Common Law Legal Requirement - Assignment Example

Question The fundamental issue of this case involves the following pointers Whether it is acceptable for the firm to distribute profits through payments to directors for their services instead of paying dividends or not. 2. Whether the elimination of Pete from the board constitutes a legal problem to the firm or not. Rules There is a Common Law legal requirement for dividends to be paid from profits. This implies that there is the need for the owners to be given their dividends separately from the work they do for the firm. This is because a business has a separate existence from its owners1. The main Australian rules relating to the distribution of profits can be found in Section 254 of the Corporations Act 2001 and this has been modified by the 2010 version of the law. Subsection 1 of Section 254T indicates that a firm must not pay a dividend unless their assets are above their liabilities. This obviously means a firm can only pay dividends when they have enough solvency levels and enough money to pay for their obligations and requirements. Subsection 1(b) indicates that the payment of dividends must be fair and reasonable to all shareholders of a firm. Assets and liabilities are to be calculated on the basis of existing accounting standards and this must reflect the true and fair views of the firm’s financial status2. This must be based on written financial records of the firm that must be kept to record the firm’s activities and processes3. The doctrine of oppression remedy is developed from the case of Foss V Harbottle4 in which it was established that in cases where a company carries out an act or conduct that is not right or appropriate, shareholders can bring an action against the company on the grounds of oppression remedy. This gives impetus for the courts to grant relieve and remedies and rule on whether the conduct of the company was oppressive or not. In other jurisdiction, these oppressive conducts against shareholders are considered to be a fraud on the minority or a fraud on the shareholders. In Australian Corporation Law, the Corporations Act sets out rules on where and how relief can be granted on the basis of oppressive conducts. In order to gain such a relief, a claimant must be: 1. A shareholder or a member of the company or be representing another member; 2. A person who has been removed from the list of members in the organisation 3. Anybody who is connected with an Australian Securities and Investments Commission investigations that is being conducted on a company5 In cases where a firm comes up with a resolution concerning something or omits something, Section 232 of the Corporations Act 2001 allows a shareholder or a class of shareholders to take action against the company. This resolution or omission must be contrary to the interest of shareholders as a whole or a class of shareholders. Application to the Case From the facts of the case, it is apparent that Dominance Pty Ltd has a tradition of sharing profits to shareholders through board meetings and contributions to the board. This is something that is contrary to the principles of the Corporations Act which requires companies to declare dividends after the end of a started period and it must be done according to the dominant accounting rules. This is a red flag that provides something of concern to Dominance Pty Ltd. Although it appears that the firm could elect to go about the distribution of profits through this approach, it is something that is of concern. Therefore, the ostracism meted out against Pete and the decision to vote Pete off the board clearly creates an objectionable conduct that is contrary to the oppression remedy rules. The decision to award a directors’ package that will blatantly exclude Pete is one that is tantamount to an oppressive act. Therefore, Pete has the right to sue the company because this is tantamount to a fraud on the minority (which Pete is). Hence, there is the need for the Pete to raise an objection and this can be based on the fact that he is indirectly sidelined through the ostracism and the tag they placed on him which led to them voting him out. Secondly, he can take action against the direct act to use the de facto approach to share the profits without considering him and including him in the process and the activity. Conclusion Pete must sue the company in court for a fraud against him as a minority. This will be based on the oppression remedy law which he qualifies under. Based on the fact that Dominance Pty Ltd uses practices and processes that indicate that they are sidelining him indirectly as well as directly, he can sue for fraud against him as a minority. This will stand because the oppression remedy law is enshrined in the Corporations Act and all the facts of the scenario puts him in a place where he is affected by the conduct of the other directors of the company. Question 2 The main issue for consideration in this section has to do with two main and fundamental issues: 1. Bob’s role as a domineering leader and its impact on the firm’s decision making and 2. The possibility for charging the directors of Brovo Building Pty Ltd for insolvent trading based on the circumstances of the case. Rules Insolvent trading occurs when a director allows his or