CORPORATE LAW

QUESTION

HA3021 – COMPANY LAW
CASE STUDY

Total Length 1800 – 2000 words

Assessment Marks available – 20 marks

Due Date – Week 10
QUESTION 1 (4 Marks)

Nicola and May are partners in a business which operates a second-hand book
shop. They have two employees working for the business. The shop is located in
leased premises. The business is doing well and has been profitable for them.

An opportunity has arisen to purchase two second-hand book shops in nearby
suburbs. Nicola and May are keen to expand their business. They will need a
large injection of funds to purchase the additional businesses. They will need to
appoint a manager to at least one of the shops, as they will be fully occupied by
the other two.

Nicola is concerned about her potential liability for the debts and liabilities of the
partnership. Also, she is concerned about the future of the business if one of
them should decide to leave, as the lease is in both of their names.

Advise Nicola on the advantages and disadvantages of incorporating. If you
recommend incorporation, what form of incorporation would be the most
appropriate? Why?

QUESTION 2 (8 Marks)

Marcia is an entrepreneurial 17-year old with a busy window cleaning business.
She is studying for a commerce degree. She wants to incorporate her business.
She wants to become an employee of the business so that she can be covered
by workers’ compensation and superannuation. She completes the registration
documents for a proprietary company. She uses her own name as the sole
director/shareholder but falsifies her date of birth (showing she is 19 years old).
ASIC subsequently registers the company having no knowledge of the fraud.

A) If the fraud were discovered what could ASIC do about the company?

Now assume a slightly different scenario. Marcia does not register her company
until she is over 18. She wants to call the company “Marcia’s Guaranteed Sparkle
Pty Ltd”.

B) Will Marcia be able to register the company with this name? If so, how can she
ensure that no one else uses it before her company is registered?

C) Is Marcia required to have a registered office? If so, can she use her parents’
home address and, does the office have to be open to the public?

D) Does she have to display the company name and/or ACN/ABN

– on her accounts?
– outside her parents’ house?

QUESTION 3 (8 Marks)

Mr. Shifty, Ms Avoider and Mr. Marginal call to make an appointment with your
firm, Fees Ruthless, solicitors. You have been asked to establish their new
company (No-Tax Agents Pty Ltd). You advise them not to bother with their own
constitution, but instead to rely on the replaceable rules in the Corporations Act.
Advise who should be appointed as directors of their company in view of the
following information:

A) Mr. Shifty states that he does not want to be appointed a director or secretary.
He suggests instead that:

• his family company be appointed as a director; and
• the company not have a company secretary;

B) Ms Avoider is currently unavailable for meetings as she has five months still to
serve for her last conviction for falsifying company accounts;

C) Mr. Marginal is 72 years old and has Alzheimer’s disease. A trustee has been
appointed to administer his estate.

Assume that Mr. Shifty’s family company subsequently goes into liquidation. In her
report to AS1C, the liquidator states that the secured creditors have been repaid
in full, but the unsecured creditors will not receive more than 20 cents in the
dollar. The liquidator does not find any evidence of wrongdoing on the part of Mr.
Shifty or any of his fellow directors.

D) What (if any) ramifications does this have for Mr. Shifty, assuming that ASIC’s
records show that Mr. Shifty has, over the last nine months, had a similar track
record with two other small, proprietary companies?

SOLUTION

Answer 1

Area of law

Incorporation of Company and forms of incorporations

Principle of law

Incorporation of a company is an important step in the establishment of a company. It is a big umbrella under which falls a variety of business types so it becomes important for a person to first of all determine as to what will be the advantages of incorporating his business and secondly what business structure may suit his business needs the best.(Baxt,2003)

Advantages of Incorporation

Some of the benefits that can be availed upon incorporation are:

• Limited Liability:  The shareholders are generally protected from any personal liability towards the debtors or creditors for the debts of the company. They are liable to the extent of their investment in the shares of the company and or to the amount of guarantee promised. In simple words if a creditor sues a company then his money can be realized from the assets of the company and not that from the assets of the members or shareholders.

• Tax benefits:  certain tax benefits can be availed upon incorporation which are not otherwise possible in an unincorporated business entity

• Easy Access to capital: if business is incorporated then more money can be raised through sale of stock and securities. It is also easier for lending institutions to provide incorporated companies with loans as it is not that much risky as in case of an unincorporated business.

• Legal identification to the company: incorporation adds credibility to the company and gives it an identity through which it can fight for itself and adds to its own goodwill.

