Business Accounting and Legal Issues †Free Samples for Students

Question: Explain Business Accounting And Legal Issues? Answer: Introduction This report is to be submitted to the supervisor of Turnaround and Insolvency Business Experts or TIBE, the restructuring and insolvency firm related to assessment of their client Deluxe and Delicious Wine Pty Ltd or DDW Pty Ltd, involved in the business of warehousing and distributing of wine. This firm is presently facing some financial inconvenience related to creditors management and the CEO of the company had approached to TIBE to critically assess the financial position of the firm through the application of legislative implication related to insolvency criteria of any firm with reference to Corporation Act 2001 of Australia. She was also seeking for the advice from TIBE regarding the available options available for the company in the form of if the company would be placed under the external administration and being the managing director what she should take in this aspect. The company has confidentially provided their file with relevant financial position which can be consider ed for considering the case with perspective of their solvency status(Parkerandrews, 2016). In this context my duty is to provide the report to my supervisor related assessment of solvency of DDW Pty Ltd as per provision of law vide section 95A of Corporation Act, 2001by considering their financial position along with the provision of application of introducing external administration and probable turnaround options suggested by me considering the case of DDW Pty Ltd. it is also to be identified about any further information required from DDW Ltd to make conclusive and effective report related to this company to assess the possibility of future course of action related to their solvency(Austlii, 2001). Memorandum of Advice ss the solvency criteria of the company. They are given below as per merit: Analysis of case The company has provided the list of assets and liabilities. It is observed from the list of assets that the company has book value of current assets as $ 1,750,000 which is consisting of debtors as $1,350,000 and inventory as $ 400,000. The debtors are considered to be good with the credit elasticity of 180 days as credit terms. It is also derived from the observations that the realistic value is lesser as the inventory value in realistic term is to be considered as 80% of the book value due to damaged or obsolete stocks kept as books stock. In the process the current assets of the company stands as $ 1,670,000(Asic, 2010). The current liabilities are showed as $ 2,290,000 which is consisting of overdraft as $ 150,000 and creditors as $ 2,140,000. Creditors are considered to be paid by 30 days credit limit. The working capital analysis of the company had shown negative balance of $ 540,000 as per book value and realistic value of $ 620,000. Working capital denotes the financial strength and liquidity of the company with the scope of investment in the business. Hence the negative impact of working capital restricts the management of the company to ensure due payment to creditors. The information had not shown cash in hand and at bank. Hence those components are not considered for calculation of current assets and subsequent working capital. Net asset value of the company and owners equity is also showing negative impact of $ 40,000. This negative impact has direct effect on the external stakeholders in the form of creditors and investors. The creditors, in particular may be afraid of losing their money due to non-availability of fund because they have to borrow the money from market with substantial interest rates applicable for those loans. With the available relevant information, it was also found that due to non-sustainable administrative staffs, it is bit difficult for the management to gather proper financial information which is elementary to conclude any probable decision for the company. The company is regularly paying $ 200,000 for their warehouse rent at Brisbane which is high so far the operation of the company is concerned. Inconsistency of creditors payment is causing disbelief on the company by the creditors. In February 2017, one of the creditors had filed a lawsuit to recover his money as per section 459E of Corporation Act 2001(Businessinsolvency, 2015). With the above observations, it is evident that the company is running through financial crunch and their liquidity is proving to be at stake. Refer to solvency criteria, the Corporation Act 2001 (Cth) described the definition of a person to be declared as insolvent through section 95A (2). Here the person represents an entity or a corporate body. Basic enquiries to be made under section 95A (2) to find out if the company is insolvent are as follows: Does the company be able to repay all its loans in time as per the terms and conditions of proving it due and liable to be paid? To find the answer to this question, the following considerations are to be taken into account: Availability of cash reserve during the time of repayment of loan as per its terms and conditions to be proven as due. Sufficient quantity of working capital or cash flow to arrange the funding for repaying loans Availability of reliable sources of funding to match the requirement of repayment The financial strength of the company to borrow from market Specified time and date for paying Ensure reliability of