- 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?
