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Commercial Application of Corporations Act

Question :

Silk Road Ltd (SRL) owns a well‐known chain of clothing and gift shops on the East Coast of Australia. The company has traditionally purchased items from East, South and Central Asia and sold them to retail customers in major shopping centres. However, since 2012, it has also conducted a successful online business through Silk Road Online Pty Ltd (SROPL). SROPL operates a website from which SRL’s products are sold to customers over the Internet. SROPL is 50% owned by SRL and 50% by Wicked Ideas Ltd (WIL), which is a Californian investment company. Leyla, SRL’s managing director, is also SROPL’s Chief Executive Officer. SROPL’s other director, Jed, is a nominee of WIL. Initially highly successful, on 1 January 2017, SROPL was affected by a dangerous form of computer malware (virus) that rendered its main website inoperable for several days. Immediately after the attack, Leyla hired a cybersecurity company to investigate the security breach and to create a ‘patch’ for SROPL’s IT systems. The hacking problem was thereby resolved. But, SROPL is now experiencing restricted cashflow and is having some trouble meeting its usual financial commitments due to a drop in online traffic. For example, SROPL paid its Internet service provider ten days late in March 2017 and has not paid its employees their superannuation entitlements since April 2017. To make matters worse, on 1 May 2017, the chief bookkeeper of SROPL quit unexpectedly, leaving Leyla to maintain the company’s financial records. She makes her best effort to collect receipts but forgets to keep the books of prime entry. On 1 June 2017, Leyla and Jed together decide as a board to ‘sponsor’ Marvin to write favourable reports about SROPL on his blog: Marvin is an ‘online influencer’ and is to be paid a $50,000 fee. Leyla raises some concerns about the size of the transaction given SROPL’s cash position but is assured by Jed that ‘WIL will pitch in with more cash if necessary’.   SROPL is wound‐up in insolvency on 1 October 2017.   

Q1. Advising the Liquidator on the Breaches of Duty for Preventing Insolvent Trading in the Corporations Act 2001.

Q2. Advising Rex

Q3. Remedies under Part 2F.1 Corporations Act 2001


Answer

Question 1: Advising the Liquidator on the Breaches of Duty for Preventing Insolvent Trading in the Corporations Act 2001

Gaining a relevant amount of understanding regarding the Act (as well as any accompanying legislation in question) is a very essential step for completion and consideration in this regard, owing to the fact that the completion of the same in a successful and efficient manner can prevent any kinds of violations and potential issues in any manner. In order to prevent the onset of insolvent trading, it is necessary to know about the presence of insolvency in the organisational functioning in the first place. In other words, the main factors and situations which can be deemed as the implementation of insolvent trading have to be understood, weeded out (if present) and prevented. The question of solvency is completely based upon the determination of the cash flows of the said company in the first place, the determination of the same can providing a proper inkling regarding the current state of the organisational balance sheet. The effective management of the cash flow (especially pertaining to the issues such as debts, dividends and buybacks of share) is thus one of the most crucial steps for consideration while ensuring the prevention of insolvent trading of any kind (Moll, 2015).


The Corporations Act 2001 is breached (especially regarding the onset of insolvent trading within the functioning and generated performances of the organisation in question) when debts are incurred despite the absence of the necessary funds and the means with which to pay them back. The incurring of the debt in question (or cases where excessive debts are incurred upon the already existing presence of a large amount of debts in the first place) in certain sticky situations for the company is a clear indication of the presence of insolvent trading (and modes of functioning) of the company in question at that point of time. The leaders and the Directors have to ensure that they know all about the states of affairs of their company from the inside out, since a leader who knows about the insolvent mode of working and keeps quiet about them is liable to be deemed as a violator of the Corporations Act 2001. The absence of any kind of reasonable grounds in these kinds of cases is a matter of serious concern as well, since the absence of the aforementioned can lead to the legal implications of the violation in question being even more severe (Verdonck, 2014).


The continued presence of trading losses, difficulties in the management of the overall cash flow, difficulties in sales of stocks in the national and the international market, failures in paying the creditors back for their help and financial support, dishonoring of checks, refinancing of  money from other parties, inability to procure and produce accurate information pertaining to the financial resources of the financial entity in question as well as the continued resignation of a large number of relevant employees within a considerably short period of time are some of the major indicators of the presence of trading insolvency within the organisation. The leaders and the directors have to ensure that these kinds of trends and changes are checked and taken into consideration very seriously, for a lax behaviour in this regard can lead to serious problems and persisting issues (Johnston & Too, 2015). Regular assessment and maintenance of the company solvency as well as seeking of professional help wherever it is needed is exceptionally useful in this regard. Acting in a timely manner as well as ensuring that the records and financial assets are maintained in a proper and effective manner are also some of the most important matters for consideration while ensuring that insolvent trading is prevented in accordance with the Corporations Act 2001 (www5.austlii.edu.au).


