Commercial Law: Statutory Duties of Employer - Case Study Example

PART A James Johns must understand that as a sole trader he carries the business on his own, it is indeed part of his personal property. In case of business liabilities and debts they are also his personal liabilities. As a sole trader he must make the right decisions regarding the operations and management of the business if he is to succeed. In his scenario James is heavily in debt which if not properly managed and right decisions made at the right time may expose his business and family to financial risk. James must understand that he must follow the right avenues to protect his business and family financially and continuity of his business. Financial planning is therefore inevitable if success is to be achieved, this must comprise areas such as mortgages, car loans, insurance, loans and taxes. James Johns owes $350000 to the National Civic Bank in terms of mortgage, Federal Finance Company needs $30000 car loan from him. He also needs to raise an extra $150000 to expand his business which may subject him to more borrowing. All this exposes his business and family at large to financial vulnerability. Since all the business and personal assets belong to the owner they are hence at risk if the business runs into financial problem with its creditors. If the business debts exceed its assets then the creditors can target the personal assets. It is also true that if James is unable to repay the mortgage and the car loan his business may be targeted by both the National Civic Bank and the Federal Finance Company. The unlimited liability feature of being a sole trader is the main disadvantage of this type of the business. James Johns should know that it is possible to insure against any claim that might compromise his personal wealth. Buying an all risks insurance package is normally very expensive and according to his financial status he may not be in a position to do so. There are several things that James must to protect his assets from financial risks, he must start by protecting his credit by making sure that the credit report he has is accurate. This should be done annually in case there are any issue regarding it he should report this to the credit bureau for assistance. He also needs to form a trust and transfer all his financial assets to this trust this will transfer the liabilities of his business to this trust and in so doing will not expose his personal assets. Buying insurance policies relevant to his business will also not be an option but a necessity. Policies such as general liability and term life as well as mortgage protection will help cushion his financial assets in the case of unpredictable circumstances. He also needs to purchase liability insurance to protect his assets even if he has a fool proof plan. Statutory duties of employer James must have his business run professionally by the two employees; well prepared cash flows are a must and help in controlling stock and over-heads. This may also help him to easily acquire a bank loan using either his personal assets or the collateral of his business. The other need for shrewd book- keeping is for tax records. James must obey the various statutory responsibilities to his employees regardless of whether they are permanent or on part time basis. This include just to name a few; written contract of employment, pay slip statement, safe working conditions, must register with revenue & customs body and insurance contributions. James should also register himself as self employed with the Inland Revenue to avoid being fined and having his business flagged for investigation by the body. It is very important that he learns that the cost of compliance is lesser than the cost of not doing so. The business should also register for VAT this will help him to claim back VAT on all invoices of his business purchases. It’s important that James understand according to common law statutory duties his employees are entitled to various claims for example the case of Sharp V Stephen Guinery the court ruled in favor of the plaintiff who brought the claim against his employer based on common law negligence and the breach of employers statutory duties. The employer was obliged to settle $160000 as damages. Insurance As a sole proprietor James should understand that he must make sure that his business has the right insurance arrangements. He must therefore select the right insurance package for his business. James must have a business liability insurance that will help protect his business against any risk arising from legal costs and damages from a law suit. This insurance is normally purchased in different forms including general liability, professional liability and product liability insurance. According to his nature of business James needs to purchase the general liability claim to protect his business from property damages, injury claims and advertising claims. James business is subjected to several liabilities and worse still he needs additional capital that may involve him to incur more liability. It may reach a point and he may not be in a position to pay the loans on time. He therefore needs to have a business insurance that will cover these unpredictable and potential liabilities. Paying small premium to any insurance company James will help protect his business against any chance of suffering huge financial losses. Insurance companies have over the years helped the small and medium business to reduce uncertainties under which they operate by placing the financial burden elsewhere so that sole traders can focus their attention on the operations of the business. James must also specify whether the car he owns is for his business or for personal use it must be insured as insurance companies handle automobiles separately from other properties and liabilities cover. It is also important that he considers insuring his house under the various unpredictable circumstances such as fire, floods and other damages. Mortgage protection James has a mortgage that he needs to protect against any unforeseen events. He needs to have a policy that will cover his mortgage payments in the case of business collapse, accidents or if he runs bankrupt. It is also important that he examines the level of cover that