Insolvency And Wounding Up Of A Limited Liability Company

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Insolvency And Wounding Up Of A Limited Liability Company

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Insolvency And Wounding Up Of A Limited Liability Company

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Question:
Discuss about the Insolvency and Wounding up of a Limited Liability Company.

Answer:

Neptune’s Prize Seafood Restaurant Pty Ltd
The name of a limited Liability company can be changed by a special resolution of the members in a general meeting. In addition, the name can be changed by the directors without necessarily consulting the shareholders. Gracie and Tasia as directors of Neptune’s Prize seafood Pty Ltd had legal rights to change the name of the company to Poseidon Prize seafood Restaurant as an administrative action to save it from the dwindling prospects. People had lacked interest in the restaurant leading to myriad of financial challenges such as the unpaid tax liability, lack of credit extension services by the bank and lack of supplies due to financial constraints.
Having formed a new company by the name Neptune’s Triumph Seafood Restaurant Pty Ltd, the previous company ceased to exist. It had to be wounded up. However, several considerations need to be done in order to liquidate Poseidon’s Prize Seafood Restaurant Pty Ltd. The business owners Tasia and Gracie had a responsibility properly dissolve the previous company under the State Law to avoid any lingering liability brought about by the outstanding business debts. The liquidator of the Poseidon’s Seafood must properly dissolve as outlined in the business code that formed the company. A proper dissolution of a Limited Liability Company requires company liquidation, paying off the creditors and distributing off the remaining assets to the shareholders based on their ownership percentages (Cartano, 2008). This particular case involved an incorporation of a new company and transfer of the whole assets without settling the debt liability for the previous company.
Although the directors of a Limited Liability Company cannot be held liable for company’s debts, the courts of law can occasionally intervene on behalf of creditors and hold directors personally liable for company’s debts especially in an insolvency procedure. The owners of Poseidon seafood which was formerly known as the Neptune seafood Restaurant are Gracie and Tasia. They have a statutory duty to act in the best interests of the creditors by demonstrating their resolve into ensuring the repayments of all creditors are done using the company’s resources. If they fail to meet their fundamental duties of acting in the interest of the creditors, while the company is trading insolvent, they can be personally liable including disqualification from acting as directors for any Limited Liability Company in future (Godbole, 2013). Poseidon Seafood’s assets are subject to sharing by the shareholder only after all the company’s tax liabilities and debts to suppliers are settled.
Directors can be directly liable only if it is proved that they performed the following actions

Used fraudulent methods to gather funds for the payment of creditors (Godbole, 2013)
Withdrew company funds for no-business related activities (Newton, 2010)
Entered into personal guarantee and then breached the terms
Disposed off the company’s assets at lesser value than the real value
Paid dividends to shareholders while the company was insolvent

In this particular case, the directors did not do any action that was contrary to the company’s code of conduct. Tasia bought the state of the art refrigeration system and stove on behalf of the company. In that regard she acted as an agent of the company and all activities done by her in the absence of the other director Tasia binds both of them. Owing to the fact that the directors did not misappropriate the company’s funds, during the time of operation, no suit can be brought against them. The company was wounded up due to failure to sustain itself as a result of financial distress. In that regard, the company should file for bankruptcy and allow the court to determine the priority of payments to the creditors.
The transfer of Poseidon’s Seafood Restaurant Pty Ltd business assets to Neptune’s Triumph Seafood Restaurant Pty Ltd is quite a tricky affair because the liquidator will be concerned with the motive and the intended purpose of the transfer. For instance, if the company that you are transferring the assets away from is under insolvency or is facing dissolution, then the transfer of assets can be perceived as an attempt to obstruct the process of claiming debts by the creditors (Newton, 2010). The transfer should be done correctly to ensure that two corporations are treated as separate entities and the assets and liabilities of the two corporations are treated as separate. One of the best ways to transfer assets and liabilities of one corporation to the other is by selling them at a fair market price from the first to the second. In that regard the proceeds from the sale of assets by the corporation under insolvency can be used to settle all debts from the creditors and tax liabilities (Alberty, 2003).
Poseidon’s Prize Seafood Restaurant’s assets were all transferred to the new company by the directors Gracie and Tasia with no consideration. They flouted the insolvency rules that demand that the company being wounded up must settle all the creditors’ debts as well as tax liabilities through liquidation of the remaining assets. Having transferred the assets to Neptune Triumph Seafood Restaurant Pty Ltd without a consideration is not the correct practice because the assets and liabilities of the two companies are viewed as the same. These companies are separate entities despite the fact that they are owned by the same people. An action can be brought against the new company for receiving assets of another Limited Liability company without making payments for the same. However, no action can be brought against the directors of the new company because the company is a separate legal entity from the owners (Hönig & Hammerl, 2014). The new company will be required by the law to pay a consideration for the assets received. Bearing in mind that the shareholders were in agreement to transfer the assets of Poseidon to Neptune triumph sea food, their action was lawful. However, transferring the assets with the intention of hindering the process of claiming collections by creditors is unlawful and an action can be brought against each of the directors for personally executing transfers to evade tax claims and creditor’s collection claims (Hönig & Hammerl, 2014). Personal liability comes when the individuals actions goes against the laid down rules and procedures of insolvency.

References
Alberty, S. C. (2003). Limited Liability Companies: A Planning and Drafting Guide. New York: American Law Iinstitute & American Bar Association.
Cartano, D. J. (2008). Federal and State Taxation of Limited Liability Companies. Riverwoods, Illinois: CCH.
Godbole, P. G. (2013). Mergers, Acquisitions and Corporate Restructuring, 2nd Edition. New Delhi: Vikas Publishing House.
Hönig, C., & Hammerl, C. (2014). Insolvency and Restructuring Law in Central & Eastern Europe: An Introduction for Practicioners. Scheydgasse : Linde Verlag GmbH,.
Newton, G. W. (2010). Bankruptcy and Insolvency Accounting, Forms and Exhibits. Hobboken: John Wiley & Sons.
Rocap, D. E. (2016). Mergers, Acquisitions, and Buyouts, March 2016: Five-Volume Print Set. New York: Wolters Kluwer Law & Business.

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