Business Law Challenges - Assignment Example

BUSINESS LAW Customer name: Paper name: Instructor’s name: Date: Question 1 Issue From the case, Susan has recourse against David because she had worked as a web developer for the company before David decided to sell it. Even though David was the founder and sole director of Start Up Pty Ltd, a company that developed Bookface, the company hired Susan to develop its website. The firm had paid a small deposit of the capital funds contributed by David’s siblings Jane and John towards the start-up capital. Similarly, both Jane and John have recourse against David since David, being the sole director decided to sell the business for a large undisclosed sum. The fact that Jane and John had contributed towards the initial capital used to set up the business implies that they were shareholders of the company. In fact, they all had a single share of the company. As a result, David could have distributed the returns gained from the sale of the business to his siblings. Law Various cases have presented the application of the principle of separate personality. The Salomon V A Salomon & Co Ltd [1897] AC 221 is one of the cases that involved Mr. Salomon that operated a business like a sole trader. At the time of establishing the company, the principle had already been set out in the Joint Stocks Companies Act of 1844 and 1856 and the Limited Liability Act of 1862. Therefore, Salmon experienced the doctrines of the Act for the first time. According to the requirements of the Companies Act of 1962, any goal of expanding the business to include other partners required at least seven shareholders.2 The Radical View also provides the other case of the law. Based on the view, the findings of economic unity regard parent or subsidiary companies to be single business entities. In the Littlewood Mail order Stores Ltd v Mc Gregor [1963] 3 All ER3, Lord Denning used the case to introduce the radical proposition into the law. One of the criteria of the proposition states that the parent company owns all the shares in the subsidiary firm. Moreover, the power to appoint directors and share ownership put the parent at an advantaged position to execute complete control of the subsidiary firm. However, for the purposes of profit and loss accounts, balance sheets and general accounts, it is proper to treat the group of companies together. S 181 (1) of the Corporations Act also states that it is the responsibility of the directors of a company to exercise the reasonable level of care and diligence in their office executions for the best interest of the company. Application The Salomon V A Salomon & Co Ltd [1897] AC 224 provides a good example of the application of the separate personality principle similar to the case between David and his siblings, Jane and John. Based on the Companies Act of 1962, the decision of a sole director of a company to extend the business operations by increasing the number of shareholders necessitated the use of at least seven shareholders. In the case, when Salomon decided to expand the business being the sole director, he decided to use six other members of the family to realize the objective. The members of the family encompassed his wife and five children to increase the number of shareholders to seven since the firm had already allocated one share of the company to each of the members. By so doing, it was evident that the other members of the family were shareholders of the company. However, when difficulties set in, Mr. Salomon made the personal decision of mortgaging the debenture to Mr. Broderip. The failure of the firm to make payments to Mr. Broderip as required compelled the latter to enforce his security thereby resulting into the liquidation of the company. The fact that the existing assets of the firm were insufficient to cater for the defaulted payments rsulted into the decision of Mr. Broderip to take a legal action against the sole director of the company on the basis that the firm’s formation agreements were invalid. As a result, Mr. Salomon should bear the full responsibility of paying the debts of the company. The Littlewood Mail order Stores Ltd v Mc Gregor [1963] 3 All ER 855 case led to the proposition that it was imperative to consider the reality behind the situation between the primary and the subsidiary prior to determining the entity that was responsible for the liability in question rather than leaving the liability to be the responsibility of the parent even when the subsidiary defaulted in the payments (Schulte 1999). The Gilford Motor Co v Horne [1993] Ch 9355 case also revealed that a fraudulent shareholder holding an influential position in the company such as a sole director cannot use the corporate veil to hide behind the corporate structure. Such fraudulent investors extend their businesses using the name of the corporate veil to attain their individual selfish interests rather than the interests of the company. S 181 (1) of the Corporations Act6 resulted in the Business Judgment Rule that bases business judgments on good faith and rational grounds rather than selfish interests of the sole director at the expense of the other shareholders of the company. Moreover, pursuant to S 191 (1) of the Corporations Act, the directors that have personal and material interests should notify the other directors of interest to the company rather than executing the selfish interest without their knowledge. The Green and Clara Ltd v Bestbell Industries Ltd 1982] WAR 17 case presents a situation where the fiduciary competed with his company to tender for a similar contract. Even though the firm would not have been able to win the tender without his competition, it was found out that the individual was liable to account since he had breached the fiduciary duty. Conclusion From the case above, it is evident that David entered the business to sell the firm to attain his selfish interests. The decision of the sole director of the company to conceal information pertaining the sale of the firm implies that David used Jane and John to portray the firm as a partnership business thereby lure the customer to purchase it besides using the corporate veil to hide behind the corporate structure. As a result, Susan, Jane and John have recourse against David. Question 2 Partnership In this case, the family will establish a family limited partnership (FLP) business that is a special case of the limited partnership business. The fact that the partners are strictly members of the family suffices to be the aspect that distinguishes FLPs from the conventional limited partnerships businesses8. There are several advantages associated with the establishment of FLPs. The ability of FLPs to create a mutual family fund is the first advantage of the type of business. Apparently, the business enables the family to pool its resources to attain a single