Paralegal Advice (Essay Sample)

Question: 1) Advise Jorgen what he can do about the loan?
2) Why would Jorgen be concerned about the loan being taken out by the company?
Introduction
Jorgen is a shareholder in the company and therefore entitled to privileges of a shareholder in corporate law. If the company he has invested shares in, wants to acquire a loan and Jorgen is not contended about it he can take legal measures against the company. Based on the principle of shareholder primacy that gives shareholders the right to dispute decisions made by the directors that contradicts the interests of shareholders. For example in the case of Barlow Versus A.P Smith Manufacturing Company (1953).
Advise to Jorge about the loan
Verse (2006) suggests that instead of companies going to borrow from the financial institutions, shareholder can fill the void and lend the company capital instead. This is beneficial since the shareholders can loan the company capital at very low interest rate and also spread the payment period to a longer time compared to the financial institutions. This move will enable the company to pay the debt without much financial strains, because this loan is always of very low interest and re-payment is spread over a long period of time as bargained by the company. It can be applied in this case, by Jorge and fellow shareholders loaning the company the amount instead of acquiring the loan from the bank. For example Deloitte International Company, prefers acquiring loans from their shareholders rather than from financial institutions due to the bureaucracy, terms and conditions associated with financial institutions (Deloitte tax news, 2013).
According to Velasco (2006) a shareholder can sue the directors by providing evidence of gross negligent although this should be the last resort especially if the directors go against the decisions made by shareholders through a unanimous vote. Jorgen can sue the directors for gross negligent, giving an evidence of the commitment towards a large sum of debt and request the court to intervene and stop the directors from the commitments. For instance in the case of Broz versus Cellular Information System Inc. (1996).
Why Jorgen should be concerned about the loan
When a company takes a loan from any financial institution, it is equivalent to a debt, and it must be paid. This commits the company’s initial capital to debt payment, which reduces the amount of profit it had prior to the debt, especially, if it is a high level debt as stated. This trickles down to reduce the dividends that shareholders are entitled to (Morin, 2006). This happened in 2012, when the shareholders of Sainsbury Company in United Kingdom received low dividends due to large debt the company had accrued in that financial year (Sainsbury Annual Report 2014).
Cecchett et.al (2011), argues that high debt leads to bankruptcy and insolvency. The people affected most when companies are declared bankrupt or insolvent are shareholders. This is because they come last in terms of compensation during liquidation of the company assets. Priority is given to the bondholders, secured creditors, unsecured creditors and lastly shareholders. In most cases a shareholder can lose money totally or gain very little compared to what the person had invested earlier resulting to an overall loss. For example in the case of Taylor versus Standard Gas and Electronic Company (1939)
Conclusion
In summary, when a company borrows, it does not always have negative consequences. Debts enables companies to grow, expand and increase production in the market and also respond to critical situations that may otherwise force it to shut down. In this case the shareholders of JMC Pty Ltd should not be naturally against the company borrowing but should also consider the positive side of borrowing and the positive effects it will bring to their company.