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Essay Paper on Business Australia Law

by Elliot Jarvis

Question 1

Bones Ltd is an unlisted public company. Its share capital consists of 500,000 fully paid ordinary shares issued at a price of $1 per share and 250,000 fully paid (non redeemable) preference shares issued at a price of $2 each.
The preference shares carry the following rights

o A right to a fixed cumulative dividend of 10%
o A right to share equally with ordinary shareholders in any distribution of surplus assets (after return of capital) on winding up
o A right to exercise one vote per share, but only in relation to a proposal for a reduction of capital or a proposal affecting rights attached to the preference shares.

These rights were set out in a special resolution passed by the company before the issue of the preference shares. Judith and Edward hold between them 80% of the ordinary shares and 78% of the preference shares and control the composition of Bones’ board. Lucy holds the other 12% of the preference shares and 1000 ordinary shares. Judith and Edward think that it is unfair that preference shareholders are entitled to share surplus assets with ordinary shareholders on a winding up, particularly in the light of the high dividend payments the preference shareholders have received over many years. They have no immediate intention of winding up Bones, but may wish to do so within the next few years. Lucy strongly objects to any proposals that may affect her rights as a preference shareholder.

(a) Advice Judith and Edward:

(i) whether Bones can alter the rights of preference shareholders to share equally in surplus assets on a winding up by amending the company’s internal rules; and

The rights of the preference shareholders were set out in a special resolution; hence, in order for the said rights to be amended, a special resolution must be passed by Bones Ltd. at a general meeting. The company must first make sure that it follows the correct procedure of calling out a meeting (CORPORATIONS ACT 2001). All the members of Bones Ltd. must be given a notice of the meeting and be invited to attend the said meeting. The notice should state in full the proposed special resolution to be voted on the meeting (INC A Guide for Incorporated Associations).

The company must make sure that that “special resolution” must appear in the notice itself. There has been an instance wherein the notice was considered invalid because the said words did not appear in the notice.

In order for the rules to be validly altered, the company must make sure that the altered rules are passed by the required majority. At least seventy five percent (75%) of the members, who are voting in person or by proxy or postal vote, provided it is allowed, should vote in favor of the proposed altered rules. It should be noted that the seventy five percent (75%) does not refer to the entire members of the company but only to those who are voting.

In order for the said special resolution which altered the rules to have its legal effect, it must be lodged with the Commissioner at Consumer Protection, within one month of passing the resolution. It must contain the notice of the special resolution indicating the details of the alteration as well as a certification from a member that the said special resolution has been duly passed and that the altered rules are in conformity of the Corporation Act of 2001. In cases wherein the notice cannot be submitted on time, a request to the Commissioner may be made to have the notice submitted outside of the time limit. Valid reasons must be enumerated why said notice cannot be submitted on time. If the request is approved, the said extension is mostly allowed for a maximum of three months only.

The new rules will take effect only upon the confirmation by the Consumer Protection. A confirmation letter will be sent by the Consumer Protection and will also contain the date as to when the said altered rules will take effect. Hence, the new rules cannot be applied unless this confirmation letter is received.

Therefore, Judith and Edward must know that Bones Ltd. can indeed alter the rights of preference shareholders so that surplus assets may be shared equally on a winding up through the passage of a special resolution specifically following the steps set forth in the Corporation Act of 2001 abovementioned and not by the mere amendment of the company’s internal rules.

(ii) whether the company could improve the position of ordinary shareholders on winding up by making a bonus issue of fully paid shares to ordinary shareholders.

If and when Bones Ltd. decides to liquidate or wind up its business, the members will choose its liquidator who would be entrenched with the power to take control of the affairs of the company (Australian Securities and Investments Commission). This happens after majority of the directors declare in the form of a document that they have looked into the affairs of the company and that the said company is able to pay all its obligations in full within twelve (12) months after the winding up process has commenced. After the said declaration, this must also be approved by its members at a meeting in which at least seventy five percent (75%) of the votes cast should be in favor of the winding up or liquidation of the company. After all these have been complied with, transfer of shares which include issuance of bonus issue will already be within the power of the liquidator whether or not to issued said shares. Said issuance of bonus shares by the liquidator may only be considered valid if the liquidator will give written consent to the transfer and said consent must be unconditional. This consent would only suffice once the liquidator can fully assure that the said distribution is in the best interest of the company and that the payment of its obligations to its creditors will not be duly compromised.

