Case Study OHS Solutions Pty. Ltd. Click Now To Get Solution

Questions: Case Study OHS Solutions Pty. Ltd. is a company formed by three friends (Des, Satish and Emma) who bring different skills and abilities to the business. Emma is an accounting graduate, Des has expertise in occupational health and safety (OHS) and Satish has an IT degree. They decided to start up a business which would provide a portal through which the public and businesses could access (for free) information on all aspects of OHS. OHS Solutions would finance its business, and make profits, by charging businesses to advertise via their website. The directors of OHS Solutions are: Managing Director Des Finance Director Emma (non executive) Director Satish (executive employed also to run the technological side of the business) Director Ying (non executive) a friend of Des and director of Support Pty. Ltd. (Support Pty. Ltd. has gone guarantor for a $50,000 loan from the Business Bank Ltd. to OHS Solutions) The Shareholders of OHS Solutions (holding equal amounts of ordinary shares) are Des, Emma, Satish and Support Pty. Ltd. As at January 2007 OHS Solutions had been operating for six months. It had some initial IT problems which prevented some of the advertisers material from being accessed. In order to try to help overcome these technical problems Satish engaged Trouble Shooters Pty. Ltd. At the February Board meeting, Satish reported that two businesses who had paid to advertise on the website were dissatisfied with what was happening and were threatening to sue for breach of contract. Emma was unable to table any financial information as the employee who had been doing the accounts had been sick and when Emma looked at the records she found that they seemed to be in a bit of a mess. She did find a large account from Trouble Shooters that was over due. Des reported that he was disturbed by this news. He had been told by Satish that the IT problems had been fixed since Trouble Shooters had been engaged, and he had just signed a $10,000 advertising contract with Promotions Plus Pty. Ltd. to advertise the website and signed up to go to a trade show to be held in conjunction with a forthcoming OHS conference. He said this was needed because a number of high profile advertisers were threatening to discontinue their association with OHS Solutions unless the portal became b etter known. Ying just listens in disbelief at the March Board meeting. It seemed to her that OHS Solutions is being poorly managed and is failing to make the most of a potentially profitable business opportunity. This could present an opportunity for Support Pty. Ltd. to make an offer to buy OHS Solutions at a good price. On the other hand Support Pty. Ltd. is exposed as a guarantor. Assume she consults you, an accountant, for your preliminary view about the predicament of OHS Solutions and what she should do. Assume also that the first thing that comes to your mind is whether Ying herself may be vulnerable as a director of OHS Solutions for failing to prevent OHS Solutions from trading when it is insolvent. Part A Write a brief explanation about why the directors duty to prevent insolvent trading exists and the circumstances and consequences of the veil of incorporation being lifted for insolvent trading. (Do not just repeat the words of the relevant sections in the Corporations Act). Part B From what you know of OHS Solutions predicament, DISCUSS whether any of the directors may be about to breach or have already breached the duty to prevent insolvent trading. (In order to do this you will need to compare what is happening in OHS Solutions case with other precedent cases and refer to the relevant sections in the Corporations Act.) What will you advise Ying? Answer: Part A Every company has a director or a board of directors who are responsible for saving the company in bad and good times. The case that has been given gives a situation where the directors need to stick to their duties and look at the company as their foremost priority. Certain sections laid down in The Corporations Act 2001 tells us about the respective duties that a director has in different situations here it being the veil of incorporation and to prevent insolvent trading in order to understand what would be the answer to the respective question, the above phrases is what we need to understand before throwing light on the sections which tell us more about the given the scenario which tells us how the director to follow these sections and fulfill their duties when the given situations arise. insolvent trading is when the director of the company proceeds into trading when the company is already in debt, it is more like incurring debts at a time when the company if insolvent or say deb ted to others. Insolvency as known is a situation when one party owes the other party a sum of money which is due. Section 588G of the Corporations Act 2001 tells more about the duties of directors especially at the time of insolvency, and completes the doubt clarification by stating that it is the directors duty to prevent insolvent trading by the company. The first clause states the following points- It will only be applied if the given person is the director of the given company when the company faces a situation where incurrence of debt occurs. The insolvency of company is present and it is going on incurring debts. There is evidence that the company is insolvent, or that it might become insolvent in the near future. It is the time when the commencement of this Act had occurred and hence would deem the directors liable. This is the situation which has been mentioned in the case study where the company OHS solutions are being unable to repay the loan taken from Trouble Shooters Pty. Ltd, reason being insolvent trading. This section further explains the duties the directors have though section 588H also provides for the defense that the directors have if the above is proved. The directors will be deemed liable only if the above mentioned points stand true. The part of this section which points out this as an offence is section 588G(3) which says that it is an offence if: The person act which was in order to prevent the company was dishonest. The person(s) knew of the current of the near future insolvency