Company Law and Auditors - Essay Example

COMPANY LAW By PART A (COMPANY AUDITORS) In the UK, auditors can be held liable basing on the common law and the statutory law. Under the UK Company Act, Sec. 498 an auditor has statutory duties to carry out the investigations which will enable him to ascertain firstly, whether the company has kept adequate accounting records and returns, secondly, whether the individual accounts of the company are in agreement with the accounting records and return and finally, in the case of quoted corporations, the auditor should ascertain whether the auditable part of the directors’ remuneration report agrees with the financial records and returns. A client and an auditor are usually in a contractual relationship thus meaning that the two parties are in agreement. The auditor thus have to perform their share of bargain carefully and appropriately as stipulated in the contract. If the auditor does not conform to the contract terms, the client can decide to sue based on the rounds of breach of contract. According Lacy, a client can sue the auditor first, due to the failure to accomplish specific performance, secondly, in the case where there is general monetary costs and damages for losses incurred due to the breach of that contract and lastly, any other consequential damages that as a result of negligence, have occurred (2002, p.78). Therefore, basing from these factors, Benard being the auditor of NASDAQ Composites Plc is highly liable. During auditing, before partaking any work for a client, the auditor or accountant should ensure that the particular duties to be executed, and in precise if there is need for any important matters to be excluded, have been discussed and harmoniously agreed with the client usually through written word or through a letter of engagement or otherwise (Delaney & Whittington 2010, p. 135). This therefore implies that before any of the undertakings is assumed, there is need for the auditor to ensure that there is special written evidence. In Re Thomas Gerrard & Son Ltd (1968) UK, the company’s auditors learned that there were various alteration to some of the invoice dates of the company. The company’s auditors then referred and consulted with the managing director of this corporation and accepted the director’s explanation although they did not scrutinize the statements of the related suppliers. As a result, there were loss of money to the company and it was thus ruled out that the auditors had breached their duty required by the company at the instance when they failed critically to examine the statements. The facts of the problem scenario are similar to those of the Thomas case except that the auditors’ situation in the problem scenario. Firstly, rather than carrying out a full stock take, Benard had simply inspected a couple of the stock containers and secondly, Bernard had questioned why photocopies only were available and did not qualify the report in the manner as required by the company law in UK which requires the auditors to state the related facts. Henceforth, it is quite clear that Benard was negligent in compiling NASDAQ’s audit report. Equally important, the concept or theory of privity makes Benard to be liable to NASDAQ Composites Plc. In this theory, the auditors and their clients enter into a contract whereby they agree to carry out certain services and hence liability occurs in the event that there is a breach of contract by the auditor. Usually in this theory, liability applies to the auditor if they fail to carry out their duties as agreed and stated in the engagement letter thereby leading the client to suffer monetary losses (Lessambo 2014, p. 269). In this case, Rather than Benard carrying out a full stock take, he simply inspected a couple of the stock containers and when he found this sample to be in accordance with the company’s records, Bernard decided to accept the total stock figure recorded in the accounts. This therefore means that Benard is liable under the concept of privity, since he did not carry out his contractual obligation of auditing all the stock thus leading to huge monetary losses to the corporation. PART B (COMPANY CHARGES / RESCUE) In the second case, Tzu, Grabbit and Runn have engaged in wrongful trading which is usually treated as a type of civil wrong in the United Kingdom (UK) and is found under the insolvency law, section 214 of the 1986 Insolvency Act (Hood & Virgo 212, p. 635). This law was introduced so as to make it possible for liquidators to obtain contributions from the directors and managers who are accountable for the mismanagement of the company that is undergoing liquidation (Campbell & Campbell 2007, p. 283). The principle of wrongful trading therefore was introduced to counterpart or supplement the concept of dishonest and fraudulent trading which had taken root in many businesses and corporations. Since Aston Royce Limited has gone into liquidation, Rich Bank, who are its sole liquidators, can partake a number of causes of actions. One of the main actions that is required to be done by Rich Bank in order to recover property or to be compensated for the credit given out to this firm is to ensure that the company does not trade during its insolvent state. This is due to the provisions for actions against insolvent trading which gives the liquidators or creditors power to secure their credit by repossessing property from the company’s directors through a litigation plan. The powers of a liquidator under a liquidation plan could include litigation, care and deposition of assets among others. Litigation refers to the ability of the litigator to file a lawsuit which will enable him to take legal action against many parties (Thanki & Carpenter 2011, p. 123), in this case, Tzu, Grabbit and Runn. Rich Bank should therefore use litigation as a strategy to be able to attain its credit from the partners. When a liquidator is considering issuing a claim against the debtor under litigation, the management should first carry out an analysis on whether the company under liquidation has adequate and enough assets to meet the debts. According to the UK Company Act Sec. 212 which highlights the procedural section about misfeasance, the creditor or liquidator is allowed to “sue the director for