TASK – Corporate Law
|Course||Bachelor of Business|
|Type of Assessment||Two questions essay|
|Length/Duration||1500 words (Total)|
|1. Demonstrate a working knowledge and|
|understanding of the principles of Australian company|
|Learning outcomes addressed||law within the context of the prescribed readings;|
|2. Identify and analyse relevant facts, problems and|
|legal issues from a given scenario and develop an|
|argument in response, discussing available options in|
|the context of company law|
Question One: kate is the owner of a very successful business selling women’s shoes. Kate’s business is expanding rapidly and she wants to update her business structure from that of sole trader to a more appropriate structure. She seeks the advice of her accountant who tells her that she has a number of options, all of which have advantages and disadvantages. What would be your recommendation to Kate and why? What factors would influence your advice?
Questions two: Myra is the only shareholder and director of Kids Clothes Pty Ltd (Kids Clothes) whic makes cheap children’s clothing. The company has 10 employees. In the past Kids Clothes hadoperated profitably, however since 2011 it has been running at a loss. In July 2012 Myra paid herself a large bonus
and then transferred all the remaining assets of Kids Clothes to a new company called Clothing for Kids Pty Ltd. The employees continue to be employed by Kids Clothes. Kids Clothes has no assets and owes each of its employees several thousand dollars in accumulated holiday, superannuation and long service leave entitlements.
- What possible legal grounds might the employees have to claim their entitlements from Clothing for Kids Pty Ltd?
- Could any action be taken against Myra personally?
Your essay must include:
- Reference to at least 2-‐3 case studies from the text book, supporting your argument.
- Reference to the applicable ethical code of conduct with your argument supporting or refuting the code.
- Correct argument essay structure. Refer to the Academic Learning Skills handout on Essay writing.
- Harvard referencing for any sources you use. Refer to the Academic Learning Skills handout on Referencing.
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References are assessed for their quality. You should draw on quality academic sources, such as books, chapters from edited books, journals etc. Your textbook can be used as a reference, but not the lecturer notes. We want to see evidence that you are capable of conducting your own research. Also, in order to help markers determine students’ understanding of the work they cite, all in-‐text references (not just direct quotes) must include the specific page number/s if shown in the original. Before preparing your assignment or own contribution, please review this YouTube video by clicking on the following link:Plagiarism: How to avoid it You can search for peer-‐reviewed journal articles, which you can find in the online journal databases and which can be accessed from the library homepage. Wikipedia, online dictionaries and online encyclopedias are acceptable as a starting point to gain knowledge about a topic, but should not be overused– these should constitute no more than 10% of your total list of references/sources. Additional information and literature can be used where these are produced by legitimate sources, such as government departments, research institutes such as the NHMRC, or international organisations such as the World Health Organisation (WHO). Legitimate organisations and government departments produce peer reviewed reports and articles and are therefore very useful and mostly very current. The content of the following link explains why it is not acceptable to use non-‐peer reviewed websites: Why can’t I just Google? (thanks to La Trobe University for this video).
Table of Contents
Answer 1. 3
Answer 2. 4
Kate is a successful sole trader dealing in women’s shoes. Since she is looking for expanding her business, it is necessary that she should plan effectively because in case her venture fails, she might end up in debts and thus go bankrupt. Kate has the necessary experience in dealing with women’s shoes, and since she has an accountant, it would not be difficult for her to deal with the bank. Thus, there are certain business structures that can be recommended to her considering the positive sides she has. The choices that are present before her at present are a partnership or a limited liability company.
It can be said that if Kate can find someone who is interested in investing along with her, then she can choose to go into a partnership with the joint capital. A partnership is said to have been formed when two or more people agree to enter into business with the aim of making profits and sharing them (The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal, ). The greatest advantage of a partnership is that it has a very flexible structure because the partners can include all the clauses that they wish to include when the agreement is drafted. Above all, Kate can also have an alteration clause in it because this shall help her to invoke changes at a later stage. However, partnership comes with a bigger disadvantage, and that is it has unlimited liability (Dignam and Lowry, 2009). All the partners become jointly and severally liable for the losses incurred in case the business venture fails. Moreover, even if one partner may be liable for misconduct within the purview of the partnership, nevertheless, the other partner can be held liable for the same (Australian Competition and Consumer Commission v TPG Internet Pty Ltd, ). This indicates that if the business fails, the partners shall fail to pay the creditors of the firm and then Kate shall become responsible for the matter even if she is not involved in any misfeasance.