Q.2 Advising Rex

It is very evident that Yolanda has not informed Rex about the considerable alterations that she has advocated in Just Nuts Pty Ltd. While Rex being a considerable stakeholder as well as can be considered as the driving force of the company. Moreover, Yolanda appear to be insolent enough not to invite Rex in the Extraordinary General Meeting where Yolanda and Laurie are supposed to take considerable decisions regarding new preferences of acquired shares. Furthermore, Yolanda appears to exploit her voting rights, which enable Laurie to have an access of the market shares of Rex in reasonable market rates without Rex’s awareness. In accordance with the section 2F.2 of the Corporation Act, 2001, Rex might seek the assistance of the class rights, specifically 246D, Rex might claim for the cancellation of the reforms or amendments that Yolanda have imposed in the financial contract under the norms of which they are bound. Rex is likely to accomplish it since the decisions and executions of the amendments that Yolanda imposed out of sheer despotism and without the unanimous support of the potential components of the prevailing contract, which drives the essence of JNPL. 


Furthermore, though Laurie have not seen yet to exploit the acquired reasonable market shares for any debauch or didactic purposes or to pursue any  vested individual interest apart from the genuine business reasons, instead of appealing for cancellation of the imposed amendments (www5.austlii.edu.au), Rex may plea for cardinal variation of class rights of the binding contract that might restrict Yolanda from taking any pivotal decision without Rex’s awareness.


On the same note, as Rex was completely unaware about the decisions that Yolanda is going to take under the persuasion of Laurie who is not an recognized or accredited party in this entire venture, Rex might plea for decisive modification of the proposed amendments that might enable him to regain his prevalent designation in terms of the contract (www5.austlii.edu.au).

Moreover, in order to initiate any of the aforementioned remedies, Rex must be advised to divulge the awareness of the significant alterations that he has been able to acquire in front of Yolanda and Laurie in order to ensure the obtaining of the written documents which can be able to symbolize the imposed alterations since the relevant court is conditioned to issue a written document in order to consolidate the essence of a certain plea (Begum, 2013)


Though Rex is not an active investors JNPL but invested a significant moiety of the initial capital when the farm is at its start-up phase, he appear likely to available each of the legal remedies mentioned above. In order to ensure seamless prosecution of his respective appeals he must advised to issue the prevailing papers of the contract along with the written document of the alterations proposed by Yolanda under the Corporation Act, 2001 (www5.austlii.edu.au).


Question 3: Remedies under Part 2F.1 Corporations Act 2001

The case of James and Oona has been an example of oppressive conduct of affairs, with their existing rights as members (as well as Members of the Board of Directors) of the company left behind by their parents not being respected in a proper and appropriate manner. They can certainly appeal to the court on the unethical and unlawful way in which they have been treated, as well as the fact that they have been made to leave the organisation of which they have been part of over the course of several years at the very least. Part 2F.1 Corporations Act 2001 has decreed the various grounds for Court Order, the various orders which the courts and the legislative organisations can make, the people who are eligible for application of orders and the requirements which are needed for a certain person in order to lodge an official complaint or order of any sort. The case of James and Oona has been abundant with the main motives which are required for the official registration of the complaints (especially pertaining to these kinds of matters), with a recommendation regarding the same being necessary for them to gain the necessary insight.


The fact that James and Oona are being unlawfully left out of the eventual plans for the organisation in question is undisputed, as the evidence of the same can easily be found from the recent meetings which have been held. Indeed, Geraldine has refused to share the necessary information pertaining to the future of the company in a proper and detailed manner, which is a clear violation of the Corporations Act 2001 as well as several laws pertaining to rightful employment and ownership. In addition, the call made by Dave to remove them from the positions of Members of Board of Directors in this scenario is a blatant mistreatment of authority on Dave’s part, as the person in question is taking undue advantage of his position as the majority shareholder. The fact that the meeting has been specially convened in order to remove James and Oona as Directors is a direct violation of many legislation and laws pertaining to equality and fair treatment in the working place as well, since the people in question have not demonstrated any weaknesses in their organisational functioning and working capabilities to warrant such a dismissal (Hedges et al. 2014).


In addition to the aforementioned, the fact that James and Oona are forcibly removed despite their organisational (and criminal) records being clear is also a major violation of the Corporations Act 2001 and as such, they have the right to file the case (in the form of a complaint) against Dave and his daughter (Geraldine) regarding mistreatment and unfair treatment.  Thus, the Part 2F.1 of the Corporations Act 2001 provides them with the option to fight for their own rights, as well as protest against the treatment which they have suffered in the given case.


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