misfeasance” and if the court finds the directors guilty, the liquidator can restore money from the possessions and assets of the company (Mallon & Waisman 2011, p. 125). In addition to that, Sec. 214 of this Act points out that the court can order directors to make a contribution to the fund more so if they had the knowledge that the “company would be insolvent” at the time of wrongful trading (Mallon & Waisman 2011, p. 125). Rich Bank should thus apply to the court and carry out a clear assessment on whether the Aston Royce Limited has the possessions and assets that can meet the due debt. In the case whereby the company’s assets and possessions cannot appropriately meet liquidator’s credit, the assets and possessions of the company’s owners or shareholders can be repossessed. Part C (CORPORATE PERSONALITY / PIERCING THE CORPORATE VEIL) Basically, incorporation refers to the process forming a limited liability company in which the corporate entity is declared a legally separate entity from its proprietors (Martin 2010, p. 35). Although incorporation may be associated with some essential impact on several aspects of the day to day corporate operation, it has exceedingly numerous advantages. A limited liability company is legally recognized as having assets, rights privileges and liabilities which are by far usually separate from those of its proprietors. Gee points out that the UK Companies Act of 1985 (as amended), acknowledged a limited liability company as a separate legal entity which may “sue or be sued in its own name and capacity,” and that is not affected by any changes in its ownership (2006, p. 387). Generally speaking, incorporation has compared to other modes of business formation, has several advantages which are discussed below. Firstly, companies and businessmen who operate as sole proprietors are most likely to be subject to unlimited individual liability in case of business debt or lawsuits against their business (Clifford & Warner 2012, p. 14). Therefore, Creditors and liquidators of the business can hold the sole proprietor individually liable for the debts and due credit of the business and can thus seize the proprietor’s personal assets such as savings, investments and home among others. In legal terms, should a sole proprietor be a defendant in a lawsuit or go out of business due to debt, then his individual possessions will be subject to seizure. However, this is usually not the case in incorporation since in incorporation, each and every member is only held accountable for the percentage that the member has invested in the company (Cooper 2009, p. 512). This therefore implies that the Shareholder of the company cannot be held accountable for the debts and obligations of the company. Comparatively, unlike partnerships and sole proprietorship, incorporation has relatively numerous tax advantages that can be of great value to companies (James 2012, p. 144). In incorporation, the Company is a legal distinct and separate entity and due to this factor therefore, there are numerous legal businesses transactions that can be structured between investors and the company. For example, other privately owned assets such as buildings can be leased to the company by the partners and as a result, one can claim deductions such as depreciation for them. Subsequently, the corporation can be entitled to other claims such as rental expense which will reduce the amount of tax paid by the company in general. Additionally, other potential tax advantages of incorporating a company may include privileges such as enjoying lower income tax rates as well as being able to carry forward losses and profits that have been made in the previous years and subsequent years respectively, among others other enjoyments. However, although incorporation has proven to have relatively numerous tax advantages, it has also a big financial tax drawback in the sense that incorporating is subjected to double taxation. This is because under incorporation, whereas the company pays tax on its profits, the shareholders also pay income taxes which is usually imposed on the dividends they receive from the company. Nevertheless, a huge percentage of this double taxation is usually decreased by the capability of the company to offset the Company’s business expenditures. Comparatively, in the business sphere, incorporation is commonly observed as signal that the proprietors or partners are serious and determined about their corporation and that they have intent dedicate both their time and substantial resources to the business for an important period of time (Rich, Jones & Hansen 2010, p. 506). Therefore, this factor enables the corporation to raise the needed amount of resources in terms of capital as well as making sure that there is sufficient supervisory and manpower to carry out the day to day activities of the company. In addition, since most companies usually have the choice of raising capital by the selling shares to the interested and able shareholders, the shareholders will be confident to buy the stock since they will know that in case of liquidation, their personal assets will be safe. Relatively important, a business or company which has been formed through incorporation has a relatively increased credibility. For instance, many individuals usually feel more secure, and confident when they invest or carry out their business undertakings with the corporations as opposed to the sole proprietorship since they have the belief that their investment is well managed. In addition to this, having “Inc.” or “Corp.” after the name of the company usually increases the professional touch of a company and thus, this can elevate the business relation of the company with other third parties. For instance, A Company with “Inc.” or “Corp.” can appear to be more steady and sophisticated to other third parties such as investors and this could help to increase the success of the overall company. Works Cited Campbell, D., & Campbell, C. T. (2007). International liability of corporate directors. Salzburg, Austria, York hill Law Pub. Clifford, D., & Warner, R. E. (2012). Form a partnership: the complete legal guide. Berkeley, CA, Nolo. Cooper, R. E. (2009). Legislation for business law. 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