Resignation and Incorporation of a New Company for the Block Chain Business
Clear Vision Ltd (CVL) is a small unlisted information technology company operating in Brisbane’s outer suburbs. Marlow is the majority shareholder, with 67% of the shares. The remaining shares are owned by Sean (20%) and Becky (13%). Each of Marlow, Sean and Becky sit on the board of CVL, but Marlow is effectively the governing director of the firm. The constitution provides that the object of CVL is to deliver expert advice to businesses considering IT investments. It is through Marlow that CVL provides these services. Sean and Becky trust Marlow to run the business in their collective interests. Until recently, CVL was a fairly unassuming company. Its annual turnover was sufficient to cover Marlow’s salary and a small dividend to Sean and Becky, but not much more. Any excess was reinvested in business items, like new computers and programs. Then, some months ago, Marlow made, what he thinks will be a major technological breakthrough. Whilst completing a project for one of CVL’s regular clients, he discovered a new type of block chain that, in his view, could have significant applications in the lucrative defence industry.
Marlow asks Sean and Becky whether they would be willing to contribute more capital to develop the block chain product further. Both refuse. Sean tells Marlow that ‘it would be unethical to make money from an industry of war’. Becky says that there are few guarantees that the research would yield any return: she regards the new technology as too speculative. Marlow, therefore, approaches Polly, his new romantic partner, about the possibility of investment. Polly is willing to put up the cash but only if the profits are split two ways between her and Marlow.
Marlow is very happy about Polly’s willingness to support the project, in part, because he loves her and believes that the investment will be an excellent use of her savings. However, he is also angry at Sean and Becky and quite willing to cause a little pain to them through CVL.
Marlow seeks your advice as to whether he can resign from CVL and incorporate a new company through which to conduct the block chain business with Polly and himself as the sole shareholders and directors. What is your advice to Marlow? How would your answer change, if at all, were CVL’s constitution to contain a clause identical to s 194 Corporations Act 2001 (Cth)?
Sam and Ellis are friends and experienced operators in the hospitality business. Over the years, each has owned large and successful restaurants in Sydney and Brisbane. On a recent trip to the United States, Ellis discovers a specialty gourmet donut shop in an entertainment district of Los Angeles. Sam has never heard of such a thing in Brisbane and agrees that it could be popular for people going out in Fortitude Valley. Talking through the practicalities, Sam and Ellis realise that it will cost about $350,000 to establish the donut shop and get it to a point of profitability. Together Sam and Ellis can contribute $200,000. The balance could be raised through a $100,000 business loan from Aussie Bank Ltd, and a capital injection of $50,000 from Craig and Diane, who are friends of Sam. Sam and Ellis regard the donut shop as a high?risk investment. But, as Sam notes, it is also potentially high?return. If the Brisbane shop succeeds and the pair can raise more funds, there is a possibility that they could franchise the idea throughout Australia. Advise Sam and Ellis on the advantages and disadvantages of incorporation in light of the facts and the relevant case law and legislation. In your answer, consider the type of company that they would best consider at this time.
Great Escapes Pty Ltd (GEPL) is in the adventure tourism business. Its principal customers are people in their early 20s who want to explore beautiful and rugged locations in South?East Asia. Lola is its Managing Director. Gary is its Chief Financial Officer (CFO).
In late April 2018, a volcano erupts in one of GEPL’s major destinations, forcing it to cancel several tours. That same week, Aussie Bank Ltd raises its interest rates on GEPL’s business loan and customers start demanding the return of the amounts that they paid on their cancelled holidays.
As a result of these events, GEPL’s accountant advises that the company is insolvent. Whereas Gary responds by dropping out of touch and failing to keep the accounts in order, Lola devises a ‘rescue plan’ in consultation with her mentor, Don. In May, she takes three key steps:
- She buys advertising space on websites frequently visited by GEPL’s target group of customers;
- She persuades Gary to resign as CFO and to give the books to an accountant; and
- She arranges for GEPL to borrow $50,000 from Kiwi Bank Ltd at a high interest rate.
Presume GEPL is wound up in insolvency in September 2018 and that Lola would otherwise be liable for breach of the insolvent trading provisions. Can Lola rely on the statutory ‘safe harbour’ in s 588GA of the Corporations Act 2001 (Cth)? Explain your answer.
There are two issues involved in this case. The primary issue is to determine whether Marlow can resign from Clear Vision Limited and incorporate a new company to conduct the block chain business. The secondary issue is to determine the changes in the advice if their constitution contained a clause identical to Section 194 of the Corporations Act 2001.Rules
As a general rule, a director can resign from a company by giving a notice of resignation. Director can resign by giving the notice to the registered office of the company under the Corporations Act 2001. Otherwise, they may give a written notice of the resignation to the Australian Securities and Investments Commission, accompanying with a notice of resignation given to the company. Under Section 5.1 of the Corporations Act 2001, the company should notify ASIC about the resignation of the director, if the same has not already been done by the director of the company. In this case, the director will not breach any of his fiduciary duties and he can resign at any time. However, it is provided under Section 201A of the Corporation Act 2001 that it is mandatory for a company to have at least one director. If the company has only a governing director to conduct their business, the director may acquire obligation while resigning. As a consequence, if the sole governing director of the company is willing to resign, he may lead the company to breach the provision of the Section 201A of the Corporations Act 2001. The director may cause the company to knowingly have less than one minimum director. The director and the company both may liable for this under the Act.