management entity. The ability of the family to share a single pool of assets is detrimental towards the distribution of the shared assets for the common good of all the family members. FLPs also guarantee the effective retention of the control of the business to the family members rather than hired directors. Therefore, in the event that Steve, Grace and Amanda opt to set up a partnership business of the pub, they will retain its control. Family partnerships also enable the easy transfer of wealth from the senior members of the family to the junior members. The partnerships can also yield valuation discounts besides protecting the members from creditors such as ex-family members. They also guarantee general liability protection to the members of the family. Moreover, FLPs guarantee the orderly succession of the management and control of the business among the family members. Finally, the partnership business will prevent the assets of the business from taking part in estate or probate administration. Some of the disadvantages of family partnerships include the technical complexity of the business that necessitates professional expertise for effective management of the business operations. It is also imperative for the parents to occupy a significant position in the business before transferring it fully to the children. There are also significant costs associated with the establishment and management of FLPs. Moreover, family partnerships are a red flag to the IRS. Finally, family partnerships may impact negatively on family dynamics especially when the parents favor one child over the others. Fixed Unit Trusts In a unit trust, the family will divide the unit property; say the pub in this case, into units before dividing the units among the members of the family. In the case of a fixed unit trust, there are fixed entitlements that the individual members of the trust property realize from its capital and income9. The major advantage of a fixed unit trust is the issuing of units, the equivalence of shares, to the individual members of the business. By so doing, it is easy to define the interests of the members of the trust in its income and assets. Moreover, since units are the equivalence of shares, it is easy to transfer the units from one member to another. The trustee can also re-acquire the units. The other advantages of unit trusts include the fact that they require less regulation as compared to companies. Moreover, they portray taxation advantages over companies. It is also possible to tailor the trust deed to meet the needs of the beneficiaries and principals. There are no problems associated with the redemption of units from the unit holder. Finally, the process of winding up the business is easier than that for companies. However, since the units are assets, it is apparent that the level of asset protection offered by a unit is not equivalent to that offered by the discretionary trust. For instance, in the event that the bank declares one of the members bankrupt, the trust will sell the units of the individual to pay the creditors. Moreover, it is not easy to make tax-free distributions from a unit trust as compared to a discretionary trust. Finally, some of the advantages of a discretionary trust such as flexibility and distribution are absent under unit trusts. Discretionary Trust In a discretionary trust, the trustee has the permission to either make or fail to make distributions to a beneficiary. The trustee also has the ability to make unequal distributions in the event that there is more than one beneficiary. Disabled trustees are the right individuals for discretionary trusts since they are effective towards preserving the benefits realized from programs through encouraging supplemental distributions rather than support ones. The fact that the beneficiary is any named person such as a spouse in the event that the settler dies poses as one of the major advantages of a discretionary trust. Moreover, the trusts permit the distribution of capital and income at the discretion of the trustees. Therefore, the members can distribute income and capital based on the underlying circumstances10. Moreover, there is an indefinite length of the trust in many countries thereby providing no limit to the duration of the trust. It is also possible to “hold over” Capital Gains Tax to prevent the payable of tax during the transfer process. Moreover, the trustees incur some cost to acquire the assets. It is also possible for the trust to lend money to its beneficiaries thereby averting the increase in their estate. Moreover, there is no inheritance tax following the death of a beneficiary. There are no Inheritance Tax implications associated with issuing gifts from the normal income of the trust. Provided that the tax position of an individual permits is sufficient, the person can reclaim Inheritance Tax. Finally, the costs associated with establishing a trust outweighs the tax liability that the members will pay without the trust. However, withdrawing capital from the trust attracts exit charges. Moreover, there is no guarantee that the trustee will benefit from an individual trust. Based on the country, the trust also pays a percentage of the Income Tax. One cannot put ISAs and PEPs into the trust yielding a loss of the tax advantage emanating from the removal of the deposits and securities. The transfer of the securities does not attract any chargeable gains. There is a certain charge for the annual gains of the trust. Moreover, the yearly CGT exemption is less than half the individual exemption. Based on the different forms of businesses discussed above, it would be appropriate for Steven, Grace and Amanda to set up the pub business as either a partnership or fixed unit trust. Reference List Bueschkens, M.A. and Rechtsman, R, Recent changes in Canada in the areas of trusts and estates law. Trusts & Trustees, 21(1-2), pp.117-133, 2015. Corporations Act 2001, Canberra: Commonwealth of Australia, 2001. Gilford Motor Co v Horne[1993] Ch 935 Green and Clara Ltd v Bestbell Industries Ltd [1982] WAR 1 Littlewoods Mail Order Stores Ltd v. McGregor (Inspector of Taxes) [1969] 3 All ER 855,(CA) Mendelsohn, J, Still" the unyielding rock"? A critical assessment of the ongoing importance of Salomon V Salomon & Co LTD [1897] AC 22 in the light of selected English company law cases (Doctoral dissertation, University of Huddersfield), 2012. National Tax & Accountants Association (NTAA). NTAA Corporate: Companies, Trusts, Super funds, 2005. Salomon v Salomon & Co Ltd [1897] AC 22 (HL) Schulte, R.C, Groups of Companies: The Parent Subsidiary Relationship and Creditors Remedies. University of Durham, 1999. Thompson, P.M, August. Family Limited Partnerships: Pros and Cons. In AIMR Conference Proceedings (Vol. 2001, No. 4, pp. 84-93). Association for Investment Management and Research, 2001. Read More