Max Be Held Liable for the Unpaid Debt of Shifty Seller Pty Ltd - Assignment Example

Company Law Name: Institution Company Law A) Max be held liable for the unpaid debt of Shifty Seller Pty Ltd A company comes into existence once registered under the Company Law. Thus, a company is as a person albeit intangible and its existence is only under the contemplation of the law (Fleckner & Hopt, 2013). Consequently, since it is a creation of the law, it carries only the properties characterized by its creation. Since a company is as an artificial person, it cannot act on its own; therefore, it needs directors as the brains and can act only through the directors. For the situation study, Max is the chief of Shifty Sellers Pty Ltd and Alex goes about as the overseeing executive of Smart Engineering Pty Ltd. Both organizations are legitimate elements. The case situation is Max, as the executive of Shifty Sellers Pty Ltd, a legal entity, bought goods on credit from Smart Engineering Pty Ltd but went into liquidation before it could pay for the goods. The debt belonged to the company and not the director as this is a limited company. A limited liability company operates as an independent entity with its own legal obligations. It is observable by many legal scholars that it is a central principle in law that a limited company is distinct and separate from the directors (Symes, 2008). Thus, an enterprise which operates as a limited liability company is expected to be responsible for the debts accrued in its operation, notwithstanding that the directors acts on its behalf as agents and enters in agreements or arrangement that create liabilities for the organization. Company law operates from the perspective that when a company director acts on its behalf, he is acting as agents. Consequently, as agents, the directors cannot incur any personal obligation or liabilities to the counterparty in the contract; however, it has to be made explicitly (Ridley, 2013). A director is liable, however, if they do not disclose to the parties they are transacting with that they are doing so as directors of the company and not as an individual, they will have breached the law. Nevertheless, the principle of limited liability is used in a wrong way in fraudulent dealings. Fraudulent dealings mean that the enterprise engages in business transactions with the explicit intent of defrauding third parties. However, in the case study, Max had engaged in what is referred to as wrongful trading which is misusing the liability principle. Wrongful trading occurs when a director of an enterprise lets the enterprise to continue engaging in transactions when he is aware that there is a prospect of going into liquidation (Ridley, 2013). In such circumstances, a court may declare the director personally liable. It is apparent that Max had contravened several Corporation Act provisions while acting as the director of Shifty Sellers Pty Ltd. He allowed the company to trade while he knew that by incurring more debts, the company would get insolvent, an eventuality that happened soon after, and the company was liquidated. The director does not seem to have acted in good faith and he should be held liable for the company’s debt. Max, according to the case study, was a known credit risk that means that his company was not doing well, a fact that Max should have been aware of but chose to continue trading while knowing that the company was headed to liquidation. Max, therefore, was guilty of wrongful trading and he can be held personally liable for the debt. A court of law can compel him to pay the debt of Shifty Sellers Pty Ltd. b) Betty is obligated for reimbursement of the $500,000 credit to Eastpac Bank Ltd. Betty, Alex spouse, holds a non-official executive position in Smart Engineering Pty Ltd. She upbeat to leave the organization administration to Alex, however, she is a signatory to all financial transaction including the bank loan documents. She however, had a feeling that the organization had some financial difficulties, a fact that was proven by the returned check. She, nevertheless, had faith in her husband’s business acumen and hoped that he would turn the business around since china was a big market. Betty possesses a focal position in the administration of Smart Engineering Pty Ltd. As per the Corporation Act 2001, a non-official executive runs an organization with the participation of different chiefs. For the situation study, Betty is a non-chief at Smart Engineering Pty Ltd with her better half. A non-executive director is viewed by the Corporation Act 2001, as a person who is not employed by the company in an executive position (Neumann, 2011). However, all directors are expected to comply with the legal dictates of the Corporation Act 2001. The Corporation Act outlines several duties and expectations of company directors. The directors are expected to act with a degree of care that a reasonable individual would be expected to display in such a role. The same diligence is expected of company directors in common law. The chiefs likewise anticipate that would handle the matters of the organization in compliance with common decency and the best advantages of the undertaking and for a legitimate reason (Anderson, 2008). The duty includes avoiding conflicts and when this happen, revealing, and managing them. These are fidelity and trust duties often referred to as fiduciary duty mostly imposed by common law while the duty is embedded in legislation. The Corporation Act expects company directors to use their positions properly and not to use them for personal