Disadvantages of Incorporation

• Start up cost: the process of incorporation of a company involves a lot of money as various fees need to be paid to various government agencies, legal fees, accounting fees etc are also required to be paid.

• Proper records of the company to be maintained: paperwork increases in an incorporated business entity as articles of association, memorandum, notices in case of any change in anything of the company ranging from change in address to the change in directors needs to be informed to proper agencies. Proper records of all financial information need to be maintained.(Cassidy,2006)

• Liability can arise: when shareholders have given personal guarantee to the creditors of the company then in those cases debts can be realized from the assets of the shareholders and they become liable for the debts of the company.

Incorporation of company is a bigger term under which there are several choices for an entrepreneur to choose from. It is not that once a company has been incorporated in some form it cannot be changed later. (Harris,2008)The form of company can be altered at any stage after fulfilment of the basic conditions of that particular type of business. Basically companies can be classified into two types as public companies and proprietary companies for the purposes of incorporation.

• Public Companies are dealt elaborately in the Corporations Act 2001. The public companies are authorised to raise capital from public upon fulfilment of certain disclosure conditions as laid in the Act. These companies have to register themselves with the Australian Stock Exchange. It is a legal obligation of these companies to have a minimum of one shareholder and there is no maximum prescribed limit for shareholders. These Companies need to have at least 3 directors’ and it is required that 2 out of these directors are residing in Australia. Public Companies are further classified into several types and the differences are mainly because of the liability. Public companies which are limited by shares in such companies the liability of shareholders or members is confined to the amount of the shares which have not been yet paid by them. Liability of the members of the company is restricted to the guaranteed amount which shareholder has promised that he will contribute to the company at the time of its winding up in a limited by Guarantee Company.  In No Liability public companies as the name suggest shareholders are no liable for anything and only mining companies are authorised by law to be no liability companies because of the risk involved in this sector. In Unlimited Company shareholders have unlimited liability.

• In a Limited by shares Proprietary Companies there is no liability of shareholders whereas there is no limit on the liability of the shareholders in unlimited with share capital proprietary companies. Like public companies proprietary companies cannot get into raising capital as it needs disclosure of documents which is prohibited in case of a proprietary company. Proprietary companies can be either small or large which depends mostly on the revenue, number of employees it has given employment to and assets that it has.

Apply the law to the facts

As Nicole is required to have large amount of funds to buy additional businesses it is advisable to go for incorporation as it will give the company some credibility and financiers will be willing to invest as risk is less. Secondly, after incorporation the personal liability also diminishes and shareholders will not be responsible for the debts of the company hence incorporation will address the liability concern of Nicole. Thirdly, even if one shareholder leaves, company still continues to survive as was the concern of Nicole. Keeping all the above points in mind it is advisable to go for incorporation ain the form of a proprietary company which is limited by shares and small in nature. Such a company can address all the concerns of Nicole satisfactorily as to investment and liability.

Conclusion

It can be concluded that Nicole can get her company incorporated as a small proprietary company limited by shares.

Answer 2

1. A.              Section 205 B of the Corporations Act 2001 states that a Director of the company is required to furnish his personal information to Australian Securities and Exchange Commission including his date of birth and any wrong information can be considered as a fraud and person making false statements is strictly liable . It is also mandatory per law that the age of the director of a company should be minimum 18 years. Other than this age qualification there is no other academic or other qualification required for being a director of a company. If Marcia is stating her age to be 19 years instead of 17 which is her real age then it can be considered as a fraud under the Corporations Act 2001.She is not qualified to be a director of a company because she does not satisfy the age criteria as laid by the Corporation Act of 2001. Australian Securities Exchange Commission can investigate the matter and cancel the registration of the company along with other penalties. Marcia can be disqualified from acting as the director of her company as she is not yet 18 years of age.(Lam,2011)

1. B.              Yes, Marcia can register her company by the name of ‘Marcia’s Guaranteed Sparkle

Pty Ltd’. Abbreviation of Proprietary is Pty and for Limited is Ltd. and these can be used in the names instead of the full forms.  Section 148 of the Corporations Act 2001 states that the company name should reflect its legal status.

In order to make sure that this name is not used by anybody else before it is registered by Marcia then she can reserve this name with Australian Securities and Exchange Commission by filing an application along with a fee of $ 42 for a period of two months at a time. These two months can be further extended by lodging another application with a fee of $42 with Australian Securities and Exchange Commission and the Commission will reserve the name for Marcia.

