Question

Background

Hetta Carbury is the Managing Director of Melmotte Ltd (‘Melmotte’), a small private limited company, who is seeking someone to invest in her business. Melmotte has been trading for more than 10 years manufacturing and selling its own-branded perfumes, lotions and candles to the public in its 15 retail stores and to other larger retail companies. Revenue and profits have been steady over the last 10 years up to the end of 2018.

In July 2015 the company appointed a new sales director, Hamilton Fisker, who with his experience and contacts in the wider retail sector has overseen the launch of an on-line shop for Melmotte’s products and secured a lucrative deal with a hotel chain.

Hetta now believes that the business has further opportunities and does not wish to lose the momentum created by Hamilton.

The bank that currently provides both the long-term loan and an overdraft facility has rejected Melmotte’s request for additional funds on the basis that there are insufficient assets to offer for security (the existing funding is secured on Melmotte's property, plant and equipment). Hetta has therefore approached a business contact, Tony Trollope, about potentially investing in Melmotte.

Grosvenor Investments (known as ‘Grosvenor’)

Tony Trollope owned a highly successful technology business which he sold five years ago for £20 million. With the proceeds he then set up an investment company (Grosvenor) that invests primarily in smaller private businesses in need of short- to medium-term funding. Tony sits on the board as a non-executive director of a number of the companies in which his business has invested, and is often able to offer valuable business advice to these companies, especially in the area of research and development activities.

Question 1 – Business structure and corporate governance (Total of 23 marks for this section)

1. Melmotte is currently a Limited Liability (Ltd) company. Explain what is meant by ‘Limited Liability’ in this context, and how this differs from a sole trader company.

Grosvenor will be hoping that the company will be able to become a Public Limited Company (PLC) in a few years’ time. Explain the main difference between a Ltd company and a PLC.

Grosvenor has stated that it would like Melmotte to have an audit each year, despite not being required to do so by law.

2. Explain the purpose of an audit and why an investor like Grosvenor would like the company to have one.

Answer 1

1. A limited liability company is a company where liability of members are limited to the amount of unpaid shares. Which means that members are not liable for the debts of the company. Liabilities of members gets limited to the amount of Unpaid amount on the shares held by them.
2. Next important thing we should understand is the difference between a limited liability company and sole trader company. In a sole trader company, liability is not limited. which means that the liability of the member if unlimited. He is liable for the debts of the company, He is liable for the losses of the company.
3. Audit is an independent examination of Financial information of an entity. Importance of audit arise from the key feature termed as INDEPENDENCE. yeah, audit is being done by a third party who is an independent person who provides unbiased judgement on the state of affairs of the financial position of the company. So as an investor, every investor wishes to have an audit report prepared by an independent person to know about the financial strength of the entity in which they are proposed to be invested.