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Assignment S1.12

Assignment S1.12

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Published by: Salman Awan on May 14, 2012
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ACC204 COMPANY LAW AIH - SEMESTER 1, 2012

INSTRUCTIONS:
This is a group assignment. Each group must have either 2 or 3 people who may be enrolled in different tutorials. Moodle, the course website, provides a discussion board where you may advertise and recruit team members. Choose your team members carefully. Students must notify the lecturer in a timely manner and provide substantiating documentation of any problems in relation to group work. All assignments must be typed in Arial, size 11, 1½ spacing, justified (align to both left and right), have the standard cover sheet and be signed by the students stating that the work is original. While referencing sources used for this assignment, you must follow the Australian Guide to Legal Citation (AGLC) (the footnote system). You must complete both part A & B. The maximum word length for this assignment is 1,600 words. Each group must submit this assignment no later than Wednesday, 23 May 2012, 4:00pm. Penalties will be imposed for late submission without prior permission. Part A ABC Data Pty Limited (the “company”) carries on business as a data service provider. There are four shareholders in the company who hold the following number of shares: Ian has six ordinary shares. Grace has three ordinary shares. Robert and Julian have one ordinary share each. At the time that each member acquired shares in the company, it was understood that they would each be equally involved in the management of the company. Ian, Grace, Robert and Julian are also the company’s only directors. Unfortunately from the time the company commenced, Ian began conducting the business of the company as if it were his own. Ian ignores the requests made by the other shareholder/directors and refuses to conduct meetings when requested. When meetings are eventually held, Ian refuses to consider any proposed resolution by the other directors/shareholders. In addition, Ian pays himself a very high remuneration for consulting work which he says he does for the company. The other director/shareholders regard this remuneration as excessive and not commensurate with the work he does or the skill that he possesses. In addition, Ian refuses to approve the payment of dividends despite company profits being available to pay such dividends. This has had the effect that neither Grace, Robert nor Julian have received any profit distribution from the company. Advise Grace, Robert and Julian whether they can bring any personal action against Ian and, if so, what orders would you advise them to seek.

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In support of this contention Mr Watson and Mr Smith state that throughout the relevant period they were advised by Mrs Horton that the company was solvent and was able to meet its obligations because most of the creditors did not press for payment within their normal trading terms. Mr Watson was the company’s directors at the time the company was wound up. Page 2 of 6 . The liquidator alleges that when each of the debts were incurred the company was insolvent. Both Mr Watson and Mr Smith allege that they had reasonable grounds to expect that the company was solvent at the relevant time and that it would have remained solvent even if the company had incurred those debts and any other debts at that time. Mrs Horton says that she was never asked to monitor solvency and that her job was more akin to being a bookkeeper and that she did what she was told by both Mr Watson and Mr Smith.Part B The Smith’s Timber Company Pty Limited (in liq) (the “company”) was wound up in December 2011. Your answer should include an analysis of the factors courts take into account when determining solvency of a company. Mr Smith was not the company’s directors until November 2011. Advise each of Mr Watson. Mrs Horton was always the company’s chief financial officer. but she was never a director of the company. Mr Smith and Mrs Horton the sum of five hundred thousand dollars being the amount which corresponds with the total of some debts incurred by the company between July 2009 and June 2011. Mr Smith and Mrs Horton of their prospects of resisting the liquidator’s action. The liquidator now seeks to recover from Mr Watson. and because there was an understanding that creditors would not take recovery action against the company provided that the company paid within a reasonable time after a thirty day notice was given.

or a proposed resolution. (g) authorising a member. Order that the company be wound up (2) If an order that a company be wound up is made under this section. (i) restraining a person from engaging in specified conduct or from doing a specified act. including an order: (a) that the company be wound up. or (b) an actual or proposed act or omission by or on behalf of a company. a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company. (b) that the company's existing constitution be modified or repealed. (d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law. of members or a class of members of a company.Corporations Act 2001 SECT 95A Solvency and insolvency (1) A person is solvent if. the provisions of this Act relating to the winding up of companies apply: Page 3 of 6 . and only if. or (c) a resolution. PART 2F. SECT 233 Orders the Court can make (1) The Court can make any order under this section that it considers appropriate in relation to the company. is either: (d) contrary to the interests of the members as a whole. prosecute. For the purposes of this Part. a member or members whether in that capacity or in any other capacity. or unfairly discriminatory against. or a person to whom a share in the company has been transmitted by will or by operation of law. (c) regulating the conduct of the company's affairs in the future. (f) for the company to institute. or (e) oppressive to. the person is able to pay all the person's debts. see section 53. Note: For affairs . unfairly prejudicial to. (e) for the purchase of shares with an appropriate reduction of the company's share capital. (j) requiring a person to do a specified act.1----OPPRESSIVE CONDUCT OF AFFAIRS SECT 232 Grounds for Court order The Court may make an order under section 233 if: (a) the conduct of a company's affairs. defend or discontinue specified proceedings in the name and on behalf of the company. as and when they become due and payable. defend or discontinue specified proceedings. prosecute. (h) appointing a receiver or a receiver and manager of any or all of the company's property. to institute. (2) A person who is not solvent is insolvent.

