Question

(a) The directors of Happy Trails are keen to purchase a block of land next door to the company’s business premises for $150,000 which will allow the company to expand. They set up a subsidiary company to purchase the land with the intention that Happy Trails would become the sole shareholder of the subsidiary. Happy Trails contributed $10,000 capital as a deposit to the subsidiary with the intention that the balance of the purchase price would be raised by way of a bank loan. However, the bank wanted $40,000 deposit and Happy Trails did not have enough cash to make up the shortfall. The three directors of Happy Trails decide to contribute $10,000 each personally in order for the sale to proceed. By doing so, they became shareholders of the subsidiary. One year later Happy Trails decides that they don’t need to expand, and the land is sold for $300,000 and the directors who had put in their own money to finance the deal made a large profit. Miss Eli and Mr Wu argue that the whole of the profit belonged to Happy Trails and that the three directors should not be allowed to keep their profit. Advise Miss Eli and Mr Wu. b) The three directors recently had a serious disagreement about the direction the company should take and as a result they are hardly speaking to each other. This means that it is very difficult for any business decisions to be made and the company is suffering financially. Mr Wu is very concerned as a shareholder. Advise Mr Wu

Answer 1

(a)

In Given Question it is clearly mentioned that three Directors of the Happy Trails Setup a Subsidiary Company for Purchasing a land to Expand Business and hold all the shares of it .

Further they contribute $10000 each for purchasing Land as Happy Trails did not have enough cash and so they are also becomes Shareholders of the Subsidiary

As per legal provision regarding it Company has a separate entity & distinct from Shareholders & any profit made by the company is the return on capital of the company

Now when a company winds up, after paying off the debts to outsiders, the company distributes remaining profits among the owners (shareholders) according to their respective share in the company.

In the given case Company sold the land for $ 300000 and made a large profit after deducting the sale from the cost in which land was purchased.Profit from sale of land is distributed among the shareholders i.e Happy Trail & three Directors of it

Thus the opinion of  Miss Eli and Mr Wu that whole profit belongs to the holding company Happy trails is not correct rather it should be distributed according to the shares they hold among the directors and Happy trails.

(b)

It is given that there is serious disagreements among Directors of Happy Trails & they hardly speaking each other & also company suffering from financial issues ,Mr. Wu is Concerned as a shareholder.

The understanding & trust among Director is crucial for growth & success of any business if they are broken it threatens the future of company .

In order for a business to function effectively there must be a strong & trustworthy relationship between owners & management

When that relationship breaks down, and a dispute occurs between the directors lasting damage can be done to the business. This can affect the profitability of the business and its ability to trade.

Dispute between directors need immediate action in order to reach suitable resolution. The sooner this resolution can be reached ,the smaller the negative impact the dispute will have on company

In this we advise Mr.Wu that effective communication between directors may overcome the above situation However, if this communication breaks down, then a dispute might arise.

For disagreement among directors , it may be possible to use mediation or another form of collaborative law to settle this dispute, by giving both sides the opportunity to give their points of view and their grievances, before a solution is reached.

Finally , If the above solutions not worked i.e. if dispute or disagreement not resolved & remain even after legal advise then windup is the final solution to save the company from future loss & damage. So, Seeking urgent meeting and final injunctions may be one solution   to prevent damage to the company