Business Law Problem Question


Business Law assignment 2014

(1a)Your first task is to advise the Homewares Board about their legal obligations and any legal action that can be taken against Tracey and Tina.

Homewares Ltd is a small limited company. They currently have three directors Peter, Tina and Tracey. Roles of a director are to attend and make decisions at board meetings. Some of these decision cannot be delegated to staff lower than their status and have the duty to fulfil these tasks themselves. As for every job, there are rules, duties and responsibilities that they have to put up with. Tracey has claimed to be 'ill' and stormed off to setup her own business that mirrors Homewares Ltd but with a little extra. Where one must act in good faith for the benefit of the company and exercise powers for the proper purpose to benefit the company and not themselves, has had an impact on her fiduciary duties. This situation relates to the case 'Industrial Development Consultants (IDC) Ltd v Cooley, 1972, High Court.' Cooley was the managing director of IDC. The Eastern Gas Board were not prepared to contract with IDC but they would contract with Cooley personally. Cooley did not disclose this fact to IDC but secured a release from his contract with them. Cooley then entered into a contract with the Gas Board. He was made account to IDC for the profit he had made from the contract (Anonymous). Directors can leave the company for unexpected reasons but not to benefit themselves with their personal interests. As Tracey has acted like this, she will be held accountable as she conflicted her duties.

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'Sickness' or being 'ill' can be a difficultproblem to manage. Although sick employees, directors and owners need to be treated reasonably, you will want to make sure that 'sickness/illness' is not being used as an excuse for unauthorised absences. Taking disciplinary action against sick employees can lead to particular legal risks. You also need to guarantee that you respect Tina's and Tracey's illness.

Well thought out sickness policies can assistdecrease absence, by discouraging both directors from taking 'sick' days as a form of extra holiday. For example, you might want them to phone in sick rather than taking the easier approach of sending an email. Reviewing the reasons for sickness can also be significant, for example, complaints of back ache may reveal genuine problems with workstations or work practices you should address as part of your health and safety policies. Unless you have clear proof, taking corrective action against a person you suspect of abusing sick leave involves taking great care.However, you could face a claim of unfair discrimination if it involves long-term illness amounts to a disability. It was be very advisable to not take action against a person whose illness is pregnancy related.

The removal of Tina being a director can be done through s168 by ordinary resolution with special (28days) notice. As peter is already aware that a director can be removed by the Board of Directors or otherwise it is the shareholders who can remove a director. Therefore he will need the majority of the board's agreement for the removal of Tina. The procedure of the Companies Act 2006 is as follows. A 28 days notice to call a meeting is required to be given and the director will be given the chance to put their objections in writing and attend the meeting to put forward their point of view.In order to remove a director, more that 50% of votes are needed. Due to this problems can occur such as having too many or too less shareholders/directors. The reason for this is that, the decision may not be accurate but instead biased or even overlooked if there are a lot of participants.Before gathering everyone for the meeting, there are a few important thing to be looked at such as:

  1. You will need to make sure who the shareholders are and make sure they are listed under the companies register of members. In some occasions there is a new member that might have not been registered yet therefore they might not be able to vote at a shareholders’ meeting.
  2. Also check whether any documents have beenchanged regarding voting power.
  3. Another important thing to check is to see whether the Chairman has a casting vote at a shareholders’ meeting incase votes are 50/50.
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Another way in which we can get around this problem is to go through, 'Company Directors Disqualification Act 1986.' Persistent prolonged absence from board meetings can also lead to disqualification of a director. Having done this, Tina may consequently lead to a maximum of 2 years where Tina cannot become a director. On the other hand, for the purpose of unfair dismissal, if Tina is removed from being a director, she may have a preparation under 's.994 CA06' for "unfairly prejudicial conduct."

1b)You are also required to advise the various investors of their legal position now that the company is facing liquidation.

