Transaction Analysis Chart

Transaction Analysis Chart

Classified Balance Sheet

As At 30^th June/ 2018

Health policy and research consultancy

Classified Income Statement

As At 30^th June/ 2018

Just like Park, most people are concerned with the liability status of their businesses before starting operations. Liability forms the basis of choosing between setting up either sole proprietorship or a private limited company. Both business structures have their advantages and disadvantages. Limited companies have separate legal entity from their shareholders/ directors, while sole proprietorships do not (Latimer, 2012). In a situation where a sole proprietor faces financial difficulties, its owner will have unlimited liability for its debts. On the other hand, the liability of shareholders/ directors of the company to its debts are limited (Muscat, 2016).  

In a business context, liability is defined as the money a business owes outsiders such as creditors and suppliers. The debts come in the form of unpaid hire purchase, unpaid invoice, and unpaid loans. In Australia, directors/ shareholders cannot be held personally responsible for the debts owned by their companies (Bottomley, Hall, Spender, & Nosworthy, 2017). However, there are situations where the limited liability status enjoyed by company directors and shareholders can be disregarded. In such a situation directors is personally responsible for the company’s debts. Therefore, as a sole director of the company, Park can still be liable for the debts of her company (Latimer, 2012).

The circumstances where limited liability status can be disregarded include:

First, sometimes directors sign personal guarantee on contract, lease or loan for the company. They become personally liable for the debt when the company cannot repay (Bottomley, Hall, Spender, & Nosworthy, 2017).

Second, lenders might require Park to use her personal property/ assets as security before securing a loan. If the company is unable to repay the loan, such properties/ assets would be repossessed by the lender (Bottomley, Hall, Spender, & Nosworthy, 2017). Likewise, Park will be personally liable for unpaid company debts if she uses her home equity loans or credit cards to maximize the company’s capital (Latimer, 2012).

Third, insufficient disclosure of financial reports, misrepresentations and frauds might cause lenders to disregard limited liability status enjoyed by company directors (Latimer, 2012). A director becomes personally liable for the unpaid company debts if she misrepresented facts when applying for a loan. Likewise, failure to separate business and personal finances would render a director personally responsible for the company’s debts (Muscat, 2016). Lastly, failure to maintain transparency and accurate business accounts can be used by lenders to make directors personally responsible for the unpaid company debts (Bottomley, Hall, Spender, & Nosworthy, 2017).

Fourth, directors can also be held responsible when they continue with operations even after a company has been declared insolvent (Bottomley, Hall, Spender, & Nosworthy, 2017). Engaging in either of the following practices renders directors personally liable for company debts; one continued operation without repaying company debts. Two, using fraudulent ways to repay debts (Muscat, 2016). Three, selling the company’s assets at an undervalued price. Four, favouring some creditors over others. And five, directors choosing to pay themselves and ignore the creditors and staff (Latimer, 2012).

Fifth, directors can also be held personally responsible where an investigation has revealed that their actions lead to ‘wrongful trading’ (Latimer, 2012). Directors might choose to maximize their own interest instead of maximizing the creditors’ returns. Such a situation might lead a company to insolvency (Bottomley, Hall, Spender, & Nosworthy, 2017). In such a circumstance, directors should be held personally liable for the unpaid company’s debts.

Just like company directors, shareholders also enjoy protection from company liabilities (Latimer, 2012). However, the protection from liabilities can be disregarded if; one, the shareholders have personally signed for a debt. And two, if the shareholders have acted fraudulently or improperly for instance, where they have used the business money for their personal benefits (Bottomley, Hall, Spender, & Nosworthy, 2017).

Based on this analysis, Park enjoys limited liability to the company debts as a director and shareholder of the private limited company. However, the limited liability protection can be disregarded based on the circumstances listed above. In conclusion, as a director and shareholders of the company, Park could still be held personally responsible for its debts.

References

Bottomley, S., Hall, K., Spender, P., & Nosworthy, B. (2017). Contemporary Australian Corporate Law. Sydney: Cambridge University Press.

Latimer, P. (2012). Australian Business Law 2012. Sydney: CCH Australia Limited.

Muscat, A. (2016). The Liability of the Holding Company for the Debts of its Insolvent Subsidiaries. New York: Taylor & Francis.