Corporate Governance of Colour Image Pty Ltd - Coursework Example

Corporate Governance Table of Contents Table of Contents 2 Answer 3 Answer 2 5 Answer 3 6 Answer 4 8 Answer 5 9 Answer 6 10 Answer 7 11 Answer 8 13Answer 9 14 Answer 10 14 Answer 11 16 Answer 12 17 Answer 13 17 References 18 Answer 1 Jack, who is a director of Colour Image Pty Ltd is expected to act with reasonable care, skill and diligence and to prevent insolvent trading under s 185 Corporations Act. These are the basic duties of the directors. The responsibility to stop insolvent trade is encompassed in s 588G of Corporations Act. It says, ‘The policy foundation is designed to defend unsecured creditors of the corporation upon winding up of the company. This duty requires directors to monitor the financial status of their company continually to make sure that it is not trading whilst insolvent. Duty only applies to directors not ‘officers’ as with other duties. Under {s 588V Corporations Act} Holding Companies also have a duty to prevent their subsidiaries from trading whilst insolvent’ Firstly under {s 588G(1)(a) Corporations Act}, “the duty is only imposed on directors and NOT officers. However, the definition of ‘directors’ will include shadow and de facto directors. Recall de facto director acts as a director even if they are not validly appointed and shadow director is able to have influence over the board” (Melbourne University Law Students Society Tribunal Service, “Corporations Law”). Firstly it should be illustrated that only willingly incurred debts for specific amount can bear a charge of insolvent trading {Standard Charter Bank per Hodgson J}, “a company incurs a debt when by its choice it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable” (Cassidy, “Concise Corporations Law”) The defense which Jack can have is that he needs to show the reasonable grounds for his expectations of insolvency at the time the debts were taken. Again he needs to show that he relied on the information provided by others in the management which led to insolvency. Otherwise, he has to validate certain credible reasons for his absence. The penalties may be fine up to $ 2,00,000 and imprisonment for 5 years with prohibition from managing any company for next 5 years ( Dawson, “Overview Of Directors’ Duties”). Answer 2 Smith and Jones can register under Limited Liability Corporations (LLC). This type of corporations is much in demand nowadays. They are the combination of partnership firm and a corporation. The tax effects are mostly based on that of the partnership firm but other entities is that it shares of the corporations. It is formed by members and not shareholders. Advantages of a Limited Liability Company can be that LLCs offer personal liability guard for members. The legal procedures to be followed are very simple and lucid. The members can come to agreement on their own terms, therefore greater flexibility and control over management can be exercised. Allocation of income is also easier. The only disadvantage is that it is a little complex than that of the sole proprietor firm or the partnership business. It works more like a partnership firm therefore there is no problem regarding the joining of their family members in future. Thus, LLC would best suit the needs of the partners Smith and Jones (Division of business services, “Limited Liability Company”). Answer 3 (i) Replaceable Rules The internal management of the company is governed either by the provisions of Corporations Act 2001, which is known as replaceable rule, or the constitution or the combination of both s 135 and 136. Replaceable rule is applicable to all the Australian companies which have not adopted the constitution specifically. Under s 135(1) replaceable rule is not applicable to proprietary company where the same person is the sole proprietor and the sole shareholder. The provisions of the section and subsection applicable to the company as the replaceable rule may be modified and altered by the constitution of the company. A company might need not have the separate constitution of its own; they can simply take the advantage of the replaceable rules contained in the corporation act as internal governance. (ii) A table of replaceable rules may be found in Corporations Act under section 141. The table contains the subject of rule and the relevant section of the corporation law covering that rule. The contents of the replaceable rules are grouped in the following categories Officers and Employees, Inspection Books, Directors Meetings, Meeting of Members, Shares and transfer of Shares. It is usually applicable to the company registered after the commencement of s 135(1) of the Act, and to the companies registered prior to the commencement that repeal their constitution after 1st July 1998 (ASIC, “Replaceable Rules”). (iii) A failure to comply with replaceable rule does not result in the breach of law under s 135(3) unless an intimate contract is formed between the company, its directors, members and the company secretary s140 (1). Under ss 128 & 129 unless a person knew or suspected that the assumption was incorrect, he/she may assume that replaceable law applicable to company have been complied with. There is a civil penalty determined for contravention of duty that includes fiduciary liable for company loss resulting from the breach of fiduciary duty, injunction restraining the party to act, directors to pay compensation to the company. Disqualification may be extended up to 15 years. Fine up to $ 2,00,000. The compensation would be equal to the damage suffered due to creditors. Brahms should take his defense as a minority share holder. He should file petition in the court regarding the manipulations made by the majority share holders for their benefit. The seizure of shares would give the majority share holders the benefit but will harm his interest. Answer 4 On the contract to purchase