TMP Operations Pty Ltd before and after Voluntary Administration - Essay Example

Table of Contents Table of Contents 2 Executive Summary 2 Introduction 2 TMP Operations Pty Ltd before and after VA 3 a) Possible Actions by Administrator for Asset Recovery 3 Claw-Back 4 Breaches of CA s588G: Civil Compensation 6 Breaches of other Corporations Act sections: Civil Compensation 7 Time to recover funds 8 b) Liability for Breaches of Corporations Act: Possible Defences 9 Breaches of Corporations Act §180, 181, 182 & 183: no liability 9 Breaches of Corporations Act S 588G: possible liability but strong defence 10 c) Restructure: Possibilities if TMPO can be salvaged 11 Company Restructure 11 Legal Remedies to assist with restructuring negotiations 12 d) Retrospective Look: What could have been done differently? 12 Conclusion 13 Appendix A: Corporate Structures and Timeline of Events 14 Timeline 15 d) Retrospective Look: What could have been done differently 12 Conclusion 12 References 13 Appendices 14 Executive Summary The directors can be prosecuted for the breaches of § 180, 181, 182 & 183 of the Corporations Act, hence giving the administrator of TMP Operations Pty. Ltd. to gain access to the funds. The remedy for insolvent transactions is also available; the directors can be prosecuted under S 588G, also the parent company, TMP Holding Pty Ltd can also be prosecuted under S 588V. Mr. Pecker, however, has quite a strong case of defence against any such prosecutions. Mr. Pecker can get a group restructure in the event of the company being saved. This can be done by the legal remedies that are available against those who caused this situation, a platform that will help in the restructuring. Retrospectively, some self protection views are presented also that can aid Mr. Pecker in avoiding such problems in the future Introduction This report can be construed to be a recommendation with regard to Mr. Corky Pecker’s legal position with TMP Operations Pty Ltd as well as any value that the company may offer later on. A summary of the corporate structures during normal operations and immediately after voluntary administration (VA) shall be given first. This summary shall be given with a timeline of events that led to the VA decision. A review of the actions that are open to the administrator for recovering value to pay creditors is given afterwards. An outline of the liabilities and defences of Mr. Pecker shall be given in case the company is liquidated. However, in case the company is saved, advice is given to Mr. Pecker for structuring. Furthermore, many legal, practicable, remedies are given that can be used to assist a negotiating restructure in case negotiations along these lines fails. At the end, the possible role of Mr. Pecker in avoiding these risks he faces now shall be given, for his future use. However, this report shall be limited in scope; it shall only report as to the application of the Corporations Act 2001 (CA, 2001). TMP Operations Pty Ltd before and after VA TMP Operations Pty Ltd (TMPO) is a subsidiary wholly owned by TMP Holdings Pty Ltd (TMPH), with Don Corleone (DC), Rhonda Sadler (RS), Hubert Burdock (HB) and Corky Pecker (CP) as directors. Appendix A (a diagram) explains the corporate structure in more detail; Table A.1 therein gives the timeline of events that led to the VA. Peter Gibson (PG) is the financial advisor and accountant of the group, with legal advice dispensed by RS, while DC retained Martha Stewart (MS) as well. a) Possible Actions by Administrator for Asset Recovery When the TMPO board decided to enter VA, Helen Gleeson (HG) was nominated the administrator. Investigating TMPO’s affairs will be her first task, along with deciding whether the best course of action would be for business to continue as usual or to wind up the company, this shall be done keeping the interests of TMPO’s creditors in mind. Right now, there are several ways of recovering the money that include receivables, cash on hand, and intellectual property, also if the company is wound up, a claw-back is possible under voidable transactions (Hanrahan et al 2007, ¶25-270, ¶26-170), further, all compensation claims payable for the breaches of S 588G of the CA, 2001 from the directors of TMPO (Hanrahan et al 2007, ¶11-180), or for the breaches by the directors of § 180, 181, 182 & 183 of the CA, 2001. As the VA was entered and the contract with FROGO is now complete, with all payments received, there is no cash left, so the first two options will not give anything. The ownership of any IP held by TMPO is dubious, and so is its possible value. As per the letter to DC by the lawyer (Reading 6.2 of the Case Study), it is noted that any IP that was supposed to be a part of TMPH and was construed, wrongfully, to be a part of TMPO (Shareholders’ Agreement, Reading 6.3 of the Case Study), should be