CORPORATE LAW

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 and its different types.

Principle of law

The first step which is needed to be taken by a person in order to establish a company is to incorporate it. There are several types of incorporations which are permitted by law and it is dependent on the needs of the business as to which particular form of incorporation should be chosen by the person. There are certain advantages that comes with incorporation and those are the advantages of (i) Limited Liability advantage protects the shareholders from the liabilities of the company because of any debt and holds them responsible only to the extent of the money that has been put by them in the shares of the company and in some cases by the amount of guarantee that has been given by them; (ii) taxation advantages can also be availed once a company is incorporated, there are no such benefits for unincorporated companies; (iii) flow of money advantage as sale of stock and securities can be conducted and more money can be fetched. Moreover, financial institutions also do not hesitate to provide incorporated companies with capital; and (iv) identity advantage as an incorporated company has a proper legal identity of its own and earn goodwill which helps in the long run.  It is not true that incorporation has only positives under its garb but there are some disadvantages also that come with incorporation and those are (i) it takes a lot of money to establish an incorporated company because of several formalities like payments is required to be made to governmental authorities, fees to be paid to the lawyers etc; (ii) Maintenance and recording cost as a lot of paperwork is involved and these papers need to be handled properly like the memorandum of the company, the article of association of the company; and (iii) it is always not true that there is no liability on shareholders and it can arise in case of a guarantee rendered by the shareholder of the company thus creating a charge on his assets and properties.(Baxt,2003)

The law provides a wide choice to a person to select the type of incorporation for his company depending upon the requirements of the business. At later stages the person can shift from one type of incorporation to any other type of the incorporation if the needs of the business changes with the time so also the incorporation can change. There are public companies and then there are proprietary companies. Both the types of companies are further divided into several types and all the subtypes of companies have their own distinct features. The Public companies are authorised to disclose themselves and thus can call for capital from the market giving thus it an advantage over proprietary companies.  One of the characteristic of the public company as laid by the law is that every public company is required to be under the control of at least 3 directors with two Australian residential directors. These public companies are either limited by shares or by guarantee. The few public companies are no liability companies and some are unlimited companies. As the name of each is indicative enough in limited by shares and guarantee a shareholder is liable to the extent of his shares and guarantee respectively. (Cassidy,2006)Mining is a risky venture in Australia and companies engaged in such activities have been treated specially by law and these are no liability companies. There is no hold on the shareholders liability in an unlimited liability public company. Proprietary companies are distinctly different from public companies and are limited by shares where liability as in public limited companies by shares is to the extent of shares in the company. The other type of proprietary company is an unlimited with share capital company where as an unlimited public company there is no hold on the liabilities that have to be borne by a shareholder.

Apply the law to the facts

The book business of Nicole is not a very big and in order to expand it a big flush of money is required. Nicole has an opportunity in hand to buy additional shops in the market and that can be made possible if Nicole incorporates the company. As studied above financial institutions are more willing to provide with money those companies which are incorporated rather than those which have no legal status and credibility.(Baxt,2009) Nicole is also willing to have minimal liabilities in the debts of the company and it is true that incorporation can resolve this issue to a great extent as studied above in the advantages of incorporation. The life of a company is not dependent on the life of the shareholders, it has its own individual identity and has its own life and continues irrespective of the shareholders. In my view incorporation can resolve all major and minor concerns of Nicole to a great extent and the company can get incorporated as a small proprietary company which can a limited liability by shares. Such company will not require huge investments and secondly suits Nicole needs perfectly.

Conclusion

In the end we reach to a conclusion that Nicole should opt for incorporation of his company and the model chosen is a limited by shares proprietary company.

Answer 2

1. A.              It is stated in law that any person can be a director with a restriction of people below 18 years of age. The minimum age criteria as laid by law to be a director of a company is at the minimum of 18 years. The law is silent on any other like academic qualification for a director of a company. In the present case in hand Marcia has not yet reached to the prescribed age of 18 years and is just 17 years old hence she does not possess the basic qualification of being a director of a company.  As further stated in the case she has provided wrong information to the Australian Securities and Exchange Commission the regulatory body with respect to her age and furnished that her age is 19 years which is in actual 17 years.  It is made mandatory by law that a director is required to furnish his personal information that includes a column for date of birth as well per section 205 B of the Corporations Act of the year 2001 to the Australian Securities and Exchange Commission. The personal information that is date of birth of Marcia  is a false statement that she has made to the authority and this lie is considered as fraud in the eyes of law and any person committing such fraud is strictly liable for his or her acts. Furnishing wrong information to Australian Securities and Exchange Commission is a serious offence and an investigation can be conducted by the authority and the result of such investigation can be disastrous the company can de registered thus throwing Marcia from the office of Director.

