Limited Liability and Shareholders’ Liability

Does transforming a business from sole trader to limited liability resolves the sole trader of any subsequent liability for injury loss or contract made by the company?

Corporations Act 2001 is the premier legislation that governs the provisions related to the companies in the country. A limited liability company is a separate legal entity different from its shareholders. However that does not mean that the shareholders are completely resolved from all liabilities. Thus, for liability for injury loss and contract made by such companies the shareholders are liable to certain extent (Parker, 2015).

In case the liability for injury loss or from any contract has been arisen due to the decision of the shareholders then the shareholders will be liable to the extent it was beyond the power of the company to enter into such contract (Lo, 2017).

Conclusion:

Hence creation of company does not resolve Peter completely from any subsequent liability that may arise in the future. Peter would have to interact with ASX if he wants to list the shares of the company in the stock exchange (Solaiman, 2017).

Are the directors personally liable for insolvent trading and the steps to be taken for voluntary liquidation of a company?

Section 95A (1) of the Corporations Act, 2001 provides that the onus to prove that the directors of an insolvent company are personally liable is on the person alleging directors liability for transactions entered into with the company. A person or organization if unable to pay all his or its debts as when these fall due then such organization or person is referred to as insolvent as per s 95A(2) of the act (Brotchie and Morrison, 2017).  

The regulatory guide 217 issued by ASIC wants the directors to prevent insolvent trading. The directors must take professional help in addressing difficulties relating to finances of an insolvent company.

It is clear that the directors have not followed the Regulatory Guide 2017 issued by ASIC thus, the directors are personally liable for breach of duty. For voluntary administration the directors must call the meetings of shareholders and creditors to pass the resolution for voluntary administration of the company (Cassidy, 2017).

Conclusion:

Directors are personally liable in this case as they have not followed the relevant guidelines of ASIC.

Internal management of a company is governed by the following:

1. Replaceable rules provided under the Corporations Ac 2001 or,
2. Constitution of the company or,

• A communication of the above two.

The rules provided in the constitution cannot be in contravention with the provisions of the Corporations Act 2001 (the act). In case any rule in the Constitution of a company is in contravention with the provisions of the act then such rules will be void (Fordham, Robinson and Blackwell, 2017).

Directors’ Liability and Voluntary Administration

In this case the rules are said to be unfair to the members but these are not in contravention with the provisions of the act (not mentioned as such in the case study) hence, refusing to comply with the rules of the constitution will be considered as a breach of the act. Thus, the members cannot refuse to comply with the rules of the constitution as long as these are not in contravention of the provisions of the act (Marx, Singh and Fleming, 2015).

Does employees need to leave employment subsequent to signing non-compete agreement and liability of the employee if he takes employment in one of the family member’s company?

A company is not allowed to force his employees to sign non-competition agreement and even if an employee signs an agreement to not compete against the company that does not require the employee to leave the employment. In fact the employer has the right to terminate an employee from his position in case such employee refuses to sign a non-compete agreement (Bishara, Martin and Thomas, 2015).

Thus there is no requirement for an employee to leave employment subsequent to signing non-competition agreement with the company. Thus, naturally there is no liability even if the officer takes employment in any of the company that belongs to the family members of the earlier employer (Lee, Sameen and Cowling, 2015).  

Conclusion:

No, an employee need not leave his employment subsequent to signing of non-competition agreement and no liability for taking employment in any other company of the former’s family members.

The requirements of funds to finance long term projects for large companies are significantly huge. Often such funds cannot be arranged from a single source such as owners’ capital or share capital. In order to arrange necessary funds companies in such case apart from issuing shares to the public borrows money from banks and financial institutions (Fraser, Bhaumik and Wright, 2015).

Taking loan from banks also allow the companies to achieve financial and operating leverage by using the tax advantage of interest payments for such loans which is not allowed for payment of dividends to the shareholders. A company will be able to leverage its tax position by using proportionate borrowed capital. Hence, there are significant advantage both on financial performance and tax position of an organization for use of loan funds.

A company is an entity registered under the Corporations Act 2001. An entity listed in the Australian Stock Exchange (ASX) has the option to issue its shares to the public to raise necessary funds to finance different projects.

Compliance of Company’s Constitution

Being public limited company, A Ltd has mainly three operations to arrange the required funds of $400,000, these are internal financing by using the funds retained in the business over the years, i.e. accumulated retained earnings; to raise capital by issuing additional shares and by borrowing funds from banks or by issuing debentures. However, the facts provided in the document has made it clear that A Ltd is not permitted to issue the shares to the external public without passing special resolution (Ferrando and Preuss, 2018).

