Business Structure: Accounting & Legal Issues
For any business it is mandatory for them to maintain an appropriate structure for their business. This construction can made with the help of using proper accounting standard. This aid them in taking business decisions which are helpful for the long term concern. A proper management of accounting promotes in taking effective decision and set financial goals for investing related activity. Legal formalities are also helpful for taking better growth related judgements. An organisation should have to follow all the legislative instruction through which their survival become easy. The present report is based on the Deluxe and Delicious Wines pvt. Ltd. In this assignments certain facts are addressed which shows that company is insolvent. Along with the facts which might affect external administration of business. Also many things are going to be discussed in this report in detail form.
Meaning of insolvency for the purpose of Corporation Act 2001
Insolvency is defines as the absence of solvency. It is an ability of an organisation to pay off its debts as and when they fall due. There are mainly five major areas of corporate insolvency regimes. These are the areas in which the corporate insolvency take place. Such areas are as follow:
- Liquidation: It is a process in which all the assets of the company is taking up by an individual person who is known as the liquidator and distributed it according to the charted accountant of a company. This is a procedure in which company sold out their assets and wind up their business. Once the winding up process is completed a firm ceases to exist.
- Receivership: A secured person who appoints another person to sale out the property of a company which are the part of the security for a loan or provision of goods on credit. These are generally be termed as the banks.
- Voluntary administration: An independent person is appointed for the short period of time with the purpose to identify and investigate that the business will continue or survive in the market or will get liquidate in the few number of years. These administration bodies are helpful to examine the firm financial condition.
- Deed of company agreement: It is one of the best result which is provided by the voluntary administration. The company enters into the transaction with the unsecured creditors in which company is operating their business on continuity basis as well as providing a better return for the unsecured creditors than a winding up process.
- Scheme of arrangement: It is an agreement which varies the legal rights of creditors and shareholders. For taking a simple example of the shareholders who take up the shares of the company as consideration for all the unpaid debts which are paid by an organisation.
DDW can paid out their debts by using this method in which their property get sold out for paying all of their debts. This is one of the thing through which their debts can paid out.
Cited organisation still do not believe that they become insolvent and continue up with their business. They always pay the amount of loan on time but from the last one year they failed to meet this obligation. This lead in reject the application of more loan by the DDW from the bank.
They utilise the power of receivership and take off all the assets of the business and set their debts out.
Issues related to the external administration
The external administration of the business includes receivership, deed of company arrangement, voluntary administration, liquidation and scheme of arrangement.
Voluntary administration is defined as the appointment of an administration who must be registered as the liquidator. It takes the control of the company completely who get insolvent it is hired for the short period of time.
The main aim of the business is to maximise the chances of the business to remain in the industry. And if they found that it is not possible then they are going to wind up the business. Their main purpose is to help the insolvent organisation to run again their business properly. They adopt such type of strategies from which they can attain better return from the creditors.
The advantages of the voluntary administrations are as follow:
- Enables the directors to take the decision which is related with the insolvency so they can hire VA.
- Relatively cheap form of insolvency.
- Provide a smooth transition to liquidation which means if they found company is not able to pay their debts they sold out some of the assets.
Receivership involves the appointment of an independent registered insolvency practitioner. It is appointed by the secured creditor of the bank who helps in recovering the debts. It is helpful in taking the possession of the goods and property of an organisation which they provide as the security. So that they can earn the amount which is generally have to get recovered soon. The advantages of receivership are as follow:
- Save the time of creditors to involve in possession activity.
- Easy to hire.
- Provide smooth functioning.
Liquidation refer to as the ceasing of the company in which all the property of an organisation get sold out with the fulfil of debts of a firm. The amount which get left after recovering the debts is distributed among different shareholders of the company. The advantages of this process are as follow:
- Reduce the load of paying debts.
- Sometimes enables and organisation to fulfil its debts due to get insolvent.
An administrator is a person who hold the right of insolvent company who look over on the business, property, affairs and financial circumstances which are faced by an organisation. After analysing all such things it become easy for an administrator to identify that in future will the company be able to complete the interest of creditors. They also found out the best alternatives through which an appropriate result can get.
The issues which are related with an external administration are as follow:
- The administrator is not properly know about the company norms and its working days are less in number. So if he failed in getting any point the result may be in the form of winding up.
- The receiver is a person who only wants its money. So in case of any kind of delay it might be sue against an organisation.
- They want their money on time they just do not care about anything that company is suffering from any kind of problem.
- Due to delay in paying the debts may leads result in selling out the assets of a firm. This promotes the method of liquidatio0n in which company have to sol out their property.
- VA is a person who helps in solving out the financial crises of an organisation. The main issue which is related with this person is that sometimes accounts of a firm may leads in resulting bad understanding about their records. So an individual take decision on such basis.