promises made to the creditors regarding repayment of loan, whether in written or in verbal form Assets to be available for realization with the confirmation of value they will realize with the provision of proving voidable transactions or preferences by the company. As per the case of Quick vs., Stoland of 1998 with no. 157 ALP615 at 622 Justice Emmett had set out 4 factors which are to be considered: The debts of the company is to be ascertained with date and time of repayment as per its terms and conditions of payable and fallen due; All assets of the company during the time in order is to be determined to the extent of its liquidity or realizable value in nature by the time frame within which all the debts are to be paid as per due time. Expected cash flow of the business is to be determined by the process of subtracting cash expenses from realizable value of projected sales which is required to generate that projected sales. Arrangements between the external stakeholders in the form of lenders and creditors and the corporate is to be made in order to distinguish significant shortfall in the liquidity of the company by realizable assets with cash flow to ensure future borrowings to be repayable at a later time than the present borrowings. The same case has found the statement of Justice Finkelstein that identification of reasonable ground of non-payment of debts by the company as per due time may be considered as justified as per the situation of the case. This situation is to be treated with the light of commercial reality and so it requires a consideration of the financial condition of the company with entire impact, which includes its activities, flow of cash, availability of money liabilities and assets which can be procured by the operation of sales of assets or though fresh loan and with the strength of raising capital from the market. As per the definition of section 95A, it is suggested that the most viable test of solvency is the cash flow test which is more perfect that the balancing assets over liabilities(Austlii, 2015). Rebuttable Presumptions of Insolvency The act has made provision with two rebuttable presumptions of insolvency There two rebuttable presumptions of insolvency which are contained in the Act vide section 588E. These presumptions are meant for operating in regards to recovery proceeding as per civil case and are not applicable in case of any criminal proceedings. The appropriateness of these presumptions are justified through the fact that they are subject of rebutting with application of the same in case of Directors who are involved in the financial affairs of the company with the added responsibility of managing them. In this way the presumptions have the access to the ways of rebuttal. Accordingly, insolvency which are contained in section 95A are defined in statutory manner are only being relied upon in case application of statutory presumptions of insolvency as per subsections 588E (3) and 588E (4) which are not able to be depended upon or are subject to rebuttal. Presumption one as to Continuing Insolvency Upon Proof of Insolvency at a Specific Date under section 588E(3) where it is being proven that the corporate entity which is being under closure was proved to insolvent at a particular period during the twelve months before to the relation- back day which is often considered as the date on which the application of winding up of the company is being filed or with the appointment of an administration , the presumption stands as the company was proven to be insolvent since that period until the relation-back day(Debtrecoveryqld, 2016). Presumption two represents insolvency criteria due to the insolvency depending upon the fact of Insufficient Accounting Records Under section 588E (4). This presumption depends upon the proof that the company is not able to keep proper records of accounting which can have the ability to correctly explain and record of its financial transactions with financial position. There is other situation in the form of if the company has not been able to keep the accounting records for seven years after the transaction had taken place which are related, the presumption is that the company was at the insolvency stage during that time. This presumption is not applicable if the company fails to maintain its accounting records in minor or technical stage. It is also not applicable in case of removal of accounts, with destruction or concealment by any person who is not the defendant direction with the circumstances where the defendant director was no involved in those activities. Indicators of Insolvency As per ASIC, there are several main financial and operational practices, which, allied with other practices give the indication of any company that the same company is at the significant risk zone of insolvency. They are given below: Poor or no cash flow forecast; Unorganized of maintaining the in-house accounting procedures; Incomplete records of financial transactions; Absence of corporate plans and budgets of different segments; Continued activities to generate losses; Accumulation of liabilities including creditors in excess over assets; Unable to pay debts or interest within due time; Gradually increased monitoring with the involvement of financiers; Creditors ageing is going beyond 90 days limit; Stop gap arrangement of installment payment with the creditors to repay their loans Judgment of debts, Non compliance