Corporation Law - Assignment Example

CORPORATION LAW Course: Tutor: University: City/State: Date: Corporation Law Question 1 The case study presented displayed various reasons supporting the stance that ABC is not bound by the loan contract awarded to Sammy by the Eldorado Bank. Firstly, her appointment was acknowledged by the ASIC on 8th August as the Managing Director of the ABC Pty Ltd. Secondly, her contract was only two years in duration. On signing the loan contract with the Eldorado Bank, she had not yet renewed her contracted or received any communication from the Company concerning her reappointment. In regard to breaching the Company’s statutes, she had signed a contract worth $ 30,000 yet the company was only liable to settling loans worth $20,000. ASIC ASIC is an Australian Body that offers programs through which companies, various individuals in addition, schemes can meet their obligation as stipulated in the Corporations Act. It enables corporations and officeholders to 1. Comprehend their responsibilities and rights under the Act 2. Enforce consequences and risks to those who fail to comply 3. Create a scenario where it is easy to comply to the rules 4. Provide adequate support to those willing to comply. It also outlines the responsibilities of the director that on review will illustrate the breach of conduct by Sammy. The existing Statutory Regulations outlined provide a guide on identifying the party liable to reimburse the loan processed by the Eldorado Bank Acting in Good Faith The director is supposed to act in manner characterized by good faith and honesty. He/she is required to perform and direct actions beneficial to the company and not himself/herself or any other party involved (Dine & Koutsias 2007, p.45). According to the case study, Sammy was aware she had not renewed her contract with the company yet she withheld the information. This action was dishonest and not in the best interest of the company. Being a former director and still in the position of Acting Managing Director, her decision was not forwarded to the Board for approval. Another error committed, as stipulated by the company, was signing a loan contract of more than $20,000. General Law Conflict The law states that the director should not place him/herself in a position where there is an actual or substantial possibility of conflict between personal interest and the director’s duty to act in the best interest of the company (Hanrahan & Stapledon 2014, p.78). Analysis of the case study shows that Sammy knew the repercussion of her action thus failed to expose the information that her contract had not been renewed, as the bank would view it as fraudulent conduct. The next section of this law states the director is only allowed to act in favor of personal interests after getting permission from the company or is permissible by the constitution. She had failed to notify the company prior to signing the loan contract thus defying her duties as a director and breaching the stipulated laws. Improper Use of Position or Information The law states that the directors are prohibited from using their position in an establishment or the information of the company to gain advantage for someone else or to cause detriment to the company (Dine & Koutsias 2007, p.66). Sammy would have been reinstated as the Directing Manager, depending on her accomplishment records set during her as director and given no other employees shortlisted as directing manager. Consequently, she used her position and inherent trust to her advantage by signing a loan contract reflecting inflated estimates without consulting the Board of Directors. This act is seen as abuse of position, and in breach of the company’s policies. Disclosure of Interest The director is tasked with the responsibility of disclosing material personal interest to the Board if the interest affects the company affairs (Hanrahan, Ramsay & Stapledon, 2014 p. 98). Sammy breached disclosure of interest as she failed to consult with the Board of Director, as the issue of obtaining loan money in the Company’s name affected its affairs. The loan borrowed was more than the amount the Company could commit to pay implying ulterior personal interests fueled the secret transactions. In conclusion, Sammy is responsible for the payment of the loan she secretly signed on behalf of the company. She failed to consult with the Board of Directors as its permission would have resulted to the company being held responsible for compensating the Bank. Her actions are deemed fraudulent as she withheld information vital in legitimizing the transaction. ABC is not bound by the contract and can seek compensation from the bank for failure to display due diligence by not confirming consent from the company’s board of directors. Word Count: 768 Question 2 Discussing insolvency of a company from a grassroots perspective is imperative when advising the directors of the Plantwell Company. Given Eric is a non-executive director as opposed to Delta and Charlie, special guidance is needed to