- Scheme of arrangement helps in providing a better path through which company can pay off their debts. If shareholders do not get the amount of money they take the shares of a firm on the place of property. This leads in case an entity again want to start their business they have to pay certain amount of money to their existing shareholders.
These are some of the general issues which face by DDW at the time when they got solvent. Their capacity to meet with all of their debts become low and their property might get sold for paying their loans. Banks refused to allot them more amount of loan for making their business success and keep it on track due to failure in amount of interest from last 12 months.
Hence for overcoming all these issues of DDW in this they have to utilise some of the ways through which they can overcome from all the relevant problems. In this concern steps which which should have to be taken into account are as follow:
- Directors have to hand over their business to the administrator so that it can take effective decision.
- They should have to support them in a proper manner by providing helps in better understanding about their financial records.
- First they have to settle down the loan of bank so that they can arrange some more fund through which other creditor's debts can be paid off.
- Use their assets effectively and sold out in the global market for getting higher return.
Hence, they have to utilise these steps through which they can save up their business and be able to continue run it up. Also they have to take their creditors and shareholders in good faith through which their work become easy and they can handle any situation. This helps them in arrange more and more funds to meet with their debts.
Additional information which helps in better report formation
The administrator already look upon on the financial re[ports of the company. This helps him taking effective decision process. All then legal obligations have to fulfil and which aid an organisation to become insolvent in a proper format. If an administrator found any kind of deviation then it should have to end up the business. But they have to follow some steps through which they have to work so that their report become effective. They have to conduct several steps for this concern which are as follow:
- Legal formulation: They have to follow the legal format through which their work become easy.
- Use the accounting standard properly so that their work can managed. This helps them in analyse the deviations which occur at the time of financial problems. Use of their liquidations in a proper manner so that their debts can be meet out. Along with this it should have to be shown in the revaluation account.
- Revaluation account helps them most because it helps in finding out the actual value of the assets.
- Also they have to wind up their business by paying all the debts which helps in showing the positive aspect of their business. This positive aspect can help them most in a significant manner.
- Appoint the liquidator on their own will so that they can find that is their company be able to generate profit or pay off the debts of others.
- Taking decision which are based on the creditors perspective. This help them in showing that they are more concerned about them.
- Pay off their debts to the bank first this helps them in getting their faith again.
All these things should have to be use by the DDW so that they can again gain the faith of their shareholders and creditors. One of the best method through which their financial reports become more attractive are as follow:
- Prepare revaluation account: By using this technique this helps them in ascertain all of their assets and liabilities value at the time of winding up.
- The another importance by consulting this approach is to pay of their debts in full settlement.
- Along with such things it also aid them in recover all the amount which do not get covered yet. This helps them in providing a little base.
- They can use the method of statutory demand which helps them in knowing about the legal aspects which are related with the business.
The major problem which is faced by the company after winding up the business is about that director loose their rights over from the business after winding up. This is one of the major problem.
Hence, they have to formulate such memorandum ion which they can bound their directors to helps VA. This process aid an organisation to make their wind up successful. Not only this their reports can also become appropriate in understanding to the administrator.
The main problem which get arise due to this winding up process is on the employees of the company. They get dismissed automatically. This lead in make them jobless and this increase the competition in market. This could get done only in the general winding up process where as on the other hand voluntary winding up helps them to remain in the job. It is completely depend on the VA that he or she wants to end up the business or not. If he or she do not end up the business thi8s may safe the job of many people.
Liquidator have certain number of powers through which it promote the business in long run. These power includes:
- Carry on business till the end he or she wants.
- Pay any class of the creditors according to the CA of the company.
- Make any compromise or arrangement which helps in paying off the creditors in respect of their claims.
- Helps in bring and defend any proceeding in respect to the company name.
- Sell or dispose of any part of the property whenever it is needed for fund.
- Receive all the receipts on behalf of company.
- Perform all such things which are necessary for the winding up process and do necessary things which are helpful in company survival.
All these things have to consider by the DDW through which their working become easy and convenient. Their directors should have to consult these things which helps them most. Their directors promote the working of voluntary administrator. So that all decision can promote the voluntar6y winding up in a proper manner.
Also they have to hire liquidators who help them in operate their business properly. This helps them in another manner. Now directors become able to take decision because administrator is hire by them. The main work of the liquidator is to sale the property of the company on best possible prices. It is one of the best suitable technique for recovering all the debts of the company and made it in the profitable manner again.
If the director do not want to start their business again then they can hire the liquidator through which their can maintain their business activity and lead to promote their business in a proper manner. They also helps them to run their business in profitable manner by selling out the complete assets of the business.
It is concluded from the above report that insolvency occur when a business organisation failed to meet with its obligations. In other words it can be said that when the debts become more and equity become less then the company is in the position of insolvency. The whole decision is in the hands of the director if they want to end up their business they can do this. But at the time when organisation is suffering heavy loss again and again, then their business should have to get wind up.