LAWS305-16YCORPORATE ENTITIES-Potential legal complications for WSBPL - Law Assessment Answer

Law Assignment

Case Scenario

FACTUAL SCENARIO

Fancy and Flamboyant Furniture Limited (‘Fancy’), is a duly incorporated company under the Companies Act 1993(CA 1993). It has 5 shareholders/directors, who each respectively hold a fifth of the shares in Fancy. The shareholder/ directors are Jim Jones, Dion Dunstan, Sam Swindle, Anton Archibald and Collin Crooks. Fancy operates a furniture manufacturing business and supplies items of premium household furniture, to furniture retail outlets in Hamilton city and the wider Waikato. The furniture is produced at Fancy’s workshop based at industrial premises, which it owns in Frankton, Hamilton.

The profitability of Fancy’s operations over the last ten (10) years has exceeded expectations. Despite this, Dunstan and Swindle have expressed serious reservations at numerous company board meetings, about the lack of a clear long-term strategic direction for Fancy, in the premium furniture market. Both Dunstan and Swindle have consistently and persuasively argued at board meetings that Fancy should capitalise on its formidable reputation as a supplier of premium quality furniture. Accordingly, they argue, Fancy should expand its customer base to include the Bay of Plenty, South Auckland and Hawkes Bay. Further, it should begin manufacturing custom-made furniture for supply to commercial customers such as businesses, schools, rest homes and private hospitals. In addition, Dunstan and Swindle argue that Fancy’s healthy balance sheet, would ensure that the proposed expansion could be funded partially from the company’s reserves and the balance funded through debt.

Fancy’s board finally resolves to commission, first, a comprehensive appraisal of the expansion and diversification proposal and secondly, a thorough report of the findings and recommendations to the board. For these purposes, it engages the professional services of Waikato Strategic Business Planning Ltd (WSBPL), a firm of highly reputable business consultants. WSBPL prepares a comprehensive report which is submitted to Fancy for consideration by Fancy’s board of directors. The report concludes, that Fancy’s business is projected to remain profitable in the medium to longer term, provided it can continue to both retain and expand the number of retail outlets, it supplies furniture to, in the wider Waikato. The report also examines the prospects of expanding the business beyond the Waikato and diversifying into supplying furniture to commercial customers. While it concludes that there are significant advantages in the proposed expansion and diversification of Fancy’s business, it also highlights significant risks. Some of the risks include a weaker than expected demand in a number of North Island provinces excluding the Waikato, a significantly higher level of debt needed for the diversification of the business and the great difficulty in securing a bigger site for Fancy’s expanded furniture manufacturing operation.

The report observes that weakened demand could jeopardise Fancy’s ability to service any debt incurred for the proposed expansion and diversification. However, the report also comments on the strategic advantage of investing in an expansion programme under prevailing business conditions. These include the lowest costs for borrowing in a generation, coupled with Fancy’s present ability to service any additional debt. A particularly strong factor for making the investment, is the strong demand for Fancy’s product range in Canterbury. This has arisen due to potential competitors having suffered irreparable earthquake damage to plant, machinery, buildings and other critical infrastructure. The report comments favourably on the strategy of investing in the proposed expansion programme. To do so, would ideally position Fancy to take full advantage of the widely anticipated upturn in demand for its products.

The WSBPL report is tabled at the May 2016 company board meeting. There is a full and frank discussion of the report’s contents. However, the discussion has raised a number of important questions that the board would like clarification on.

The questions are:

(a) What potential legal implications are there for WSBPL, in terms of the following:

The Board decides that it requires WSBPL’s expertise on a consultancy basis to monitor and actively participate in the implementation of the report’s recommendations. WSBPL agrees entirely with the Board’s decision and is actively engaged by the Board for this purpose.

• What are the implications if this consultation took the form of WSBPL’s directors being present at Fancy’s board meetings to advise Fancy’s board on how best to implement the recommendations?
• Would your answer in (i) be different, if WSBPL’s directors were not present at Fancy’s board meetings but Fancy’s board was reliant on direction from WSBPL’s directors on the implementation of the report’s recommendations?

(b) Due to a deadlock at Fancy’s board, Dunstan, Swindle and 2 employees of WSBPL who wrote the report, are seriously considering resigning from their respective positions. They plan to form a new company in order to supply furniture retailers outside the Waikato as well as industrial and commercial consumers as recommended in the WSBPL report.

