Corporation Law Financial and Operational Risks

Question: Describe about the Corporation Law for Financial and Operational Risks. Answer: A) In the given situation the property is inherited to Dilara and Aysha by their great grandfather. They continued working on the wine yard as a part of the going concern concept. The purpose of the business is to continue for an indefinite period. The current business structure is based on Partnership. The profit is distributed among the sisters in an equal part. The partnership is governed by the Partnership Act[1]. The current property is inherited which is governed by the inheritance act[2]. The business is facing financial and operational risks. Dilara and Aysha are planning to change the business structure which would yield maximum benefit. The business has less working capital to operate its day today functions. In this particular situation the partners are sharing the profit as per the agreement in between them[3]. Profit sharing is the prima facie evidence which provides an evidence regarding existence of partnership[4]. Both the sisters are partners by the virtue of the agreement. The most common right of partnership is the mutual benefit to access the financial report of the organization. They have right to alter the agreement consensually. The partners have right to take decisions in the benefit of the organization. A small size organization is recommended to continue partnership as they have limited resources. The asset has been inherited from their great grandfather. There is lot of flexibility inherited in a partnership organization. It is better than the other business type due to fewer obligations especially compared with the publically owned company. The law and regulation are easy in case of partnership. At present the responsibility is shared in between the sisters to carry winery business. The only limitation of partnership in the given situation is lack of funds. The business has recently faced a problem in continuing the business due to lack of knowledge. In Green v Beesley[5] partnership is a mutual contribution by each partner. They are planning to sell a part of their business to Mr. Polat due to his expertise which would ultimately benefit the business. The partnership agreement is recommended to resolve the dispute in between the parties to the contract. It will help in benefitti ng the organization for a longer time period. b) The current business structure of Akita is partnership. The business is going through the major financial crises and it requires an expertise to invest in their business. Mr. Polat is a winery expert and wants to invest in the business. It is recommended to continue the business as a partnership. Akita needs to restructure its business by dissolving the current partnership agreement. The clause in the agreement needs to be added with the mutual consent with the new partner. It includes the provisions related to the profit sharing ratio. Currently the partners are equally sharing the profits. Restructuring of the business is necessary to create the profits. Partnership agreement should clearly states the provisions related to the future dispute. The right and duties of each partner must be mentioned clearly in the agreement. It is suggested to register the partnership as per the countrys law. Registration of partnership helps in resolving the future disputes caused internally or externally. The partnership organization gives leverage to partners while taking major decision in an organization whereas it is a time consuming procedure to take a decision. The resolution in a company is passed by the mutual consent of the board members. The process of registering a partnership is easier than a corporation. The organization is very small hence it is not recommended to restructure it. Restructuring of organization will ultimately put the burden on the existing partners. The legal expenses of converting an organization are very high. Hence it is recommended to continue partnership by adding Mr. Polat as a new partner. His investment and expertise would ultimately benefit the interest of the organization. The partnership can be managed easily by the partners. It is a small organization hence it is recommended to continue the partnership by adding the required resources for a perpetual growth. 2) As per the corporation act 2001 it is mandatory to pay dividend to all the shareholders of the company. In the given case study the company has incurred revenue of 300%. It is mentioned clearly in Section 254W[6] that every individual of the same class has equal rights to receive same dividend unless the company has a constitution which states different dividend rights or the company has passed a different resolution. Whereas section 254U[7] states that the director has a right to decide the amount of dividend payable at the end of the month. The method of payment is either through cash, grants or through transfer of assets. In the given situation Mr. Leo is the non-executive director who holds two shares of Thomas the Tank Engine Pty Ltd. Ruby and Amanda has mutually decided not to pay the dividend for the previous year. It is stated in the act that the executive directors cannot decide the decision related to the dividend. The shareholder has rights to claim dividend from the previous year profits. The current situation reflects the Leo purchased two shares in Thomas The Tank Engine Pty Ltd for $500,000 in total. Thomas The Tank Engine Pty Ltd manufactures trains which they sell it to the retail stores. Section 254T[8] states the company has to pay dividend until and unless the company exceeds the liabilities. The dividend should be fair to the companys shareholder. Thomas The Tank Engine Pty Lt d revenue has increased 300% The shareholder has a right to retrieve the document of the company. In this given situation the other two directors without any prior information decided not to pay to the other shareholders for their own benefit. The directors