COMPANY LAW CASE OF NICOLA

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?

TEXT BOOK
Text book
CiroT. & Symes C.,(2009) corporation law in principle 8th edition Thomson Reuters

 SOLUTION

Question 1

Issue: In current situation Nicola and May were planning to expand their business. For this they need to hire a manager who can take care of one of the shop. As their business is growing they are also planning to incorporate.  The issue that is arising here is that whether they should incorporate or not. If yes, which type of incorporation will suit best with their business?

Law: In Australia the laws related to the incorporation is governed by the Corporation Act, 2001. As per this law a corporation is any body corporate or unincorporated body under any law of that place. The body may hold property in the name any manager or any body duly appointed for this purpose. For any corporate, incorporation is very necessary and beneficial. After incorporation this body transforms into a company. [Balakrishna, 2009]

Advantages of Incorporation: After incorporation a company becomes a corporate personality, which has a separate legal entity. There was a most celebrated case decided by House of Lords on this is Solomon v Solomon co. Pvt Ltd. (1897 AC 22).  Another major advantage of the incorporation is the limitation of liability. After being separate legal entity on incorporation, the company starts leading its own life and members are not liable for any debt. They are liable only to the extent of their own share. [Ciro, 2009]  An incorporated company never dies, the members come and go but the company lives forever. [Re K/9 Meat supplies (Guildford) Ltd (1966) 3 All ER 320]

Disadvantages of Incorporation: Incorporation also gives opportunity to the company to attract professional managers. It gives it the professional status. Whereas there are also some disadvantages of the incorporation of company such as, lifting of the corporate veil. Although a company after incorporation will be a separate legal entity and will live its own life but the court may at any time with reason can order to look beyond the veil. In case of any fraud or mischief by any member (Gilford Motors v Horne) or when determining the character of the Company (Daimler Co Ltd. v Continental tyre and Rubber Co)   the courts may order to lift the corporate veil and find out the culprit.

Second, the Incorporated Company requires a lot of formalities and complexities from its Incorporation to administration.  In other words Incorporation is a very expensive affair.

Companies are broadly classified according to the size and liability. Mainly there are two types of Companies in Australia, Propriety Company and Public Company on the basis of size. The propriety company may be limited liability or no liability company. But there is restriction on the no liability companies in Australia except in mining Industries. [James, 2008]

Advice to Nicola

It won’t be wrong to say that Incorporation has many disadvantages but we can not ignore the enormous benefits of Incorporation for the person who wants the new business to start. Hence I will advice Nicola for the Incorporation of a small scale propriety Company limited by shares because first of all in a propriety company the disclosure requirements is less and its shares are not offered to the public and a large propriety Company has to appoint an auditor and lodge an appropriate financial statements with Australian Securities and Investments Commission (ASIC). On other hand if Nicola incorporates as a small propriety Company, they are required only to prepare audited financial statement if ordered by the ASIC. [Middletons, 2012] The propriety companies limited by shares are very popular in Australia this is because, the shareholders are not liable for the company, and they are only liable to the extent of the capital originally vested in the Company.

Question 2

1. Marcia, with an intention to become an employee wanted to register a Company and that to a propriety company in her own name. She filled the Incorporation form for the business registration with her name and as a sole director of the Company. [Christie Loretti, 2012] The business incorporation requirements can slightly vary in different jurisdictions but the main thing is that the person must provide the essential information to ASIC. Every business which is required to be registered must be under part 5 B.2 of the Corporations Act 2001. The company must give names of their office holders with their consensual forms. The directors of the Company must be above 18 at the time of registration. [Cyro, 2009] Here Marcia misinterpreted her age as 19 years in the registration papers. If ASIC found it that the age was fraudulently mentioned as 19 years then it can cancel the registration of Company later. The advice here to Marcia is to delay the incorporation till she attain the age of majority as per the rules.
2. Marcia can register her Company in her own Name as Marcia Guaranteed Sparkle Pty Ltd. but the first step in this is to make sure that the name is not taken by someone else earlier or check the availability of the name. Second she has to reserve the name although this is not mandatory but if she has to reserve the name from being used by someone else she has to fill form 410 for the request for reserving the name of the company. The ASIC will allow the reservation of name for two months only if it is not similar to the name already taken by someone or it carries the similar to the name of the company carrying the national business. [Australian Trade commission, 2011]  ASIC may not allow her to reserve the name if the business itself fails in the requirements of registration.
3. Rules relating to Registered office in Australia is that every company which is to be registered must have the office in Australia but it should not be a post office. [Hopkins, 2012] Marcia can use her parent’s home as her registered office and she has show the consent of the occupier of that premises to ASIC. The occupation of office like this arise the strict liability of the company. The consent is essential because if ASIC further came to know that the occupiers did not consented for the premises to be used for the registered office of the company or have withdrawn the consent, ASIC may give notice to the director that it wants to change the address of the registered office as the address of the director of the Company. If in such case Marcia fails to give the address of new office then ASIC will change the address to the directors address. [Common Wealth Consolidated Act,]
4. Yes, Marcia is required to display her registration number i.e. the ACN/ABN number in her every account and outside her parents house which is her registered office. It is required by section 610 CW of the corporation Act 2001 and as per the rules of registration by ASIC that every registrable Australian body must display its ACN number and name in a conspicuous place in visible character outside every office of the registered company so that it will be open to public. In addition the company also has to display its place of origin, whether this is a limited liability company or not and if it is its registered office then must be mentioned the “Registered Office”. For the registration number of the company it is required that all the public documents of the Company and negotiable instruments must contain the number. [ASIC,2012]