• Would the four individuals be held accountable in any way for their proposed course of action? If so on what basis?

• If there would be a very high likelihood of the individuals being held accountable, advise them on how best they should proceed with implementing their plan in order to avoid being held accountable for their actions?

(c) Fancy has since last year experienced a downturn in its trading operations due to weakening demand for its products. Its accountant has produced a set of accounts for the last six months of 2015, which indicates a trading loss of $400,000. Six months later, debtor and creditor reconciliations reveal payables of $600,000 and receivables of $300,000. Fancy has also since the beginning of this year, been unable to pay both its PAYE and GST debts as they fall due to Inland Revenue and a number of company cheques have been dishonoured this year. Despite this state of Fancy’s financial affairs, the company’s accountant advises the board that Fancy can continue operating and thereby trade its way out of financial difficulty. Fancy’s General Manager has also assured the Board that Fancy has secured other major clients as substitutes for the few smaller ones it had lost.

• How should Fancy’s board respond to this state of affairs and are there consequences if it chose to allow Fancy to continue trading?

• Fancy’s board of directors expects the company accountant to provide the board with financial information on Fancy’s trading operations on a regular basis. However, the accountant has been unable on numerous occasions to meet this demand.

(d) What in law is the purpose served by such records and what if any, specific information should they contain?

• What legal obligation is there on Fancy’s board, to ensure accounting records are kept?

• If there is a legal obligation on the board, what consequences may follow for any failure to comply?

Potential legal complications for WSBPL:

The Board decided that Fancy requires the expertise of WSBPL on a consultancy basis in order to monitor the implementation of the recommendations in the report provided by WSBPL. As per the Companies Act 1993, the consultation can take place in the presence of the directors of WSBPL. As per the section 160 of Companies Act 1993 in New Zealand, the board of directors of Fancy can ask the directors of the consultancy companies recruited by them in order to help them and they can take part in the board meetings along with the board meetings of Fancy but there are certain limitations present of the directors of WSBPL while they work with Fancy. The main limitation is that the directors of WSBPL can only provide suggestions but the final decisions will be taken by the directors of Fancy. As per the section 141 of the Companies Act 1993, the directors of Fancy can take advice from the directors of the WSBPL in the board of directors meetings but the decision regarding the advice should be taken by all directors of the Fancy after discussion. As per the section 138 of the Companies Act 1993, subsection (1) a director of a company or board of directors can rely on the statements, reports or any financial document provided by the advisor companies which is WSBPL in this case, while exercising their power or duties to any external corporation. The directors of Fancy should ensure that the directors of WSBPL are qualified enough to provide recommendations and suggestions to Fancy. The directors should also make proper enquiry before taking the company on board for providing their suggestions to Fancy.

