CORPORATE LAW: CASE STUDY Essay Example

CORPORATE LAW: CASE STUDY

Corporate Law: Case Study

Question ONE

Issue

Are Alan, Ben and Fred at risk of liability or other suctions concerning the issues that are going on between Wealth and Boss?

Law

In a company, directors, shareholders, and management, amongst other employees, have certain obligations that purport them to work and uphold the interests of their company. In this perspective, every employee or owner of the organisation should be aware of his or her responsibilities and duties, upon which legal assessments and evaluation are based. In Australia, Corporate Act 2001 outlines these duties and responsibilities to which directors, as well as other involved parties in the affairs of an organisation, should adhere.

According to the Australian Corporate Act 2001, directors are liable to comparable obligations as guided by different jurisdiction, especially the obligation of being loyal and serving the interests of the company. Therefore, it can be argued that directors need to act in the best interest of the company. This is principally distinguished as considering the expectations and interests of shareholders; directors have the obligation to entirely evade irreconcilable situations. Also, the Corporate Act 2001 section 181 requires that directors to act in good faith, an implication that directors should protect the interests of the company. Section 182 prohibits using the position to manipulate the interests of the organisation for personal use. Further, it is also prohibited in section 184 for directors to act or promote dishonesty and recklessness that affects the interests of the company. Therefore, acting in violation of the duties and responsibilities implies breach according to the Australian jurisdiction. For instance, in Australian Growth Resources Corp Pty Ltd v Van Reesemaat (1998) 13 ACLR, (Hoyer, T 2010; Tomasic et al. 2002) explain that fiduciary characteristics of duties of organisational directors result in legal liabilities upon violations of section 182 to 184. In the same perspective, the Darvall v North Sydney Brick & Tile Co Ltd(1989) 16 NSWLR also illustrate the liabilities upon which a director is subjected for violation of duties and responsibility to act in the best interest of the company (Tomasic et al. 2002).

Application

In this case, Alan, Ben and Fred are at risk of liabilities for violating their positions or powers as directors to promote activities that only serves them. Fred is at risk for violation of sections 181, 182 and 184 of the Corporations Act 2001. He was amongst the directors of Wealth who set up another company, Boss and forced it into unfavourable contracts for their own gain. Fred has violated section 181 for failing to act in good faith for interest of the Wealth. Fred, Alan and Ben were aware of the fraudulent activities of manipulating accounting figures. Also, both Alan and Ben were amongst the directors of Wealth when Fred and his Boss colleagues were transferring substantial amounts from Wealth to Boss, jeopardizing the business activities of the company. These are recklessness and dishonesty, which are prohibited by sections 184. From their activities, the company also incurred debts, which also put Alan and Ben at risk of liabilities for permitting activities that resulted in debts for Wealth. The conduct is prohibited by section 588G of the Corporations Act 2001.

Conclusion

Alan and Ben breached their duties as directors for participating in fraudulent activities involving recklessness and intentional dishonesty. Their decisions also resulted in debts by the company. Fred is also at risk of liabilities for using information of Wealth to support the setup of another company. Therefore, Alan, Ben and Fred are at risk for violating their duties as directors.

Question TWO

Issues

1. Is each claim a debt that Flexible is required to pay?

2. How much will claimants receive and in which order of priority?

Law

Corporations Act 2001 has sections that define the definitions and boundaries within provable debt can be considered. According to these sections, debts incurred before the date of the bankruptcy are given much concern. Liquidation date is defined as the date of the sequestration arrange or the acknowledgment of the account holder’s appeal. The liabilities that need payment before this date are considered provable depts. According to Corporations Act 2001 sections 444 and 553 (Commonwealth Consolidated Acts n.d.). This apects was also demonstrated in the ruling of High Court in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56 in connection to costs orders as one of the types of provable debts if their dates are before the liquidation. According to the Act, section 553(1), “in each ending up, all obligations payable by, and all cases against, the organization (present or future, certain or unexpected, found out or sounding just in harms), being obligations or cases the conditions offering ascend to which happened before the applicable date, are allowable to verification against the organization” (Commonwealth Consolidated Acts n.d., n.d.). it is imperative to note that the date of proposed debts that are seeking approvable for payment is considered against the date of liquidation as demonstrated in the Federal Court in Environmental and Earth Sciences Pty Ltd v Fouris [2006] 152 FCR 510 (Tomasic et al. 2002).