of statutory payments in the form of tax and employees superannuation liabilities; Difficulties to obtain finance from the sources; Facing hurdles to realize current assets in the form of inventories or debtors; Loss of key management entity in the company(Svpartners, 2015). In case of DDW Pty Ltd, it is observed that the typical situation which prevails in the company can be correlated with the above discussion. The company is running through cash shortage and is proving its other accounting aspects unfavorable to run the business. Following observations will dictate the inference related to the case study of DDW: Observations: Main criteria of proving solvency is by substantiating the financial condition of the company through its working capital analysis and cash flow analysis. As per the file provided, the financial analysis had shown unhealthy symptom of working capital with current liabilities are more than current assets, which generates negative working capital. Moreover the current assets, considered at book value, are found in lesser amount at realistic assessment which is prevalent in case of inventories with 20% damaged goods which cannot attract any value for the company. The receivables are with the terms of 180 days credit limit and this is not allowing the company to generate sufficient amount of cash in-flow and is weakening their fund position. The payables of creditors are as per the terms of 90 days credit limit which denotes that the company has to generate money from other sources to pay the debt as the debtors are paying their dues on 180 days credit limit(Topp James, 2015). Other observations had also showed high level of overhead cost towards rent of the warehouse, compensation to staffs and changed business scenario which is not generating profit margin as it was prevailed. Due to high turnover of administrative staff, the accounting procedure is not followed properly which had caused incomplete accounting reports for the period. Inference The company is proving to move towards gradual insolvency for the below findings: The creditors are not paid in due time and they have to file lawsuit to recover their money. The accounting process is not strong which caused confusion amongst the creditors regarding the amount of their dues. There is not proper reconciliation of accounts between the creditors or collection of confirmation of balance from the creditors. The working capital situation is really grave and there is no early sign of recovering by the company. Although the cash flow statement cannot be provided by the company with relevant information, it is also evident that the cash flow statement will not be good enough due to the gaps of recovery from debtors and payable to the creditors with the existing day gap of 90 days. It is found that some gifts are being taken from the company for some occasion of Directors family. This is causing cash shortfall too, as the gift is to be paid on cash(Austlii, 2015). The issue of this case study is to cosnider provision for external administration or turnaround process for DDW, there are certain options available as per Australian Securities and Investment Commission or ASIC. It is advisable that if the company is proved to be insolvent, the company should not be though of incurring further debt without the provision of restructuring the company with refinancing by attracting refunding to ensure recapitalization of the company. It is normally advised to appoint a voluntary administrator or a liquidator. Respective Law is The Corporation Act 2001 (Cth) of Australia and the respective section is 95(A) Voluntary Administration This provision is designed in order to show the way through which the company can find its future direction. While going for this option, the voluntary administrator, a person with independent and properly qualified, has to take full control of the respective company to find the best suitable way in order to ensure the safety for the company or the business of the company. In case both these criteria cannot be met, the objective of that person is to ensure creation of such condition which can take proper care of the creditors to return the money they have provided for the company for business operation before the occurrence of the company going to liquidation. This objective can be fulfilled though a deed of company arrangement. It is the best option for the company to appoint voluntary administrator as it is the quick and easy method. This initiative can be made by the Board of Directors of the company after resolving that the company is proved to be insolvent or gradually tends tow ards insolvency with the inference that the appointment of voluntary administrator is to be done. For initiating this process, the directors have to get the written communication in the form of consent from a registered liquidator who will act as voluntary administrator. Liquidation The objective of liquidation of any insolvent corporate is to have the interference of a suitably qualified person who is independent in nature to take entire control of the company in order to ensure that the affairs of the company is to be wound up in the systematic process with fairness and prudence to ensure maximum benefit to the creditors. They are professionally qualified to guide the management of the company for the required steps to be followed for appointing a liquidator. Normally the liquidation process initiated by