the land: Kim bought the land on behalf of the company before the company got incorporated. Thus, in any case if the company refuses to pay it is Kim who will stand liable to pay because the contract or the agreement to purchase is made on the name of Kim herself. Thus, it is a fault on the part of Kim. Thus, Kim would be held liable for the transaction. Further, it is upon Kim to lawfully pursuit the case or any other contract with the previous owner of land. On the contract for fencing work: Mei Leng can sue the company on the grounds of non disclosure of facts. And she can ask for her damages. It is the duty of each and every organization to disclose related facts whenever a contract is made or tender given. So, Mei Leng can ask for her damages if not given, and then she can successfully knock the door of the law. Answer 5 (1) The Corporations Act’s “maintenance of capital” principles generally limit the skill of a company to decrease its issued share capital. However, there are certain “return of capital” process available under the Act which are intended to protect the welfare of shareholders and creditors (sec 256A) which are to address and reduce the risks of such deed leading to the company’s bankruptcy, aim to ensure equality between the company’s shareholders & require revelation by the corporation of all information. Part 2J.1 Division 1 of the Act and sec 588G of the Act deals with the issue (Company secretary, “Return of Capital’). (2) Ordinary share holders are the real owners of the company whereas the preference share holders receive preferences in time of liquidation of the company and even in receiving of debentures. Advantages of equity finance over debt finance are that that there are no loans taken from the market and therefore there is no liability to pay dividends at a desired time. Again, the business becomes more convincing with the help of the investors. (3) Fixed charges are mortgage on a precise fixed-asset (land) to secure the reimbursement of a loan whereas floating charges are mortgage on an asset that alters in measure or value as of time to time (inventory) and to secure the refund of a loan. Two reasons for which it is important for a lender to ensure its charge is registered unenforceable are to have guard alongside external administrators & or the charges will fall behind registered charges (Worrels solvency and forensic accountants, “Securities over Assets”). (4) Disclosure documents are prospectuses, statements or information of offer statements in the case of securities, or product disclosure statements in the case of other fiscal products. A prospectus should set out firm information which will help in judging the merits of the investment and also to understand the terms and conditions of the offer. Disclosure document is needed while raising funds from the public and also while incorporation of the company. Disclosure is not required when the offer is a personal offer and if the offer is done by certain kind of financial organizations (ASIC, “Raising funds in Australia”) Answer 6 (a) As Buggy is working for his personal interest therefore he should be prosecuted or fined. The amount of fine is to be $200,000 or is to be imprisoned maximum up to 15 years. He can also be removed from the post of the director. (b) Dimple is found to be guilty and therefore should be prosecuted. An inside informal trade is questionable in the eyes of the law therefore she can be imprisoned or removed from the post of managing director and can even be fined. (c) Woods have not purposefully made the wrong decision. It can happen that sometimes certain unwanted events do take place. So, Woods should be made the bait for such a happening. Rather it is the duty of the corporation to stand beside Woods at this situation. This is what corporate governance emphasizes. (d) Insider trading is considered to be immoral and illegal too. Thus, Rita should be held guilty and be prosecuted. She can be heavily penalized for inside trading and would be imprisoned for a number of years. Answer 7 Corporate Governance has proved to be a subject since citizens began to organize themselves for any purpose. How to make certain the control of organization is harness for the settled purpose, rather than abstracted to a few other points, is a topic of constant importance. The institution of domination provides a structure within which the communal and economic being of countries is conducted. Corporate governance concerns the use of authority in company entities. The OECD gives the most reliable functional meaning of corporate governance: “Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance” (OECD, “The role of financial accounting information in strengthening corporate control mechanisms to alleviate corporate corruption”). Yet, corporate governance has broader implications and is serious to monetary and social well being, first of all in providing the yard sticks and performance actions to achieve business achievement, and secondly in giving accountability & transparency to make certain the equitable allocation of the resulting affluence. The significance of corporate governance for the stability and equity of society is perceived in the broader definition of the concept offered by Sir Adrian Cadbury. Sir Adrian states, “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society” (UTS Center for Corporate Governance, “Corporate Governance”). ASIC v Vizard [2005] FCA 1037 The main plot of the case is that Mr. Stephen William Vizard who was the director of Telestra, on three occasions was found guilty of benefitting himself and his family members from the confidential official information. It was an act of insider trading. Though it did not bring losses to the company but the act is illegal. The corporate governance lessons that can be learnt from this case are that each and every one should have the fair right of