of the company. The company is insolvent as a matter of fact, or that it would become insolvent if any debt incurs. When the debt incurs, the person(s) happens to be a director of the respective company. And the most important point being that the company incurs a debt. When the above points or one of the above points is fulfilled it becomes an offence in the part of the director. Hence we know that it is the directors duty to prevent the company from insolvent trading as mentioned in the Corporations Act. The table given is mentioned in the Corporations Act- When debts are incurred [operative table] Action ofcompany When debt is incurred 1 paying a dividend when the dividend is paid or, if the companyhas aconstitutionthat providesfor the declaration of dividends, when the dividend is declared 2 making a reduction of share capital to which Division1 of Part2J.1 applies (other than a reduction that consists only of thecancellationof a share or shares for no consideration) when the reduction takes effect 3 buying back shares (even if the consideration is not a sum certain inmoney) when thebuy-back agreementis entered into 4 redeemingredeemable preference sharesthat are redeemable at its option when thecompanyexercises the option 5 issuingredeemable preference sharesthat are redeemable otherwise than at its option when the shares areissued 6 financially assisting apersonto acquireshares (orunitsof shares) in itself or aholding company when theagreementtoprovidethe assistance is entered into or, if there is noagreement, when the assistance is provided 7 entering into anuncommercial transaction(within the meaning ofsection588FB)other than one that acourt orders, or aprescribedagencydirects, thecompanytoenter into when thetransactionis entered into Next point that we know is that it is also the directors duty to prevent the veil of incorporation (Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723) being lifted for insolvent trading including the circumstances and the consequences. One of the most important reasons why a company is incorporated is because the legal liability of the company is something which is kept separate from the individual, who is involved with the company. When we consider the given case we see that this veil ensure that the company is altogether a separate legal entity and that it is not involved with the directors or the share holders personal assets. One of the leading cases which dealt with the veil or incorporation is Briggs v James Hardie Co Pty Ltd, where the company was given the separate legal entity apart from its members. But the question is what are the circumstances and consequences of lifting of veil or incorporation. It basically means a situation when the corporate personality of the company is ignored and it is checked upon as to who has the real control over the company, and who the fraud as the case maybe is. In Re Edelsten ex parte Donnelly the court stated that The argument [of fraud] is, of course circular. It can only succeed if the argument of sham succeeds, because if no property was acquired by, or devolved upon, Edelsten, no duty capable of being evaded could arise under the ActThe submission that the VIP Group had been used to perpetrate a fraud was coincident, and stood, or fell, with the submissions which sought to have the transactions, by which the VIP Group acquired property, treated as shams. Reasons for lifting or piercing of this veil could be one of the following; or rather the provisionals ground for lifting of veil would be- Public interest The welfare legislations are to be avoided at times and hence the veil is lifted Company lands up being a sham (Sharrment Pty Ltd v Official Trustee in Bankruptcy) Times when the company avoids any legal obligations When the economic realities of the company has to be brought forward When the people in control of the company belong to an enemy land, or residents of other enemy country When people use the company for tax benefit or revenue benefit, which can be injustice too (RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442) Having an alter-ego or an agency (Barrow v CSR Ltd) Groups and enterprises (Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd) And the most important point being fraud or mis conduct of the people involved which need the lifting of veil Thereafter there are legal consequence which bind the on the directors who are responsible for such a condition of the company and as the case maybe, there may be criminal and civil penalties or maybe compensatory actions (sections 588J, K, M (2), M (3), R, S, T, U) the persons are under liability to fulfill the decision made by law on the proof that they had been behind the insolvent trading. Part B On the basis of the given scene one has to discuss whether one of the directors at the OHS solutions has been into breach of duty, when it came to insolvent trading, beside the advise that can be given to Ying. When the given case it considered it is seen that Satish is playing an important role in engaging other companies in contract with OFS solutions even after knowing that the loan that they had taken earlier has not been given back and that it is due. Despite of the knowledge of the pending loan he goes ahead and signs a $10,000 advertising contract with Promotions Plus Pty. Ltd irrespective of the given situation. This is where Satish does not fulfill his duty as a director who is supposed to prevent the company from insolvent trading. In this case he goes ahead and conducts such a trading. Hence we see that there is a breach of duty, a and though the other directors were not involved in signing of this contract but they too could not prevent the company from insolvent trading, as Emma got to know about the overdue amount and informed Des and at the same time in a board meeting the matter was presented to Ying. As directors it was their duty to prevent the company insolvent trading, but since they could not, there was definitely a breach of duty. There are three types of consequences that the directors have to face when there is breach of duties guided by section 588G of The Corporations Act, which are- Compensatory measures: as it is known that the director of the company is usually responsible for the breach of this kind of