assigned to TMPH by TMPO. With DC’s and HB’s inclination towards keeping the IP close at hand, it is assumed that the IP was to be so assigned by the directors. This leaves claw-back and civil compensation (due to breaches of CA, 2001) as the only viable source of money to satisfy the creditors. Claw-Back This is a way of recovering funds in case of liquidation of the company; these funds are recoverable through prosecution under voidable transaction. Types 1, 3 & 4 of the voidable transactions shown in Figure 26.1 of Hanrahan et al (2007, ¶ 26-170) are pursuable here, as the transaction here was an insolvent transaction. Moreover, there is strong evidence based on the albeit vague timeline, that these three types will fall within the time limits specified, especially types 3 & 4. Paramount to pursuit under CA, 2001 S 588FE of type 1 will be the commencement of the winding up process, if proceeded with, the relation-back day. To find if the transactions were insolvent would be the next step in determining culpability under CA S 588FE; the test being an unfair preference or uncommercial transaction being entered into during the company’s insolvency, or which contributed to the said insolvency (Hanrahan et al 2007, ¶26-170). Two events seem relevant in these circumstances (with reference to Table 11.1 of Hanrahan et all (2007, ¶11-140) and Plan Phoenix, in Reading 6.2 of the case study): 1. Payment of royalties and dividends from TMPO to TMPH. The first is payment to an unsecured creditor, whereas the second is dividends from capital or profits (also an offence under S 254V CA, 2001. 2. Possible redemption of preference shares, a basic element in the corporate structure alluded to in the said Plan Phoenix. The liquidator will expound the typical definition of Profit being Income minus Expenses in court, even though there is no clear definition of the same in CA, 2001 (Hanrahan et all (2007, ¶ 19-520)). Conclusion being that the argument that since “funds coming into TMP Operations from the project have been regularly transferred into TMP Holdings … TMP Operations has been working with minimal cash reserves and is habitually late making payments to its own subcontractors” (Reading 7.1 of the Case Study) holds ground, indicating that at some time a projection of cash in and cash owing would have been possible, where there was no profit, resulting in no dividend payable. This projects an image of unfair preference to TMPH with regards to payment of royalties and uncommercial transaction of paying dividends out of no profits. The fiduciary duties of company directors include acting in the best interests of the company, and paying dividends that result in the insolvency of the company is clearly not in the best interest of the company. There must have been a point at which some, if not all, directors could have reasonably foreseen the deficit in cash reserves in case of payment of dividends, more so, as they knew about the cash flow situation that led to the completion of the SHUTCO project and could have also reasonable foresee it to be a deemed debt that could contribute to TMPO’s insolvency. A claim under S 588FDA, CA, 2001 (related to unreasonable director related transactions) would be stronger in the circumstances. Although it also falls under the uncommercial transactions mentioned above, it clearly aims at transactions that benefit directors. Here such a payment is the immediate distribution of the dividend to TPMH to members who are the directors of TMPO and the reasonable foreseeability of the problems of entering into such a transaction to the detriment of the company. (§ 588FDA1(a)(i), 488FDA1(b)(iii) & 588FDA1(c) of CA, 2001). The breach of S 588FE(2), CA, 2001 (type 1) can be pursued within six months of relation-back day (RSD), breach of S 588FE(3), CA, 2001 (type 2) can be pursued within 2 years of the above-mentioned uncommercial transaction and a breach of S 588FE(5), CA, 2001, (type 4) can be applied, as the whole structure mentioned above was designed to make TMPO judgment proof, with the removal of funds viewed as an attempt to interfere. Finally, a breach of S 588FE(4) can also be applied based on the questionable transactions with related entities, which in this case is TMPH. Breaches of CA s588G: Civil Compensation To get a judgement in favour of the liquidator, for the creditor of TMPO, under S 588G of CA, 2001, is to establish that each of the directors of TMPO was a director at the time of incurring the debt, and knew or reasonably suspect that TMPO is insolvent or will become so if the company incurred a debt. As to the first question, there is no doubt, apart from RS, who was not present at the end of the project, though some debts were incurred during her presence as well; all the persons in question were directors at such a time. Moreover, as the line of credit