Financial Accounting of Sambal Pty Ltd - Assignment Example

Company Law Student’s Name Institutional Affiliation Question 1 Issue Jim and Peter are directors of Sambal Pty Ltd. Sambal Pty Ltd has a constitution that restricts the amount of money the company can borrow at any one time to $10m. The company already has a bank loan outstanding from the bank for $10m. The company recently took out another $2m loan from ABC Bank. The loan contract was signed by two of the company's directors and had been authorised by the board. The company is now claiming that the loan contract with ABC Bank is invalid as it contravenes the constitution. The company is refusing to pay interest to ABC Bank in relation to the $2m loan. Rule The corporations act of 2001 spells out the duties of the directors of a company. According to this law, the directors of a company are required to make judgment for a proper purpose and in good faith (Blackshield & Williams, 2010). Secondly, the directors of a company are supposed to make judgments that they rationally believe is in the best interest of the company. Furthermore, they are supposed not to have any personal interest in the subject matter of any judgment they make. The directors are prohibited by this law from using their position to gain personal benefit in a manner that may be detrimental to the interests of the company (Blackshield & Williams, 2010). The law also prohibits them from using information gained through their position to gain personal benefit at the expense of the company. Section 248C requires that a director may convene a meeting after giving a reasonable notice to all other directors. Part E of the same sections requires the directors to elect a chair to be chairing their meetings. The length of the service of the chair is to be determined by the directors. Part F of the same section deals with quorum (Parkinson, 2002). The section indicates that, unless the directors make another determination, the quorum for any directors’ meeting is two directors. This quorum must be present every time. Part G of section 248 requires a resolution of the directors to be passed by a majority of the votes that have been cast by directors, who have voting entitlement (Blackshield & Williams, 2010). The chair is allowed to vote; when necessary in addition to any other vote they may be entitled in their capacity as a company director. Application In this case, the directors have breached the constitution of Sambal Pty Ltd. Therefore, the company can take a claim in court against the directors who have breached their primary duties if it can show that the breach is likely to affect the performance of the company (Lowly & Dignam, 2006). An arrangement or contract entered into by a company in a situation where the directors have breached their fiduciary duties can be declared void by the court. In this case, the loan that ABC bank lends to Sambal Pty Ltd can be declared void by the court because its approval breached the constitution of the company. Conclusion Sambal Pty Ltd can seek for the rescission of the loan contract with ABC bank or repay the money without interest if the court declares the loan as void. If the loan contract is rescinded, ABC bank can seek for damages, not from Sambal Pty Ltd but from the company directors who breached their fiduciary duties. If the company decided to pay the money without the interests, ABC bank can seek for repayment of the interest from the directors of the company and not the company. Therefore, liability lies with the directors of the company who violated their duties by failing to respect the company's constitution. Question 2 Issue Susan is a 25% shareholder of Rich Pty Ltd. Rich has not paid a dividend to its shareholders for the last 3 years. Susan is unhappy with the board's refusal to pay a dividend and believes that, as a shareholder, she deserves better and that she has the right to receive a distribution of the company's profits. The board has not provided any reason it is refusing to pay dividends. Susan is unsure of the company's financial position but thinks that the company can afford to pay dividends. Rule Section 254T of the Corporations Act 2001 requires that profits support dividends. Since profits are important in the ability of a company to pay dividends to its shareholders (Krakkman, 2004). There has been a discussion on what constitutes profits. Arguments in this discussion include whether accounting standards should be put into consideration, whether profits should be counted from circulating or fixed assets, and whether profits from fixed assets that were unrealised would apply. In Industrial Equity Ltd v Blackburn, the judiciary held that consolidate profits were not important in computation of profits that support dividends. They only profit that could be distributed according to the high court was the profits on the head company (Kirby, 2005). The same section of the Corporations Act 2001 states that a company should pay the shareholders the dividends they are entitled to if its assets are more than its liabilities immediately after the declaration of the dividend and the excess is enough for dividend payment (Krakkman, 2004). The section also states that a company can only pay out the decided dividends to the shareholders if the payment of the dividends will be fair to all the shareholders. Furthermore, a