assist him resolve the existent issue of insolvency. As a non-executive director, Eric had the duty of protecting the company against insolvent trading amongst other obligations. Being part of the Board of Directors, he would have performed several duties, which would save the company from its fate. However, owing to his incapability the company is currently incapacitated by debt. Prior to making decisions, it is vital Eric considers several liabilities that might arise under the s588G act detailing insolvency trading. Person Was a Director When a Company Incurred the Debt Firstly, due to his position of non-executive director, Eric is equally held liable to the company’s debt as his other director counterparts. According to the laws under the Corporation Act, the director(s) should be able to asses the situation during the board meetings and carefully consider any implications potentially influential to the financial performance of a company in respect to insolvency (Lipton, Herzberg, & Welsh 2014, p.87). His obligation would have been to question the strategy forwarded by Charlie. Additionally, he is expected to have questioned the financial implications of relocating the company. He had his doubts, which he failed to defend in order to convince the other director against the relocation strategy. Company Became Insolvent By Incurring the Debt The Plantwell Company on facing dire competition experienced a drop in the profits. This situation did not initially affect its solvency but after its relocation to other premises under the directive of the three directors, it resulted to the company incurring more loses thus increasing its debt to the creditors (Paterson, Ednie, & Ford 1987, p.34). Consequently, the debt accrued is traceable to business decisions made by the directors thus they bear responsibility. Eric as a non-executive director failed to evaluate the risks involved and accordingly issue advice to the executive directors. The company financial state was weakening due to declining profit levels thus a profit-increasing strategy was more prudent than incurring additional debt through relocating. Additionally, the company was likely to take time before penetrating the new market to gain the substantial customer base required to make enough profit to settle outstanding debt. Reasonable Grounds for Suspecting Insolvency The case reveals two reasonable grounds for suspecting insolvency where the company’s profits were decreasing and its industry’s competition increasing. It is also noted that Eric had reservations against the relocation strategy implying he had insolvency suspicions if an alternate strategy on boosting profits or counteracting competition was not adopted. This translated to liability on his part as he failed to forward his alternate claims and suspicions while opposing the relocation strategy. Being non-executive director, he is expected to monitor the company’s performance and raise concerns on strategies deemed irrational and counterproductive. From the case study, Delta as a director has the lowest skill in terms of merits required to be a director. In retrospect, she reached the end of her formal education at the age of 14. By definition, duty of care is the legal obligation of the director to act according to the directives and policies of a company (Paterson, Ednie & Ford 1987, p.57). Any actions contrary to that are deemed as total breach of the laws and regulations stipulated. She runs the risk of breaching several regulations while performing her duties as a director in the company. She should be aware not to perform the following actions to avoid breaching the statutory regulations. 1. she should avoid any actions that would incur debt to the company rendering it insolvent 2. always act in good faith in the best interests of the company 3. Perform actions for the proper purpose. 4. Placing her in a position where there is an actual or substantial likelihood a conflict between her duty to the company and the director’s duty of another Company. The liabilities that may result when the company becomes insolvent are as follows a. they company will be ordered to pay civil penalty charges to the creditors b. The creditors and liquidators are permitted to request for compensation. The liquidators require sanctions in order to compensate the creditors for their loss. c. Benefits from the company are directed to unsecured creditors d. They company is taken by the liquidators who may decide to put the company up for sale or claim it. Word Count: 751 References Dine, J., & Koutsias, M. (2007). Company law. Basingstoke, Palgrave Macmillan. Hanrahan, P. F., Ramsay, I. M., & Stapledon, G. (2014). Commercial applications of company law. North Ryde, NSW, CCH Australia. Lipton, P., Herzberg, A., & Welsh, M. (2014). Understanding company law. Paterson, W. E., Ednie, H. H., & Ford, H. A. J. (1987). Australian company law. Sydney, N.S.W., Butterworths. Tomasic, R., Bottomley, S., & Mcqueen, R. (2002). Corporations law in Australia. Annandale, the Federation Press. Read More