Legal Rights of Tanya and Boris - Case Study Example

BUSINESS AND CORPORATIONS LAW ASSIGNMENT Student’s Name Course Instructor’s Name Institution City Date Business and Corporations Law Assignment Part A Legal Rights of Tanya and Boris Acquisition of loans from the banks often requires a third party guarantee as they would be liable in case one defaults in paying the loan. Guarantee is a contract that has to be signed by all the sides, and the content of the pact must be well elaborated by the concerned parties. It is thus a collateral undertaking that is implemented for failure of a primary debt (Clarkson et al. 2014). It is discharged when legal enforcement of the principal obligation does not take place. The guarantors have legal rights too in the event that the borrowers default in paying the principal amount they owe the bank. Tanya and Boris have a number of rights that they are entitled to despite the situation they found themselves in with Olga. The defense that they need to stage is the fact that they were not well informed of the underlying regulations of the agreement. The bank failed to notify the couple of the uncertainty of Olga's income. It is a requirement that the parties involved in the contract must be well-informed of the procedures and terms that are captured in the pact (Ruggie 2013). It is to ensure that no individual may be caught unawares when a conflict arises. The modes of repayment of the loan were to be agreed upon, and the steps that were to be followed in case there was a default were to be explained to the couple. Tanya and Boris cannot be forced to repay the loan because the terms and conditions were not explained for them to understand beforehand. Tanya and Boris are old and have to rely on Olga for support. A contract may be considered invalid because one of the parties is physically or mentally handicapped. The particular disadvantage may be found for the case facing the couple. They rely on others for emotional and physical support, which implies the bank should not hold them accountable for the repayment of the loan. The bank was also aware of their conditions at the time the agreement was being signed by the parties. It is against the contract law to enter into such deals when one of the members is not in good health. The bank is to blame for having agreed to accept the couple as the guarantee. Eastpac Bank never went ahead to investigate on the relationship that exists between Olga and the old couple. The bank had the responsibility of establishing the type of relationship that the guarantors had with Olga. It was to ensure that they confirm with Tanya and Boris if they could stand in for Olga in the event that she defaults. The couple seems to have been pushed into signing documents that they were not well aware of its credence. The squabble is that the other parties were taking advantage of them. They did not understand English and probably were not able to read the contents of the documents to comprehend the type of deal they were entering into with the bank. They thus had just to do all that they were told during the signing of the agreement. After the bank had noticed that they could not understand what was going on then, it was to find ways of making the guarantors aware of all that pertains to the agreement. Tanya and Boris had the right to be made aware of the statutory requirements of the covenant. Signing of the contract was rushed without proper explanation on the terms of lending. The couple may argue that they were hurriedly taken into signing of the deal without knowing the motive of the other parties. The law requires that none of the members should be influenced to enter into loan agreements without being offered full details (Hoffman et al. 2014). Attention had to be given to the rules guiding writing and appending of signature on the documents. One can only write and sign on papers that they understand their contents, which is not the case with the elderly couple. They were unaware of being liable to pay any outstanding amount immediately the bank perceives that Olga could not repay the loan as required by the covenant. The bank could not get the sum of money owed to them by Olga through acquisition of assets that could compensate the loan. Tanya and Boris rely on the support of Olga and may not be having assets that could be taken by the bank to cover up the loan. A consideration has to be put on the appropriate ways of recovering the principal amount, which could be through taking the car that was bought to cover the loan. Recovery of the loan should be made to the guarantor only if the lender has exhausted all the possible means of getting it from the borrower (Stewart et al. 2013). Olga still has the car and can be used to cover the principal amount borrowed from the bank. Guarantors should only be the last refuge in case the borrower is at large after defaulting in paying the loan. Olga should thus be more liable than the couple for the loan taken from the bank. Eastpac Bank has to exhaust all the avenues that are possible in recovering the loan before bringing the burden to Tanya and Boris. The bank also went ahead to issue the money without considering the financial statements of the borrower. They understand the uncertainty surrounding Olga's income but still went ahead to grant the loan. It was a risk that they were venturing into, and it is the bank that is to blame. A grace period is also to be provided for the borrower to put measures in place on the ways to start repaying the loan. The bank should thus not put a lot of pressure on the guarantors before confirming repayment default by the borrower. The guarantors are always entitled to the provision of advice that is independent and should be offered by a legal authority. Tanya and Boris were not offered legal advice before they were allowed to sign the agreement. They can thus argue that they only signed after the other parties persuaded them. They are not to be held liable considering the conditions that they signed the agreement. The case law and the statutory law prohibit the bank from seizing properties of the elderly couple. They should not bear the blame or held liable for the loan repayment because they only signed the covenant under the influence of Olga. The bank also did not reveal all the underlying terms of the agreement. Part B Benefits of Investing In Start-up Companies Either By Way of Debt or Equity Businesses are started with the central plan of ramping it up to profit making venture. A start-up company needs a substantial