company can only pay dividends to its shareholders if such payment does not compromise the ability of the company to settle its debts with its creditors. The dividend policy of any company is a subject that can only be addressed to the board. Application The fact that Susan is unsure of the financial position of the company makes it hard for her to take any action against the company. Though she believes that the company has been making profits, and thus the company should pay her the dividends she deserves, it is important to understand that the company board and not the shareholders control the dividend policy of a company. There are certain provisions in the Corporations Act that dictate when a company should issue dividends. If a company has not met any of those provisions, then it would be imprudent to issue dividends. Conclusion Susan should first approach the company’s management and ascertain the financial position of the company. Any company is supposed to issue its shareholders with its annual financial reports for perusal and verification, and inform them why dividends will not be awarded. Failure to provide the shareholders with such critical information goes against the rules of disclosure. Furthermore, the Corporation Act 2001 calls for transparency in accounting standards, and disclosing the financial information about the company to the shareholders is part of this transparency (Michael, 2004). Therefore, Susan should demand that the company furnishes her with the financial reports for the three years, and with the help of a financial expert, she can determine whether the company was in a position to issue dividends or not Question 3 Issue John, Sam and Mark are the only shareholders and directors of Maya Pty Ltd. Mark owns 27% of the shares and his cousins John and Sam (who are brothers) each own 36%. Recently, the relationship between Mark and his cousins broke down. Mark has moved to Darwin and no longer actively involved in the company's management. John and Sam called a general meeting to be held at John's beach house in Brisbane on Good Friday at which they proposed a resolution to remove Mark from the board. The notice of meeting was sent to Mark but delayed in the post and did not reach him until the week before Easter. At this stage, he was unable to book a flight from Darwin to Brisbane so could not attend the meeting. Rule The corporation Act lists the procedures necessary for holding company's meeting. First, every member is entitled to receive an invitation notice. Secondly, in a meeting of directors, a quorum must be at least two people unless the constitution states otherwise (Enright, 2006). The act also provides that a director of a company can be removed through an ordinary shareholder resolution or by a meeting of the board of directors, especially when the director in question is incapacitated, disqualified or has neglected their duties. The alleged director must be given an opportunity to be heard before he or she is removed from office. Application The meeting that passed a resolution to remove Mark from the position of a director in the company's board had a quorum of two members, as provided by the Corporations Act 2001. Furthermore, Mark was invited for the meeting through a letter, which delayed in the post. Therefore, the directors had acted in accordance to the provisions of the Corporations Act 2001, which entitle every member to an invitation to a meeting (Enright, 2006). The Act provides that a director can be removed from office by a shareholder resolution, by a meeting convened by the board of directors if he or she is disqualified, incapacitated, or has neglected his or her duties. In this case, Mark has neglected his duties as a director of the company, which means that there is resolution passed to remove him from the board is in line with the provisions of the Corporations Act 2001. However, Mark has not been given a chance to be heard before he is removed from office, as provided by the law. Conclusion Sam and Mark have acted in accordance to the Corporations Act 2001 in their process of removing Mark from the board of directors. They have invited Mark for a meeting, but he does not attend the meeting. The meeting that has passed the resolution has a quorum. Furthermore, the law supports his removal. The two directors have only passed a resolution but have not enacted it. If they go ahead to enact the resolution they have passed, to remove Mark from the office without giving him a chance to be heard, Mark can sue for damages arising from the loss of office. However, if they give him a chance to be heard, they will have acted within the law. References Blackshield, T; & Williams, G. (2010). Australian law and theory (5 ed.). Annandale, NSW: Federation Press. Enright, C. (2006). Legal technique. Melbourne: University of Buckinghamshire, Kraakman, R. (2004). Anatomy of corporate law: A comparative and functional approach. New York: Oxford University Press.  Kirby, M (2005). Company law in Australia: Principles and applications: Complexities of the corporations Law. Australian Journal of Corporate Law, 20 (1), 88-90 Lowry, J., & Dignam, A. (2006). Company law. New York: Oxford University Press McDermont, P. (2006). Company law in Australia. Sydney: OUP Michael, C. (2004). Companies acts: In history of accounting. New York: Garland Publishing Read More