Corporations Law - Happy Holidays Ltd - Research Paper Example

LAW 5206 – Corporations Law Assignment 2 Template – Semester 3 2015 Name: Student number: Word count (without footnotes) (maximum allowed 4000): State any approved extension date and attach the course leader’s approval: Question 1: /30 Question 2: /30 Total marks awarded: /60 MARKING CRITERIA FOR LAW5206 ASSIGNMENT 2 Question 1 Question 1 (30 marks) Write Maximum of 2000 word answer here: The circumstances of director’s behaviours at Happy Holidays Ltd are related to the breach of director’s duties. The corporations Act 2001 (Cth) provides various duties to company directors that must be adhered to when managing or doing any business that related to the organization1. All company directors of organisations that are incorporated under the Corporations Act 2001 (Cth) must abide by the statutory duties imposed on them (Queensland Government 2014, p.1). Under the Act, all individuals appointed as directors of a company have statutory duties of acting in good faith and for the appropriate purpose. They have a duty of acting with care and diligence, duty to avoid improper use of information, avoid improper use of position and a duty of disclosing specific interests2. In Happy Holidays Ltd, among the four directors of the company, two of them have breached director’s duties under the Corporations Act 2001 (Cth). Adriana and Bruce are the two directors who have breached the Act by undertaking or engaging on business activities that are against the Corporations Act. Adriana has breached the Corporations Act by not acting in good faith and for a proper purpose. He has also breached the Act by failing to disclose certain interests and failure to act with due care and diligence. Adriana also failed to act with care and diligence. Sec 181 of the Corporations Act 2001 (Cth) requires that company directors to exercise their powers and discharge their duties in good faith, for the best interest of the company and for the proper purpose3. Directors are prohibited from performing activities for self interest, third parties and sectional interests. They should perform their duties only for the interests of the company, failure to which they are considered to be in breach of the specified duty. In the case of Fodare Pty Ltd v Shearn (2011), the court held that company directors must ensure that they act in good faith and in the best interests of the company4. In the case of Cassegrain v Gerard Cassegrain & Co Pty Ltd (2012), the court held that the interest of the company should be paramount in any activity undertaken by the directors5. Contravening this duty may warrant them to pay compensation and other costs. Adriana decided to engage in activities whose intention was self interest. He engaged the Happy Holidays Co. Into a business deal with another company he has interest knowing that the company was not in a good position to provide Happy Holidays with the expected results. Instead, he wanted to benefit himself and his wife and not for the interest of the company. 3 million dollars from the company were lost from this activity. Sec 180 of the Corporations Act 2001 on the duty to act with care and diligence requires that directors have a duty of exercising a degree of care and diligence that is reasonable when exercising their powers and discharging duties6. They should act in a manner that a reasonable person in their position would given the opportunity to do so. In the case of ASIC v Healey (2011), the court held that a director who contravenes this section 180 of the Act will be liable to a fine and disqualification from being a director7. Adriana did not act with care and diligence when engaging in a business dealing with ConsultWise. He knew that the company has been struggling financially because of a number of poorly executed consultancy agreements and that the firm has never provided advice on the gaming industry. This was a malicious action without care and diligence. Adriana failed to consider the loss that the company would incur as a result of ConsultWise not delivering the standard advice on the possibility of Happy Holidays Ltd being in a position to get a license to provide a tender to the new casino. A reasonable person in Adriana’s position would make a sound judgement and not engage in business with ConsultWise due to its financial status and poor performance in delivering services. Instead Adriana had a personal interest in the judgement of engaging in such business dealing. Adriana also breached the Corporations Act by failing to disclose certain interests to the other company directors when making the decision to engage ConsultWise as their consultant on the matter at hand. Sec 191 of the Corporations Act 2001 requires that any director of a company with personal interest that is material in a dealing that is related to the company affairs to provide the other directors with a notice of such an interest except when an exception applies to such disclosure8. Adrian was the husband of Frederick, the majority owner of ConsultWise and he wanted to give her business a contract that would help the business boost its financial status since