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Company Law Assignment: Ninja Computers Pvt Ltd

TLAW 402 COMPANY LAW:

Bruce and Lee are the only shareholders and directors of Ninja Computers Pty Ltd, a two-dollar company that operates a computer stores in Sydney. Bruce and Lee share management of the company. Bruce is the managing director, which also involves responsibility for the company’s finances (because he worked for several years as an accountant with a large firm). Lee manages the company’s staff, business marketing and client relations. Lee knows very little about finance but is a good people person. Lee has complete trust and confidence in the ability of Bruce to manage the business, given the background and experience of Bruce.
On 1 July 2017, Lee received a telephone call from one of the company’s trade suppliers (SupplyCo) demanding that an overdue monthly supply account be paid. Lee thought this was very strange because Bruce was normally very efficient at paying the company’s bills. However, Lee was very busy that day and he left a message for Bruce on his desk.
Two weeks later when Lee asked Bruce about the bill, he replied that he paid it. On 1 August 2017, Lee again receives a telephone call from SupplyCo demanding payment. Lee emails Bruce about this, who replies that he has “sorted it out”. What Bruce has in fact done is pay off the creditor using the company’s credit card which is now over its limit.
Any doubts that Lee had about the company’s financial position is removed when Bruce sends an email to him advising that the company had been able to review its tax position and received a “huge” refund from the tax department, which he has used to buy new company cars for each of the directors costing $55,000 each. Although Lee is not happy about Bruce buying the cars without consulting him, Bruce insists that he only bought the cars to take advantage of a special tax advantage in buying luxury cars for business purposes.
Bruce, who has a reputation as a liar, had given false information to Lee. Bruce has been selling several company assets to pay off the luxury cars and his personal gambling debts. The money used to pay for the Christmas party was taken from another company credit card that Bruce signed up for. The company has been surviving on credit for all of 2017. Bruce has been able to conceal this from Lee by failing to keep proper financial records since 1 August 2016.
On 1 November 2017, Lee tries to use his company credit card, but it is rejected by the ATM due to insufficient funds. Lee tries to contact Bruce but his answering machine states that he is on holiday and will return to work on 8 November 2017.

On 9 November 2017 Lee becomes concerned because Bruce does not return from holidays and his mobile phone has been disconnected. On 10 November 2017, Lee receives a telephone call from the company’s bank manager who informs him that the company has now exceeded its $150,000 overdraft and that, for this reason, the bank will no longer honour any payments made by Ninja Computers Pty ltd.
On 14 December 2017, a liquidator is appointed by the court. The liquidator now seeks to repay the creditors of Ninja Computers Pty Ltd, but the company has insufficient funds and assets to make any repayment of debts totalling more than $285,000.
(a) Advise the liquidator, with reference to the Corporations Act 2001 (Cth), as to what action she should take against Bruce and Lee and the chances of her success. and
(b) Assume ASIC, instead of the liquidator, has taken legal action Bruce and Lee for breach of the Corporations Act identified in your answer in part (a). Explain, with reasons, what are the most likely potential legal consequences for Bruce and Lee? 

Answer

a. ) Advise the liquidator, with reference to the Corporations Act 2001 (Cth), as to what action she should take against Bruce and Lee and the chances of her success.

Introduction

The initial function of a liquidator is to assign a cause of action. In the provided scenario the liquidator can ask recoveries from the directors of the company. There are a number of circumstances where a director of a company can be subjected to the liability to the recoveries by the creditors or the liquidator of the companies. The provided scenario is a potent instance of insolvency as the company has lost its capability of paying of the debt to the creditors. Solvency is defined in section 95A(1) of Corporations Act as the ability to pay off the debts to the creditors. As per section 95A(2) the Ninja Pty Ltd is insolvent as it has lost its ability to pay the debt to the bank and the creditors as well [1] . The liquidator that is appointed by the court seeks to repay the creditors of Ninja Computers Pty Ltd almost $285,000 that the company can not pay due to shortage of funds. 

Relevant facts 

In order to advise the liquidator of the possible action against Bruce and it is important to summarize the relevant facts of the provided case. 

  • Both Bruce and Lee hold the position of the shareholder and the director of the Ninja Computers Pty Ltd. Bruce is the financial manager of the company whereas Lee is responsible for the marketing and the public relations of the company.
  • As per the scenario Bruce has lied to Lee and is also responsible for several breaches under the Corporations Act which resulted in the bankruptcy of the corporation.
  • Both of the directors of the company have breached their subsequent duties. However, Bruce is the primary convict in this case of breaching his duties as a director and as an accountant as well. 
  • Bruce has directly involved in ‘dishonest’ using of Corporation’s money and has also breached his duty to the supplier of the company.
  • However, it is the prime responsibility of each of the director to monitor the activities of their employers in order to avoid any possible scenario of insolvency. Therefore, Lee has failed to actively perform his duties as a director of the company as well.

In the regards to the above mentioned fact the appointed liquidator can take legal actions against the directors due to the case of insolvency [2] . There are a number of well known circumstances that suggests that a director of a company can be subjected to the liability of recoveries by the liquidator and the circumstances are:

  • As a result of breach of Director’s duties
  • Misconduct of a director or breaching a specific statutory provision
  • As a debtor of the company who has overdrawn loan account.

As per the provided scenario the directors of the company can be subjected to compensation as debtor of the company along with one of the directors who has overdrawn a loan account.

