Managing Corporate - Term Paper Example

«Managing Corporate» Table of Contents Introduction 1 Duties and Responsibilities of Directors of a Private Limited Company, with Particular Focus on the Impact of One Director’s Actions on Other Directors 2 Duties and Responsibilities 3 Analysis of the Consequences of Defaulting On Secured and Non-Secured Loans and the Resulting Actions That Can Be Taken By the Bank 7 A Discussion of the Main Differences between a Private Limited Company and Public Limited Company, Including Special Auditing Rules That Apply To PLC's 8 An Evaluation of Whether Conflict of Interest On Behalf of the Bank Applies In Relation To Carol 9 An Analysis Of Your Decision Not To Divulge Carol’s Actions But Later Doing So With A Description Of Remedies Available To Both Customer and Bank 11 A Description of Ways in Which A Public Limited Company Can Raise Finance That Is Not Available To A Private Limited Company 12 A Discussion of the Bank’s Duties and Responsibilities When Providing Advice under their Contract with the Customer, In Particular, In Relation To Funding 13 Reference 15 Bibliography 18 Introduction In today’s business world, none of the companies can be identified as an island. Each and everyone of it are linked with one another by a complex network of relationships with suppliers, customers, and other business partners. To run an organisation with the aid of an effective management the managers needs to reinforce these relationships. Efficient relationship management is the primary pillar on which the survival and existence of a company is based (Kubi & Doku, 2010). CRM or customer relationship management forms an integral part of a company’s management structure. As the market situation of the world is getting complex day by day thus there is a less availability of new customers. The purpose of CRM is to retain their customers at all times and to build the trust and reliability of those customers more to become devoted towards the organisation and their offerings (Rittippant & Et. Al., 2009). In context to the study, it is note worthy that a code known as the Audit Firm Governance Code is applicable to companies in UK. This code is aimed to promote the confidence and choice in markets for the audit of the listed companies. The code is helpful to the stakeholders at large (European Corporate Governance Institute, 2010). Duties and Responsibilities of Directors of a Private Limited Company, with Particular Focus on the Impact of One Director’s Actions on Other Directors Duties and Responsibilities The shareholders are the real owners of any limited company and are run by a director. The main duties and responsibilities of a director of a private limited company according to Companies Act of UK are broadly discussed below: Duties Statutory duties are those that are included in company’s act 1985, 1989 and 2006. Under the 2006 Act, the various duties of a director are; To act within the powers of a director This means that a director is liable to act according to the policies stated in the foundation of the company and should exercise those powers that are provided to them in the articles. The directors are therefore required to get familiarise with the articles and powers provided in their document. To promote the success of the company The director is entitled to look upon the tasks which will aid to achieve maximisation of profits and also which follows ethical path. The director is required to strengthen the relationships within the company that exists among the suppliers, customers and others. To exercise the independent judgment A director may seek advice from other directors when required but he cannot blindly follow their judgments. He is responsible to deliver his own judgments when desired. Duty to exercise reasonable care, skill and diligence Each director comes to the organisation with some specified expertise on domain knowledge. For example, a director with the accounting qualification is desired to exercise more actively in scrutinising the accounts of the company. He is required to do it with due diligence and care. To avoid situations that could give rise to conflicts of interest The director should not work for an interest that would lead to a conflict. He is subjected to avoid such situations where is directly or indirectly related to the third party. Other duties Under Health and Safety Works Act 1974, a director of a company is liable to be punished accompanied by imprisonment if he is found guilty for any offences made (HSE, 2010). Hence under the 2006 Act, the directors are also responsible for duties towards health and safety, employment and tax legislation (Companies House, 2010). Other statutory duties under 2006 Act 1. Substantial Property Transactions 2. Loans, Quasi Loans and credit Transactions 3. Political Donations 4. Protection against personal liability 5. Liabilities towards indemnities and insurance 6. Environmental legislation and, 7. Product liability. (Withers Worldwide, n. d.). Responsibilities Recording minutes of all director’s meetings Making of annual return Keeping proper accounting records Table accounts, balance sheet directors should report at Annual general Meeting Circulating audited accounts to the members Appointing the auditors and company secretary To comply with the prohibition, limitations and restriction of a private limited company Ensuring that the dividends distributed are derived only from profit, and, Making declaration of solvency in case of temporary winding up by a member. (KL Management Services, 2010). Impact of one Director’s Actions on another Director As the company grows big, the number of directors increases in the companies. An important consideration in this respect how the action of one director impacts upon the other directors. The statutes categorically specify that the directors are independent of each other and one director should not be influenced by the actions or perceptions of the other. The directors need to operate and function within the well defined power that they possess. But the matter of fact is that one director can often get influenced by the actions of the other in a real scenario and many a times, they might operate in cartel too. Considering statutes, the action of director should not impact the other director. Analysis