income. And also, the director should not use his power illegally. Each and every citizen should have the same right to information. Thus, it is unfair on the part of some person who has access to inside information to manipulate it for his and his family member’s interest (Federal Court Of Australia, “Corporate Law Judgments”). Answer 8 Buying back of the shares completely depends upon the sole discretion of the management of the company. Thus, the case does not stand for this reason. Again the other allegations that Kelty brought on Bull of controlling the management in his own way and manipulating it for his own benefit have no evidence. Even the retention and distribution policies are to be determined by the management and so even the issue of sweat shares. Thus, he has no grounds to file a case. And still if a case is filed proper evidence to prove that Bull manipulates the other share holders is required without it the case will have no base. Answer 9 Michael and Alex can not bring any case in front of the law and if they bring it, they would not have a solid ground to win it. Though it is a fault of the Alice Springs Surf Club Ltd to provide notice to its number of members but they provided a written apology on the club’s notice board and on the newspapers. They did not receive any notices nor were they aware about the fact that the apology was made. Even the resolution has been passed on majority of the shares thus the case falls short of a reason. So, it would be wise for Alex and Michael to have a talk with the management and shareholder not present in the AGM and ask for another meeting where all the members can be present. Answer 10 (249D, 249N or 249P) Tom has each and every right to force the management of Rocky Pty Ltd to attend for a meeting when the interests are vested. It is to be noted that if the majority of the shareholders have an opinion regarding a particular subject then the court can even enforce the management for a meeting. First of all what Tom should do is to submit a letter of prayer to the chairman of the organization and then have more of members in his side so that the causes have substantial ground. This will not only give Tom a back up but would also force Rocky Pty Ltd to call for a meeting where the fate of the resolution is to be determined (Marinac, A. “Corporations Amendment Bill (No.2), 2005.”). Answer 11 Contents of annual financial report are the financial statements for the year with respect to the company reflecting the accounting standards, the notes to the financial statements which include the disclosures needed by the regulations & the notes needed by the accounting standards and the directors declaration about the statements and notes. Directors declaration states whether, in the directors view, there are rational grounds to think that the company, registered plan or disclosing body will be able to disburse its debts as and when they turn out to be due and owed and whether, in the directors view, the financial statement and remarks are in accordance with this Act, (Sec 296 & 297) (CCA, “CORPORATIONS ACT 2001 - SECT 295”) The major duty of an auditor is to access every financial statement of the company and determine whether it is correct. Another important duty is to find out frauds and to detect loop holes. The duties are owed to the state government Answer 12 Office Systems Limited can take legal actions against Century Suppliers Pty Limited for non payment. But if again Century Suppliers Pty Limited files a suit against Office Systems Limited for breach of specifications ordered and can prove the same then Office Systems Limited will not receive any payment and may also have to give certain charges as penalties. And if Office Systems Limited wins the case then Century Suppliers Pty Limited will be forced to pay the amount or even more. Answer 13 It is the case of insider trading. Though in this case the benefit has not been to Bruce’s family members but the information of the future happening was passed to Monty. Thus it an illegal act on part of Bruce, so he can be prosecuted. So, Bruce and Monty can be punishable up to fine of $ 200,000 and imprisonment up to 5 years. Other disciplinary actions like termination of job can also be taken against Bruce (Monash University, “Insider Trading Policy”). References ASIC, “Raising funds in Australia”, Aug 14, 2010. Government of Australia. No Date ASIC, “Replaceable Rules”. August 14, 2010. Government of Australia. No Date. http://www.asic.gov.au/asic/asic.nsf/byheadline/Replaceable+rules+outlined?opendocument Company secretary,” Return of Capital’, Memo. ?. Aug 14, 2010. Home. No Date. Commonwealth Consolidated Acts,” CORPORATIONS ACT 2001 - SECT 295”, Aug 14, 2010. Brief. No Date. < http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s295.html> Cassidy, Julie. Concise Corporations Law. Federation Press, 2006. Dawson, B. “Overview Of Directors’ Duties”, Aug 14, 2010. Melbourne University Law Students’ Society Tutorial Service. 2010 FEDERAL COURT OF AUSTRALIA, “Corporate Law Judgments”, Aug 14, 2010. Summary 2005 Marinac, A., “Corporations Amendment Bill (No.2) 2005”, Aug 14, 2010. A E F ROFE AM. 2005. Melbourne University Law Students Society Tribunal Service, “Corporations Law”. Overview. 14 August, 2010. MULSS. No Date. Monash University,” Insider Trading Policy”, Aug 14, 2010. Menu. No Date, OECD, “The role of financial accounting information in strengthening corporate control mechanisms to alleviate corporate corruption”. August 14, 2010. PDF Cast. No Date. UNIVERSITY OF WISCONSIN-MADISON,”Limited Liability Company”, Aug 14, 2010. Division of business services. ., No Date UTS center for corporate governance, “Corporate Governance”, Aug 14, 2010.University of technology Sydney. No Date Worrels solvency and forensic accountants, , “Securities over Assets”, Aug 14, 2010. What are Fixed and Floating charges?. 2008 Read More