from McBank was in default for “some time” (Reading 10.1 of the Case Study), it would have been reasonably suspected that TMPO was, or would become, insolvent as a result of further debts. Hence, there are clear breaches of S 488G, CA, 2001, by DC, HB and RS. Mr. Pecker’s possible liability under s588G will be discussed in another section of this report. There is also the option of the application of S 588V, CA, 2001, to TMPH with regards to seeking compensation, as based on the general operations of TMPO, there are reasonable grounds to suppose that TMPH was a shadow director of TMPO. This will be similar to the details applied to the directors of TMPO, as the same people are the directors of TMPH, having the same information they did as directors of TMPH. Breaches of other Corporations Act sections: Civil Compensation Several other aspects also crop up that can be prosecuted under other breaches of duty according to the CA, 2001, upon review of the activities of each director during the course of the SHUTCO project. Mr. Pecker’s role in them will be discussed later. Presently, the focus will be on the potential pursuable aspects for the administrator to attempt recovery of funds through civil compensation. If breaches to the CA, 2001 are found, the directors, and delegates if possible, could be disqualified from managing a company, as well as made to pay fines and compensation to the company (enforced by ASIC, noted in Hanrahan et al 2007, ¶10-190). The specific breaches of the directors in relation to TMPO, as per the information provided include: RS – not acting in the interest of the company (S 181), misuse of information and position (§182 & 183) when she broke confidentiality by stealing and using IP and confidential knowledge and transmitting this to Omnipax. Not showing reasonable care and diligence (S 180) as she had knowledge of the subcontractor requirements as well as issues relating to litigation (negligence), but she did not proceed to protect the company from possible litigation or insolvency. Also adding to her breaches is acting outside her authority in contracting the office refit under normal direct and employee fiduciary duties; DC – not acting in the best interest of the company (s181): working for Omnimax resulted in a conflict of interest, misuse of information (s182) while working with Omnimax, and not acting with reasonable care and diligence (s180) as DC was the managing director of TMPH and most probably of TMPO as well, he nominated TMPO’s accountant and had a working knowledge of TMPO’s financial position; HB – not acting in the best interest of the company (s181) by having a conflict of interest in working for Omnimax, misuse of information (s182) while working with Omnimax, and not acting with reasonable care and diligence (s180) as HB was involved in the management of the company (like DC), he nominated TMPO’s accountant and also had a working knowledge of TMPO’s financial position. Delegates – particularly PG, who was given the task of financial oversight by TMPO’s directors, have liability under professional negligence (see Latimer (2007, ¶4-090) and also under §180, 181 and 588G of the CA, 2001. Time to recover funds It is important to consider the nature and timing of fund recover while trying to recover value in the TMP group as per Mr. Pecker’s desire. TMPH holds valuable IP (which could be sold to predators such as Omnimax) and possibly cash (subject to “claw back” under S 588V). To protect TMPH, it is best if no action is taken against TMPG, as any such action might result in fines that lead to liquidation of TMPH. This prevents recovery under S 588V but also prevents recovery under S 588G. So the best way to recover funds would be through other breaches of the CA, 2001, mentioned above. Keeping in mind that litigating each person and TMPH under § 588G & 588V (in case of liquidation of TMPO), is uncertain, takes a lot of time and is expensive, there is a chance that creditors might be persuaded to vote against liquidation and the administrator, or Mr. Pecker himself, is asked to pursue the persons responsible for the current situation on behalf of TMPO. b) Liability for Breaches of Corporations Act: Possible Defences As per the Case Study, Mr. Pecker has always acted in good faith, both as an employee and director. He immediately forwarded information to relevant people with regards to TMPO (e.g. his memo to RS concerning Chemo, Reading 5.3 in the Case Study). Also, he always acted within project management, his field of expertise (e.g. when he moved the project well ahead of scheduled completion, Reading 6.1 in the Case Study). Moreover, it appears that Mr. Pecker did not take his distribution of funds from TMPH, unlike the other directors (Reading 8.1 of the Case Study). Lastly, there is no evidence that Mr. Pecker acted against the best