amount of capital to get running properly. The investment capital may be sourced from different sections, but one has to consider how much is needed and when should it be available. The amount required varies broadly depending on the size and type of the business. There are those that require more capital to be invested because they are resource intensive, for example, processing businesses. There are two primary sources of obtaining the finances for investment, and these are debt and equity. However, the government may at times support particular industries by issuance of incentives because of their significance to the population. Equity funding The term equity financing refers to receiving a financial investment into one's business in exchange for a portion of the enterprise ownership. Capital investment allows the investor also to share in the profits that the company makes from its operation (Waresul et al. 2013). It involves an investment that is permanent into the company and is not repaid at a later date by the firm. The investment has to be well defined in a business entity that is formally created. It can take different forms like membership units as seen with limited liability companies or as a preferred stock as applied to a corporation (Isaksson & Çelik 2013). Companies often adopt different classes of stock with the aim of regulating the shareholders’ voting rights. Equity funding takes various forms, and a number of them are available on the market that may assist start-up companies to pick up in their operations. They include venture capital, angel investors, equity offerings, warrants, government grants, and initial public offerings. Venture Capital Venture capital is a source of funds directed towards young companies from already established enterprises or individuals in the business. They always offer the support for the starting companies with the aim of obtaining a share in the ownership of the firm (Yarram 2015). The enterprises that provide the venture capital are often reluctant in giving the initial capital required to start the business unless the new entity proves to have a management team that has good past records. They would always prefer investing in those companies that have already established themselves from the equity funds of the founders. The firms that are already profitable usually get much of the venture capital. The investors would prefer businesses that have a competitive advantage. They must have a high-value proposition in terms of a patent, demand for the products or significant idea that may propel it to success (Bundgaard 2014). The investors usually need to be represented on the board of directors and should be involved in hiring of the top management officials. They have the ability to provide valuable guidance to the operations of the entity, as well as, business advice, in general. They are always focused on receiving a return on their investment and may at times be having objectives that contradict those of the founders. They tend to concentrate on the short-term gain as opposed to the founding fathers' long-term gain goals. It explains why the venture capital firms will often associate themselves more with companies that have high-growth potentials. They believe it may result in high rates of their desired returns. However, they are investments that come with high risks while the investors would be looking for returns of about 25 to 30 percent of their total investment (Waresul et al. 2013). They do this by investing in a number of companies that may make up to 50 percent on the returns. It is to ensure that if some fail to deliver; they will still obtain a profit margin anticipated initially. The investors would always employ the 2-6-2 rule of the thumb as they invest their capital. The argument is that two of the investments would offer high returns. Six of them will give moderate returns or may provide the original amount invested while the other two will fail. It shows that the investors glide on their options so that they do not lose in the end. They will at least make a profit or get their initial amount back wholesomely. It is a better idea for those offering funds to the start-up companies as the business may at times go to losses, and the investor will be one of the affected people. Angel Investors Angel investors refer to individuals or businesses that have a passion in assisting small businesses endure and grow. They do not concentrate only on the economic returns but have mission focus. They will do all that they can to make the company survive as they have the interest of sustaining the enterprise (Miglani et al. 2015). They will not be willing to sacrifice their capital that is invested in the business and may prefer that it makes a profit for them. Angel investors often prefer particular geographic locations that need to be developed and may pump resources to ensure economic development is achieved for the area. Unlike the venture capitalists, the angel investors would be willing to finance the early stages of starting up the business and offer smaller investment amounts as well. Government Grants The start-up businesses in various states may be offered grants or tax credits by the government to support them as they grow. The government often takes such initiatives to assist the enterprises develop faster and help in economic development of the country at large (Mishra 2014). They would be able to offer job opportunities when they are established and act as a source of revenue for the economy. Equity Offerings It involves the sale of the stock to the public directly by the business. Equity offerings have the ability of raising substantial amounts of funds for the enterprise depending on the circumstances (Isaksson & Çelik 2013). Its structure can take various forms and requires proper scrutiny by the legal representatives of the company. Initial Public Offerings Initial Public Offerings (IPOs) are always useful when the operations of the business are profitable. It should have stable management, and its products or services must have high demand (Waresul et al. 2013). It can only be possible if the company has been in operation for a number of years. The duration would have allowed it to gain roots and have a customer base that is loyal. It is thus hard for start-up companies to begin through the IPOs, but will have to raise funds through private means a number of times to launch its products into the market. Warrants These are considered as securities that provide its owner the rights to