Liquidity is, 'To settle the affairs of a business or an estate by disposing of its assets and liabilities.' (Houghton Mifflin Company, 2009) To work out how liquid a company is usually worked out through ratios. Liquid ratios allow someone to monitor the businesses cash position. They measure liquid assets held by the business such as cash and assets that can easily be turned into cash. The purpose of the ratios is to compare these assets with short term debts and liabilities. For Homewares Ltd, Peter has been made aware that the company is facing liquidation. After the removal of all assets the liquidator will pay the claims against the company's assets. Generally, the priority of claims on the company's assets will be determined in the following order:

  1. Liquidators costs
  2. Creditors with fixed charge over assets
  3. Costs incurred by an administrator
  4. Amounts owing to employees for wages
  5. Amounts owing to employees for leave
  6. cutback payments owing to employees
  7. Creditors with floating charge over assets
  8. Creditors without security over assets
  9. Shareholders

The first business/organisation to be paid is the Bank. As this is fixed charged it has top priority. Fixed charge security is defined as credit over a particular fixed asset, which is then registered and stays in strength until a fixed charge debt is paid. A feature of fixed charge security is that a borrower would require the lender’s consent to sell a fixed charge asset. For instance include land, property and specific items of equipment (i.e. financed vehicles). Secondly, Alfred is next to be paid as his transaction is a floating charge form. Floating charge security is a mortgage over assets that adjusts in quantity and/or price over time, such as stock or cash in the bank. The security only crystallizes (i.e. fixes to the assets) once a company goes into liquidation and administration. The special nature of the floating charge is that the company can continue to use the assets and can buy and sell them in the ordinary course of business. It can thus trade with its stock and sell and replace plant and machinery. The charge is said to float over the assets charged, rather than fixing on any of them specifically. This continues until the charge 'crystallizes', which occurs when the debenture specifies. This will include any failure to meet the terms of the loan (non-payment, etc.), or if the company goes into liquidation, ceases to trade, etc.

(1c)Additionally Peter has asked you to confirm what his legal obligations are in relation to Adam, and if any of the other parties trying to purchase the car have any claim over it.

(1d) Finally Peter has approached you of his interest to set up another business, but is unsure after his experience with Homewares which type of business organisation would suit him. He is frustrated with being bound by rules and craves the flexibility to do what he wants with minimum risk. Advise Peter of his options clearly identifying the advantages and disadvantages of different business types.

There are many business structures that may be very suitable for Peter and his new business idea. One of the first things to settle on when starting your new business is which organisational structure to make use of. There are three different types of structure options, including partnership, limited liability company (LLC) and corporation that I would advise Peter to use. Each structure has its own advantages and disadvantages.

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There are two forms of partnership structures which are general partnership and limited liability partnership. For a general partnership, the owners are fully liable for business lawsuits and debts as it has an unlimited liability. As for a limited liability partnership, the business owners are not individuallyaccountable for business lawsuits and business debt. Partnerships are stress-free and reasonably priced to form. As a partnership, you group your resources together with your partner. The financial burdens of operating the business are shared between partners. You and your partner maintain all management rights of the business. The income for partnerships is reported on each partner's personal income tax return. This makes tax time less complicated.

Forming and managing a Limited Liability Company is easier and less expensive than forming and managing a corporation. As your business grows, you can easily upgrade it to an LLC status. As an LLC, your personal assets are protected from lawsuits and business debt, and only assets of your company can be touched by lawsuits and creditors.

There are two types of corporations, S corporations and C corporations. A C corporation is double-taxed. The corporation pays taxes, as do the company's shareholders. S corporations are single-taxed. All taxation and business expenses are paid for by the company's shareholders. This lightens the financial burden of the business owners. S corporations are limited to a maximum of 100 shareholders. A C corporation can have unlimited shareholders. As an S or C corporation, you are not personally liable for lawsuits and debt. When your business is structured as a corporation, it easier to attract investors for your business.