Legal Aspects of Doing Business - Case Study Example

Possible Defenses for the Guarantors Tanya and Boris Name: Course Professor name University name City, state Date of submission Introduction This law essay seeks to assist both Tanya and Boris to be able to defend them against liability for their niece’s loan default. Owed to the evidence that they are signatory guarantors in the contract between Olga and the East Pac Bank. Failure by Olga to pay the loan advanced to her has caused her cousins Parents to liable. In the case study, Tanya and Boris agree to be co personal guarantors of the loan that Olga took to buy the car. This means that they agreed to be responsible in case of Olga’s default. In these, they would pay the debt of Olga in the event, that she fails to do so[Fie12]. In this Tanya and Boris accept the Primary obligation to towards the deal. Body Full-Disclosure Under contract law, it’s the responsibility of the bank to fully disclose the details of the contract (loan) signed between the East Pac Bank and Olga to both Tanya and Boris. They lender and the borrower fail to inform the co-guarantors who are old, frail and uneducated that Olger’s income is uncertain and might not feet the full sum outstanding of the loan. This would be a good defense strategy for the two co-guarantors to defend themselves on the line that they can not be liable because the bank failed to disclose fully the details of the loan situation. Presence of the Notary In the event, that the signatures of a binding document are not educated there should be a notary that would explain further the meaning of the document and thus enabling the individuals to make an informed decision. In this case study, Both Toni and Tanya do not understand any English yet they are citizens in a country that teaches English as a language in school, This simply goes to say that both of them have not gone to any school and as that are illiterate to understand the document they are signing. As such they would defend themselves from paying for the defense that they were unaware of the documents content[Cam09]. Bankruptcy. Whenever the court declares a person or a corporation as being bankrupt, then it means that that particular corporation or individual is unable to exercise his/he financial obligation in any way. The case study says that Both Boris and Tanya are said to depend on Olga for both physical and emotional support, this shows that the two can not manage on their own and thus the current situation that they should pay Olga’s loan does not play well. They can defend themselves on this line since they are unable to fend physically and emotionally for themselves. Scope of Risk The case study tells us that the bank knew that Olga’s income was uncertain and that she could not be able to pay the loan in due time, They also knew that there was a high possibility that Olga would default on the loan but they go ahead and give her a loan. The very high risk that they took but knowing that Olga had guarantors they advanced her without even checking the financial ability of Tanya and Boris. This is an argument angle that would also favor the co-guarantors in their defense against receiving liability for the loan default. Inducement of the Guarantor The Financial law states that a guarantor can only take responsibility for a default on a loan exclusively when it is clear that they are acting as guarantors on their pure personal conscience and not by any inducement. Tanya and her husband Boris can argue that they were induced into signing that agreement because a failure would have meant the end of Olga’s emotional and physical support. Though Olga had lived with them and they categorically claim that they are fond of her, it still would not be in their best interest to sign the binding agreement in view if their health and elderly status. Undue Influence Tanya and Boris can claim that Olga had expressed power over them because they depended on her, Unlike Ivan they could not refuse to guarantee her, even though, the might have known the riskiness of them signing the loan documents and accepting responsibility for Olga’s default[The13]. Failure by the lender to protect the guarantor Although they agreed to sign the document, according to the Australian legal commission it’s the duty of the lender to protect the guarantor in the case of a borrower failing to repay the loan. The first failure should not warrant for the Bank to ask Tanya and Boris to pay, Instead it should further follow up on Olga and even reposes the car or Olga’s property instead[The13]. Lack of a witness Among the defenses, Tanya and Boris can claim that they did not sign the document as there was no witness to show that they likely witnessed the signing of the guarantee. Though this method would seem cruel, it is a viable idea that would be capable of releasing then from that obligation[Lee13] Joint and Several Liability This act states that a guarantor of a debt though liable upon default by the borrower, and the individual to whom is guaranteed is not required to first resort to recover from the primary obligator[Jac11] Lack of Notice by the lender Failure by the East Pac Bank to notify Tanya and Boris on the possible loan default. This is also a defense that would be applied by them to defend themselves against liability. References Fie12: , (Field Fisher Waterhouse, 2012, p. 2), Cam09: , (Campbell, 2009, p. 38), The13: , (The Legal Service Commission of West Australia, 2013), Lee13: , (Lee, 2013), Jac11: , (Jacob, et al., 2011, p. 3), Inv151: , (Investopedia, 2015), Inv15: , (Investopedia, 2015), Smi14: , (Smith, 2014), Tat15: , (Tatum & Harris, 2015), Sha15: , (Sharma, 2008-2015), Deb14: , (Debt Dictionary, 2014), Fre15: , (Free Dictioinary, 2015), Yan06: , (Yan, 2006, p. 706), Bor14: , (Borsa Istanbul, 2014), USs15: , (U.S small Business Administration, 2015), PART B Investment in Start-Up Companies via Equity and Debt Instruments Name: Course Professor name University name City,state Date of submission Introduction This paper delves to show the benefits of investing in start-up companies with the use of both debt and equity. It also aims at showing the different types of equity and debt that can be used for the above said investment. It will mention the types together with individual advantages and advantages. A debt instrument is defined as an electronic or paper obligation that