buy the shares from the start-up company at a predetermined price at a later date before the expiry of the duration. The owner would use the warrant to his or her advantage depending on the prevailing market prices at that time. In case the market prices are higher than the warrant price, then one will use it to obtain the shares. If the market prices are lower at the time of purchase, the owner may decide to leave it expire and go by the current prices in the market. Warrants are meant for long-term funding purposes. Start-up companies may find them to be significant as they encourage investment through downside risk minimization while offering an upside potential (Bundgaard 2014). They can, for instance, be provided to the management team of the business as part of the recompense package. Debt Funding Debt financing entails borrowing of funds with the promise of refunding at a later date together with the agreed interest rate (Day & Taylor 2014). The creditors benefit from the interest that the principal amount will have accrued during the specified duration. There are two major forms of this type of funding. It can be secured or unsecured debt. Those secured have collaterals while the unsecured do not have guarantees. The debt may be repaid within a short time or long period. The short-term debt is often used to fund the activities that are current, for instance, the operations of the business. On the other hand, the long-term debt usually finances the assets of the enterprise, for example, buildings and equipment. Debt financing takes various forms and may be provided by a number of institutions. They include banks, commercial finance companies, government programs, and bonds. Banks and Other Commercial Lenders These are the most popular sources of business finance. However, they do have a lot of restrictions on the start-up companies. They require a comprehensive business plan, proven track records, as well as, numerous collaterals (Stewart et al. 2013). The source is suited for those entities that are already established and are doing well. Businesses have to come up with statements on the profits and losses, budgets on cash flows and declarations of their worth in case they need to borrow additional funds. Commercial Finance Companies These companies are always more willing to depend on the collateral’s quality other than the past records of the business. They do not often consider the profit projection of the entity but are interested in the worth of the guarantee for repayment of the loan (Bundgaard 2014). They should be the last resort if the funds cannot be obtained from the other lending institutions. The businesses that do not have enough assets should not go for this option as the costs to be incurred are always higher. Government Programs The government of different states may at times initiate programs that support the new companies. These programs include being a guarantor for the loans that the young entrepreneurs may acquire from the lenders. It gives an assurance to the creditors of repaying the loans granted to the small businesses with limited assets that can be used as collateral. The government always starts such programs more so in rural areas so that they can experience uplift in the economic development (Mishra 2014). Bonds Organizations use these for the purposes of raising funds for particular activities. They are unique forms of funding because it is the company that provides the debt instrument. The company determines the interest rate and the maturity period (Black et al. 2013). The face value of the bond is the amount paid for it at the time of its issuance. Investing in the start-up companies comes with a lot of challenges, as well as, benefits. One may decide to venture in any of the forms available for funding the young enterprises. The risk that may be involved is the uncertainty of the operations of the new businesses. The possibility of them entering and picking up at once in the market is minimal. They may need intensive capital investment at the start and will not be able to raise all of it. The investor must, therefore, be well aware of the possible outcomes before investing in a particular entity (Davis & Lewis 2013). The potential growth of the enterprise must be promising to the investor. Startup companies come with a number of benefits to the financiers. It introduces new brands in the market and will be able to position itself as the company producing the unique products that may help it enter the market. It can penetrate the market through the adoption of proper policies including pricing of its products slightly lower than the market prices. It will draw numerous customers from the market and may grow faster to establish itself in the industry. A start-up business is better placed in coming up with strategies that may propel it to greater success. The investors would thus want to take part in the growth by financing them by way of equity or debt. Conclusion Investment in the form of equities will be more beneficial to the investor when the management team is dedicated to seeing the company prosper. The return on investment is always high after the business has gained ground in the market. The debt funding may make a young company be declared bankrupt, which may be detrimental to the growth of the enterprise. The amount they make is less at first and may not allow them to acquire all the needs of the company. The best option is thus funding through equity as the investors share in the ownership of the business. They will be better placed in providing the regulations that will ensure the company does not collapse. The interest that one may receive from the debts owed by the enterprise is far much less compared to the gain that an individual receives by being part of the shareholders of a business. List of References Black, S, Kirkwood, J, Williams, T, & Rai, A 2013, ‘A history of Australian corporate bonds,’ Australian Economic History Review, 53(3), 292-317. Retrieved from http://onlinelibrary.wiley.com/doi/10.1111/aehr.12021/abstract on 27/3/2015 Bundgaard, J 2014, ‘Debt-flavored Equity Instruments in International Tax Law,’ Intertax, 42(6), 416-426. Retrieved from https://www.kluwerlawonline.com/abstract.php?area=Journals&id=TAXI2014040 on 27/3/2015 Clarkson, K, Miller, R, & Cross, F 2014, Business Law: Texts and Cases, Australia, United Kingdom: Cengage Learning. Davis, K, & Lewis, M 2013, ‘6 The bond market in Australia,’ International Bond Markets, 130. 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