Legal issue

The specific statutory duties of directors of a company are;

  • To declare an interest in the existing transactions and the arrangements
  • To use a substantial property transaction only if the company approves of it.
  • Get the loans and the quasi loans to be approved by the company
  • To obtain a trading certificate

As per the provided scenario, Bruce has breached the mentioned duties as he has not got approval from the company and he has also breached the general duty of honesty towards the corporation and the other director of the company. His illegal expenditure of the company fund is a breach to the statutory duties of a director and needs to be taken under consideration by the liquidator.

Section 588G of the Corporations Act, 2001 sets out Director’s duty of preventing insolvency and also states that a director has a duty of preventing insolvent trading that is associated in the following scenarios [3] :

  • The accused being a director of a company at the company incurs a debt.
  • The company being insolvent at that time
  • At that time there are reasonable grounds for suspecting of possible insolvency.

In this case both the directors have committed an offence regarding the failure of preventing the company incurring the debt as it was dishonest under section 588G (3) [4] 

Relevant case law

It is possible for the liquidator appointed by the company bring a claim against the director Lee because of negligence and misfeasance and against the claim of breaching statutory duty against Bruce. In the year 2013 in the case Re SCW Pty Ltd NSWSC 302 heard an application by the liquidator of the company for insolvency under section 479(3) of the Corporations Act, 2001. The liquidators in this case decided not to commence proceedings against one of the directors of the company for alleged breaches of directors’ duties.

Ambrose (Trustee) in the matter of Poumako (Bankrupt) v Poumako [2012] FCA 889 (2012) is another relevant case where transfer void of bankruptcy was noted. Valeba Pty Ltd v Deputy Commissioner of Taxation [2012] QSC 200 (2 August 2012)is another example of relevant case law that can be cited by the liquidator. 

Application of the legal principles and case law

It is possible for the liquidator to bring the claim of compensation against the breach of duties of the directors and also the for the allegation of insolvency [5] . It is important for the liquidator to investigate the affairs of the company and she also needs to be aware of the potential recoveries that can be benefit the company because here in the provided scenario the liquidator needs to establish that the debt that the company owns is the debt owned by Bruce against the permission of the company and he has breached and also owes the company money. But this process can be a complicated one as it is important for her to prove that the loan was not sanctioned by the company. However, because of Lee’s inability to keep the record, both the directors need to be claimed against the breach of their duties. Whether the breach was sanctioned by the company or not is the prime issue in this case.

Legal reasons

As per the guideline of the director’s duties elaborated under Corporations Act, 2001 it is the moot concern of a director of a company to act in the best interests of the company and not for personal interest or profit. Lee is accountable for the owed money and guilty of breaching the statutory duties of the directors. The liquidator in this case can bring a claim to the court to repay and restore for the money and to contribute such sum to the company’s asset.

Conclusion

This case significantly sheds light on the possible charges of fraudulent trading and wrongful trading that caused the company insolvent liquidation. The debts are owned by the company and the director of the company the normal channels of recovery are to be persuaded and it needs to put restriction on using the name of the company to avoid further insolvency.

(b) Assume ASIC, instead of the liquidator, has taken legal action Bruce and Lee for breach of the Corporations Act identified in your answer in part (a). Explain, with reasons, what are the most likely potential legal consequences for Bruce and Lee? 

Fact

  • Bruce manages the finance of Ninja Computers Pty Ltd whereas Lee manages the other services of the management
  • 1 July, 2017 Lee has been informed of a payment due by the SupplyCo that Bruce further claims that he has paid it
  • A false email has been received by Lee from Bruce that he is buying a car company out of the massive tax refund where each director is supposed to pay $55.000
  • The email is false since Bruce is buying luxurious cars out of the credit of the company
  • 1 November, 2017 Lee has been unable to withdraw money from the credit card of the company due to inadequate funds
  • 9 November, 2017 the bank manager informed Lee that the credit card of the company has exceeded the overdraft amount of $150,000
  • 14 December, 2017 a liquidator has been employed by the court who seeks to repay the creditors of the Ninja Computers Pty Ltd

Issue

Bruce, being the in charge of the financial matters of Ninja Computers Pty Ltd can be accused to lie to his fellow shareholder Lee. In the name of tax refund, he has invested credits of the company to buy a car company and personal debts of gambling. Moreover, Bruce had not paid the overdue amount of their suppliers while deploying the cumulative credit of the company to pursue his didactic purposes. Moreover, he is the only exponent who can be held responsible to transcend the overdraft limit of the credit account of the company.

Law

Section 479(3) of the Corporation’s Act, 2001

These law chiefly deals with the cases of insolvency trading that ASIC might wield in order to punish Bruce who has been found to be involved in financial debauchery while being unable to pay the creditors [6] .

Section 588G of the Corporation’s Act, 2001

In accordance with the simulations of this section, both of the shareholders of the company of being negligent while monitoring all the services of a management. ASIC might accuse them of being encouraging dishonesty and money laundering by being negligent to the core managerial duties of a firm [7] .

Section 1801 of the Corporation’s Act, 2001

Under this section, ASIC might charge the two shareholders of exhibiting flagrant breach of their declared duties while devoid of the requisite diligence expected from them [8] .


Advice

The ASIC might accuse both of the directors for encouraging dishonesty within Ninja Computers Pty Ltd by being negligent about their moot directorial duties [9] . Furthermore, Bruce can be evidently accused for getting involved in the affairs of insolvency that is likely to rise from the negligence that he exhibited while maintaining financial accounts. Apart from them, both of the directors can be accused to get involved into the deliberate breaches of duties and diligences expected from a director. 

Conclusion 

However, aparently Lee seems naive since most of the violations of duties and negligence regarding the director’s obligation has been done by Bruce without his awareness. In this regard, the court can be requested not to punish Lee from the Humanitarian grounds and grant him a duration to collect the money and repay the debt.  


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