of the Consequences of Defaulting On Secured and Non-Secured Loans and the Resulting Actions That Can Be Taken By the Bank Secured loans are loans which are offered by accepting some collateral that serves as a means of security. These are generally loans with larger amounts, longer payment period and lower interest rates. On the other hand, the unsecured loans are loans that are offered based on the borrower’s past credit history. These are generally smaller loan amounts, with few pay back options and higher rate of interest. The rate of interest is kept or maintained high in order to serve as a purpose of fiscal protection. Our analysis is what consequences occur when secured and unsecured loans are defaulted. Generally the banks may take the following actions on loan default; Credit penalties Asset Repossession Fiscal Penalties and, Legal repercussions. On default of loans, firstly the bank treats it as a bad debt and records it as a liability on their balance sheet. The corporate client is charged lump sum fees over the default amount. Banks may have taken away the collateral which was provided at the time of giving loan into their consideration on default of a loan. Clients will be charged with the fiscal penalties on the default of such loans provided. High risk loans which are known as unsecured loans are charged with higher fiscal penalties. Resulting Actions Whether it is a high risk or low risk loan, client is required to pay some additional fees on default of a loan to the banks. With a larger debt, the banks may take legal action and the court of judge will determine the actions to be taken based on the amount of loan that is being default. The banks might even appoint administrators or arbitrators for the purpose to settle up the loan repayment issue with the big or corporate clients. If all the methods fail, the banks basically dispose of the collateral that had been mortgaged with them to write off the defaulting loans. A Discussion of the Main Differences between a Private Limited Company and Public Limited Company, Including Special Auditing Rules That Apply To PLC's The companies of United Kingdom are generally categorised under public limited companies or PLC and private limited or Ltd. Companies. Although both of them have limited liability but some significant differences are identified between them. Usually, a PLC can offer shares and debentures to the public and thus they are eligible to be listed in the stock exchanges. The status of PLC as a corporate body is much higher than an Ltd company to the banks, customers and suppliers. Also, the law that governs a PLC is more rigorous and cost of structuring a PLC is much higher than an Ltd company. The common factor of both the companies is that they can be converted between each other. In context to PLC, the name given to a company ends with the phrase ‘public limited company’ whereas, in case of an Ltd. The name follows an extension as ‘limited’. With regards to the share holding pattern and structuring; Minimum number of members in case PLC required is two but in an Ltd company the minimum member required is one. In a PLC minimum number of directors required is two but in an Ltd company it is one. In case of a PLC the business cannot begin until the certificate of compliance is obtained mentioning the minimum share capital requirements. But the Ltd Company can begin as soon as they obtain a certificate of incorporation. The minimum authorised capital as approved for a PLC is £50,000 which may be altered by means of the statutory instrument. In Ltd Company the same is not specified. The minimum issued capital for PLC is £50,000 of which is at least £12,500 and ought to be fully paid up altogether with the whole of any premium. In case of Ltd, it is 1 share or nil paid. With regards to audit, The accounts of the PLC must be audited but the later is not required to be audited as it is exempted under S249A (Bond Partners LLP, 2010). An Evaluation of Whether Conflict of Interest On Behalf of the Bank Applies In Relation To Carol Champion4U is a profit making company having two directors named Carol Bell and Tom Champs each having equal shareholding in it. The company has a non-profit making wing named as ChampsUK charity where Carol Bell is a finance director. In both the companies Carol Bell is the sole decision maker. Carol Bell has taken an unethical action by transferring the charity funds to the profit making company in order to meet the loans that they suffered in the credit crunch. Champion4U is having an overdraft facility of £25,000 and a loan of £50,000 secured over its premises. WAC is another customer of bank which has been directed by Champion4U to construct a school. Bank believes WAC has many years experience in the steel frame and construction business and thus they are a genuine customer of bank. For the project WAC requires funding of £4.5 million. Banks conflict of interest may arise against Carol being the owner of WAC, if WAC defaults the loan due to credit crunch. Tournier v National Provincial and Union Bank of England in the year of 1924 had been a trend setting case in the corporate history of United Kingdom. The case had talked about the conflict of interest in between the banks and its customers at length. Also, it has pointed out the four situations where a bank can have the privilege of not maintaining client’s confidentiality which includes that of interest of the bank. In the given case as Carol is found to be decision making authority in both Champion4U and ChampsUK, her involvement with WAC will definitely violate the bank’s interest as WAC is bestowed with the contract of building school for the ChampsUK which can be easily manipulated by Carol with her position in all the three organisations. An Analysis Of Your Decision Not To Divulge Carol’s Actions But Later Doing So With A Description Of Remedies Available To Both Customer and Bank Carol’s action has affected conflict of interest of the bank, therefore as a Relationship Manager of the bank one should inform about the fact to Hamish, the Finance Director of WAC. Although bank is liable to maintain confidentiality of its clients but since both the company is having same ownership, thus bank is bound to disclose the action taken by Carol. In spite of all these, the bank has a good faith and