Therefore, once all the legal requirements has been complied with by the company the decision as to whether or not to issue bonus shares in order to improve the position of ordinary shareholders will no longer be the sole decision of the directors of the company not by its shareholders but will already be within in realm of power of the assigned liquidator or the person in charge in the winding up process of the company.

(b) Advise Lucy whether she can take any action to prevent either or both of the proposals going ahead.

Lucy can prevent or oppose either or both of the proposals. First she has to comply with all the legal steps. She needs to have a Notice of Appearance otherwise known as Form 4 (Federal Court of Australia). This application to oppose the liquidation or winding up process of Bones Ltd. needs leave of court. This opposition needs to be filed within the time prescribed by the Corporation Act of 2001. This opposition may be done during the hearing of the application. The person opposing the liquidation or the winding up process must state on the notice the grounds or reasons why he opposes the liquidation of the winding up process of the company. Lucy must also have an affidavit in which the matters mentioned in the notice must be verified. Her opposition to either or both of the proposals will only be valid once these legal requirements are complied with. One thing she must also make sure is that, she must look into if not investigate as to whether the reasons given by the liquidator if in case issuance of bonus stocks is permitted is indeed to the best interest of the company and that the creditors of the company will not be compromised.

Question 2

Griffin Pty Ltd is a small proprietary manufacturing stick on labels for fruit. There are two shareholders, Hermione and Harry, who are also the sole directors. Harry handles the production side of the business and Hermione looks after the financial matters.
The last year has been a particularly bad one for fruit production, following years of drought and hailstorms. Because of this, Griffin’s business has suffered and money is short. Hermione has had to use money that had been put away for GST and employee entitlements to pay suppliers. She is convinced, however, that business will pick up and they will be able to continue.
Hermione orders a new supply of ink from their regular supplier on their usual 30 day credit terms. Harry pays no attention to financial matters so is unaware of the difficulties facing the company.
Has either of the directors breached s.588G? Give reasons for your answer.

Section 588G of the Corporation Act of 2001 refers to the positive duty of the directors of the company to prevent or avoid company trading while insolvent. Failure or neglect to comply with this may render the company’s director personally liable for the debts of the company (Melbourne University Law Students’ Society Student Tutorial Service).

In order for this section to apply and have the director personally liable, the following conditions must be present: (a) he was a director at the time the company incurred the debt; (b) the company was insolvent at the time the company incurred the debt or becomes insolvent upon incurring said debts; (c) at that time, there were reasonable grounds for suspecting that the company is insolvent or so would become insolvent; (d) that time is at or after the commencement of the Corporation Act of 2011 (Section 588G, Corporation Act).

Insolvent trading occurs when a person could reasonably conclude that the company is not capable of meeting its debts after thoroughly reviewing the financial capacity of the company (GWM Lawyers and Conveyancers).

If  it should be proven that the director has indeed violated section 588G of the Corporation Act of 2001, a liquidator may initiate an action against the director or directors, as the case may be (Concise Corporation Law). Said action must seek that the director or directors who violated section 588G should recompense the company an amount equivalent to the loss or damage which was suffered by the creditors due to the violation of the director or directors. In the absence of the intervention of the liquidator, the court may order the guilty director to recompense the company.

In the case at hand, Hermione could not be considered to have breached or violated section 588G of the Corporation Act of 2001 firstly because at the time that she decided to use the money to order a new supply of ink from their regular supplier, the company was not insolvent and it did not also become insolvent due to the fact that said debt was incurred; secondly, at the time that the debt was incurred, Hermione was far from suspecting that the company is insolvent or will become insolvent upon incurring said debt. In fact she was even positive that they can overcome the financial difficulty that their business is currently experiencing.

On the other hand, Harry could not also be considered as having violated section 588G of the Corporation Act of 2001 firstly because although he is one of the sole directors of the company, he is not in charge in the financial matters or dealings of the company hence, he was not the one who decided on whether or not to incur the debt; secondly, since he is not in charge in the financial matters of the company, he was in no way suspecting that they are insolvent or will become insolvent if and when the company will incur a debt, he is not even aware that the company is currently experiencing financial difficulty.

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Corporation Act of 2001. Web.
INC A Guide for Incorporated Associations. Web.
Australian Government, Australian Taxation Office. Web.
Australian Securities and Investments Commission. Web.
Federal Courts of Australia. Web.
Jacques, Mallesons Stephen and Dawson, Blake. Melbourne University Law Students’ Society
Student Tutorial Service. Web. May 4, 2011.
GWM Lawyers and Conveyancers. Web.
Cassidy, Julie. Concise Corporation Law. 5th Edition. Page 270.

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