allows the issuing party to built funds by way of promising to repay a lender according to the contract previously signed by the two parties[Inv151]. Types of these instruments include bonds, certificates, Mortgages, leases and Medium-term notes. Equity (stock) on the other hand is used to show an ownership interest. It is often used in trading companies. They are used in the allocation of assets. They combine to build an investor’s portfolio[Inv15]. Body Debt Instruments. It is the use of debt instruments to gain the portion of a company or corporation. They create a way in which in which participants and markets easily transfer debt ownership from a party to another. This increases liquidity for that particular levered company and also gives participants of that company to trade debt to other individuals as well. The following are the types of debt present in the Market; Bond A bond is a convertible note or as said earlier a debt that a start-up company or otherwise would sell to the investors in an aim to raise capital, to spread risk or to acquire market control. Interest however is accumulated in the instrument. The bond can be novice into common stock in the event of an IPO, an Acquisition or a Liquidation process. Some known bond characteristics include; Senior- This refers to those bonds that are in first-lien position. This means that in the event of default followed by the liquidation, the bondholder has the first priority to recoup the borrower’s investment. Whenever bankruptcy is involved and the stakeholders sell the proceeds of that company, the bondholder is the first to receive re-payment. This means that the bondholder of this type of bond holds a low-risk. Subordinated- This is a junior bond that is the second level of Debt, It subordinate in its relationship to the senior bond, this means that this bond is riskier thus has a higher interest rate. It also means higher risk for the lender. It carries equity components with it such warrants or sometimes it is associated with other convertible securities. A Secured Bond – This is a type of bond that is said to be backed by a specific asset. This includes assets like Plant equipment and Machinery. It signifies that something of value will be available in the event of failure of the borrower to pay. An Unsecured Bond - This is also famously referred to as debenture; this kind of a bond is not backed by an asset. This means that repayment is no guarantee in the case that bankruptcy occurs. Floating Bond- This type of bond is one that pays different amount of interest depending upon the rate at which the market goes with. The holder of this bond is not certain what the investment will be at the end of the holding period. A fixed rate Bond- This is the type of bond that has a single rate of interest throughout its entire term. Its advantage to its owners is that its owners know with certainty the exact chunk of payment they will get at the end of that specific period. They are often of three types these being the Treasury bond the corporate bond and the Municipal Bond. Callable Bonds- This is a bond that the issuer can redeem it prior to its maturity. The bondholder usually receives a premium when the bond is called. Non-callable Bond- This is that type of bond that cannot be redeemed prior to its maturity date. Convertible bonds- This is that bond that can be converted to become another type of security. Straight bonds- This is the type of bond that cannot be converted into another security till its maturity. The advantage of bonds to the Start-up company is that the founders of that company get to possess control of the board of directors, the Management, the fund rising and the exits as well. If the investors think that the founders are doing a good thing then this way they invest in bonds in the company. Bonds also involve simple contacts. Other advantages of bonds include that they are; Flexible in the amount that should be raised from an investor, it is not necessary for an investor to be patient for other investors. The Bankruptcy law provides the holder of this debt with liquidation preference. This for of instrument is also flexible as it can be offered to all accredited investors. A bond also offers multiple investors with a simple syndication. However many the advantages are to this method of debt insurance, they happen to have a very low-interest rate[Smi14]. Certificates This is an instrument usually used as a low-risk instrument by investors. This instrument is well known as an instrument that allows investors to make moderate returns in the balance in the account over a given period of time. While these funds remain in possession of the start-up company, the worthiness of the funds on their deposit are used in further debt trading hence allowing the particular company to remain liquid. This is advantageous to the company because it allows it to remain growing and still provide a spectrum of services to their customers[Tat15]. Commercial Papers This includes documents such as promissory notes that create a form of documentation for a short –term loan. They define the nature of financing and include information like the date for which this note will come due. The convenience of this instrument is that it can be traded for another entity without impacting the commitment of that particular recipient on the repayment of the debt outstanding. To the issuing company, Commercial papers are an effective and cost-effective way of raising working capital, two companies offering this instrument; they take advantage of the short term interest’s fluctuations in the market. To the investor it provides a quick exit option in case there is a perceived failure of the company. This debt instrument has a wide range in the case of maturity, although it is exempted from security registration requirements[Sha15]. Mortgages Mortgages as well belong to the category of debt instruments[Deb14].It is a defined as an instrument that is secured by the collateral of a specified real estate property, the which the lender is obligated to pay back with a predetermined process of payment. They assist investors to pay values on property without paying the actual amount due. In the case of a start-up company the company will pay the investor the interest over a span of years until it finally owns the property free and clear. In the case that the company fails to pay the interest on