Question

plz answer the question for business entity law below:

Question 22 (this question has two parts- answer both parts) (a) Rexico Ltd is a scientific instruments manufacturing company which has been operating for about 5 years. The board has decided it needs more funds, approximately $8milion, to fund an expansion into Asia. It is considering an offering of either shares or debentures. The company has existing ordinary shareholders, no debenture holders and a credit facility from What Bank secured by a charge over circulating and non-circulating assets. The board of Rexico seeks your advice. What are the benefits and disadvantages of opting to issue debentures rather than shares. In either event could the offer be structured in a way so as to avoid the need for a disclosure document? Advise the board citing cases and legislation in support of your advice. (10 marks) (b) Rexico Ltd decides on a public offer of shares. In the disclosure document it is stated that Rexico has applied for patents on 5 specified scientific instruments when applications have actually only been lodged for 2. The earnings forecast was based on the lodgement of 5 patent applications and as a result it was overly optimistic. Pablo is an executive director who has been instructing the patent attorneys on behalf of Rexico. The other six directors on the board have not personally dealt with the patent applications and have relied on information supplied to the board by company employees. Shares were issued at $2 per share. The price on the ASX has since slumped to $1.20 per share. Trevor and Tamsin bought shares in Rexico based on the disclosure document. They seek you advice what, if any action they may be able to take against the directors or Rexico Ltd to recover their loss. Advise them citing cases and legislation in support of your advice (10 marks)

Answer 1

A) benefits of issuing debentures are if the return on investment is greater than return on capital than issuing debentures is more profitable than issue of shares. As then the extra profit will be used for payment of instalment + interest as if we issue shares then the extra payment would be given to equity holders. Also the interest is tax deductible.

The disadvantage is that when the fixed obligations can be burdensome when there is no profit and also the debentures ask for collateral which can be burdensome for company

B) the company has no responsibility to outsiders regarding the memorandum and articles of association