Corporate Law Subject - Essay Example

QUESTIONS NO In answering no of whether or not Wondersteel could be guilty of deception or fraud resulting in the invalidation of the contract in entered into with Bevin Brown, my answer is as follows: Under question no. 1, issue no.1 issue, DISCUSSION: From the facts of the case, it appears that with the twenty five thousand shares offered to shareholders to sell their share to the company, twenty thousand shares were sold by Bevin Brown. There also appears to be an intention to target Mr. Bevin, who happens to be old by reason of his being retired school teacher. You can again add this to the fact that the small print in offer is alleged to have not been understood by Bevin. Under the law, a man is has the constitutional right to be presumed innocent until proven guilty by a court of law. The accuser has the hard work to prove the accused is guilty. If the Australian Securities and Investment Commission will sustain this theory and it can be proven by evidence, this would constitute vitiation ( impairing the quality or effectiveness of an act such as to contaminate, spoil, make invalid) of consent which would make the contract voidable ( contract is valid unless it is questioned or objected, then, it is made illegal or void).(www.allwords.com). Under the corporation law of Australia, the contract is invalid if voidable. A voidable contract may be held valid if there is failure to question the same within the time prescribed by Australian law. _______ www.wikipedia.org (2005) www.asic.gov.au (2005) In the Australian Stock Market, the seller offers a price and a buyer bids a price. There can be no exchange of stocks without free consent of both. You could reference see point in time legislation and updates to determine if you are following the law. If Bevin could prove fraud there will be cancellation of contract and a possible award of damages to Bevin. Since Bevin signed and approved the sale of his shares, then his negligence for not reading the fine print is not ground for cancellation of contract. To answer the SUB ISSUE no 1, the possible defenses and remedies of Wonders to uphold the validity of the contract is as follows. DISCUSSION:Wondersteel could invoke the defense of good faith by proving that it did not compel Bevin to sell his share because other stockholders were also offered to sell their share aside from Bevin. Under a free market economy, the seller offers a stock or product at a proposed selling price. The buyer or bidder then gives a bid price, usually lower than the offer price. If they both do not agree to the offer and bid, then the seller may lower his offer price and the buyer may increase his bid price. This is the normal practice in the Australian Stock Exchange. No force or intimidation was seen in the situation here. In answering ISSUE NO. 2, Regarding possible loan contract violation between Wondersteel and XYZ bank my opinion is as follows. The case states that Mr Malcolm _______ http://www.asx.com.au/index.htm (2005) http://portsea.austlii.edu.au/pit/ (2005) www.newadvent.org (2005) used some of the loan funds to pay Malcolm's mortgage repayments of his luxurious Sydney home and private school fees for his children. He also transferred a very large amount out of the loan funds to an overseas corporation, which owns 51% of Wondersteel' shares. In fact Wondersteel even defaulted on its repayment to XYZ and a receiver was appointed under the terms of the charge document. DISCUSSION: It appears that Wondersteel ,by prima facie, violated its contract with XYZ Bank. Although XYZ Bank is not without recourse, when a receiver was appointed under the terms of the charge, the use of the loan funds is still unjustified. Mr. Malcolm as director owes loyalty to Wondersteel. Under the law ,directors are agents or trustees of the corporation. As agents or trustees they hold a fiduciary relationship with their corporation which is their principal. The directors, according to the Australian Corporation law, required to safeguard the assets and the liabilities of the corporation. It is not even a mere conflict of interest but a flagrant violation of trust between a directors and the corporation. In the case of transfer of large amount of loan funds to a corporation which owned 51% of the Wondersteel, the act is still unjustified. This is despite the possibility the overseas corporation authorized Mr Malcolm as Major ________ www.bii.co. (2005) stockholder it controls decision making in Wondersteel. Under the general principles of corporation law, creditors like XYZ must be protected before the owners. They must not be prejudiced by the acts of the owners. In fact, when a corporation will be under liquidation, creditors' claims must first be satisfied before the owners. Under the principle also of piercing the veil of corporate entity the stockholders cannot hide under the guise of having separate personalities from the corporation. The financial statements should be easily understood by stockholder, creditors etc. The act of disloyalty of Mr. Malcolm, by misappropriating some of funds for his personal us, is aggravated by the fact that he is unconcerned that Wondersteel would eventually be wound up and deregistered. With this it can de deduced that he really planned to terminate the life of Wondersteel with the final objective of terminating the life of Anything Metal, a closely owned subsidiary of Wondersteel. It appears that it is the killing of Wondersteel which would kill Anything Metal. The killing of the latter would in turn deprive the employees of their claims under the tort law. As to possible defense of Mr. Malcolm, he must prove that the funds used for the luxurious Sydney home and the payment of school fees for his children did not come from the loan funds but are valid compensation from the corporation. As to the transfer of funds to the overseas company, it must be proven that it was not done in bad faith. The loan from XYZ has a floating and fixed charge, means the loan is backed-up by enough collateral and the creditor could have _____ www.companydirectors.com.au/ 2005 investigated very carefully before it had extended a loan to Wondersteel. XYZ, being secured creditor, is not without recourse because it could go after the real property and trading stock as a result of the floating and fixed charge. In a great probability it will recover from the loans. It appears that it would be the employees of Anything Metal that would