interests of TMPO or TMPH at any time and in any manner. Breaches of Corporations Act §180, 181, 182 & 183: no liability With a view of the above-mentioned being factual, Mr. Pecker will not be liable for any breaches of normal duties as a director. He acted with reasonable care and diligence (§ 180), in good faith and with the best interest of the company at heart (§ 181); moreover, he did not misuse either his position or any information given to him (§ 182 & 183). As far as the possibility of litigation under S 180 is concerned, with regards to financial monitoring, it is clear that as Mr. Pecker’s expertise is not financial management but project management, hence, he relied on the advice of the financial advisor of TMPO, PG. When the roles of DC and TMPO’s board decision to delegate financial monitoring to PG and day-to-day financial management to RS under S 198, CA, 2001, are observed, it is clear that Mr. Pecker took reasonable care and diligence in monitoring the financial status of the company even in his reliance on delegates. Breaches of Corporations Act S 588G: possible liability but strong defence The critical elements are mentioned above in looking for possible actions for breaches of S 588G of CA, 2001. As far as Mr. Pecker is concerned, it is evident that at the time the debt was incurred, he was a director, moreover, these debts were incurred either at the time TMPO was insolvent or caused it to become insolvent, therefore, litigation might be brought against him as well. However, many defences can be used for Mr. Pecker in this regard. 1. Solvency could have been reasonably assumed by Mr. Picker, given the size of the project, as per S 588H(2) of CA, 2001. It is clear that this is strongly related to the understanding of the financial situation by Mr. Pecker on a regular basis. 2. As per S 588H(3), Mr. Pecker relied on PG to give an accurate and timely picture of the finances of TMPO. PG is a noted accountant and financial advisor, is competent to hold this position, and was providing regular information through executive summaries. Based on these, Mr. Pecker could reasonably expect solvency while debts were being incurred. c) Restructure: Possibilities if TMPO can be salvaged As TMPH owns substantial IP, it will be important to protect it if any value in the TMP group is to be salvaged. This IP could be substantial as significant advancement was made during the project on top of TMP’s original licensed IP. Moreover, all IP developed during the project is retained by TMPH, and as no other available technology can compete with its capabilities, a monopolistic opportunity for application of this IP arises. Given the possibility that TMPO might be salvaged, a discussion regarding structuring and possible negotiating tactics that could be employed by Mr. Pecker to maximise both the corporate and his own value is provided below. Company Restructure Mr. Pecker should seek for the removal of DC and HB from both TMPO and TMPH, RS, of course, is already gone. Most of the actions that the administrator can bring against DC and HB on behalf of TMPO are actions that Mr. Pecker can bring against them on behalf of TMPH. This is an opportunity for Mr. Pecker to settle with DC and HB on behalf of TMPH, by having them assign all of the IP from TMP to TMPH, having them authorise the share buy back of TMPH shares from TMP (which will give Mr. Pecker a controlling interest in TMPH AND TMPO), and having them resign as the directors of TMPH and TMPO. Additionally, as part of their severance from TMPH and TMPO, DC and HB should sign a ten year non-competition and confidentiality agreement, specially with regard to Omnimax and Frogco. On a separate note, Mr. Pecker can also consider transferring his shares to a trust or corporate entity before any share reallocation takes place, with a view of future asset protection. Legal Remedies to assist with restructuring negotiations DC and HB may oppose Mr. Pecker’s efforts to restructure TMPO and TMPH if TMPO is salvaged and actions under S 588G are not pursued, and also depending on the outcome of any action by the administrator in relation of breaches of the Corporations Act outlined above. However, there are remedies available to TMPO, TMPH and to Mr. Pecker himself that could aid in persuading DC and HB. These include, briefly: breach of Shareholder Agreement (Confidentiality (c4), Non-Competition (c6) and promoting the business (c8h)) under contract law, action under § 180, 181 & 182 of CA, 2001, that have already been outlined as actionable for the administrator for TMPO and possible dishonest breaches resulting in imprisonment in relation to the agreement with Omnimax and TMP while DC and HB were directors of TMPH. Also, there may be action possible by Mr. Pecker against DC and HB as a minority shareholder under CA Part 2F.1 (oppression) as