it had already started sinking. It is also seen that the money gained from the business dealing was used for personal gains to renovate their house and very little for bidding the tender. It is seen that, the action of Adriana was to benefit himself and his wife when he failed to disclose his interest in the business engagement with ConsultWise. Available Defence Breach of the duty to act in good faith, in the best interest of the company as well as for the proper purpose is considered a criminal offense in Corporations Act sec 184(1). However, Adriana may use the defence of not intentionally being dishonest or reckless to engage in a business with ConsultWise to cause Happy Holidays a big loss. When the activities are not intentionally dishonest, a director may not be liable for breach of director’s duties. However, this determined based on the motive of the director to prove that there was not intentional dishonest. Bruce Bruce has breached the Corporations Act by failing to act with care and diligence, not acting in good faith and for the proper purpose and not avoiding the use information and position improperly. As a company director, Bruce is expected to take a reasonable care and diligence when exercising his powers and discharging duties. In the case of AWA Ltd v Daniels (1992) 7 ACSR 759; 10 ACLC 933, the court has a duty of determining whether this duty has been contravened based on subjective elements9. Bruce breached the Corporations Act by failing not taking reasonable care and diligence when he failed to disclose the financial status of the company to the other directors. He ought to have disclosed the poor financial condition of the company in the related key hotels and that the company was not able to pay ConsultWise 3million for the consultancy service. A reasonable person would have disclosed such information to avoid the company going through extra financial distress. Bruce violated the Corporations Act by improperly using his position to move those funds to the other related companies with consultation with other directors. Sec 182 of the Corporations Act says that company directors should refrain from improperly using their position for the purpose of gaining an advantage for themselves or someone else or that would cause a detriment to the company. In the case of R v Byrnes (1995) 130 ALR 529, the court held that a director will have contravened the Act by undertaking an activity with the intention of causing detriment or obtaining advantage even if the benefit or detriment occurred10. Sec 184(2), directors who dishonestly use their position are regarded to have committed an offence. Bruce used his position as a director to conceal the financial position of the company and took advantage to move funds to other key hotels. This has a detrimental effect to the financial position of the company since more money would continue being lost from the non-performing hotel branches. Bruce also breached the Corporations Act by improperly use the information he had about the company. Section 183 of the Corporations Act requires company directors not to improperly use information that they acquire in their position as directors of a company11. Bruce was aware that the financials of the company were poor as a result of down turn in a number of key hotels. However, this information was not reflected in the company financials because of the movement of funds. Bruce failed to disclose this information, and instead used it as an advantage to move funds to other hotels hence concealing the financial problems of the company. Section 184(3) describes that it is a criminal offence for company directors to use information dishonestly. In the case of ASIC v Vizard (2005), a director who contravenes section 183 of the Act is liable for damages and disqualification from the director position12. Available Defence Use of information improperly is considered a civil case for the company director. However, Bruce would use the defence that he was acting for the interest of the company by concealing its financial position. By revealing the true position of the company would have rendered the business insolvent and unable to trade. Steps to remove the board of directors Whelan says that removal of company directors should be done following certain procedural steps to ensure that the removal process is fair and appropriate13. To avoid the directors from challenging their removal, shareholders of the company should follow the following procedure; Give a notice of intention – the shareholders will begin by giving a notice that they are intenting to more the resolution of removing the directors. Give a notice to the company – the shareholders will give the company two months notice prior to conducting a meeting for the removal of the directors. Give notice to members – the shareholders will give the members a notice of 21 days that a meeting will be held for making a resolution to remove the directors Meeting with the directors and natural justice – the shareholders will meet with the directors and require them to put their case to the members through speaking about the motion and give a written statement Voting – here, the shareholders will make an ordinary resolution to remove the directors Casual Vacancy – finally, the shareholders will be required to announce a casual vacancy for people to apply to fill the directors vacant positions MARKING CRITERIA FOR LAW5206 ASSIGNMENT 2 Question 2 Criteria F C B A HD Quality of analysis and problem-solving skills: Identifies legal issue/problem No clear identification of legal issues relevant to the case and/or issues identified are not relevant. Identifies at least one legal issue relevant to the case but more detail is required. Identifies most legal issues relevant to the case but lacks clarity. Correctly identifies most legal issues relevant to the case. Correctly identifies all legal issues relevant to the case. Evaluates relevant legal principles Lack of relevant legal principles or those identified are incorrect Outlines some relevant legal principles but citation of applicable cases and/or statutory provisions needs more detail. Outlines some relevant legal principles, citing applicable cases and/or statutory provisions. Outlines all relevant legal principles, citing applicable cases and/or statutory provisions. Outlines all relevant legal principles, citing applicable cases and/or statutory provisions. Develops logical conclusion Stated conclusion is not aligned with the question fails to tie together legal arguments either for or against the application of legal principles. Stated conclusion is broadly aligned with the question and ties together some legal arguments for the application of legal principles. Stated conclusion broadly answers the question, and ties together some legal arguments for and against the application of particular legal principles. Stated conclusion answers the question and ties together most the legal arguments for and against the application of particular legal principles. Stated conclusion answers the question, and logically ties together the legal arguments for and against the application of particular legal principles. 20 Marks 0-9 10-12 13-15 16-17 18-20 Quality of research skills: Research Little or no evidence of original research Evidence of some original research Evidence of original research from a number of different sources Evidence of a high level of original research Evidence of a high level of original research which enhances application and analysis Citation and referencing Many errors and/or little or no attempt made at referencing Mostly accurate – some minor errors Consistently correct 5 Marks 0 1-2 3 4 5 Quality of communication skills: Letter format Poor structure and/or miss formal letter elements Mostly appropriate structure and/or some use of formal letter elements Appropriate structure and use of most of the formal letter elements Excellent structure and use all of the formal letter elements Writing style, grammar and spelling Inappropriate style, tone and/or choice of language or many errors of spelling and/or grammar. Mostly appropriate style, tone and/or choice of language. Spelling and grammar mostly accurate. Appropriate style, tone and/or choice of language. Accurate spelling and grammar. Highly appropriate style, tone and/or choice of language. Spelling and grammar consistently accurate. 5 Marks 0-1 2-3 4 5 Question 2 (30 marks) Write Maximum of 2000 word answer here: From: Accountant Harry Fine Outfitters To Company Directors Harry Fine Outfitters Dear Sir/Madam RE: ADVICE FOR ACTION TO BE TAKEN AS A RESULT OF INSOLVENCY CIRCUMNSTANCES AT UNIFORM PTY LTD It is with my deep concern of the circumstances that the company is facing due to the huge amount of debt owed to Uniform Pty Ltd. From the recent updates of the company, Uniform Pty Limited is insolvent and not able to trade anymore. I am also aware of the big transactions that Uniform Pty Limited has been engaging with Harry Fine Outfitters. Being insolvent, Uniform Pty limited cannot pay its creditors. I write this letter to inform you about the external administration procedure that is preferable for you Harry Fine Outfitters as creditors to Uniform Pty Ltd. This is also to inform you whether as a creditor Harry Fine Outfitters has a priority to any of Uniform Pty Ltd’s assets to satisfy its debt. Finally, I will give details of whether Steve and Gary have breached any provisions of the Corporations Act 2001 (Cth), and if so, the consequences for them and any defences available for them. On the issue of external administration procedure that would be preferable for Harry Fine Outfitters as creditors to Uniform Pty Limited is liquidation. Liquidation is the winding up of a company to enable it repay its debts to the creditors14. In the case of Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 936/2012, the court held it is necessary to wind up a company that cannot pay its debts15. In liquidation, a party external to the organization is appointed for proceeding with the process of winding up of the company. In the liquidation process, a liquidator is usually appointed for the purpose of winding up the business affairs and closing the insolvent company16. A liquidation procedure is carried out voluntarily, non-voluntarily of compulsory under court’s