1. ii) In case, the WSBPL’s directors were not present at the board meetings of Fancy, but the board of Fancy was reliant on the direction from WSBPL, the answer would have been similar as above. As per the section 142 of the Companies Act 1993, it does not matter whether the directors of a third party are present or not in the board meetings, the board of the company have the full right to take the advice or suggestions from the third party and they can implement them but it needs authentication of all directors of the company.
2. Due to the deadlock at the board of Fancy, Dunstan and Swindle and 2 employees working at WSBPL who were responsible for writing the report are considering about resigning from the respective positions. The main plan of the individuals is to form a new company in which their main aim is to sell different types of office furniture, custom made furniture etc outside of Waikato and the industrial and commercial consumers as stated in the report of WSBPL. As per the section 148 of the Companies Act 1993, if a person has been authorized to conduct business in any licensed market then no account will be taken (Prevost, Rao, & Hossain, 2012). In that case, the two directors need to provide a notice to the remaining board of directors and they also need to provide details of the company they are going to form between the two employees of WSBPL and the details should be provided in advance. Otherwise, the similar things might happen as in case of Holland Corporate Ltd v Holland [2014] as the directors used their power without legal terms. It can be recommended to the two directors of the company that as they are going to do the business outside Waikato and the target customers of the new company they are going to form are also different from Fancy, it would not be a problem for them and they might not be accountable in this ground. The directors should be loyal to the company, otherwise cases such as Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 or Regal (Hastings) Ltd v Gulliver[1942] 1 All ER 378 might be an example of the unlawful activities of the directors of the companies.
3. From the case it is evident that Fancy has made substantial losses in the last year and they have also faced downturn due to the weakening demand for the products of the company. The accountant of the company has made a set of accounts for the last six months and it has been observed that there has been a trading loss of $400,000 in the last year and six months later the debtor and creditor reconciliations revealed that there is a total of payables of $600,000 and the total amount of receivables is $300,000. Fancy have also been unable to pay the GST and PAYE debts because they have fallen under the Inland Revenue system and multiple cheques of the company have been bounced in last year. Despite the state of the financial affairs of the company, the accountant of the company has advised the board of directors that Fancy can easily continue operating their business and trade in such a way so that they can get out of the financial difficulties. The general manager of the company has stated that there are a number of clients present of Fancy in place of the smaller clients which they have lost. In case of Fancy, the directors of the company cannot allow them to do the trading. As per the section 135 of the Companies Act 1993, a director or board of directors of the company should not agree in the business process which might impose risks in future to the company and which might bring loss to the creditors of the business or they should not allow the company to be carried out in a manner which can bring substantial or serious loss to the performance of the company (Hossain, Prevost, & Rao, 2001). As per the Companies Act 1993, this type of business is called as Reckless Trading in which the company conducts the business in such a way which is highly risky and the companies can be exposed to different types of threats which might affect the business performance of the company negatively (Kelsey, 2015). The first risk in case of Fancy is that a number of pay checks of the company have been dishonoured and it might bring several types of troubles to Fancy. They might also need to face legal complexities if the individuals or companies can make complaint for the check bounce. In this case, the board of directors should arrange a meeting and they should take a collective decision for it.
4. i) As per the section 194 of the Companies Act 1993, the financial records of organizations should be kept by them. It is the duty of the board of directors of the company to ensure that the financial records or the business transactions records must be kept by the company properly and the accounting standards used by the organizations should be met, if the company needs to prepare the statements as per the act (Guthrie, 2001). The financial statements will also enable the company at the time of auditing. It is the duty of board of directors to establish and maintain a proper system for controlling the accounting records. It is also very important for the companies to create the financial statements in English or in a language which is easily accessible and which can be easily transformed into English (Yeoh, 2015). As per the section 194 of the Companies Act 1993, if the directors of the company do not meet all requirements regarding the financial statements, it is considered that all directors of the company has made an offence and they are liable for penalty as per the section 374 of the Companies Act 1993. As per the AWA Ltd v Daniels(1992) 7 ASCR 759 it is the duty of the directors to keep the financial records as per the standards.

According to the section 191 of the Companies Act 1993, the directors of the company need to inspect the financial and all reports and records related to the business in a periodical interval. The directors also need to present a notice in written form to the board of directors after inspecting the records. In some cases, if the directors apply to the court that the inspection is not properly connected to the duties of the directors in some organizations then the court might think about it. According to the section 190 of the Companies Act 1993, the financial records of the company should be kept in written form or in a form which allows the information and documents which comprise of the records which is easily accessible and convertible into a written form. It is also a duty of the board to ensure that adequate measures are met to prevent any type of errors in the records. As stated in the section 189 of the Companies Act 1993, and section 88 and 195 as well, it is highly important for the organizations to keep some documents and statements in their offices (Bradbury, 2012). Among them the most important one is the constitution of the company. The second important document is the details of the meetings and resolutions of the directors in the last seven years (Hossain, Cahan, & Adams, 2000). The other documents to be kept by the directors in the offices of the organizations are certificates given by the directors and the committee of directors in the last seven years, the full names and present addresses of the present directors of the company, copies of the documents to the shareholders of the company for the last seven years including the annual financial reports of the company, copies of all types of financial statements and the accounting records. If the company fails to keep any of these documents in their offices then it is considered that the company has made an offence and they are liable for penalty as per the section 373 (2) of Companies Act 1993.