gains. The company directors expect information presented to them in respect to the organizations actual financial affairs including its solvency. The duty does not diminish because of delegation of responsibility and, therefore, directors cannot feign ignorance of the enterprise financial position. The duty calls for the directors to interrogate the information given to them to ensure that it represents the true position of the company (Keay, 2007). For instance, Betty signed the bank loan document while being aware that the company was not in a healthy financial position and it was staring at insolvency. The Corporation Act demands that company directors should avoid insolvent trading. A breach of this duty, as provided for in Part 5.7B, may occur if an individual was a director of the organization when the debt was incurred and the enterprise was insolvent or got insolvent when it incurred the debt (CCH Australia Limited, 2011). Additionally, at the time of incurring the debt, there were grounds that may have led to the suspicion that the company was going to become insolvent but the director was aware of such grounds and failed to prevent the company contracting the debt. For the case study situation, Betty, as a chief of Smart Engineering Pty Ltd, knew that the organization was in genuine monetary position subsequent to the money stores were low. According to the Corporation Act 2001, Betty should not have allowed the company to take the bank loan since it was not in a position to repay the monthly installments. The company has already defaulted for close to six months, which, in essence, means that the company is, for all practical purposes, Smart Engineering Pty Ltd is insolvent and should be put under liquidation. According to the Corporation Act 2001, it is wrong to continue operating a company that cannot meet its creditors’ obligations. As an individual who was a director at the time the loan was taken, and was fully aware of the financial health of the company, Betty is liable to pay the total amount accrued. C. The Legal Consequences of Breaching the Corporation Act 2001 Effective regulation is dependent on the enforcement results that deter misconduct. The Corporation Act 2001 sets out the regulatory directives that businesses are expected to follow and the breach of which attracts tough penalties. There is a range of penalties available breaches that are commensurate with the particular misconduct. The aim of the penalties is to discourage other contraventions while promoting compliance that could lead to a better financial system (CCH Australia Limited, 2011). The responsive regulation theory recognizes that the regulatory agency may not be able to enforce the contraventions of the regulations it administers. It is, therefore, necessary for the regulatory agencies to foster and encourage voluntary compliance with the law. Often, the agencies actions include warning letters after which an imposition of a civil action is taken. What it means is that should the enforcement agency deem that certain provisions as provided by the Corporation Act 2001 to fall under civil penalty provisions, then a civil action could be brought against the offender (CCH Australia Limited, 2011). The civil penalty as provided for by the Act includes the provisions that relate to directors duties, insolvent trading, and share capital. Thus, when the regulatory agencies believe that a company has contravened the provisions of the Corporation Act, it can initiate proceedings that would seek a pecuniary penalty or a declaration of contravention orders under the Corporation Act subsections 181, 182, and 183 (CCH Australia Limited, 2011). According to the Corporation Act 2001 section 588G, there is a civil obligation imposed on a director to help a company avoid getting into debt when the said director is aware that there are reasons to suspect that the company may be insolvent or the debt would drive the enterprise into insolvency (CCH Australia Limited, 2011). According to the case study, Betty was aware that the company financial situation was not good and the bank loan would only drive the company to more financial problems including insolvency. Under the circumstances, Betty breached subsection 181, and 183 of the Corporation Act 2001 and was therefore, liable for prosecution. Part 5.7B calls for the imposition of personal liability for insolvent trading and the court could order Betty to pay the amount the bank stood to lose (CCH Australia Limited, 2011). References Anderson, H. (2008). Directors' personal liability for corporate fault: a comparative analysis, New York: Kluwer Law International. CCH Australia Limited, (2011). Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations, North Ryde: CCH Australia Limited. Fleckner, A. & Hopt, K. (2013). Comparative corporate governance: a functional and international analysis, Cambridge Cambridge: University Press. Hannigan, B. (2012). Company Law, Oxford: Oxford University Press. Keay, A. (2007). Company directors' responsibilities to creditors, London: Routledge. Neumann, J. (2011). The non-executive director - general duties and special liability, Munich: GRIN Verlag. Ottley, M. (2013). Q&A company law 2013-2014, London: Routledge. Plessis, J., Hargovan, A. & Bagaric, M. (2010). Principles of contemporary corporate governance, Cambridge: Cambridge University Press. Ridley, A. (2013). Key facts company law, London: Routledge. Symes, C. (2008). Statutory priorities in corporate insolvency law: an analysis of preferred creditor status, Farnham: Ashgate Publishing, Ltd, Read More