Company Law as Prerequisite for the Business Fraternity - Math Problem Example

Company Law 266 Businesses have immensely expanded in the recent past. With the salient growth and development, there is a dire need for the business fraternity to have workable mechanisms that regulate operations. Company law is an enactment seeking to maintain sanity in the business arena. Given the innumerable transactions that occur at businesses premises and the prevalent technological advancements, there is a need to have statutory stipulations (Corporations Act 2001). Over the world, company law is enacted conforming to the constitution seeking to sublime and negating sub-optimization. Company law is hence an essential prerequisite for the business fraternity as it aids the government and other regulatory authorities in undertaking checks and balances. Problem Analysis Coco limited is a chocolate company directed by Hugo. The company purchases cocoa from Brazil. After strenuous deliberations, it was apparent that there was a worldwide cocoa shortage calling for urgent redress. To avert this detrimental distress, Coco limited sought to acquire a conclusive cocoa shipment from Costa Rico. It is worth indicating that, Hugo has in-laws in Costa Rico dealing in the cocoa shipment business. During the fateful meeting, the directors deemed it fit Hugo to contact his in-laws and start deliberations. Not long after the meeting, Coco limited placed a huge order for cocoa from Costa Rico to Australia. It was decided that the shipment would not be insured, as the insurance cost was exorbitant. In essence, the insurance cost would hike the cost of coco highly hence, the company would make losses. Initially, Coco limited paid a 25 per cent deposit and the remainder was due on delivery after 3 months. The shipment suffered a terrorist attack and sank along the Suez Canal (Becker & Fuest, 2007). Coco limited could not pay for the goods. With the sinking of the ship, the company suffered more debts worsening its financial position. The following month, the company faced a tax offence. The Australian Tax Authority lodged a complaint indicating that the company had not remitted due taxes. It is prudent to indicate that, the company’s directors might be personally liable for the pending tax obligations. It is worth indicating that the question adopts the four-step method to problem solving. The first step is the general problem analysis. This is followed by three separate answers bearing two steps; facts and devising a plan. Finally, there is the looking back section that finalizes the paper. 1. Should the directors be concerned with their move of not insuring the Coca shipment under both the corporations Act 2001 and case law(solution 1) Facts The Corporations Act of 2001 regulates the Australian business fraternity in ensuring that the country conforms to stipulations. It is evident that Coco limited under the lead of its directors violated the stipulations of the Corporations Act. The Corporations Act 2001 section 761G clearly indicates what constitutes a business differentiating between wholesale and retail. It is prudent to indicate that Coco limited qualifies as a wholesale client given the size of the shipment. Coco limited qualifies as a wholesale client as per the definition of the Corporations Act. Additionally, it is imperative to note that, the directors intended to purchase the Cocoa from Costa Rica to supplement the upcoming shortage (The new Corporations Act 2001 and related legislation). This is sufficient evidence that Coco limited is a wholesale enterprise hence qualifies for insurance. During the deliberations, the move not to insure the shipment was intentional. This implies that the directors were fully aware of the parameters set in place in accordance to the Corporations Act of 2001. Devising a Plan In light of these sentiments, the directors contravened the stipulations of the Corporations Act 2001 intentionally. The directors decided to neglect the insurance fees because payment would result to reduced profits (Corporations Act 2001). Violation of statute whether intentionally or not attracts some legal consequences. In fact, the directors should be concerned since they are unable to meet the expenses. The directors have the mandate to exercise due care as they undertake their decision making duties. First, the decision to defy insuring the shipment was ill advised. This is because of the fact that, in light of the above fact, the directors are liable for such impervious decisions. Since the shipment was not insured, the company owes two debts. First, there is the pending 75 percent that is yet to be paid to the creditors. However, a long short, coco limited owes the Costa Rico firm 75 percent of the pending payment. Additionally, the company owes the shareholders 100 percent of the amount payable for the shipment. This is because, in the event that due procedure was followed, the shipment would have been compensated. It is apparent that Coco limited has suffered significant losses given the poor decision antics of the company directors. In light of these sentiments, the company directors are answerable to the Corporations Act 2001. It is imperative for corporation directors to act consistently with the requirements of Statute. According to case law, there is formidable precedence in Australia curtailing such lack of insurance during transportation. According to past litigation, the court indicated that insurance is a necessity during transportation of merchandise across the world. The aim of insuring commodities is to ensure that in the event of danger or loss, liable parties are brought to book and compensate their counterparts. In the past, case law has had to delineate what constitutes insurance during transportation (Jou, 2005). This is because of the fact that, transport insurance is a new concept that humanity is yet to understand. The directors of coco limited were well aware of the requirements, essence, and repurcations of insuring the shipment. It was