cannot take decisions regarding the dividend policies without making any amendment[9]. In the given situation the director has misused their power. Their decision regarding the dividend is ultra vires. In the situation when the management tries to take an undue advantage of their power, the other members have a right to question the two directors[10]. Lifting of corporate veil: In such a situation if the management tries to utilize it powers beyond the memorandum, in that case the members has a right to lift the veil. Management has no right to use the power which is given to them. Here, Ruby and Amanda, the two executive directors took a decision beyond their power without consulting the other members of the company. In such a situation it is recommended that the other member has a right to reach the court as per Section 233[11] which gives right to the court regarding the decision to wind up the organization. In case of any inappropriate activity the court can interfere in the companys operations. If the company default in making payment to any of the shareholders, then court has right to modify or repeal the operations of the organization. The case mentioned in the act is of oppression and mismanagement by the executive directors of the company. It is a case of oppression where one member of the board was ill-treated just on the basis of questioning the other two members. Ruby and Amanda utilizes the companys asset to lease out the car which is again an ultra-vires act. As per the Corporation Act the company cannot expel a director without the consent of the other directors. The removal of director can only take place on a serious ground. Section 191[12] of the Corporation act states that the directors have a responsibility to state the material personal interest. 3) The corporation act 2002 imposes various duties on the director of the company. The Director has a duty to diligently follow the working of the company which includes proper information related to the financial position. He has to ensure that the company does not trade when it is insolvent. He has to exercise his powers in a good faith for the shareholders interest. All the major decision related to internal working in a company is taken through the directors. They should carry their duty diligently with a motive of wealth maximization. Directors should not misuse their position for their own interest. Section 198A[13] specifies the power of the director. He has the responsibility to carry out the daily business activity of the business. He has the right to exercise the power in the good faith of the company. The company relies on the information given by the directors[14]. In the given case study TACH Ltd is making losses due to the previous investment made. The financial statement was negligently made by Mr. Erol who failed to mention it in the Board meeting. The given situation mentions negligence at the part of the directors. Section 180[15] states that, "it is the civil obligation to carry out the duty carefully". The directors have responsibility to carry out the duties in the favor of the organization. A director is imbibed with a responsibility to carry the routinely functions in an effective manager. He should discharge his duty efficiently with reasonable care. He has to make judgments in a good faith. Here the directors Section 181 of the corporation act states that the directors should take due care while discharging his duty. They have a duty to carry out the responsibility with a proper care. In this given case the company went insolvent due to the negligence of the director. Here the directors has committed mistake while addressing the general meeting. The shareholders have a blind faith over the decision which is carried out by the directors. Their judgment is believed by the shareholders. They hold a fiduciary place in a company. It is believed that their judgment is in the interest of the corporation. Section 182[16] mentions that the directors should not use their position for the purpose of self interest. He should not carry out any object which is detrimental for the company. Any person who contravenes the clause mentioned above has to pay a civil penalty. The corporation act 2001 states the civil penalty against the director who contravenes against the general duty given to him. The given case is regarding sheer negligence by the directors. SECT 1317E[17] mentions the amount of fine to be charged against the director. In the given situation the company went insolvent due to the mistake of directors. The director has a duty to prevent the operations in an organization when it is insolvent. A company is said to be insolvent if it is unable to pay debts when they are due. The director has a responsibility to carefully mention the financial statement of the corporation. A corporation cannot work further, if it is declared insolvent by the court. Section 183[18] of the act states that, "the directors should not misuse his position". A director is considered to have done wrong if he uses his place wrongfully. Further if he fail to exercise his power with a good intention. He is considered to be at a wrong if he utilizes his position dishonestly. The director is subjected to be at default, if he uses its place to benefit someone known which is detrimental for the corporation. Directors hold a fiduciary position in an organization. He should not use his rights to provide interest in a wrongful manner. In the case study the directors negligence has caused harm to the corporation. The company was at a very good financial position. Mr. Erol decision has caused harm to the existence of the company. The loss to the company is caused due to his negligence. The company officer is considered to be at fault if he passively neglects the common law and duties which were given to him. The company cannot trade while it is insolvent. As per s ection 592[19] of the corporation act, the company cannot carry out the trading activity when it is insolvent. Section 