he requires and also carefully examines the terms and conditions and know exactly what the premium covers. He must also check the wait period for the cover where he feels he can comfortably repay the mortgage without straining financially. By doing this he will have secured his home and will not worry about it being auctioned if he is unable to pay at a specific time. Since in this case a couple is involved then the mortgage should be billed on a joint life, initial death basis. They should also seek any tax relief on mortgage if they have not done so already. Trading trust A trading trust is formed by a deed of agreement where a party gives a nominal amount as the opening capital of the trust and selects a trustee to run the trust. Both individuals and businesses are competent of performing as trustees but a corporate trustee is ideal. The company operators retain control of the trustee corporation as its directors and shareholders. Setting up a trading trust will be a plus to the couple in that the trust will provide financial protection to the family members. They will not worry about personal assets such as the family house car and any other asset not disclosed here. A trading trust is also beneficial in that its life is longer that the life of an individual beneficiary or member. In the case of death the business will still go on under the trading trust and does not generate a potential investment gains tax liability. The structure of a trustee has the ability to provide maximum flexibility of the trust administration and management. Sources of capital There are several ways through which James can raise the needed capital for expansion his business. James may be in huge debts but borrowing still is a good source of additional capital. He may take a loan from a bank however; he needs to be very careful on the terms and conditions of the loan. He should form a trading trust before taking the loan as this will transfer the liability to the trust rather than his personal assets. He needs to develop a good business plan for his business, present tax returns for a couple of years, present both personal and business financial statements. Commercial banks are still among the least loan providers and as such he should have no fear seeking a bank loan. With the trading trust in operation James should approach different suppliers and source for the needed stock on credit and the repay after sometime. Creating a good relation with the suppliers is very critical for the success of any business. There should be well laid plan of how creditors will be repaid without failure. James may also seek debt financing as in this the interest on the loan depends with the size of the loan sought. Local or national development agencies should be sought after because they offer loans with the lowest interest on loans. The other avenue that James may use to get the needed capital is from friends and family members. This method of sourcing is among the best in that they are normally the most lenient investors because at the end of it they may opt to sell their interests in his business for a nominal return. PART B Bankruptcy has been defined as the status where a borrower is declared to be incapable to pay his or her credits. There are two types of bankruptcy namely voluntary and involuntary, voluntary bankruptcy is where a debtor decides to willingly file a case to be declared so. Involuntary bankruptcy is whereby a creditor goes to court and files a case that the debtor be declared bankrupt. In our case study James Johns is heavily in debts and has no steady cash flow to repay his debts. James owes creditors an accumulated value of $100,000. Gareth Jones Pty ltd one of the creditors is demanding $28,500 from James and has further advised him that if he does not honor his obligation he will take legal action against him. James has also faulted on both his car repayments and his home mortgage. He has received letters from both the National Civic Bank and Federal Finance Company, the two letters states that James must start repaying the amount due immediately or otherwise legal action will be sought to recover the debts. James has also defaulted repaying the agreed child support of $ 120 every week, the amount has accumulated to $ 2,400 and the separated wife has vowed to take legal action against him if he fails to pay. James also owes the tax office an accumulated figure of $ 36,000, the tax office has requested that James must make his own arrangement immediately to repay the outstanding amount. One of James employees Mary suffered a work related injury and as a result of an oversight the insurance could not cover the cost. He has also failed to pay his employees for two months and the total amount in arrears is $3200. All the above clearly shows that James is heavily in arrears and that most of the creditors have asked him to repay or else they will seek legal advice. James needs to understand that he is indeed lucky that he has only received notices and no action has actually been taken. None of the creditors has filed a case in a court of law to have him declared bankruptcy. He also has not decided to have him declared as bankrupt, however, James must understand that if he does not take an immediate action he will soon be declared as bankrupt and have his assets auctioned. Rising again may be very tough because of the legal procedures that accompany the ruling of being declared bankrupt. James has accumulated so much debts but it does not mean that he has no means to repay the debts. All he needs to do is to make good arrangements on how he should start repaying these debts. He must show an act of goodwill and restore confidence in the minds of his creditors. He also needs to seek immediate action to start repaying the mortgage and the car loan. All his debts are secured debts and the creditors have the right to follow their money till it’s fully repaid. Bankruptcy does not affect the rights of a secured creditor to deal with its security. James John creditors hold legitimate security over his assets or property should he be declared bankrupt and are, within the terms of their security. They are entitled to sell the assets in order to recover the amounts owed. Creditors who hold security over property belonging to other