evident that, during the meeting the directors calculated the total expense incurred by the shipment if insured. The directors were looking for a shortcut that would reduces expenses and maximize profits. Sinking of the ship was not among their concerns and the accident came as a shock. The ripple effect of the ship sinking affects the financial position of the firm. Legally, the directors are answerable to both the company shareholders and the Costa Rico based company. It is prudent for the directors to consider paying the amounts owed to the Costa Rico based firm, as the terrorist incident had nothing to do with their earlier arrangements. The directors are personally liable for contravening the stipulations of the Corporations Act 2001. This implies that the directors neglected their legal duty of care by deciding to embark on uninsured shipment risking the company’s well being (Symon, 2006). In the instance of litigation, the directors are accountable and should compensate the shareholders. 2. Insolvency Of Coco Limited(solution 2) Facts Insolvency is the inability of a company to meet due obligations. There are two types of insolvency namely cash flow insolvency and balance sheet insolvency. Cash flow insolvency is a situation where a company has insufficient working capital such that due obligations in the short term cannot be satisfied with the cash flow. Balance sheet insolvency is a situation where the company cannot meet due obligations by selling or disposing assets in the balance sheet. This implies that there is a possibility of having a cash flow insolvent business, which has a solvent balance sheet. This is a situation where the balance sheet is illiquid by as per the market rate, the company is capable of meeting due obligations through disposal of the available assets. On the contrary, a business can be balance sheet insolvent but cash flow solvent. This is a scenario where the company can meet due obligations in the course of operations but cannot meet the long-term debts by disposing balance sheet assets. It is worth indicating that, there is a significant difference between insolvency and bankruptcy. Bankruptcy is a legal solution to insolvency only issuable by a court order. Devising a Plan In Australia, the Corporations Act 2001 governs corporate insolvency. This piece of statute clearly identifies what constitutes to insolvency and the amicable procedures that deal such situations. This is because of the fact, in the eventuality of insolvency the company has to have a stream of creditors all in need of the sums owed. The corporations Act 20001 clearly stipulated the order in which compensation from the disposal or sale of company assets follows. In the instance of court order sanctions, the court has the mandate to put companies into Creditors Voluntary Liquidation, Voluntary Administration, or Liquidation (Zwier & Dale, 2005). It is worth noting that, secured creditors with possessing registered charges have the special ability to appoint receivers and receivers & managers all depending on the characteristics of their charge. Coco limited is confined to the jurisdiction of the Australian law. The Corporations Act Of 2001 is in effect and the company has to oblige. It is evident that coco limited is facing financial distress and in a point of insolvency. The company is unable to meet due obligations and is constrained by significant debt sums. This implies that the Coco limited is highly leveraged and is not positioned to meet the due obligations with the revenue streams. Additionally, the company suffered severe losses from the sinking of the ship carrying raw materials. Since the ship was uninsured, the company has to pay its creditors the whole amount. With the salient features coupled with a looming raw material shortage, coco limited is insolvent. There is a dire need for the directors to act prudently and dissolve the company to avert any losses. Conversely, there are innumerable options that negate further financial distress helping insolvent firms recover. Coco limited has the mandate to ensure all creditors whether secure or otherwise are compensated. 3. What Is The Liability Of The Directors In The Eventuality Of Insolvency(solution 3) Facts With the passage of time, company’s structures assimilate limited liability. A limited company is a company structure where the liability of stakeholders of the company or members is limited to their investment or guaranteed to the company. This implies that the liability of the company extends as far as the investment of members in a company. For instance, shareholders invest share capital in a company and hence, their liability extends as far as their share of capital. It is prudent to indicate that the limitation in companies may emanate from shares or by guarantee. When the limitation emanates from shares, there is a further division of private and publicly owned companies. The privately owned companies restrict selling shares to selected individuals who happen to be the founders of the organization (Toporowski, 2010). This implies that both the law and company's rules restrict any additional membership. In contrast, the publicly owned companies are open for any member of the public that meets the threshold or prerequisites. In Australia, the concept of limited liability companies has thrived immensely. This is because of the fact that, this structure awards significant responsibility to owners of a company. On the contrary, it creates an artificially different person who is solely liable for debts or assets. An Australian company bearing the term limited or Ltd. at the end of its name is a public company, such as a company listed on the Australian securities exchange. It is worth indicating that some of the Australian public companies can be unlisted. According to the Corporations Act 2001, Australia does not have a direct equivalent to the plc. It is imperative to highlight that, as per the stipulations set out by the Corporations Act 2001 a shareholder in a limited company, in