order. A company that is insolvent like Uniform Pty’s Ltd can go to administrative receivership, administration or liquidation17. In your case as the creditors to Uniform Pty Limited, the external procedure that is most preferable in this circumstance is compulsory liquidation. As creditors, you have the authority to initiate the process of company liquidation through petitioning a court order requesting for a compulsory liquidation of Uniform Pty’s Ltd. In the case of Ward & Another v Smit & Others: In Re Gurr v Zambia Airways Corporation Limited 1998 (3) SA 175 (SCA) 180H Scott JA, the court held that the court has a discretion to set aside a winding-up order to creditors18. In the liquidation procedure, it is important to follow the following process. First, present a petition to the court on the grounds that Uniform Pty’s Ltd is insolvent and advertise that petition in the Gazzette. Secondly, get a winding up order from the court. Thirdly, appoint an official receiver or the court may appoint a receiver for you. The official receiver will become the liquidator by virtue of the winding up order or after being appointed by the court. The official receiver has a duty of investigating the affairs of the company and sending a report to you, the creditors. Fourthly, the official receiver will hold a creditors meeting four months after the winding up order is issued by the court. Here, you can decide to appoint a liquidator as the creditors of Uniform Pty Ltd or come up with a liquidation committee. The appointed liquidator will have the responsibility of realizing the assets of Uniform Pty’s Limited, agree on the creditor’s claims, and distribute the collected funds in the way of dividends19. The liquidators will then call a final meeting to give the creditors an account and report on the liquidation20. Regarding the issue of whether Harry Fine Outfitters have a priority to any Uniform Pty’s Ltd assets to satisfy its debt, i don’t think that you have any priority to any of the assets of Pty’s Ltd to satisfy your debt. As creditors of a company, it is important to understand that during the liquidation process, once the assets of the insolvent company is realized or are available for the various income streams, distribution of these funds is usually done based on an order of priority that is strict. I want to you to know that distributions are first made to pay the individuals or organisations that hold a fixed charge security over the assets of the insolvent company and realizing the cost of realization. The group that follows for payment are creditors who receive their payments of there are any funds remaining. These are the preferential creditors such as holiday pays to a certain limit and employee’s wages in arrears. The third group to receive funds of there are any remaining at this point are those creditors holding floating charge securities with the insolvent company. This is in exception for a part that may require setting aside for unsecured creditors. The fourth group to be paid are unsecured creditors and this depends on how the creditors present their claim during the proceedings. The last group to receive funds of any remaining are the shareholders21. In the current scenario, you Harry Fine Outfitters have no priority to any assets of Uniform Pty Ltd to satisfy your debt. This is because, Harry Fine Outfitters fits in the fourth category of unsecured creditors after the preferential and those with fixed charge security are paid. It is important to understand that the bank with be the first to be paid by the liquidators after the realization fees is paid. The bank registered a security interest over all present and after acquired property of Uniform Pty Ltd on the 6th of January 2016. In your case, Harry Fine Outfitters did sign a security agreement with Uniform Pty Ltd on the 2nd of January 2016. However, instead of registering the security interest on the personal property securities register, you put the paperwork aside with the intention of doing so, hence forgetting to register due to school rush. In this case, the bank will be paid all the realizations from the company assets since it has a fixed security charge over all the present and after acquired property of Uniform Pty Limited. Since all the realizations will be distributed to the bank, there will be not funds remaining to pay the other creditors including Harry Fine Outfitters (Unsecured Creditor). On the final Issue, i want to comment on whether Steve and Gary have breached the provisions of the Corporations Act 2001 (Cth) and if so, the consequences they will face and the defences that are available to them. Under the Corporations Act 2001, section 588G, the directors of a company have a duty of preventing insolvent trading of the business22. Failing to fulfil this duty and allowing a company to incur debt while insolvent is considered as a contravention of the Corporations Act. The director of the company will be said to have contravened Sec 588G of the ACT if one was aware that the company was insolvent or suspected to be operating on such grounds when allowing the debt to be incurred. One will also be liable if as a reasonable