Question 3

There is nothing to worry about the appointment of director for your Company (Mr. Shifty, Mr. Avoidable and Mr. Marginal) because The Corporation Act has nothing much important to say about the qualification, statutory, academically or publically of a Director. It is possible for anyone to be the director of the Company if he or she is above 18. [Section 201B of Corporation Act] for any propriety company there must be one director which must be the resident of Australia and for public company at least three out of which two must be the residents of Australia.  The person can only be disqualified or restricted to become a director by the ASIC or the courts. [PWC, 2011]  The grounds on which ASIC can disqualify anyone to become a director are many such as, if the person becomes bankrupt or on the basis of personal insolvency and who have been convicted of various offences, such as fraud or any offence under the Company Law. So, as Mr. Shifty do not want to be the Director nor the Secretary and Mr. Avoidable is under the Conviction for the offence and will not be available for the meetings they can not be the Director, also Mr. Marginal is suffering from Alzeimer and unable to do his work, can’t be appointed as director. Keeping in mind all these I will suggest you to appoint the family Company of Mr. shifty as the sole director of the company because in case of sole Director you need not be appointing a Secretary and bother about the constitution.

The liquidation is a situation where the company faces financial difficulties or realizes that they are becoming insolvent or is likely to become insolvent i.e. not able to pay the debts. [Tony Cyro, 2009] When on finalization of liquidation conducted by the liquidator it was found that the company will not be able to pay the debts of unsecured creditors, the company should be deregistered because liquidation is considered as the orderly winding up of the Company. [ASIC Information Sheet, 2008] The deregistration of the Company also results in the capital loss. Once the company is deregistered it no more remains the member of consolidated group as it ceases to exist. [Consolidated Reference manual, 2011] Although it was find by the creditors liquidation that Mr. shifty and his company is not involved in the insolvency of the company this time but it was also found that they are engaged in similar kind of business from past 9 months. First of all it is a duty of the Director not to trade while insolvent i.e. whenever taking any new debt it is the duty of the director to check that whether his company is in insolvency or having the chance of become insolvent. There are various penalties for the directors who continue to trade while being insolvent, civil penalty or pecuniary penalty of $200,000, in addition to this, compensatory penalties can also be imposed on the directors.  The director may be held personally liable for the debts as a consequence to this. In order to take insolvent action against the director of any insolvent Company, it is generally presumed by ASIC that the company was insolvent through out the period since it can not shown that it failed to maintain proper financial records.

References:

1. Ciro T. and Antonio, 2009, ‘Corporation Law: in Principle’, 8^th Edition, Thomason Reuter Publication.
2. Balakrishna Avinash, 2009, ‘Advantages and Disadvantages of a Company’, Notes on Company Law, Viewed on 30^th May 2012 from http://www.hanumant.com/CompanyLaw-ByAvinash.html
3. Cox James, 2008, ‘Six different types of public and propriety Company’, viewed on 31^st May 2012 from http://www.jamescox.com.au/six-different-types-of-public-and-proprietary-companies/
4.  Middletons, 2012, ‘Companies incorporated in Australia’, viewed on  May 31, 2012 from http://www.middletons.com/publications/dbia.asp?lvl=2&id=19
5. Christie Loretti, 2012, ‘Requirements of incorporation’ Viewed on 31^st May 2012 from http://smallbusiness.chron.com/requirements-incorporation-4391.html
6. Australian Trade commission, 2011, ‘Structure for establishing a business in Australia’, viewed on May 31, 2012 from http://www.austrade.gov.au/ArticleDocuments/1358/Structures-for-Establishing-a-business-guide.pdf.aspx
7.  Hopkins, 2012, ‘Australian Companies: Requirements of the Act’, viewed on 31^st May 2012 from http://www.hopkinscorporate.com.au/companies/australian-companies-corporations-act-requirements
8. Australian Securities and Investment Commission, 2012, ‘Starting a company’ Viewed on 31^st May 2012 from http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Starting%20a%20company%20or%20business
9.  Price Waterhouse Coopers, 2011, ‘Guide to the Directors for duties and responsibilities’, viewed on May 31, 2012 from http://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf
10. ASIC Information Sheet, 2008, ‘Insolvency: A guide To Directors’, viewed on May 31, 2012 from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Insolvency_guide_for_directors.pdf/$file/Insolvency_guide_for_directors.pdf
11. Consolidated Reference manual, 2011, ‘Liquidation and deregistration’, viewed on May 31, 2012 from http://www.ato.gov.au/content/downloads/bus34764crmC0701220.pdf

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