It is always desirable to have an optimum capital structure for an organization. An optimum capital structure is the one where there is perfect blend between equity shareholders’ funds and borrowed funds. Thus, before deciding the sources to collect necessary funds for business it is important to evaluate the existing capital structure of a company. After evaluating the existing capital structure the company should decide the sources to be used to arrange capital.

In this case the company should use both borrowed funds as well issue additional shares to the existing shareholders proportionate to arrange the required funds of $400,000. As a result the capital structure would not be changed and at the same time the company would be able to enjoy operating leverage (Ferrando and Preuss, 2018).

In case an entity finds it difficult to pay off its debts then it can be put into administration. Placement of a company into administration can be voluntary or involuntary. Involuntary administration is when the creditors place the company into administration. Such administration is also referred to as external administration. Generally the creditors who have claims against the company can place the company into external administration if the claims are not met by the company as and when fall due.  

The creditors will be involved at the time when an entity enters into external administration or liquidation process. Generally, there are two types of creditors namely, secured and unsecured creditors. A company needs to make payments to the creditors fully in case it has resources available at the time of external administration or proportionately to their respective dues when the company does not have adequate resources to pay off the creditors fully.

In this case the PQR Pty Ltd is continuously finding it difficult to pay off its debts and as a result the creditors of the company has decided to place the company into involuntary liquidation. The company now needs to call the meeting of the creditors to pass the resolution for involuntary liquidation. The creditors subsequent to the involuntary liquidations must be paid in full or proportionately to discharge their liabilities. As discussed earlier sectored creditors shall be paid first then the employees’ dues shall be cleared before making payment to the unsecured creditors. After making the payment to the creditors if any balance is left in the hands of the administrator of the company then such balance shall be proportionately distributed to the shareholders in proportion to their shareholding in the company. It is important to note that after discharging the liabilities of all the creditors, both secured and unsecured creditors, if any balance remains then only proportionate payments shall be made to the shareholders of the company (Lipton, 2017).

Secured creditors shall have preferential right to the payment over and above the other creditors. The dues in respect of employees shall also have preferential right to the payment as the employee are treated as special creditors. Generally after payment of secured creditors the payments to the employees are made in respect of their dues before making payment to the unsecured creditors.

References:

Bishara, N.D., Martin, K.J. and Thomas, R.S., 2015. An empirical analysis of noncompetition clauses and other restrictive postemployment covenants. Vand. L. Rev., 68, p.1.

Brotchie, J. and Morrison, D., 2017. Insolvent trading and voluntary administration in Australia: economic winners and losers?. Accounting & Finance.

Cassidy, J., 2017, July. Superfluous or superlative: The role of reckless/insolvent trading prohibitions in New Zealand and Australian directors’ duties regime. In Australasian Law Teachers Association 2017 Annual Conference. Available at: https://researchspace.auckland.ac.nz/handle/2292/35792 [Accessed on 20 October 2018]

Ferrando, A. and Preuss, C., 2018. What finance for what investment? Survey-based evidence for European companies. Economia Politica, pp.1-39.

Fordham, A.E., Robinson, G.M. and Blackwell, B.D., 2017. Corporate social responsibility in resource companies–Opportunities for developing positive benefits and lasting legacies. Resources Policy, 52, pp.366-376.

Fraser, S., Bhaumik, S.K. and Wright, M., 2015. What do we know about entrepreneurial finance and its relationship with growth?. International Small Business Journal, 33(1), pp.70-88.

Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the financial crisis. Research policy, 44(2), pp.370-380.

Lipton, P., 2017. The Introduction of Limited Liability into the English and Australian Colonial Companies Acts: Inevitable Progression or Chaotic History. Melb. UL Rev., 41, p.1278.

Lo, S.H., 2017. Piercing of the corporate veil for evasion of tort obligations. Common Law World Review, 46(1), pp.42-60. Available at: https://journals.sagepub.com/doi/abs/10.1177/1473779516682195 [Accessed on 20 October 2018]

Marx, M., Singh, J. and Fleming, L., 2015. Regional disadvantage? Employee non-compete agreements and brain drain. Research Policy, 44(2), pp.394-404.

Parker, D., 2015. The Company in the 21 st Century: Piercing the veil: reconceptualising the company under law. Journal of Business Systems, Governance & Ethics, 10(2).

Solaiman, S.M., 2017. Legal personality of robots, corporations, idols and chimpanzees: a quest for legitimacy. Artificial Intelligence and Law, 25(2), pp.155-179.