Section 194 of the Corporations Act 2001 provides that if the director has any material interest in affairs related to the company, and discloses the interests to the directors, then the company cannot avoid the transaction merely because it has the existence of the interest and the director may proceed any transactions relating to the interest, unless the interest is of a nature that which is not required to be disclosed under Section 191. A company can include the clause 194 or any clause identical with this clause in their constitution.Application
Marlow was the majority shareholder and effectively involved in delivering expert advice to IT investment businesses. He was the governing director of the firm. He was aware that he is responsible for providing the services of the company under its constitution. Sean and Becky trusted Marlow to run the business for the collective interests. In this present situation Marlow cannot resign the company under the Corporations Act 2001, to cause a pain to Sean and Becky as they did not agree to contribute capital for developing the block chain product. It was provided under the constitution of Clear Vision Ltd, that Marlow should be engaged in the business of the company. If he resigns from his position, then the company would be left with no one to effectively govern the business. Therefore, it would be suggested to Marlow to find an appropriate replacement for his position before he gives the notice of design. Under Section 201F (1) of the Corporations Act 2001 Marlow can appoint another director with a help of a resolution from Sean and Becky. He can resign the company after doing so and conduct the block chain business with Polly and himself keeping himself as a sole shareholder and directors.
Consideration of Clear Vision Ltd's Constitution
If Clear Vision Ltd had a clause in their constitution identical with Section 194 of the Corporations Act 2001, Marlow would not have been able to resign the company. Under this Section Sean and Becky could not have been able to avoid the transaction as Marlow had made necessary disclosure about his interest to develop the block chain product. The Clear Vision Ltd cannot avoid the transaction in this case. Therefore, Marlow can proceed with the transaction and there is no need for Marlow to resign to conduct the block chain business with Polly, being the sole shareholder and directors.
From the afore said discussion, it can be concluded that Marlow could resign from the Clear Vision Ltd only after he select an appropriate director.Issue
The issue is to determine the best suitable company and the advantages and disadvantages of incorporating a company of gourmet shop.Relevant rules
The most common types of company structures are: Sole trader, Company, Partnership and Trust. In Sole Trader types an individual is responsible for every aspects of the operation. Whereas, a Company is a legal entity separated from their shareholders. Partnership is a form of business that is an association of two or more people that are legally responsible for running the operation of the business together. Trust is an entity which holds an income for others benefit (Asic.gov.au. 2018).
The Australian Securities and Investment Commission monitors and regulates the incorporation process under the Corporations Act 2001 (Asic.gov.au. 2018). There are certain advantages and disadvantages for incorporating a company. The advantages of incorporating a company is that, the liability of the shareholders would be limited, the company would be able to conduct its business in anywhere within Australia. However, there are certain disadvantages of incorporating a company, such as, the process of incorporations can be expensive, and the directors may be liable for the debts of the company, if they fail to fulfil their obligations (Business.gov.au. 2018).Application
Sam and Ellis can consider to incorporate their business as a company. Company is a legal entity which is separate from its member and is responsible for their own debts. The liability of Sam and Ellis would be limited if they incorporate their business as a company. Therefore, if the company faces any issue regarding the high-risk investment or the company fails to gain a high end return, then the company would bear the liability. The liability shall not be generally extended to the personal liability of Sam and Ellis. In Salomon v Salomon & Co Ltd, it was observed that incorporating the business as a company was a better decision as it was a separate legal entity. Therefore, Sam and Ellis should choose to incorporate the gourmet donut shop as a company.
Hence, Sam and Ellis should consider to incorporate the business as a company to limit their personal liability.Issue
The issue in this scenario, is to determine whether Lola may rely on the statutory ‘safe harbour’ under the Section 588GA of the Corporations Act 2001.Relevant Rules
Section 588 G of the Corporation Act 2001 provides that a director shall be said to have contravened this Section, if the person was a director of a company when the company incurred debt while the company is insolvent, and the director had failed to prevent the company from incurring the debt. They can be liable if they had the knowledge that there are reasonable grounds for suspecting the company to be insolvent or a treasonable person on behalf of his position would have the belief that the company is or likely to be insolvent. A director failing to comply with this section may incur personal liability. Section 588 GA of the Corporations Act 2001 ensures a ‘safe harbour’ for the directors to safeguard them from their personal liability. In order to apply the safe harbour, the debt incurred Company needs to be directly or indirectly connected with the activities of the director (Aicd.companydirectors.com.au. 2018).Application
Lola cannot rely on the statutory ‘safe harbour’ under Section 588GA of the Corporations Act 2001 as she had not incurred the debt under her course of action as a director. She shall not be protected from personal liability as the company wounded up in September 2018, and she did not have the reasonable belief to assume that the company is insolvent or likely to become insolvent. To claim the protection of Section 588 GA of this Act, it was required for Lola to incur the debt for the company from her own conduct. As the conditions of safe harbour is not met by Lola in this case, she would not be eligible to claim the statutory relief.
From the above discussion it can be concluded that Lola cannot rely on the statutory ‘Safe Harbour’ which has been provided under Section 588 GA of the Corporations Act 2001.
Aicd.companydirectors.com.au. (2018). Retrieved from https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/06547-1-director-tools-insolvency-safe-harbour-a4-9pp-web.ashx
Asic.gov.au. (2018). Retrieved from https://asic.gov.au/for-business/your-business/your-business-structure/
Asic.gov.au. (2018). Retrieved from https://asic.gov.au/for-business/your-business/small-business/starting-a-small-business/
Business.gov.au. (2018). Retrieved from https://www.business.gov.au/planning/business-structures-and-types Corporations Act 2001
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