Commercial Law and Practice - Coursework Example

Company Law The world is arguably becoming a global village, and the tumultuous economic climate has left most companies on the verge of liquidation and bankruptcy. A company can be viewed as a legal entity that is artificial because it does not have the ability to live or die. It commences its operations after registration and can be said to have an effective death after it has been dissolved. Liquidation of a company is the process by which the assets of a company are investigated and distributed to the relevant parties that are legally entitled to these assets, so that the company can be dissolved. Dissolution of a company can be voluntary or through winding up. Voluntary liquidation of a company occurs when the shareholders of a company come to a consensus, pass a resolution saying that they have agreed to dissolve the company. On the other hand, the court may give out an order for the winding up of a company commonly done at the behest of a creditor who has not been paid. According to Ahmadu and Robert (425) global trends have led companies to be cautious in the way their operations are halted. Question 1 Liquidation of any company entails the winding up of financial statements in order to create time for effective dismantling of the structure of the company and help in fairly distributing the assets of the company to its creditors. Liquidation provides the only true way of ending the activities and operations of a company because both the assets and financial structure are evaluated (Ahmadu and Robert, 471). The court order for compulsory winding up Zed Ltd provides both the company and creditors with transparency and accountability because an independent entity, the liquidator, is given the task of protecting the interests of the shareholders, directors, creditors, and members. Since the court has appointed a liquidator, it shows that the creditor had enough proof to show that Zed Ltd truly is not able to pay all its debts. In addition, the company has in the recent past had cash flow problems. Therefore, Zed Ltd is insolvent. In the case of Niger Merchants Co. v Copper (1877) 185 ChD 557n, Jessel MR proposed that pursuing a winding-up petition for a solvent company is an abuse of the court’s process (Hicks and Goo, 609). Other such cases include Mann v Goldstein, and the sentiments of Malins VC in Cadiz Waterworks Co. v Barnett (1874) LR 19 Eq 182. Zed Ltd is unable to pay its debts; hence the creditor can apply to the court for a petition for winding-up. Section 123 provides information that can be used to substantiate whether or not a company is unable to pay its debts. The companies act provides provisions that are to be followed during liquidation as asserted by OECD (246). Although Zed Ltd was not aware of the petition filed in court by one of their creditors, the law requires the company not to accept any deliveries of goods for which it has not prepared any payment procedures. Also, the company is supposed to maintain the current status of its creditors, but it should not improve or make worse the situation. Nonetheless, any improvement or worsening of the situation may lead the directors to incur personal liability or be liable for misfeasance (Debt UK, 2008). The company has to ensure that no assets fall into the hands of creditors because they may be available for set off. Zed Ltd was under pressure to pay up its outstanding bills and debts; it sold a spare machine for ?10,000 whose initial price was ?9,000. Moreover, the company had donated a minibus to a charity in an attempt to promote the company’s image. However, Zed Ltd was not aware of the petition filed against it in court. The sale of the spare machine and the issuance of the minibus to charity involve company assets. However, the minibus was given to charity on 15 October 2009; creditor cannot challenge this move because it had taken place before the petition was filed in court. On the other hand, the spare machine was sold on 4 August 2011, while the petition was filed in court on 1 August 2011. Despite the fact that the spare machine was sold at ?10,000, and it was worth ?9,000, the company made the transaction after a petition had already being filed in court. This move can be challenged in court. During compulsory winding of a company, found under Section 253 of the Companies Act (Cap 50), the court declares it void and null any disposition or sale of company assets because this affects the distribution of assets to creditors (Government of Singapore, 2009). However, the court may allow for trading that is beneficial to creditors, as well as unsecured creditors. Also, selling of assets, which included selling the spare machine at a profit, is allowed because it does not cause any dissipation of Zed Ltd’s assets. Section 238 Insolvency Act 1986 requires the administrator or liquidator to apply to the court for transactions made at undervalue. The liquidator has to substantiate whether or not the company was insolvent during trading. According to section 239-241, preferences occur when a creditor receives more than the other creditors before a company goes into liquidation (Finch, 399). The creditor’s challenge of the sale of machine or issuance of minibus has no basis because he is not allowed to get more than the other creditors. The assets should be fairly distributed. The liquidator is entitled with the pivotal role of ensuring that company assets are collected, protected and any unfair preferences (sections 239-241) are investigated and reported to the creditors of the company as asserted by Australian Securities & Investments Commission (2). Once a petition is filed, the assets of a company and its operations are handed over to an independent liquidator. Since Zed Ltd was not aware of any petition, they went on to sell the spare machine. This can be challenged by its creditors. The liquidator is supposed to distribute the assets to creditors in order of priority without any defrauding of creditors (Section 423). The court can rule the assets to be investigated in order to restore the position of the company if the assets would still be available. A victim can apply to the court and not necessarily a director or creditor. Question 2 A floating charge is a pledge that a company gives, and it incorporates both current assets and future assets, but it does not fix on the assets in order to allow freedom for the company to continue with its operations until a time when conditions arise, within the terms of the loan agreement, allowing the lender to fix the charge on the assets. A floating charge has to be registered in order to be deemed valid. However, in case it is not registered, a court may rule the charge to be void. In case the floating charge was created within a span of two years for a connected individual (or six months for anyone else) of a company facing the possibility of being liquidated or an administration order issued against it, the charge may be categorized as an unlawful preference as established by Smith and Smith (151). In Re Westmaze Ltd (In Administrative Receivership) The Times July 15 