parties are not secured creditors within the context of the bankruptcy law but have rights in the estate as an unsecured creditor. Creditors holding security of less value can deal with their security and are also able to claim in the bankruptcy. These creditors are entitled to vote at any creditors meetings for the loss or expected loss. “Family Law Act 1975 (Cth) ss 70NDA, 70NAE, 70NAF and Family Law Rules 2004 (Cth) r 21.08 in relation to Tindall Vs Saldo [2010] FamCA 626 and Tindall & Saldo (No.2) [2010] FamCA 1174. The court ruled in favor of the mother for the father having admitted to contravene parenting orders. In our case James has failed to comply to the order regarding supporting his children. He should make quick arrangements with his separated wife to avoid dire consequences by the court. In relation to James property should he be declared bankrupt his business as well as his personal assets will be divisible among his creditors, and any powers and rights relating to his property will be exercisable by him if at this time he has not been declared bankrupt? According to the laws of bankruptcy James has committed an act of bankruptcy by favoring one of the creditors over the others. Jerry Bright one of his creditors who he owed $ 6000 was paid the outstanding amount on 4th February 2012 only because he was his long time friend. This is an act of bankruptcy in the sense that at his situation he should not discriminate against any of his creditors but rather treat them equally. James must also understand that should he fail to meet the deadlines and any of the creditors goes ahead to file a bankruptcy case against him, he should seek bankruptcy protection from a court of law. James is thinking of departing for Mexico so as to avoid the creditors if he indeed does so then he will commit an act of bankruptcy. Currently James has refused to neither answer his phone nor open his door in fear that his creditors are demanding payment. He should understand that by absenting himself he is committing an act of bankruptcy. For instance in ‘Bisson et al. v. Luciani et al. 1982 OR 257 “The parties held property as tenants in common. When they tried to sell the property together, the purchases back out of the deal when they discovered legal action had been registered against Luciani. The sale did not go through. Bisson found a purchaser for his half and asked the court to order partition. The court found that a joint tenant or tenant in common had a prima facie right to a partition unless a "sufficient reason" could be found not to partition” Bisson et al. v. Luciani et al. 1982). Therefore, James should understand that they owned the property as joint tenants with his wife as such he has the obligation to obey that fact. Regarding the mortgage if James had bought the mortgage protection as advised earlier in part one, he should then approach the insurance agent and ask them to start repaying his mortgage on his behalf until his cash flow stabilizes. According to the obligations under the law of the Trustee in Bankruptcy, should James be declared bankrupt then a trustee should be appointed to his case. In order to pay his creditors the trustee will have to sell his assets, investigate his financial affairs and may recover money or property transferred to anyone else. According to James case there are several transactions between him and his sister Megan that may call for the trustee interest in his bid to repay the creditors. The trustee’s duties are particular in legislation and they have to stick to definite standards. James may choose to appoint a registered trustee if he petitions to become bankrupt. Failure to choose a trustee, the Official Trustee (ITSA) is the selected to oversee his estate. James creditors are also given the right to change the appointed trustee at any given time should they feel they are not getting the services they need from the trustee. James will then be subjected to various obligations during the period of his bankruptcy. James will then be required to inform his trustee any change in name and address, he will also be required to submit his passport to his trustee who may then impose travel condition, should there be any change in his income then he must notify the trustee. During this period should he receive any assets while he is bankrupt he is bound to inform the trustee. He is also expected according to the ITSA standards to cooperate with his trustee and provide information when asked to do so. There are several restrictions that James must understand that he will be subjected to. He will be required to inform any potential lender that he is un-discharged bankrupt. He cannot manage a company or be involved in its management without the approval of the court. Conducting business will also be very challenging in that he must first disclose that he is bankrupt to anyone that he deals with. Lastly it is also important that he notes that there are several professions and trades that he will not be employed in. Failing to adhere to these restrictions and obligations could lead to fines, criminal prosecution or even imprisonment. There are several ways James can employ to deal with these unmanageable debts. He is at liberty to choose either formal or informal based on agreement between him and his creditors. Some of the informal arrangements that he can use is making arrangements with his creditors for example he ask them to give him more time to repay, negotiate repayments or even ask them to accept smaller amounts to settle the debt. He may choose to either do it himself or seek the help of a registered trustee, lawyer, registered debt agreement administrator or an accountant. James may also seek to have a freeze on his debts for a set of time to allow him to bounce back again financially. Proposing a debt agreement his debts, after-tax income and assets must be over a certain limit. He may also propose a personal insolvency agreement between him and his creditors. James also has the right to petition for a voluntary bankruptcy this will allow his to be discharged from most of his debts. Reference Harland, D (2009) ‘ Unconscionable and Unfair Contracts: An Australian Perspective’ in R Brownsword, N Hird and G Howells (eds) Good Faith in Contract: Concept and context. Read More