Assignment Topic:
One
of the main ways in which the ‘veil of incorporation’ can be lifted is when
directors breach their duties. This
essay question is set around the duty to prevent insolvent trading. You will need to have read the chapter in
your prescribed text that deals with this duty and have then researched more
widely by looking at other textbooks, the relevant CCH online library, articles
from the internet and journal articles.
You must answer both parts of this topic. Please make sure you have REFERENCED in the
body of your work ACCURATELY. Remember,
referencing shows you have researched and thought about what material will be
relevant to assist you in answering the questions.
Read the following scenario
and answer BOTH parts
(questions) at the end.
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 better 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.
YOUR TASK
Part A - (approx
800-1,000 words) 10 marks
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).
And
Part B - (approx
1,500-1,700 words) 10 marks
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?
(Note: you do not have full information, so state
briefly in the essay what information you need and make reasonable assumptions
that will allow you to give your advice.
ONLY DISCUSS INSOLVENT TRADING – THAT IS THE QUESTION AND YOU DON’T HAVE
ENOUGH WORDS TO GO INTO OTHER AREAS)
PLEASE
NOTE THE FOLLOWING INSTRUCTIONS:
References
must be cited in Harvard referencing style (eg Smith 1992) .The assignment must
include a bibliography (list of references used in the assignment). The Internet may be used for authoritative
reference material provided the source, author, date of access, and site
address is clearly shown in footnote format.
In
addition to sources from the Internet, at least three hard-copy sources must
also be used. These can be either books
or articles or both. Materials from any
common law jurisdiction may be used.
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