1. C.              It is mandatory for a company to have a registered office hence Marcia is required to have a registered office. It can be her parents place but for that it is required that they consent to their address being specified in the notice and be used as a registered address of the company.

It is proprietary company and not a public company hence it is not required or the registered office to be open to public.

D.        Marcia is required by Section 153 of the Corporations Act 2001 to display the company name and/or ACN/ABN on all public documents and all negotiable instruments including its accounts.

Marcia is also required by the same section to display company name and/or ACN/ABN outside her parents’ house as it is the registered office of the Marcia’s company.

Answer 3

After July 1998 replaceable rules are applicable to all companies except in those cases wherein companies have devised their own constitution. Like a company constitution replaceable rules also provide a framework for the management and administration of the company. As stated in Corporations Act 2001(Section 134) a company can function based on the guidelines given in replaceable rules or in constitution or in both.(enotes.com,2012)

For any company incorporated prior to July 1998 there is a provision that these can repeal their own old constitution in order to adopt replaceable rules. Section 141 elaborates in great detail all replaceable rules as well as also states which rule is applicable to what type of company. No-Tax Agents Pty Ltd. has been advised to follow replaceable rules as it save cost and time of framing one’s own constitution.

Ms Avoider will not be able get the leave of the court to serve as a director of the company No-Tax Agents Pty Ltd. because she is convicted and there are still five months for her to serve as her conviction term and during this period she cannot be appointed as director of the company No-Tax Agents Pty Ltd. It is stated in section 206B of the Corporation Act 2001 that a person who has been under the Corporations Act. She has falsified the accounts of the company thus acting in contravention of the Act and is thus disqualified from acting as a director of the company.

Mr Marginal is suffering from Alzheimer and has appointed a trustee to look into his own business matters and because of this incapacity he can also not be appointed as a director of the company No-Tax Agents Pty Ltd. Australian Securities and Exchange Commission has the right to disqualify such people from acting as the director of the company in the general interest of public. A person suffering from Alzheimer cannot take proper decisions which can be detrimental for the company and for the public as well keeping all these in mind Mr Marginal who is suffering from Alzheimer cannot be appointed as a director of No-Tax Agents Pty Ltd. Moreover this disease has no cure and it can also not be assumed that he will be fine one day to serve as a director of the company.(Sealey,1981)

Mr Shifty’s family company can be appointed as the director of the company because the other two cannot be Mr Marginal because of his disease and Ms Avoider because of her conviction. A special resolution can be passed in a general meeting to appoint the director. The company does not have a Secretary that means it is a proprietary company because for public companies it is mandatory to have at the minimum one secretary. Hence this family company of Mr Shifty which is a proprietary company can be appointed as a director of the company ‘No-Tax Agents Pty Ltd’.

1. D.              Liquidators report says that the secured creditors can be paid in full but there is no money with the company to pay to the unsecured creditors which are not prioritized in the ranking of payments. Mr Shifty being the director of the company and on observation of his past track record of similar nature in other two proprietary companies, the matter can be investigated by Australian Securities and Exchange Commission for the involvement of any fraudulent act because of which the company went into liquidation. This issue can be investigated by Australian Securities and Exchange Commission even if the liquidator has not found any wrong doing on the part of Mr Shifty, Mr Marginal and Ms Avoider.

References:

1. Australian Securities and Exchange Commission Act 2001
2. Baxt, R; Black, A; Hanrahan, P Securities and Finacial Service Law (2003) 6th Ed.
3. Corporation Act 2001 (Cth) –Austll II
4. Cassidy, J. 2006, Concise Corporations Law, (5th ed) Federation Press, Sydney
5. Harris, J; Hargovan, A; Adams,M Australian Corporate Law 3^rd Edition
6. 6.                 Australian Securities and Investment Commission, viewed on 4^th may 2012,www.asic.gov.au

7.Albert Lam, Share holders right: the Derivative Action, Hampton, Winter and gleynn, [2011],  viewed on 6^th may 2012, http://www.hwg-law.com/articles/shareholders-rights-part-i-common-law-derivative-action

8.E-notes, Shareholders rights, Business Law, [2012] viewed on 6^th may 2012, http://www.enotes.com/business-law-reference/shareholder-rights

9.L S Sealy, Foss v Harbottle- A marathon where nobody Wins’, (1981), Modern Law review, Cambridge Law Journal, 202.

KH96

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