the event of insolvency or bankruptcy would be liable to contribute the amount remaining unpaid on the shares. The amount is usually zero, and the reason behind this is that most shares are issued when fully paid (Altes, 2003). It is prudent to state that, according to the Corporations Act, paid relates to the amount paid for the first issue alone to the company. This sentiment seeks to negate any misconception that might emanate from the thinking that any amount paid between shareholders during share transfer is considered. A shareholder has ultimate limited liability extending as far as the invested share capital. Devising a Plan Under the Corporations Act 2001, the directors of a limited liability company are protected by the limited liability clause. This implies that the Coco limited directors including Hague have limited liability to the company’s debts. Nevertheless, there are salient exceptions to this clause. The Corporations Act 2001 indicates that in the instance the directors directly cause insolvency, they will be held personally liable (Corporations Act 2001). The reason underpinning this argument is the fact that, directors have the responsibility to act in the company’s best interest. There are instances where the directors might act contravening the shareholders desires leading to insolvency. In such an instance, directors are personally liable. In the event that insolvency resonates from fault or negligence borne by the Board of Directors and the Company’s assets are insufficient to cover the incurred losses due to insolvency, the Board of Directors may be held severally and jointly liable. This relates to the balance of the obligations not met by disposing the company’s assets. According to the Corporations Act 2001, Hague and the other directors will only be liable for the company losses in the event of asset disposal and they do not meet the due obligations. Any balance over and above the amounts raised from disposing the assets will come from directors. Implementation Quoting from recent case laws, directors should note through the judicial system, in the event that wrongful trading resonates to insolvent liquidation personal liability is inevitable. This implies that, a director of a company wound up because of insolvency is personally liable for debts owed as the court sees fit if wrongful trading is evident. It is worth noting that, going by the case laws, Coco limited directors are personally liable for insolvency. According to Corporations Act 2001, wrongful trading entails a situation where “at some time beforehand, a director knew or ought reasonably to have concluded that there was no reasonable prospect of avoiding the insolvent firm winding up, but did not take ‘every step’ to minimize the potential loss to the company’s creditors”. In essence, Coco limited directors new that the shipment was vital for the corporation’s growth and neglected to insure the merchandise. In attaining a decision as to whether the directors took every step to mitigate the loss to the company creditors, the court assumes that the directors we well aware that there was no reasonable prospect of the company avoiding the insolvent liquidation (Corporations Act 2001). The main aim of the enacting wrongful trading laws is to streamline company directors and avert financial distress. This is a stunt measure to ensure that the directors, try to trade out of trouble, stop, and think carefully regarding the outcome of their decisions. Similarly, in the instance Coco limited directors had thought about the detrimental consequences emanating from wrongful trading, the company would not be grappling with the prevalent financial crisis. Wrongful trading looks at each director’s function. The intention is to deduce what a diligent person with general knowledge, experience, and skill required of a director do in the light of the circumstances. Essentially, this is an objective test, subjected to directors of the same caliber in the quest of answering fundamental questions. Looking Back It is prudent to indicate that, under the Australian statute, the actions of Coco limited directors were wanting. The directors contravened imperative laws indicating negligence and lack of due care. In the instance, that Coco limited becomes insolvent because of the ill-advised move to ship the merchandise uninsured, the directors are personally liable. Their liability emanates from any amount over and above the amount garnered from disposing the company’s assets. It is prudent for the law to take due course on the actions of the directors. This will negate future wrong moves from directors awarded with such powers. References Altes, A. K. (2003). On Limitation Of Ship-owners Liability.”I. Netherlands International Law Review, 10(02), 139. Becker, J., & Fuest, C. (2007). Why Is There Corporate Taxation? The Role Of Limited Liability Revisited. Journal of Economics, 92(1), 1-10. Commonwealth Consolidated Acts. (n.d.). Corporations Act 2001 - SECT 761G . Retrieved September 12, 2013, from http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s761g.html Corporations Act 2001 reprinted on 16 June 2006 (taking into account amendments up to and including those made by Act No. 17, 2006) (Reprint 2, [3rd ed.). (2006). Canberra: Attorney-General's Dept.. Jou, J. (2005). Corporate Borrowing And Growth Option Value: The Limited Liability Effect. Journal of Economics and Finance , 25(1), 80-99. Symon, H. (2006). Corporations Act 2001. Melbourne: Leo Cussen Institute. The new Corporations Act 2001 and related legislation: Corporations Act, Corporations Regulations, ASIC Act and Regulations, Corporations (State) Act, other legislation. (Centenary of Federation ed., 2001 mid-year ed.). (2001). Sydney, NSW: Butterworths. Toporowski, J. (2010). Corporate Limited Liability And The Financial Liabilities Of Firms. Cambridge Journal of Economics, 34(5), 885-893. Zwier, L., & Dale, C. (2005). Voluntary administration under the Corporations Act 2001. Melbourne: Law Institute Victoria. Read More