her company to incur more debts at a point where it is apparent or ought to be apparent to him or her that the company was in debt6. Conventionally, a claim for compensation can be made by a liquidator against a director who continues to trade where it is apparent that the company is in debts. There is also a personal liability that could be placed upon a director where it is apparent that the director was aware of the circumstances (ie the debt) but continued to trade when he was aware there was no money in the firm’s coffers. This implies that the veil of incorporation may be lifted in these circumstances and a director can be held liable for his actions in cases where the firm trades at a loss. Generally, directors have a fiduciary duty that they owe to a company that they run. This fiduciary duty revolves around the fact that directors have an obligation to ensure that they run the company in good faith. And this includes the need to put aside their personal interest and take reasonable care to run the company in order to meet the best interest of the company. The Companies Act, 2001 places a duty on directors to stop the company form incurring further debts that it is not able to pay7. Therefore, in cases where a firm continues to trade at a point where it is apparent that the firm is in debt is a breach of this fundamental duty for directors. It implies that directors were aware or they ought to have been aware of circumstances and situations leading to the case at hand. And they should have stopped trading when it became apparent to them. This gives liquidators the right to make claims and as long as they establish that it was apparent and clear that the director/directors in question should have reasonably known that the firm was in debts and they failed to do so, they can make claims for the recovery of the debts. And where necessary, the directors will be personally held liable for the debt. Application From the case at hand, it appears that Bob is the chairman of the board and hence, he has the obligation and duty to take final decisions and reasonably examine things to ensure that he knows what is going on in the firm. He authorises transactions and has to take reasonable steps to verify information before giving authorisation. The financial difficulties that Brovo Building Property went through were apparent to them and they knew they needed money and they needed resources to survive through the difficult times when the financial challenges occurred. However, as directors, they are also tasked with the survival of the company through trading and balancing risks. From the facts of this case, it is apparent that the directors were aware that the bad press was going to affect them negatively. And hence, they stood the risk of losing their initial investments. Therefore, they took some kind of action to restore the firm and ensure that it operated properly and appropriately. That could be said to be the reason and the motivation to call the meeting and seek the views of the other directors. It is also apparent that the attention of Bob was drawn to the fact that the firm had no money. Therefore, in trying to find a solution to the situation, they needed to raise money from somewhere. This shows that Bob was aware of the situation and should have taken reasonable steps. The response of Bob was rather negative. Sensing that there was no money, the directors elected to take a loan against the little assets they had over their liability. The loan they took was above the assets. And in taking on that risk, the directors went beyond the basic scope of authority they had as directors. They went beyond what they had and this implies that they were trading beyond their resources and the resources they reasonably knew existed. This shows that they worked beyond their allotted amounts that they had authority over. Hence, it could be proven that they were trading beyond their means. This is tantamount to insolvent trading. This is because the directors knew about the financial situation and at the point when it became clear that they had received a bad and negative press exposition. At that point, they should have declared the firm to be insolvent. In spite of this, they went on to take a loan to try to advertise. This was tantamount to insolvent trading. And it is clear and apparent that they did this at a point where they ought to have known that the firm had no money to support trade at that time and in those situations and circumstances. Conclusion From the facts of the case, it is apparent that the directors have been involved in insolvent trading. Hence, liquidators will have the right to sue the directors and the firm for the loan that they took which was $20,000 above the net assets they had. Hence, the directors will be held liable for that amount of money that exceeded the firm’s resources and a liquidator can successfully sue for that amount of money. The directors will also be subjected to sanctions by the corporate authorities for engaging in insolvent trading. This could include a ban on becoming directors. Bibliography Books Stapledon, Hanrahan Ramsay. Commercial Applications of Company Law (Sydney: Oxford University Press 2014) Cases Foss V Harbottle [1843] 67 ER 189 Salomon V Salomon and Co Ltd [1897] AC 22 Read More