duty, and hence as the case maybe, the liquidator of the company may sue the director and ask for compensation. (Under S588M). The compensation maybe parallel to the kind of loss or the damage that has been incurred by the liquidator. Civil penalties are also a form of liability that the directors have to face. Civil penalty provisions such as s 588G are enforced by the Australian Securities and Investments Commission (ASIC) and the following orders can be given out- Compensation to be paid. To pay a pecuniary penalty of up to $200,000 Disqualifying the director from the post and the company for specific period of time. Criminal penalties: ASIC can also seek for the criminal penalty against the director. The criminal penalty will be a fine of up to $200,000, or imprisonment for up to five years, or both. When other cases have been taken into consideration keeping in mind the kind of situation that OHS solutions has been faces, and how there were other companies too which had been involved in the case where there was a breach of duty which were mentioned in the section 588G of the Corporations Acts. One of the cases which has been studied under the title of breaching of insolvent trading laws is The Stake Man Pty Ltd v Carroll [2009] FCA 1415. Here the sole director of the company seeked advice of an accountant keeping the companys current situation in mind and despite of being warned against the insolvency of the company, the director went ahead and plunged more revenue into the company and went looking for new investors for the company. In the following years the company was placed into voluntary administration and the liquidators of the company asked for wounding up the company, following which it was claimed by a liquidator that the company was involved in insolvent trading. The director of the company was banking on the defense sections of the same act, they being S588H (2), 588H (3), s1317S and s1318. The main point that is to be kept in mind about this particular case was the judgment which said that the director would be held liable for the breach of duty of the given section because keeping the circumstances in mind, the chances were very less that the shares of the given company could be sold and at the same time , the defense of being genuine in taking the decision for the company and believing that the insolvency could be overcome was something baseless for the director to assume as there had been no reason why the director should have assumed this. Although Mr. Carroll allowed the Company to incur debts while it was insolvent in breach of s588G, in light of the surrounding circumstances and the fact that Mr. Carroll neither gained personally from the breach nor acted against professional advice, His Honor considered it appropriate that he be wholly excused from liability for contravention of the insolvent trading provisions. This is one of the first cases where the court has used its discretion when it came to laws related to insolvent trading. When this case is studied in the same light as the one given we see that it deals with nearly the same kind of situation except the fact that in this case there was one sole director, a and the case that has been given for study had a board of directors. Here too Satish believed that plunging in more money would improve the current situation of the company and that the company would flourish and get more business and a better name, but at the same time the breach of the given duties as directors were ignored by this board, and none of the directors were able to prevent the trade when the company was insolvent keeping in mind that it still owed the loan taken by the Trouble Shooters, and that the current contract would mean taking in of more payment which would put the company in further debts. Hence the cases lie more or less parallel. The defenses that are available for the directors also gives a chance to consider more similar cases that have been considered in the past for the same reason as the case mentioned above. Few of the defenses that the directors can take help from are- The director had taken various steps and made number of decisions in order to prevent the company from getting into the insolvent trade like that of voluntary administration The director did not participate in the management of the company at the time the debt was incurred for some 'good reason'. This is the defense that Ying can use if at all she has to take the advice of the accountant and show the way she had been involved with the company when the decisions were being made and the losses were incurred. As Ying got to know about this in the board meeting that was held in March, whereas the decisions had already being made in February and that the contract had already been signed by Satish and that the directors had merely been informed about it, this section can help Ying. Relying upon the other director for the information which is presented relating to the solvency of the company, and the director thence believing that the company is not anywhere near to being insolvent. Basically on the information provided by the other person makes the director believe in the solvency of the company. The director had reasonable reasons to believe that the company was solvent and if not in the near future the company would regain its potion and be solvent and that there were no chances or signs of insolvency. When the following defenses which have been mentioned din the given Act is considered and also that the case mentioned above shows that the court uses its discretion when making decisions regarding the directors and the breach of duty as per s588G, Ying can be advised to take help from then above mentioned defenses as she was not involved at the time when the decision was being made, and that she was informed about it by the other director who without thinking of the loan which had been already borrowed earlier went ahead and plunged the company into a contract. Since the companys position was already bad, keeping in mind that the clients had complaints regarding in its work, Satish cannot give the defense of expecting an improvement in the position of the company, which anyway does not stand true in the given case. 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