dissolution, then in such scenario he is not under the obligation to claim for compensation from his partners as he is also the member of the business. Such scenario will eventually lead to loss of money, which he has given in the form of debt to other partners of the business.
Reference List:
Al-Hawamdeh, A., Chiu, I. H., Goergen, M., Mallin, C., & Mitleton-Kelly, E. (2013). The interpretation of the director’s duty under section 172 Companies Act 2006: insights from complexity theory. Journal of Business Law, 4, 417-433.
Ashraf, T. (2012). Directors’ duties with a particular focus on the Companies Act 2006. International Journal of Law and Management, 54(2), 125-140.
Barbu, E. M., Dumontier, P., Feleagă, N., & Feleagă, L. (2014). Mandatory environmental disclosures by companies complying with IASs/IFRSs: The cases of France, Germany, and the UK. The International Journal of Accounting, 49(2), 231-247.
Brown, A. (2014). ASIC: Schedule B reports: What we do with them and improving outcomes. Australian Insolvency Journal, 26(4), 40.
Brown, A. (2014). ASIC: The Senate inquiry into the performance of ASIC.
Chan, D. T., Hui, L. C., & Yiu, S. M. (2014, July). Assessing cryptographic signature schemes from a legal perspective. In Privacy, Security and Trust (PST), 2014 Twelfth Annual International Conference on (pp. 322-329). IEEE.
Douglas, K. J. (2015). The termination of the duty and authority of a bank to honour its customer’s cheques and other instructions for payment, including the broader implications for a bank of Sections 341 (2) and 348 of the Companies Act 1973 (Doctoral dissertation).
Keay, A. (2015). Assessing and rethinking the statutory scheme for derivative actions under the Companies Act 2006. Journal of Corporate Law Studies, 1-30.
Kelly, A. (2015). Consumer credit law: Payday lending practices: Why unethical loans are harming the vulnerable.
Lowry, J. (2012). Codifying the corporate opportunity doctrine: The (UK) Companies Act 2006. Int’l Rev. L., 1.
Mason, S. (2012). Electronic signatures in law. Cambridge University Press.
Mittal, I. (2016). Problems and challenges in implementation of consumer protection act.
Nahar, N. S. (2015). 038_Investigation into the Affairs of Companies under the Companies Act, 1956.
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