the property, the investor can retain back the property[Fre15].the advantage of this form of the debt instrument is that it allows risk to be spread of the decline of loan values to the investor. Leases Although traditional financing has often defined leases as a last resort mode of financing, the current market has shown that leases is the best way to go in debt financing investment[Yan06].The investor might invest in this startup company via the attainment of leasing contracts that will allow the company to pay him/her periodically for a given period of time while the company uses the given item. This in a way will allow him to be part of the start-up company[Bor14]. Notes Medium-term note (MTN) is an instrument, with the exclusive characteristic. Notes are often offered repeatedly to investor’s through an agent. Investors select from several possible maturity ranges: 9 months to a year, more than one year to eighteen months, more than eighteen months to two years, and so on up to thirty years. Medium-term notes are recorded under Rule, which gives that specific corporation the highest flexibility in issuing of securities continuously. Borrowers have the flexibility in making MTNs to satisfy their needs. They can provide either fixed or floating-rate notes. The coupon can be denominated in US dollars or in another foreign currency. Medium-term notes are different from corporate bonds in the way in which they are divided to investors when they are previously sold. Although other investment-grade corporate bond are sold on the best-efforts basis, typically, they are underwritten by investment bankers. Traditionally, MTNs have been divided on a best-efforts basis. Either by an investment banking firm, or a dealer acting in the capacity of an agent. Yet another disparity between corporate bond and MTNs when they are provided is that MTNs are usually disposed off in relatively limited amounts on a continuous or an intermittent basis, whereas corporate bonds are sold in large, discrete atonement. At one period the typical MTN used to be a fixed-rate debenture that was non-callable. It is popular today for issuers of MTNs to pair their offerings with the agreement in the derivative market so as to make debt constraint with more attractive risk-return features that are applicable in the corporate bond market. MTNs created when the issuer concurrently transacts in the derivative retail are called structured notes. The most popular derivative instrument used in making structured notes is a swap. Equity Equity financing is the method of raising money in exchange for securities or shares of ownership of the company. The two injectors of this type of financing being the angel investors and the venture capitalists. Issuing securities is the way most entrepreneurs follow in getting finances for their companies. The best thing about this method of financing is that it is secured typically from angel investors and even the venture capitalists. The main objective of investors in equity is to achieve a super rate of return. This can be achieved through the timely disposal of investments. However a good investor always considers an exit strategy from inception[USs15]. The right to convert a partnership or membership interest into stock are contingent interest on equity. The most common being stock options, convertible notes and warrants. The benefits of Equity funding to the start-up company is that the investor that provides the funds receives the risk in return plus there is no requirement to pay the funds if the business fails. This method of financing also provides a start-up business with recognizable valuation. Never the less this instrument does not lack limits, Limits such as that it sometimes is complex to understand, to the business owner it means sacrificing part of his/her business to the new owner, In the future after acquisition decision making will require approval by the shareholders. To the investor the high cost of legal and procedural formalities will be costly affair. The number of investors willing to acquire start-up businesses is usually to minimal. At strange times the maintenance of other investors is paramount even when it entails their negative influence on the business. Benefit of investing in start-up companies either by Debt instrument or Equity Acquiring of another business takes is often a difficult decision that requires a lot of speculation about future performance, Calculation of the current performance and the market to that company of Firm, For these investment by investors is done in consideration and thus the creation if debt and equity acquisition of a company. Start-up companies especially prove hard to speculate on their future market performance. These warrants the investors to choose either to invest in the company through equity or through various debt instruments at their disposal. Debt instrument are many in number, all with their advantages and disadvantages as stated above, similarly equity though few in number have their advantages as well as their disadvantages. All in all an investment in the start-up business ought to follow the rules of business, that is to invest in those assets with lower cost but a high revenue in order to maximize the profit. Reference Fie12: , (Field Fisher Waterhouse, 2012, p. 2), Cam09: , (Campbell, 2009, p. 38), The13: , (The Legal Service Commission of West Australia, 2013), Lee13: , (Lee, 2013), Jac11: , (Jacob, et al., 2011, p. 3), Inv151: , (Investopedia, 2015), Inv15: , (Investopedia, 2015), Smi14: , (Smith, 2014), Tat15: , (Tatum & Harris, 2015), Sha15: , (Sharma, 2008-2015), Deb14: , (Debt Dictionary, 2014), Fre15: , (Free Dictioinary, 2015), Yan06: , (Yan, 2006, p. 706), Bor14: , (Borsa Istanbul, 2014), USs15: , (U.S small Business Administration, 2015), Reference Fie12: , (Field Fisher Waterhouse, 2012, p. 2), Cam09: , (Campbell, 2009, p. 38), The13: , (The Legal Service Commission of West Australia, 2013), Lee13: , (Lee, 2013), Jac11: , (Jacob, et al., 2011, p. 3), Inv151: , (Investopedia, 2015), Inv15: , (Investopedia, 2015), Smi14: , (Smith, 2014), Tat15: , (Tatum & Harris, 2015), Sha15: , (Sharma, 2008-2015), Deb14: , (Debt Dictionary, 2014), Fre15: , (Free Dictioinary, 2015), Yan06: , (Yan, 2006, p. 706), Bor14: , (Borsa Istanbul, 2014), USs15: , (U.S small Business Administration, 2015), . 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