belief on Carol’s ability since she has an expertise in construction and has vast knowledge of third world countries. Both WAC and Champion4U are good customers of the bank and bank does not want to loose any of them. Hence, as a remedial measure bank advices Carol to become the new director of WAC, which the bank believe will be helpful in meeting the future loans without any default (Financial Ombudsman Service, 2005). The case of Tournier v National Provincial and Union Bank of England [1924] clearly stated that bank can do away with confidentiality of the clients if it violates law of the land, public good, and bank’s interest and if the client allows the disclosure. In this case, as Carol is set to be the director of WAC and has also been part of unethical and unlawful money transfer from charitable organisation to the profit making concern, the bank is concerned its own interest as all the three organisations are customers to it. Therefore, to secure bank’s own interest, the Relationship Manager has decided to divulge the details about Carol to Hamish. A Description of Ways in Which A Public Limited Company Can Raise Finance That Is Not Available To A Private Limited Company Public limited company can raise finance from various sources like issuing shares, venture capital, applying for Government grant and bank loans, mortgage, through retained profit and by selling assets. PLC sells their shares to public which means that anyone can purchase that share and become a part of the company’s ownership as he is entitled to the part of profit based on his share of investment. Once the shares are issued they are listed in a stock exchange which helps one to trade that is repeated buy and sell of that particular stock. This provides a wide exposure to a PLC to raise long term finance. On the other hand a Venture capital is an important source of finance that evolves with a group of individuals or companies identified as venture capitalist. They offer monetary capital for the development of a business for a part of profit in return. They are capable of taking high market risks. In UK, government grant acts as an important source of finance for a PLC. This can be European Union, local authority or national government. PLC can go for bank loans. Banks provides loan for a longer period which may be up to 25 years term of repayment. This is the easiest mode of availing finance for a PLC. Although there is risk of increased cost as rate of interest rate may rise. A PLC may seek a mortgage loan for raising their finance by providing their property as collateral. ‘Ploughing Back of Profits’ is a term which is very common in raising business capital by a PLC. It is aimed to utilise the profits earned by the shareholders in a PLC as re-investing them into their business. Selling of assets can also be utilised as a short term finance capital in a PLC (Bizled, 2010). A Discussion of the Bank’s Duties and Responsibilities When Providing Advice under their Contract with the Customer, In Particular, In Relation To Funding Investment banking is significant to the survival of businesses that intends to develop by utilising external capital. Investment banks hence play vital role in process of raising the IPOs and capital. Banking advice is associated with the corporate actions relatively than the product or organisational subject, like, improvement of product, analysis of market or managing the organisation. The various duties and responsibilities are; Understanding the requirement of Client Company Banks duty is to provide general financial advice on various issues related to the structuring of funding Banks advices on the raising of capital Making useful recommendation Providing expertise equity underwriting Providing advice on investment management and fund management Performing tasks on pre-financing of IPO’s Performing ancillary services. Elaborately, the banks first and foremost duty is to understand the needs of the corporate client. Banks provide advice on the structuring the funds by advising on parts of finance that needs to be raised from debt instruments, or obtained by floating IPO’s, or by private placements and public offerings. Banks provide with useful recommendation on the IPO related factors. Investment banks are having expertise in underwriting equities. Their fundamental duty includes providing advice on investment management and fund management and there by assisting their corporate clients. Responsibilities also include delivering ancillary services that basically involves supporting of transaction in trading of securities in secondary market. Reference Bizled, 2010. Long Term Sources of Finance. Sources of Finance for Business. [Online] Available at: http://www.bized.co.uk/educators/level2/finance/activity/sources13.htm [Accessed October 20, 2010]. Bond Partners LLP, 2010. Major Distinctions between Public and Private Companies in the United Kingdom. News. [Online] Available at: http://www.bondpartners.co.uk/News/9/Differences_between_UK_PLCs_and_Private_Companies [Accessed October 20, 2010]. Companies House, 2010. Companies Act 2006. Frequently Asked Questions. [Online] Available at: http://www.companieshouse.gov.uk/infoAndGuide/faq/companiesAct2006.shtml [Accessed October 20, 2010]. European Corporate Governance Institute, 2010. The Audit Firm Governance Code. Documents. [Online] Available at: http://www.ecgi.org/codes/documents/icaew_audit_firm_code_jan2010_en.pdf [Accessed October 20, 2010]. Financial Ombudsman Service, 2005. The banker's Duty of Confidentiality to the Customer. Ombudsman news. [Online] Available at: http://www.financial-ombudsman.org.uk/publications/ombudsman-news/45/45_bankers_duty.htm [Accessed October 20, 2010]. HSE, 2010. Health and Safety at Work etc Act 1974. Legislation. [Online] Available at: http://www.hse.gov.uk/legislation/hswa.htm [Accessed October 20, 2010]. KL Management Services, 2010. Duties and Responsibilities of Directors of a Private Limited Company. Home. [Online] Available at: http://www.klmanagement.com.my/blog/duties-and-responsibilities-of-directors-of-a-private-limited-company/ [Accessed October 20, 2010]. Kubi, B. A. & Doku, A. K., 2010. Towards a Successful Customer Relationship management: A Conceptual Framework. Academic Journals. 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