232(4)[20] imposes a reasonable degree of care and diligence while preventing the company to commit a fraud. Trading when company is insolvent It is prohibited to continue trading when the company has become insolvent. The act restricts the directors to pursue the trading activity. The following situations are considered while judging the position of the company: The situation when the company has incurred debt. In the given case study the company has incurred loss due to the negligence of the directors. The section stops the directors to continue trading on the reasonable ground that the company would not be able to continue trade due to huge loss. In case if the company incurs further loss it wont be able to pay off the debts to the creditors. The section further states that any person who was the director at the time when the company incurred loss tries to contravene to the clause mentioned in the section will be jointly and severally liable for the payment. The loss was caused due to the negligence of the directors. The financial statement was wrongly prepared by the director. Hence they are wholly responsible to continue. In the case law of Walden v. Hensler[21] it was states by the judge that mistake of law cannot be used as an excuse by the director. The director is under the fault if he commits a mistake due to his own negligence. In case if the directors want to prove that they were not wrong. They have to prove that the error was committed without the persons consent. In this particular case the decision was taken by the directors, secondly if company faces any debt, it wouldnt be able to pay off the debts in the future date. In the case law of Metal Manufacturers Ltd v. Lewis[22] it was stated by the majority of the New South Wales Court on the appeal of Mrs. Lewis that she was a passive director and she is not liable under 592(1)[23] of the act. She has further established under section 556(2) that she has not contravened any of the duty mentioned in sec 181 to 184 of the corporation act. The loss occurred to the corporation were without any prior information. Section 232(4) makes its compulsory to follow reasonable care while disposing off their duty. He has to discharge his duty very carefully. If he fails to comply with the section, the section attracts a fine of $ 5000. It is argued that the relevant act is the part of negligence. Section 189(c)[24] of the act states that, "the information given by the director is utilized by the company". Any information which is given by the director to the company is considered to be in the good faith. Hence, under the given situation the directors are liable to pay the penalty for the breach of duties mentioned in the section 1371E. The company cannot trade further under the name of TACH Ltd. 4) The auditor has a responsibility to plan and perform duty to assure whether the financial statements are free from any error or mistake. The financial statement is the responsibility of the management. He has a responsibility to express his opinion regarding the financial statement. It is the duty of the management to adopt sound policies to establish a strong internal control[25]. The auditor is responsible towards the management. He has a duty to work in the benefit of his client. They have a responsibility to follow the instructions which are given by their client. The auditor has a responsibility towards their clients. The independent auditor has to fulfill the duties which are given by the client. The auditor report is used by the third party to make a conclusion related to the financial position of the company. He has a direct relationship with the management or the client instead of the third party who uses the information. Decision of stakeholders depends upon the report w hich is given by the auditor. An auditor holds a fiduciary position; he owes an indirect responsibility to ensure that the rights of the shareholders are safeguarded. An audit is conducted to protect the interest of the shareholders. He is expected to examine the account which is maintained by the management. It is mandatory by the law to appoint an auditor to keep a check over the companys financial positions. The policy behind the concept is to create a direct responsibility of the auditor. He is directly responsible to the management of a corporation instead of various parties. Outsider parties are related to the auditor through the corporation. He is being appointed in the general meeting by the shareholders. It is expected that an auditor is appointed with the mutual consent of the people. Outsiders rely on the information which is stated by the auditor in the financial report. He has a duty to take care of the responsibility which is given by the client. In case if the auditor commits a mistake, it creates a direct responsibility on the management. In case of negligence by the auditor, they are held responsible. Any wrongful intentional act committed by the auditor makes them responsible under the current act. The auditor owes a duty of care in tort to the auditor. The approach is called as privity test. The defendant auditor owes a duty of care in tort if there is a contract in between the parties. In the case law of Ultramares Corporation VS Touch[26] auditor is liable under tort to anyone other than the client. There is a liability of the auditor beyond the liabilities mentioned in the act. There are many responsibilities which can be carried to find the exact possible test for the existence of the possibility. There are several possible tests which can be applied. Firstly for the prediction of the use of financial statement and auditor report, secondly knowledge of the limited class, thirdly the plaintiff who will rely on the given information[27]. The following concept is appropriate as the auditor has responsibility towards the society as well. A stakeholder relies on the information given by them. It is recommended that the auditor should use the responsibility given by the client.