7000. ii) As per the section 194 of the Companies Act 1993, it is the duty of the directors to ensure that all details of the account statements are made properly which will correctly record all transactions of the company in a particular financial year. The accounting records of the company should also help the organizations for ensuring that the financial statements of the organizations are made as per the standard accounting practices and rules. The accounting records of the company will also lead the financial statements in order to be audited as per the standard rules (Hossain, Perera, & Rahman, 2002). It is important for the directors of Fancy to create and maintain a proper system of control for the financial records. As per the section 374 of the Companies Act 1993, if the board of directors fail to comply with the requirements set in the section 374 of the Companies Act 1993, then it will be considered that every director of the company commits an offence and they are liable for conviction. The financial statements of the companies should be registered. Otherwise, as per the law, the directors will be having infringement offence for not registering the financial records. As per section 207 of the Companies Act 1993, there are some things which will be imposed to the company. For example, there will be an infringement fee which will be around $7000. The notice will also be served to the company under the section 207Z of the Companies Act. The infringement offence will also be there which means as per the section 207G of the Companies Act 1993, failure to keep the accounting documents. As per the section 207P of the Companies Act 1993, the board of directors of Fancy should appoint an auditor in order to get the financial statements audited. The section applies to the company related financial records and statements if they are not prepared within stipulated period of time. It should also be considered by the board of directors of the company to arrange an annual meeting for the particular accounting period for appointing an auditor who will be responsible to manage the office as per the conclusion of the previous meetings until the next meeting takes place (Oyelere, Laswad, & Fisher, 2003). In case, the company is a public entity, the Auditor General and its auditor does not apply. But, in case of Fancy, it is a private limited company and they need to get the financial records audited properly.

As Fancy is a company based on New Zealand, the accounting records of the company should be kept in New Zealand itself. If the records are not kept in New Zealand, it is important for Fancy to ensure that the returns and accounts for the operations of the organization should satisfy the requirements and they are sent to a place in New Zealand. The board of directors should also provide a notice to the employees and all public that the accounting records are to be kept by the Registrar.

iii) As per the section 194 of the Companies Act 1993, it is the duty of the directors to ensure that all details of the account statements are made properly which will correctly record all transactions of the company in a particular financial year. The accounting records of the company should also help the organizations for ensuring that the financial statements of the organizations are made as per the standard accounting practices and rules. The accounting records of the company will also lead the financial statements in order to be audited as per the standard rules As per section 207 of the Companies Act 1993, there are some things which will be imposed to the company. The financial statements of the companies should be registered. Otherwise, as per the law, the directors will be having infringement offence for not registering the financial records. As per section 207 of the Companies Act 1993, there are some things which will be imposed to the company. For example, there will be an infringement fee which will be around $7000. The notice will also be served to the company under the section 207Z of the Companies Act. The infringement offence will also be there which means as per the section 207G of the Companies Act 1993, failure to keep the accounting documents. For example, there will be an infringement fee which will be around $7000. The notice will also be served to the company under the section 207Z of the Companies Act. The infringement offence will also be there which means as per the section 207G of the Companies Act 1993, failure to keep the accounting documents.

From the paper it can be concluded that The Board decided that Fancy requires the expertise of WSBPL on a consultancy basis in order to monitor the implementation of the recommendations in the report provided by WSBPL. The board of directors of the company can ask the directors of the consultancy companies recruited by them in order to help them and they can take part in the board meetings along with the board meetings of Fancy but there are certain limitations present of the directors of WSBPL while they work with Fancy.

As per the section 138 of the Companies Act 1993, subsection (1) a director of a company or board of directors can rely on the statements, reports or any financial document provided by the advisor companies which is WSBPL in this case, while exercising their power or duties to any external corporation. The directors of Fancy should ensure that the directors of WSBPL are qualified enough to provide recommendations and suggestions to Fancy. The directors should also make proper enquiry before taking the company on board for providing their suggestions to Fancy. From the case it is evident that Fancy has made substantial losses in the last year and they have also faced downturn due to the weakening demand for the products of the company. The accountant of the company has made a set of accounts for the last six months

Despite the state of the financial affairs of the company, the accountant of the company has advised the board of directors that Fancy can easily continue operating their business and trade in such a way so that they can get out of the financial difficulties. As per the section 135 of the Companies Act 1993, a director or board of directors of the company should not agree with the business being carried out in such a manner in which the company might face substantial risks in future which might bring loss to the creditors of the business or they should not allow the company to be carried out in a manner which can bring substantial or serious loss to the performance of the company.

The first risk in case of Fancy is that a number of pay checks of the company have been dishonoured and it might bring several types of troubles to Fancy. They might also need to face legal complexities if the individuals or companies can make complaint for the check bounce. In this case, the board of directors should arrange a meeting and they should take a collective decision for it. It is also very important for the companies to create the financial statements in English or in a language which is easily accessible and which can be easily transformed into English.