suffer the losses because the XYZ loan was backed up by the floating and fixed charge. Anything Metal was at the losing end. The funds that it would have needed even went to Wondersteel. Given the fact that it has limited assets and has a fixed and floating charge over its real property and trading stock is even made worse by the fact the charged document was not formally approved by the board of Anything Metal. This is further aggravated by the fact that Anything Metal did not benefit from the loan because it was advanced to Wondersteel which is also being deprived of its funds as mentioned earlier. In the result of the investigation of ASIC it appears, from the facts presented in this case,that Mr. Malcolm had a hand in what really happened to Wondersteel and Anything Metal. Again there has to be a court hearing where both sides can bring out evidences which were not indicated in the case at hand. This could tilt the balance of blindfolded justice lady to one or the other side. In answer to the ISSUE NO. 3, asking if Article 259A of Corporation Act is breached my answer follows: DISCUSSION: There was transfer of funds from Wondersteel to the overseas corporation which owns fifty one percent of the former. The transfer of funds, based on the initial facts appearing here, to have amounted to directly acquiring its own shares because there is no reason to transfer funds. The Australian Corporation Act of 2001 among others also provides that under 259A A corporation directly acquiring its own shares a company must not acquire shares (or units of shares) in itself except: (a) in buying back shares under section257A; or (b) in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or (c) under a court order; or (d) in circumstances covered by subsection 259B(2) or (3)." It appears that this may have been violated. As a defense of Wondersteel, it must prove that the transfer funds was done under a valid reason. The initial facts of the case does not show that the buy back of its own shares was not in violation of the Australian Corporation Law of 2001. Again, Wondersteel can present evidence in a court hearing that they have additional evidences to the fact that all transactions, particularly this transfer of funds from Wondersteel to another overseas company is not in violation of the Australian Corporation Law of 2001 and thus create disadvantage to the creditors of Wondersteel, the stockholders of wondersteel, the employees and let us not forget the regular customers of Wondersteel. Evidence must be presented by both parties for a appreciation and court judgment to be arrived at. QUESTION NO. 2 In answer to the final exam question as to what legal advices we could give Malcolm in relation to his functioning as company director of Comptech, my opinion is as follows: I would advice him to continue liquidation. Comptech has no where to go because the company is already insolvent. According to the liquidators. It even defaulted in payment of its debts. But in the liquidation, he must follow the law as to who should be paid first. However, if we look at the various glaring violations we will note the following. There was really no registration of members and no adequate financial records, such as balance sheet , income statement and statement of cash flows, to enable true and fair financial statements. This non registration of stockholders failure resulted also to failure to have the statements audited and therefore failure to lodge financial records with Australian Securities & Investment Commission.. There was a complete failure and from these premises we could deduce that the record of liabilities and assets may not be proper and fairly presented. This will cause undue disadvantage to the company's creditors, stockholders, employees, management, government taxation and other government regulation agencies, it suppliers and last but not the least, its customers. Therefore, liquidation must be coupled with the reconstruction or adjustment of the balance sheet and income statement and even statement of cash flows for compliance with the requirements of the Corporation Act to have valid and fair liquidation in the end that stockholders, creditors, suppliers, government agencies, customers and employees will be satisfied with the liquidation of the corporation and the distribution of assets. There is a plan to increase directors fees due to increasing complexity of their workload. Question 2.2 tells us to identify which sections of the Corporation code has been breached. The sections of the Australian Corporation Law that are breached are: (1) the public company has only 2 directors. Section 201A. (2.) There were no auditors appointed and the company did not have its financial reports audited. This is a violation of Australian Corporation Law Section 88A. (3) The company did not prepare annual financial statements. It also did not submit or lodge annual balance sheet, income statement and statement of cash flows which are audited by external certified public accountants to the Australian Securities Investment Commission.. This is indicated as a violation of Australian Corporation Law Section 88A. (4) Another violation glaringly seen here is that the directors did not give notice to the Australian Securities Investment Commission that there will be a change of the principal place of business. This is a clear violation of Australian Corporation Law 2001 Section 205B. (5) Again, another obvious violation of the Australian Corporation law is there was no initial registration of members or stockholders . As of the present, there still has not been any registration of members. This is in violation of the Australian Corporation law of 2001 Section 88A. (6) A different violation of the Australian Corporation Law of 2001 is that there was no recording or updating of the minutes of the meetings. This is a violation of Australian Corporation Code of 2001 Section 88A. (7) There was ,evidently, a failure to keep accounting record, to enable show a true and fair balance sheet, income statement and statement of cash flows. This is violation of Australian Corporation Law 2001 Section 88A. next question is to identify and discuss the order of payments during liquidation after selling all assets. Cash distribution shall be as follows: From the $200,000 realizable assets, and $ 1,800,000 liabilities, Priority payment is : First, we must pay the winding up expenses. This is worth $ 25,000. Then we pay the employees of Comptech $175,000. Third, _______ http://www.csaust.com/ (2005) we will pay the loans from DGZ Finance Company $ 100,000. Fourth, we will pay the creditors of the company $100,000. Fifth, is to pay the other company creditors $400,000. Last, we must pay the members the $1.000,000. Since there are no accounting records, there is doubt created that the employees connived with management in coming up with the fact that assets are $200,000 and liabilities $ 1,800,000. In liquidation, we should follow the procedures set up by the Australian government concerning the winding up and deregistration, employee payments and cancellation of taxation registrations to be met. If the company is in financial difficulty, its directors or the company's liquidator can put the company under the control of the administrator. It appears that only the first two will be satisfied. However, pending the investigation of the employees due to the magnitude of violations, foremost of which is failure to keep registry of member and adequate financial records, minutes meeting and other records, the creditors must take precedence over the employees. But if the liability of the employees is the result of honest work, the above order of priority must be followed. The other legal issues and breaches of the Corporation act of 2001 and the remedies that can be availed of by the company, its directors, shareholders, and creditors of ACSI are as follows: Under issue 1, if the directors, officers and employees liable under Section 180 of the Australian Corporation Act of 2001, there were obvious failures to maintain adequate and regular updating of balance sheet, incomes statement, and statement of cash flows. This was one of the factors that led to the insolvency of the business ______ www.iris.tas.gov.au (2005) necessitating the liquidation and non -payment of even the other company creditors. The Corporation Acts provides: Section 180, There should be care and diligence of the directors and officers in managing the business . This is a civil obligation only. (1) A director or other officer of a corporation must exercise their powers and discharge (2) The must do their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Note:this subsection is a civil penalty provision (see section1317E). Business judgment rule (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection(1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; and (b) do not have a material personal interest in the subject matter of the judgment; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold." From the provision of the law, it appears that directors including Malcolm and the employees must keep records for decision making. _____ Australian Corporation Law 2001 Under issue no. 2. asking if the directors, officers and employees are liable under Article 181 of the Australian Corporation Law 2001, my opinion is: DISCUSSION: The case facts are findings of ASIC.. There is a possibility that Mr Malcolm had no harmful intentions to all parties. He was just not aware that he had to follow certain recording and accounting and management procedures to be prevent the bankruptcy of the company. This could be the best defense of Mr. Malcolm and the other officers and employees. The failures, as their defense tactic, was caused by fortuitous events beyond the control of Mr Malcolm. The director has primary responsibility for the assuring that the proper financial Management procedures and are maintained and that the business policies agreed by voting in the board of directors' meeting is implemented and carefully watched so that the policies of the board are carried out. The finance committee appointed by the board of directors shall provide oversight or in the common language, watch over, the safeguarding of assets of the organization and shall have primary responsibility for the ensuring that all internal and external financial reposts such as the balance sheet, the income statement as well as the statement of cash flows are fairly presented. The executive director and the treasurer to compose the head officers of this finance committee. Both of these officers will appoint other members of the group, usually with background in accounting and law practice. The Australian Corporation Law of 2001 provides that in case of good faith in the discharge of _______ www.art-teez.org (2005) their functions as directors, officers and the like, the law provides clearly as follows: Australian Corporation Law 2001 Section 181 Good faith-civil obligations of directors and other officers. (1) A director or other officers must exercise their powers and discharge of duties in good faith and in the BEST interest of the corporation; and for a proper purpose. This means safeguarding assets of the company. From the initial facts presented in this case, there is a wanton lack of good faith or even lack of dedication, initiative, good father of a family attitude watching his family loyally. This is one of the major factors that caused the downfall of the company. The defense of good faith is a very difficult uphill battle for Mr Malcom under the situation. Bankruptcy proceedings are done at Federal Magistrates Court of Australia. After all the above facts are presented, there is feeling that we must follow the law of the land like the Australian Corporation Law of 2001 and also related laws in winding up like the Australian Bankruptcy law. The Australian bankruptcy law enumerates the steps as to who will wind up the business, who will be paid first, who will be paid next, and so on. In our situation above, there is a possibility the employees , due to non recording of daily business transactions could have contributed to the failure or the bankruptcy of the business. As a result they must be paid only after the creditors, who are the parties adversely affected by the bankruptcy, have been paid. _______ www.fedcourt.gov.au (2005) Australian Corportion Law of 2001 www.allwords.com www.wikipedia.org www.austlii.edu.au/ www.lawfoundation.com.au www.asic.gov.au/asic/asic.nsf www.asx.com.au/asx/homepage/index.jsp www.csaust.com/ www.companydirectors.com.au/ www.lipton-herzberg.com.au/s http://www.newadvent.org/cathen/06642a.htm http://www.bii.co.id/corporate/work_cap_ln_req_e.asp http://www.fedcourt.gov.au/litigants/bankruptcy/b_bankruptcy.html http://www.art-teez.org/accounting_tutorial/109_safeguarding_assets.htm http://www.companydirectors.com.au/ http://www.iris.tas.gov.au/bep/Channel7964.html Read More