person in such a position would be aware of the circumstance and allow debt to be incurred23. Steve and Gary have breached the provisions of Corporations Act by allowing Uniform Pty Limited to operate and incur debt when it is insolvent. From the scenario, it is clear that the company is financial distress and not able to meet its liabilities. It is indicated that for the company to operate in the following season, it has to get credit from its creditors, Harry Fine Outfitters and the bank to enable it continue with its business operations. Additionally, it is also clear that the company has been experiencing the same problems before but it has been able to manoeuvre its ways of remaining in operation. Under the Act, a director commits an offence when the company goes into debt at the particular time, during that time; the person was a director of the company, the company was insolvent at the time of incurring debt and the director’s failure of preventing the company from incurring the debt was dishonest. There are various consequences of breaching the Corporations Act 2001, sec 588G. A director may be held personally liable for debts that were incurred when the company was insolvent24. According to the Australian Securities and Investments Commission, it is the fundamental duty of a company director in ensuring that the company does not carry out business while insolvent25. One may be required to pay those debts incurred when the company was not able to pay its debts personally when they fall due. A person may also be liable for criminal and civil charges for breaching civil and criminal provisions of the Corporations Act 2001. Steve and Gary have breached civil provisions of the Act and are liable for a civil penalty of up to $200,000. There are several defences available for Steve and Gary for contravening sec 588G of the Corporations Act 2001 (Cth)26. Sec 588G of the Act provides defences that Steve and Gary can use to defend themselves from their failure to prevent the company from trading while insolvent. The directors can argue that they had reasonable grounds of the expecting the company to be solvent since it operated in such a condition earlier and they were expecting that the company will be back in good condition when the schools open and after selling the stock they were supplied by Harry Fine Outfitters. They can argue that this was a reasonable ground to expect the company to be solvent when incurring the debt at that time27. The above issues are important based on the circumstances of the issue. I hope you will put them into practice and understand better how to deal with the impending menace. Thank You in advance, Yours Faithfully, Accountant Harry Fine Outfitters References Anderson, H., 2014. Directors' Liability for Fraudulent Phoenix Activity—A Comparison of the Australian and UK Approaches. Journal of Corporate Law Studies, 14(1), pp.139-173. Australian Institute of Company Directors, 2015, What are the duties of directors?, Director Resource Center, Available from: Australian Securities and Investment Commission, 2015, Creditors – Liquidation, Insolvency, Available from: < http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/creditors-liquidation/> Australian Securities and Investment Commission, 2015, Directors' liabilities when things go wrong, Available at: < http://asic.gov.au/for-business/your-business/small-business/small-business-resources/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/> Chakraborty, A., 2014. Role of Official Liquidator. Available at SSRN 2440875. Ellison, M, 2013, Legal Duties and Liabilities – A guide for directors of Commonwealth authorities and companies, Minter Ellison Legal Group. Garrett, J, 2014, The Directors Series: Part 2 - Fiduciary Duties, Available at: < http://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties> Hegarty, P. and Di Francesco, T., 2015. Seizure of property by liquidators under section 530C. Australian Insolvency Journal, 27(2), p.32. Legal Services Commission of South Australia, 2015, General Duties of Directors - Corporations Act 2001 (Ctth), The Law Hand Book, Available at: Price Water House Coopers, 2011, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia, PWC Australia. Queensland Government, 2014, Corporations Act 2001 (Cth) (the Corporations Act), Duties and Responsibilities of Board Members, Department of the Premier and Cabinet, Available from: http://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx Tunstall, I, 2015, Defences available to directors of companies trading while insolvent, Find Law, Available at: < http://www.findlaw.com.au/articles/687/defences-available-to-directors-of-companies-tradi.aspx> Whelan, A, 2014, How to Legally Remove a Director/Commitee Member, Third Dimension. Issue 2. Acts Corporations Act 2001 (Cth) Cases ASIC v Vizard (2005) ASIC v Healey (2011) AWA Ltd v Daniels (1992) 7 ACSR 759; 10 ACLC 933 Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 936/2012 Cassegrain v Gerard Cassegrain & Co Pty Ltd (2012) Fodare Pty Ltd v Shearn (2011) Ward & Another v Smit & Others: In Re Gurr v Zambia Airways Corporation Limited 1998 (3) SA 175 (SCA) 180H Scott JA Read More