1998, the court dismisses the application on the grounds that the charge was describes as ‘fixed’. Sections 238 and 239 require an application to be made by either the liquidator or administrator. The doctrine being used in this scenario is based on the fact that all creditors should be treated equally so that in case a floating charge is extended to one creditor, the creditor is placed at an advantage over other creditors by obtaining security for his debt. In case the above happens, the liquidator has to investigate and establish that the debtor was insolvent at the time the preference was effected to the creditor, or the creditor became insolvent because of the preference. In addition, the liquidator has to establish that the debtor’s desire instigated him to place the creditor in a position that is more favourable than they would have been in had the preference been denied. In the case of re M.C. Bacon Ltd, Millet J stated that it was not relevant to substantiate direct evidence of the desire- which could be deduced from the case’s circumstances (Finch, 400). In case, the creditor is a connected individual, there is a possibility that desire affected the company’s decision. Also, the preference has to have been granted within the statutory periods. Zed Ltd granted Janice, a director, a floating charge on 8 November 2009, which was registered with the Registrar of Companies. According to Birds et al., (1569) if a company is ruled to be insolvent under section 247 (2) of the Insolvency Act 186, a floating charge that was created by the company in question attaches to the property then comprised to the company’s property and undertaking or, in part of that property and undertaking. A floating charge attached on the property or undertaking of a company that has been created within six months of the initialization of the winding up process shall, unless it can be proved that the company was solvent soon after the charge was created, be invalid apart from any instance payment was made in cash to the company at the time of or consequently to the advent of and putting in mind the charge combined with its interest on that amount at the rate of 5 per cent annually. The floating charge will be deemed invalid if at all within the six month period the company were not solvent, and the charge was extended to secure money for the company. The floating charge is made invalid, but the debt is left valid and acts only as an unsecured debt. Since the floating charge was registered at the Registrar of Companies, any realization of assets resulting from the floating charge will first be paid to distinct priority claims in agreement with Section 328 of the Companies Act before the claim of the lender (Janice in the case of zed Ltd) secured by the floating charge is satisfied. Zed Ltd had registered the floating charge with the Registrar of Companies as required by law. However, the details of the charge have to be delivered to the registrar of Companies within 21 days of their creation and entered in the Register of charges which is open to public inspection (Smith and Smith, 153). Since Zed Ltd did not register the details of the floating charge in its own register, kept on its premises, a search of the register results within the 21 days period to reveal if the charge had been taken. Although Zed Ltd and any other company are obligated to keep its own register, any incident of non-registration has no effect on the validity of the floating charge. Moreover, a debenture holder can register the charge if the company fails to, and can recover registration costs from the company. Failure to register the charge leaves both the company and any responsible officer with the threat of been fined. Furthermore, failure to register within the 21-day period makes the floating charge void against any claim by a creditor, administrator or liquidator of the company in respect to corporate assets. Question 3 Zed Ltd has been facing cash flow problems at various periods of time in its history. Breach of duty is dealt with in s.212 Insolvency Act 1986. According to Butler (1) if a director of a company is found to have misapplied, preserved or is held accountable for any misappropriations of money or other property owned by the company or is found liable of a breach of duty, the court may rule that the director repays, restore or account for the funds or property with interest or provide a similar figure by compensating the company’s assets as the court may deem sound and appropriate. This applies to the duties of directors as outlined in the Companies Act 2006 sections 171 through 177. These sections incorporate the power granted to the directors to act within their power, their duty of care and duty to ensure there is no instance of conflict of interest. The term director covers a wide scope and integrates de jure directors of the company, de facto directors who take the post of a director without any formal appointment, and shadow directors, who are responsible for the actions of the official directors of the company (Dignam and Lowry, 13-14). De facto directors or shadow directors incorporate directors who are in place by fact. These include banks since they are usually involved with the management affairs of the company in an effort to protect their lending practices. Others are parent companies, or individuals who are held responsible for saving a company from going into insolvency, but do not entail insolvency practitioners. Campbell (261) stresses the fact that liquidators have the power and means to demand compensation from directors, who are found guilty of breaching their fiduciary duties to the company. s.212 Insolvency Act 1986 provides a summary remedy against default directors, liquidators, company promoters, company officers, and administrative receivers. The law can only apply if the individual has held office as an officer of the company, has been a liquidator or administrative receiver of the company, or has been involved in the promotion activities, formation or management activities pertaining to the company (Swadling, 261; Talbot, 40). The director or liquidator found guilty during the winding-up of the company may have breached any fiduciary or other duty that is related to the company. Sheikh and Rees (128) have established that creditor’s claims might, alternatively, be founded on the grounds that directors have failed to act in the best interest of the company and not on statutory breaches. Finch (160) argues that courts may remove liquidators, administrative receivers, voluntary liquidators, administrators, and supervisors of CVAs depending on powers of control. However, courts are generally reluctant to interfere in cases involving insolvency, and advice parties aggrieved by the actions of liquidators to apply to courts to reverse or modify these acts. Works Cited Ahmadu, Mohammed, and Robert, A. Hughes. Commercial law and practice in the South Pacific. London: Routledge, 2006 Australian Securities & Investments Commission. “Liquidation: A guide for creditors.” December 2008. 7 December 2011. 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