directors involves convening a meeting of members to practice their power by voting on the issue of winding up of the company and to appoint a liquidator. Receivership Normally a company proceeds to this option when the situation demands appointment of a receiver by the secured creditors who are holding the security of the company over few or all of the assets of the company. Basic role of the receiver is to arrange for collection and sell of the charged assets of the company sufficiently in order to make repayment of debts which are owed by the company to the secured creditors. In this context, director is also with the status of secured creditor and has the power to seek necessary advice prior to appointment of any receiver. Consequences of external administration In case of seeking for external administration of insolvent trading action, there are several other consequences to be faced by directors of a company which are varying on the type of external administration sought for. Power of directors Directors of any company are virtually loosing control over the company. In case of switching over from voluntary liquidation to deed of company arrangement, the power of the directors is specifically mentioned in the terms of the deed. After the completion of the deed, the directors are empowered with full control if not the deed made provision for the company to proceed towards liquidation on completion of the deed. In case of appointment of receiver, the power of the directors is conformed through the details of charge document with the extent of the assets which are concerned about the receivers jurisdiction par appointment. In case the receiver is being appointed to cover all or maximum of the assets of any company, the receiver ahs the power to exercise full control with the directors to meet certain specific duties and responsibilities with the retention of residual control. Obligation of directors Obligations of directors are lying with the provision of all details related to books of accounts and records, list of all assets with location and valuation with the written report of business of the company to be given to the external administrator with other relevant documents as required by them within the specified time frame. Meeting of creditors This meeting can be convened in voluntary administration and liquidation with the presence of creditors and a director to provide meaningful information about the financial position, property, business and affairs by the director. Public examination This is the extreme position for the directors to appear for if the liquidator or the voluntary administrator has the power to ask for it though court order. Incase of receivership, the same can be conducted through the consent of ASIC. Conclusion Refer to above discussion; the company should go for voluntary administration to resolve the financial situation of the company, as this can give room for the directors to manage the situation with revamping of financial crisis(Asic, 2015). Refer to the case DDW insolvency assessment, requirement of audited financial statements are required including balance sheet, profit and loss, cash flow and other schedules of balance sheet items like assets and liabilities with owners equity for last five years. These will enable to make a comprehensive report to assess the need for specific type of administration service to be introduced to the company to recover from this situation. It also requires to have the reconciled accounts of creditors because there found some ambiguity with the closing balance of creditors. The inventory is to be evaluated in realistic manner and the recoverable debtors are to be identified with proper ageing of outstanding and the nature of recoverable debtors through collection of confirmation of balance by debtors. References: Asic, 2010. Australian securities and Investments commission corporation act. [Online] Available at: https://download.asic.gov.au/media/1308307/A033_10.pdf [Accessed 11 May 2017]. Asic, 2015. Insolvency: a guide for directors. [Online] Available at: https://download.asic.gov.au/media/3337054/insolvency_guide_for_directors_42_1-amended-aug-2015.pdf [Accessed 11 May 2017]. Austlii, 2001. Corporation act 2001. [Online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed 11 May 2017]. Austlii, 2015. Corporation Act 2001 - Sect 95A. [Online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s95a.html [Accessed 11 May 2017]. Austlii, 2015. Solvency and insolvency. [Online] Available at: https://www.austlii.edu.au/au/legis/cth/num_act/ca2001172/s95a.html [Accessed 11 May 2017]. Businessinsolvency, 2015. Business in solvency. [Online] Available at: https://www.businessinsolvency.co.za/ [Accessed 11 May 2017]. Debtrecoveryqld, 2016. Rebutting the Presumption of Insolvency. [Online] Available at: https://debtrecoveryqld.com.au/%EF%BB%BFrebutting-presumption-insolvency/ [Accessed 11 May 2017]. Parkerandrews, 2016. The decline of business turnaround investment. [Online] Available at: https://www.parkerandrews.co.uk/turnaround-investment-decline/ [Accessed 11 May 2017]. Svpartners, 2015. Indicators of Insolvency. [Online] Available at: https://www.svpartners.com.au/insolvency/indicators-of-insolvency-checklist [Accessed 11 May 2017]. Topp, A. James, T., 2015. The Corporations Act 2001 (Cth) (the Act). [Online] Available at: https://www.findlaw.com.au/articles/1993/what-is-insolvency.aspx [Accessed 11 May 2017].