Business Structures and Regulations Essay

Introduction

On Jacob's suggestion, Sean Bush has visited the freehold offices of Whiskin & Co Limited (Whiskin). Sean felt that the building would convert easily into an assessment center for Clayton Financial Training Limited (CFT), and would be a good addition to CFT's property portfolio. LTT has confirmed that it has no interest in the building. Consequently, Sean has suggested to CFT that CFT should offer to purchase Whiskin's freehold office for PS250,000. Additionally, LTT has also agreed to loan Sean Bush PS13,500 to meet his costs of relocating from Newcastle to be nearer LTT's head office.

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Advise Sean with regard to the following issues:

• On Any Potential Consequences of CFT Acquiring From Whiskin the Freehold Office For PS250,000;

The value of Whiskin's freehold office is PS345,000. However, Sean advised his organization to acquire it for PS250,000. It this company proceeds purchase the office at PS250,000, the company will be making the transaction at an undervalue. If CFT acquires the asset at PS250,000, it will be sinking Whiskin further into insolvency since it has a liabilities that amount to PS615,000. The transaction will make Whiskin further unable to pay its creditors thus increasing the disadvantageous position they are already in. Also, CFT would be unjustly enriching itself as if it decided to sell the asset; it will do so at a value that is significantly greater than the one it purchased the asset.

A transaction which is deemed undervalued is one in which a company enters into by consideration and offers to transact an item with another company at a value that is significantly less than that the worth of the item (Pomeroy & Sims, 2010, p. 3). A transaction can be considered undervalued if it encompasses three aspects. One of the aspects is if the transaction is a gift. The second aspect is if the consideration of the transaction is for marriage or civil partnership. The last aspect is if the value of the money that is offered by the buyer is considerably less than the value stated by the insolvent (Macro, 2017, p. 7).

A transaction at undervalue is addressed in the Insolvency Act of 1986 and provides provisions that apply to companies as well as individuals. The law allows an office holder such as an administrator or a liquidator who serves on behalf of an enterprise to make an application to a court of law when an insolvent company or an individual has entered into a transaction that is deemed to be at an undervalue (Macro, 2017, p. 2).

Purchasing Whiskin's assets at an undervalue has potentially negative consequences for CFT. Accountants, solicitors, and insolvency practitioners are often proactive is using undervalue claims as part of their armory when filing disputes against and attacking transactions that were made before a company's insolvency (Pomeroy & Sims, 2010, p. 1). Generally, engaging in a transaction that is at an undervalue is considered to be unacceptable under the law. Certainly, transactions at an undervalue mischievously result in asset depletion or fragmentation of the insolvent estate which is to the disadvantage of the estate and its creditor. Therefore, laws have been established to protect firms and their estate from what practitioners refer to as fraud. Specifically, laws exist to prevent one party from achieving unjust enrichment while depleting or fragmenting the estate of another party (Pomeroy & Sims, 2010, p. 1).

When accountants, solicitors, and insolvency practitioners take the application to court, and it is deemed that the transaction that was made was at undervalue the judge can apply some remedies to the fraud. Judges consider each case of transactions at an undervalue individually based on its particular facts and always consider the most appropriate remedy to a case. In considering the most appropriate remedy, judges ensure that it is practical and just ( Reid v Ramlort, 2005). In essence, the goal of the judge would be to restore everything to a position that things would have been if the debtor would not have engaged in the transaction with the purchaser. Therefore, the judge the option to decide whether to reverse the transaction or not. The judge also has the option to decide whether to order monetary compensation or not ( Reid v Ramlort, 2005). Hence, one of the consequences of undertaking the transaction is that if an applicant who is one of Whiskin's creditors files a case, a judge may order that the transaction is reversed or that CFT compensates the applicant.

A court may rule against CFT in multiple instances. In his or her application, an applicant may want to seek monetary payment order that is accompanied by an interest payment if the transaction was made at a time when he or she would have benefited from an increase in house prices (Pomeroy & Sims, 2010, p. 8). Therefore, the creditor will be compensated for the loss of value on monetary terms since Whiskin's did not wait for its asset to appreciate in value to sell it and fully settle its liabilities. Therefore, CFT will be required to pay the creditor a monetary sum and an additional interest rate that is advised under discretionary terms by the judge. The goal of the judge would be to restore everything to a position that things would have been before the transaction occurred. In essence, if CFT purchases the offices at an undervalue its risks the transaction being overturned, recompensing the applicant with interest and subjecting itself to a possibly lengthy legal process.