well as actions by directors that harm members (specifically directing business opportunities away from the company and changing the shareholding by cancelling share controlled by RS). Similar actions action can be taken against RS. In addition, action against Omnimax for injunctive relief against their use of any IP gained through RS as well as possible recovery damages (Latimer (2007, ¶3-685)). d) Retrospective Look: What could have been done differently? With a view of limiting such future problems, Mr. Pecker can take some actions that can help him avoid such problems. Apart from attaining a controlling interest in any company he is involved with, Mr. Pecker can also do the following: 1. Ensure suitable role specifications with specific powers and limits to he detailed powers, especially the power to purchase on behalf of the company. 2. Ensure selection and retaining of independent advisors like accountants and solicitors, placing checks and balances for such advisors to audit the actions of executive directors in case of overlap of area of operations. 3. Ensure an outline of a method by which minority shareholders and company management will be maintained in an equitable manner. 4. Have the information provided scrutinised regularly and act on any suspicions as to them. 5. Building corporate or trust structures to hide the wealth can add a layer of asset protection. Other procedures can be put in place for efficient and accountable corporate governance but these will cover the major issues. Conclusion As VA has been entered, and a substantial amount of debt is owed, an opportunity to gain access to funds through prosecution of directors is presented before the administrator of TMPO. The directors can be prosecuted for breaches of the Corporations Act § 180, 181, 182 & 183. Moreover, if the company is liquidated, another remedy is available under S 588G and S 588V for prosecuting the directors and the parent company for insolvent transactions. There is no liability on Mr. Pecker under §180-183 of CA, 2001. Further, he has a strong defence against being prosecuted under S 588G. Mr. Pecker can restructure TMPO, in case it is saved, and thus ensure future success for both TMPO and TMPH. Some help in negotiations with DC and HB is provided to help this restructuring. Moreover, some retrospective views of self-protection are discussed so that Mr. Pecker may prevent the recurrence of such problems. Appendix A: Corporate Structures and Timeline of Events (As outlined in Reading 9.4 Law for Practising Managers Case Study (2007)) TMP Operations Pty Ltd (TMPO) is a wholly owned subsidiary of TMP Holdings Pty Ltd (TMPH). Shareholders of TMPH are (50%) TMP Pty Ltd (TMP), (25%) Rhonda Sadler Family Trust Pty Ltd (controlled by Rhonda Sadler (RS)), and (25%) Corky Pecker (CP). TMP is jointly owned and directed by Don Corleone (DC) and Hubert Burdock (HB). Directors of TMPH include all of DC, HB, RS, and CP (reference Shareholders’ Agreement c3d, Reading 6 of the Case Study) and the same for TMPO (reference Reading 7.1 of Law for Practising Managers Case Study (2007), hereafter referred to as the Case Study), each being executive directors (as defined in Hanrahan et al (2007, ¶9-200)). The situation is presented diagrammatically in Appendix A. In addition, Table A.1 of Appendix A outlines the time line of events leading up to voluntary administration. In terms of financial and legal management, the group was advised as follows. The group financial advisor/accountant is Peter Gibson (PG). The primary legal advice had been from RS with DC also retaining Martha Stewart (MS). According to Reading 7.1 of Case Study, the director arrangements change slightly when RS resigns her positions, citing ill health but in actual fact she leaves TMPO and TMPH to take a position with Omnimax. Given this, TMPO is left with three directors and it would seem so is TMPH. This is brought to completion during the settlement between DC, HB and RS, Omnimax (Reading 8.1 of the Case Study) as RS shares are bought back, presumably underscoring her non-involvement as an ex-director. At this point, it could be presumed that the Shareholders’ agreement is amended to allow for less than four directors, an amendment that would have to be authorised by all parties (see Reading 6.3 of the Case Study). Timeline Below is a rough outline of a timeline that shows relevant events referenced from the instigation of voluntary administration. Table A.1: Timeline of Events Date Within 16 wks of Present Within 12-16 wks of Present Some wks since RS left Within 2 wks of Present Present Event RS contracts for office refit RS conspires to and does leave DC/HB agree with RS and Omnimax SHUTCO Project Completed VA called Cash position Additional $150K, other sub-contractors in arrears About $300K outstanding, no more payments due in Read More