1. B.              The name of the company should reflect the legal status of the company like Pty or proprietary after the name of the company reflects that the company is a proprietary company and no a public company. Name is enough to clear the mind of the people who are dealing with the company and there is no requirement to see the documents of the company. The name ‘Marcia’s Guaranteed Sparkle Pty Ltd’ clearly states that the company is a limited liability proprietary company and can be registered with the Australian Securities Exchange Commission under the Corporations Act of the year 2001.

Marcia can reserve the name ‘Marcia’s Guaranteed Sparkle Pty Ltd’ with the Australian Securities Exchange Commission. Such reservation will restrict other people to use the same name for their company for the time the company does not get registered.  The process for making such reservations is that an application stating the name of the company to be reserved is filed with the Australian Securities and Exchange Commission. The application is required to be coupled with a fee of $42 and one application can make the name reserved for a period of two months. This application can be renewed by filing the same amount of fee as paid with the first application and this second application will further lead to an extension of two months and for these many months the name will be reserved for the use of Marcia and it is good enough time to get registration of the name done.

1. C.              Marcia is supposed to have a registered office for her company ‘Marcia’s Guaranteed Sparkle Pty Ltd’ as it has been made compulsory by law to have one such registered office. There is no restriction that Marcia cannot give her parents residential address as her registered office address as long as her parents give their permission to receive all communication and notices served on the company and their address be used as a registered address of a company. Public companies are required to be open to the public and same is not applicable on a proprietary company.

D.        Section 153 of the Corporations Act 2001 states that a company is required to exhibit its name or any of its ACN or ABN number on all the company related documents which are meant for public viewing as well as on the negotiable instruments that includes the accounts of the company as well. It is also necessary that name of the company or its ACN or ABN number be mentioned outside the registered office premises hence Marcia need to get the Company name written at her parent’s  place which is the registered office of her company.

Answer 3

The Corporations Act 2001 introduced the concept of replaceable rules in the year July 1998 and gave an option to companies to be either governed by the replaceable rules of the Corporations Act or formulate their own Constitution. If a company had a Constitution but now wants to be governed by replaceable rules then it can repeal the constitution. It is not necessary that if replaceable rules are there then there cannot be any constitution a company can be governed by either or both at the same time. (Harris and Adams, 2009)The replaceable rules are given in detail in the Section 134 and 141 of the Corporations Act of the year 2001. It is better and advisable to be governed by replaceable rules as it saves resources and money, which is required to make a constitution. When something ready to use is available why to go for creating one.

1. A.              A person convicted for any offence under the Corporations Act cannot be made a director of a company (Section 206B Corporations Act 2001) during the phase of conviction and till five years after the release of such person. Ms Avoider has been convicted for an offence falling under the Corporations Act 2001 and is still serving her conviction term hence she cannot be appointed as the director of ‘No-Tax Agents Pty Ltd’. She has a disqualification of conviction to serve as a director.

1. B.              Alzheimer curtails the decision taking power of a person and the sufferer cannot take decision for his own self forget about the good of the company. Mr Marginal requires help of a trustee to deal with his personal business issues s o it cannot be inappropriate to think that he cannot manage the affairs of the company. Such people are considered as incapable and it is a disqualification in the eyes of Australian Securities and Exchange Commission for the position of a director hence Mr Marginal who is seriously suffering from Alzheimer cannot be made the director of the company as he is not mentally capable to take any decision for the benefit of the company No-Tax Agents Pty Ltd.

1. C.              Mr Marginal is suffering from Alzheimer and Ms Avoider is serving her conviction term thus making both of them to be disqualified to act in the position of a director of a company. We are left with Mr Shifty and his family company which are in a position to be made the director of the company upon a special resolution being passed and as there is no Secretary it can be deemed that the company is a proprietary company.(Tomasic and McQueen ,2002)

1. D.              It is matter of serious concern as earlier two companies managed by Mr Shifty has met the same fate hence Australian Securities and Exchange Commission can investigate the matter to find out the role of Mr Shifty in the whole picture even if liquidator does not report of any such act by any of the doers of the company.

References:

Books

1. Baxt, R; Black, A; Hanrahan, P Securities and Finacial Service Law [2003] 6th Ed.
2. Cassidy, J., Concise Corporations Law, (5th ed) [2006] Federation Press, Sydney
3. Harris, J; Hargovan, A; Adams,M Australian Corporate Law 3^rd Edition
4. Roman Tomasic, Stephen Bottomley and Rob McQueen 2002, Corporation Law in Australia, 2^nd Edition.

Legislations

1. Australian Securities and Exchange Commission Act 2001
2. Corporation Act 2001 (Cth) –Austll II

LD42

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