SS Corporate Law

Question 1

Insolvency means a firm is able to pay its debts as they become due in the normal course of business

Answer 1

false

Question 2

a company is a seperate legal entity

Answer 2

true

Question 3

misleading disclosures about company performance can cause insolvency

Answer 3

true

Question 4

using the word “limited” or “Tapui” at the end of a company name is not up to the owner; it is a legal requirement

Answer 4

true

Question 5

a director can be liable for an injury at work that breaches the Health and Safety in Employment Act.

Answer 5

true

Question 6

Personal guarantees given by shareholders and directors should be carefully considered, as they can pose significant risks to personal assets.

Answer 6

true

Question 7

After being declared bankrupt, it is an offence to travel overseas unless permission is obtained.

Answer 7

true

Question 8

A liquidator can assume the responsibilities of a director and recover costs on behalf of creditors.

Answer 8

true

Question 9

Starting a competing business with intellectual property from a former company that was a partnership is a non-competition violation under a shareholders’ agreement.

Answer 9

true

Question 10

To avoid disputes with investors, it is wise to do due diligence on co-investors before they put capital into the business.

Answer 10

true

Question 11

systematic liquidation

Answer 11

sell off the assets and distribute cash

Question 12

what is “employee share ownership”

Answer 12

it allows employees to become owners in the firm and over time can buyout the original owner

Question 13

what is insolvency?

Answer 13

it is a state of financial distress that applies to individuals and companies. Occurring when entity is no longer able to meet the financial obligations they have agreed upon with their lenders or creditors. In short, they cannot pay their bills.

Question 14

what happens if a company doesn’t satisfy the solvency test?

Answer 14

A company is prohibited from paying out dividends or making distributions

Question 15

common causes of insolvency

Answer 15

mismanagement, economic conditions, litigation & disputes, fraud, death or divorce, failure to innovate, bad luck

Question 16

are shareholders liable for debts and obligations?

Answer 16

shareholders have limited legal liability and are not personal liable unless those that have personally guaranteed

Question 17

incorporated company

Answer 17

it is contained as a seperate legal entity - when it is incorporated it is likes its own person it can own assets, property, goods and services as well as enter into contracts and transitions seperate to people who own it

Question 18

guaranteeing document

Answer 18

sometimes shareholders and directors are asked to personally sign a “guarantee document” guaranteeing the companies depts

Question 19

an example of a guarantee document

Answer 19

signing a lease, a landlord might want a personal guarantee to be signed to ensure you make each rent payment in full/ on time as your company might not have many assets etc.

Question 20

with the example of a personal guarantee, how could the landlord react in the scenario if the company went under

Answer 20

the landlord has the ability to go against the company or against the shareholders because they signed that personal guarantee.

Question 21

would a family trust have legal liability ?

Answer 21

no.

Question 22

are banks and landlords are likely to seek personal guarantees?

Answer 22

true

Question 23

can directors face personal liability for breach of directors duties? e.g. reckless trading

Answer 23

yes they can

Question 24

owner protection

Answer 24

Set up a separate entity to operate the business (e.g. a company) rather than operating as a sole trader or ordinary partnership.

Question 25

should shareholders and directors try to avoid giving personal guarantees of the company’s debts/obligations?

Answer 25

yes but it can make it difficult to borrow money, lease property or to attract other investors if your not risking your own assets

Question 26

personal asset protection

Answer 26

a part of financial planning that helps you keep your assets safe from creditors

Question 27

why is personal asset protection important?

Answer 27

Directors might wish to consider setting up a family trust and transferring assets to it to protect them as if they don’t there personal assets like car, house and anything else are on the line and could go bankrupt.

Question 28

what’s another layer of protection other than personal asset protection?

Answer 28

to set up a family trust. a common method to quarantine those assets and move them out of your name. if the company goes under, those personal guarantees you signed anything in the trust is safe from a liquidator.

Question 29

what are three options when faced with insolvent issue?

Answer 29

1. Agreement to pay lesser sum / time payment arrangement
2. Creditors Proposal or Compromise / Summary Instalment Order
3. Bankruptcy / Liquidation

Question 29

what cant be covered by Directors and Officers insurance?

Answer 29

criminal fines

Question 30

what is a offical assignee do?

Answer 30

they are appointed to take control of your assets and all of your bank accounts/financial affairs. they step in and take charge.

Question 31

can you control the business/financial side of the business when you are bankrupt?

Answer 31

no. there is a prohibition in place saying you cannot this is why an offical assignee steps in.

Question 32

liquidation is?

Answer 32

usually occurs when a company becomes insolvent (unable to pay its debts when due)

Question 33

voluntary liquidation

Answer 33

if all shareholders agree the business isn’t working they can agree to bring the company to end and go into voluntary liquidation

Question 34

who is typically the liquidator and what do they do ?

Answer 34

tends to be accountants. they do the same job as a offical assignee by taking control of the company and all assets and bank accounts involved, turning assets into cash to pay people off.

Question 35

preferential creditors

Answer 35

an individual or organization that has priority in being paid the money it is owed if the debtor declares bankruptcy

Question 36

what is a GSA (General Security Agreement)?

Answer 36

A document that gets signed and registered that grants security. They take priority and will get paid out of those assets.

Question 37

does a unsecured creditor usually get paid last?

Answer 37

yes. it is typical they will get nothing or 1 cent for every dollar they are owed from the liquidation

Question 38

what is a Court appointed liquidator?

Answer 38

a statutory demand. issuing a document to a company, the company has to officially respond within 10-15 days. if they don’t respond within the legislation then the company can be put into liquidation.

Question 39

other than selling off assets what does a liquidator do ?

Answer 39

look into how the company has been trading in the last 6 months, they also make sure the directors have been acting properly.

Question 40

can a Liquidator can disclaim contracts/ obligations?

Answer 40

yes most of the time.

Question 41

is receivership about bringing a company to an end?

Answer 41

not necessarily. typically an accountant that gets appointed as a receiver and gets appointed by someone who has security.

Question 42

what does a receiver do for the company

Answer 42

to seize assets they have security over and sell them and then that one creditor gets paid. With the other money the bank gets paid or whoever is left after that one creditor and then the business can carry on after that.

Question 43

can receivers go after directors etc?

Answer 43

no they cant. not like a liquidator can.

Question 44

what does a shareholder agreement do?

Answer 44

reduce the risk of disputes and disagreements. this is important as Disputes between shareholders can be crippling to the business and very costly

Question 45

what is a shareholders agreement?

Answer 45

A contract between the shareholders of the company. It sets out agreements they have reached about how their relationship is to operate and how the company is to be run.

Question 46

advantage to a shareholders agreement is…

Answer 46

A Shareholders Agreement is a private document that the Shareholders can keep confidential. Where as a Constitution is a public document, filed with the Companies Office and available from the Companies Office website.

Question 47

what are some matters a shareholders agreement could cover?

Answer 47

decision making, financial policy decisions, cash and in-kind contributions, exit strategies, non-compettion, dispute resolution.

Question 48

A major transaction (defined as buying or selling assets worth 50% or more of the company value) needs….

Answer 48

75% shareholder approval. everything else is based on majority vote

Question 49

Personal guarantees given by shareholders and directors should be part of the normal
course of business and can attract other investors to contribute capital to the business.

Answer 49

true