or (ii) another member in their capacity as a member. Note 1: If an application is made under this section. or requires the company to adopt a constitution.(a) as if the order were made under section 461. or (e) a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into: (i) the company's affairs. or (b) a person who has been removed from the register of members because of a selective reduction. in certain cases the court may order that the company be wound up in insolvency (see section 459B). PART 5. and Page 4 of 6 . Note 2: For selective reduction . and (b) the company is insolvent at that time. or (ii) matters connected with the company's affairs. unless: (a) the order states that the company does have the power to make such a change or repeal. even if the application relates to an act or omission that is against: (i) the member in a capacity other than as a member. or (b) the company first obtains the leave of the Court. or (c) a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member. and (b) with such changes as are necessary. or by incurring at that time debts including that debt. see subsection 256B(2).7B----RECOVERING PROPERTY OR COMPENSATION FOR THE BENEFIT OF CREDITORS OF INSOLVENT COMPANY Division 3--Director's duty to prevent insolvent trading 588G Director’s duty to prevent insolvent trading by company (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt. or (d) a person to whom a share in the company has been transmitted by will or by operation of law. SECT 234 Who can apply for order An application for an order under section 233 in relation to a company may be made by: (a) a member of the company. the company does not have the power under section 136 to change or repeal the constitution if that change or repeal would be inconsistent with the provisions of the order. or becomes insolvent by incurring that debt. Order altering constitution (3) If an order made under this section repeals or modifies a company's constitution.

if the company has a constitution that provides for the declaration of dividends. or would so become insolvent. Note: This subsection is a civil penalty provision (see subsection 1317E(1)). or by incurring at that time debts including that debt. when the assistance is provided when the transaction is entered into 7 (2) By failing to prevent the company from incurring the debt. the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting. and (aa) at that time. (1A) For the purposes of this section. it incurs a debt at the time set out in column 3. if there is no agreement. as the case may be. there are reasonable grounds for suspecting that the company is insolvent. (3) A person commits an offence if: (a) a company incurs a debt at a particular time. or becomes insolvent by incurring that debt. and (b) the company is insolvent at that time. Page 5 of 6 . or (b) a reasonable person in a like position in a company in the company’s circumstances would be so aware. the company to enter into 3 when the buy-back agreement is entered into when the company exercises the option 4 5 when the shares are issued 6 when the agreement to provide the assistance is entered into or. if a company takes action set out in column 2 of the following table. When debts are incurred Action of company 1 paying a dividend [operative table] When debt is incurred when the dividend is paid or. a person is a director of the company. or a prescribed agency directs. and (d) that time is at or after the commencement of this Act. and (d) the person’s failure to prevent the company incurring the debt was dishonest. and (c) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)).1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) buying back shares (even if the consideration is not a sum certain in money) redeeming redeemable preference shares that are redeemable at its option issuing redeemable preference shares that are redeemable otherwise than at its option financially assisting a person to acquire shares (or units of shares) in itself or a holding company entering into an uncommercial transaction (within the meaning of section 588FB) other than one that a court orders. when the dividend is declared when the reduction takes effect 2 making a reduction of share capital to which Division 1 of Part 2J.(c) at that time.

the person had reasonable grounds to expect. strict liability applies to paragraphs (3)(aa) and (b). (3) Without limiting the generality of subsection (2). at the time when the debt was incurred. and (ii) that the other person was fulfilling that responsibility. it is a defence if it is proved that. see section 6. that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. and did expect. absolute liability applies to paragraph (3)(a).4B as it applies in relation to a contravention of this section. (4) The provisions of Division 4 of this Part are additional to. he or she did not take part at that time in the management of the company. (6) In determining whether a defence under subsection (5) has been proved. (2) It is a defence if it is proved that. and (b) when that action was taken. and do not derogate from. and (b) expected. the matters to which regard is to be had include. see section 6. Part 9. because of illness or for some other good reason. Page 6 of 6 .(3A) For the purposes of an offence based on subsection (3). and (c) the results of that action. 588H Defences (1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).2 of the Criminal Code. it is a defence if it is proved that. (4) If the person was a director of the company at the time when the debt was incurred. at the time when the debt was incurred. Note: For strict liability. the person: (a) had reasonable grounds to believe. and did believe: (i) that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent. Note: For absolute liability. (3B) For the purposes of an offence based on subsection (3). that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. but are not limited to: (a) any action the person took with a view to appointing an administrator of the company.1 of the Criminal Code. (5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt. on the basis of information provided to the first-mentioned person by the other person.

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