Since undertaking a transaction at an undervalue can be considered as a fraud, Sean should be advised that the directors at CFT can be found criminally culpable is they proceed with the purchase. As per the law, if it is found that fraudulent trading took place and the liquidator can sufficiently establish the claim, then directors at CFT can be held personally liable. For instance, if found culpable, a court can order that an individual who took part in the transaction and or the directors to personally contribute to the claimant's assets (Welham v Director of Public Prosecutions, 1961).The occurrence would mean that even though Sean is not a director to the company, encouraging his company to pursue in the transaction may subject him to an occurrence that he has to personally contribute to the claimant's assets if found guilty. Another consequence of engaging in the transaction may be that if found guilty of engaging in fraudulent activity, the director of CFT may be disqualified from practicing as directors. The disqualification may take a period of up to 15 years (Dignam & Lowry, 2012, p. 88).

• The Proposed Loan From Ltt to Sean: Loans and Debentures

The loan that will be provided to Sean will be unsecured. Therefore, to prevent the company from issuing an unsecured loan, security for the loan will be provided in the forms of a debenture. A denture is a form of documentation used in the creation and acknowledgment of debt (Bailey, 2015, p. 6). Sean should know that the institution providing the loan, which is LTT, in this case, is in a stronger bargaining position than he is. Hence, LTT has the right to demand furthers personal security from him. An example of a security that may be issued is placing a fixed charge on the director's personal assets (Bailey, 2015, p. 6). Therefore, Sean should know that any of his properties that have equal value to the loan may be used as a security to the loan. Hence, Sean can choose to subject any of his assets to the risk of being repossessed in the event he fails to pay the loan, or he may choose to seek an alternative source of funding.

Sean should also know that shareholders in a small company can take a loan on the grounds of the company's debenture (Bailey, 2015, p. 6). Sean is therefore eligible for a loan since he acquired a stake in the company. However, the Insolvency Act of 1986 stipulates that the loan amount cannot be used to guarantee a current debt particularly if it is in anticipation to the enterprise becoming insolvent (Bailey, 2015, p. 6). If Sean finds that the loan is not sufficient to facilitate the movement of his office, the company may issue him another loan as it is permissible under the law. The assertion is backed by the regulation that his initial debenture may be used as cover from more than one loan. It is also permissible for it to cover a series of simultaneous loans (Bailey, 2015, p. 7).

• Declaration of Interests in a Proposed Transaction

When receiving a loan from the company, there are rules on declaration of interests that by affect Sean. At some point, Sean may not be required to declare interests under some circumstances. Some of these circumstances include that the other directors are reasonably aware of the matters that they should have knowledge of, or if it is believed that the debtor's interests will not result in a conflict of interest (Morris, 2014, p. 2). The debtor, who is Sean, in this case, will also not be required to declare his interests if the interests of conforming to the performance of his role as per the director's service contract (Morris, 2014, p. 2). However, the conformity of the interests with the performance of his role as per the contract is to be considered at a board meeting.

However, none of these interests applies to Sean; he will have to declare the nature and extent of his interests for taking the loan. The declaration must made before the company, and the director begins the proposed transaction (Morris, 2014, p. 2). The regulation implies that Sean must declare his interests before LTT begins processing his loan. In the event that Sean makes a declaration which is found to be incomplete or inaccurate, he will be required to make re-do the declaration process if the process of processing the loan has not begun. Since the procedure of processing and disbursing the loan will not have begun at the time of the declaration, Sean will not be held criminally culpable is he is found to violate one of these duties.

• Declarations of Interest in an Existing Transaction or Arrangement

Sean will, however, be found criminally culpable is he violated any of the stipulated duties in this section. Similar to the regulations that require a declaration of interests wherein a proposed transaction, there are exemptions that do not require one to declare interests in an existing transaction. These exceptions include the event that the directors are aware of the interests, the interests cover the terms of the debtor's service to the company and whether the interests will not result in conflict (Morris, 2014, p. 2). The law allows Sean to make the declarations by giving a general notice, providing a written notice or to other directors in a board meeting (Morris, 2014, p. 3).

As stated earlier, the failure to declare interests in an ongoing transaction is treated as a criminal violation. Instituting criminal charges is a civil remedy for one's failure to declare his or her interests in a transaction (Murad v Al-Saraj, 2005). The civil remedies can also be used in case of failure to reimburse the loan as per the Companies Act of 2006 is that a judge can order that property or assets should be returned to the company. A judge can also order that the profits owed...