Section 477 of Corporation Act 2001 outlines the power of the liquidator at the time of liquidation. According to the section, the liquidator can continue with the business on his own terms; however, nay class of creditors, also known as provable debts, should be compensated fully. As outlined in the Corporations Act 2001 section 556 and demonstrated in the case featuring Waterman Collections Pty Ltd [2013] FCA 706, even though dates are considered, the type of debt or creditors are also considered whilst establishing their payment criterion and probabilities. According Griffiths (n.d.), creditors are compensated based on whether they are secure or unsecured creditors.

In the same perspective, Corporations Act 2001 section 556(1)(a) further states that upon scheduling the winding up of a company, secured debts and claims are paid before others; expenses incurred whilst getting in property of the company or continuing the company’s business are paid first. Part (b)(i) explains that the expense claim must be within 12 months upon commencing the liquidation. Section 561 guides about the priority of making the employees’ claim and its priority of payment. According to this section, employees’ claim must be paid before any secured or unsecured claims; however, just as the ruling in Italiano Family Fruit Company Pty Ltd (in liq) v Italiano Family Fruit Company Pty Ltd (in liq) (2010) FCA 1355 demonstrated,
it must be based on section 556(1)(e) for approval for payment and must within a period of 12 months after liquidation is scheduled.

Application

In this case, various claims emerge that need reference from different sections of the Corporations Act 2001 to determine whether they are all provable debts and the priority in which the liquidator should respond to the claimants. Flexile Ltd is liquidated by Cassell, an activity that is scheduled to commence on 10 June 2017. In this case, following section 556 of the Corporation Act 2001, liquidation expenses, dated 10 June 2017, cannot be considered a debt but must be paid before any other secured or unsecured debts. The priority of payment then follows with employees’ entitlement, which according to section 561 should also be paid before other settlement of debts. Based on circulating security interest explained in section 560(a), wages of $150,000 would be paid first, followed by superannuation of $14,000, and then leave of absence of $50,000. Upon completion of the above, section 556(1)(b) requires that court orders be settled next, implying that PI Queensland Supreme Court judgement, dated 25 May 2017, about $250,000 in damages would be paid next. Stretch Pty Ltd loan of $150,000 to Flexible would then be paid next considering that this is a secured creditor. However, based on section 485 of Corporations Act, Ret lease cannot be considered a debt, since David was not one of the officers of the company when he was signing the agreement.

Conclusion

Basing on guidelines given by Corporations Act section 485, the company needs to determine a day for which all the creditors prove their claims or debts based on section 556 and employees apply for their clams basing their argument on section 561. With the help of court, all the assets of the company would be collected to settle the approved debts in the order discussed above. However, it should be noted that winding up expenses as well as charges should be paid first, even if the company’s properties are insufficient to for all the approved claims.

Reference List

Commonwealth Consolidated Acts n.d., Corporations Act 2001- Sect 553, Available from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s553.html

Commonwealth Consolidated Acts n.d., Corporations Act 2001- Sect 477, Available from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s477.html

Griffiths, R n.d., ‘Creditors type and ranking’, Rapsey Griffiths. Available from: http://rapseygriffiths.com.au/creditors/

Hoyer, T 2010, ‘Section 588FA of the Corporations Act- change of wording but no change to meaning’, 18 Insolvency LJ, pp. 77 -95. Available from: http://sites.thomsonreuters.com.au/journals/files/2010/09/InsolvLJ18.2_Hoyer_article.pdf

Tomasic, R, McQueen, R & Bottomley, S 2002, ‘Corporations Law in Australia (2^nd Ed.)’, Annandale, NSW: The Federation Press.

Corporations Act 2001 (Cth).