There is another form of business organization that is suitable for Kate to the present situation, and that is the formation of a Limited Liability Company. She can decide to establish a company that is limited by shares. Since the proposed structure is that of a company limited by shares, it naturally indicates that there shall be shareholders in the company. In such a situation, the liability of the members shall be limited to the capital that is invested on each one of them. So, that is nothing more than the actual face value of each of the shares and the premium that is paid for them when the shares were being issued (Nolte and Ghosheh, 2010). In case, there is any insolvency, the loss of the shareholders shall be limited to the money that they have invested in the company by buying the shares (Dasreef Pty Ltd v Hawchar, ). There shall be no personal liability of the shareholders towards any of the creditors of the company, and this clearly means that all the personal assets of the shareholders shall remain under absolute protection.
There are several advantages of forming a company. Not only will the company of Kate has an independent status of its own, but, it shall acquire the legal capacity to enter into any business contracts and can sue or can be sued like any other living person (Bevan, 2007). The shareholders of the company shall remain distinct, and they shall not remain accountable for any of the acts that are done by the company (Tabcorp Holdings Ltd v Bowen Investments Pty Ltd, ). Thus, this clearly indicates that Kate can not only enjoy the advantages of limited liability but at the same time can also take the benefits of the separate legal entity of the company without posing any threats to her personal assets even if her business fails. The only liability she will have is in the shoes of a director where she can be held liable for fraud if she commits so. However, it is also necessary to note that there are certain disadvantages of forming a company as well. There will be stricter rules and regulations applicable in this venture (Harris, 2009). Kate shall also become liable to publish financial statements annually and also hold meetings of shareholders. In case Kate decides to choose this business structure for her, it is advisable that she should form a single member company where she shall be the only shareholder.
It is advisable that Kate should not start her business with too much of debts and investments involved. She should also strive to take up short term business commitments. Also, getting freehold business premises is advisable. With minimum expenses and maximizing profits, it is thus advisable that Kate should go for a limited liability company.
In the given situation, Myra is the sole shareholder and director of Kids Clothes Pty Ltd having ten employees which though initially was in a profitable situation, started making losses since 2011. In spite of this, Myra after paying herself a bonus in 2012, transferred all assets of Kids Clothes to another company thereby depriving the employees of their entitlements. The rights of those employees shall be discussed here.
The issues that arise in the matter are:
- Whether there are any rights in the hands of the employees to claim their entitlements from Clothing for Kids Pty Ltd?
- Whether Myra can be held under the law for personal liability?
If a company goes into liquidation or loses its assets, then the employees have a claim of priority employee entitlement that should be in the following order:
- Outstanding wages and amounts of superannuation
- Leftover leave of absence and
- Retrenchment pays (Asic.gov.au, 2016).
When the assets of a company are merely transferred to another company, then that calls for a clearance of the employee entitlements from the assets of the new company on a priority basis to all the employees. In case this provision does not comply with, then the employees can approach the Court to settle their claims at the earliest and thus bring legal action against the directors.
Though the directors of a company are not personally liable for the debts of the company, yet in certain circumstances, personal liability arises. Forming or indulging in any illegal phoenix activity is one such area where directors become personally liable (Amcor Limited v Construction Forestry Mining and the Energy Union, ). This involves a situation where the director intentionally transfers all the assets of the indebted company to a new company so that he can avoid paying the dues to the creditors, exempt from paying taxes and also waive the employee entitlements (Asic.gov.au, 2016). It has been laid down that director who engage in illegal phoenix activities are sad to have been acting in breach of civil and criminal provisions of the Corporations Act 2001 (Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited, ). The essence is that the aim of the directors should be to avoid the claims that are due to them and then clear their liability in all circumstances.
In the given situation, it should be noted that the ten employees of Kids Clothes Pty Ltd have not received their entitlements over a long time. In spite of this, Myra being the director of the company, paid herself a bonus and did not settle the claims of the employees. This indicates a breach of law on the part of Myra for which the employees can approach the courts and claim for their settlement of rights.
On the other hand, there is another concern as well in the matter. After paying her a bonus, Myra also transferred all the remaining assets of the company to another company, but the employee’s payroll was not transferred. They continued to remain as the employees of the former company only. This indicates that there is no change in the shareholding structure, and the activity of Myra was a simply illegal phoenix. Thus, Myra can be said to have been making a breach of her duties under the position of a director for which she can become liable not only under the civil laws but also for criminal dereliction of duties. Hence, the employees can claim their entitlements from Clothing for Kids Pty Ltd and also ask for their outstanding dues.
Similarly, Myra can also be made responsible for personal liability under the situation, and it shall be her responsibility to settle the claims of the employees without delay.
In conclusion, it can be said in the above matter that:
- The employees can approach Clothing for Kids Pty Ltd for settling their claims because it is nothing more than the parent company under a new and pseudo name; and
- Myra is responsible under the civil as well as criminal laws for personal liability for making a breach of her duties under the position of a director.
Amcor Limited v Construction Forestry Mining and Energy Union HCA p.10.
Asic.gov.au. (2016). Directors’ liabilities when things go wrong | ASIC – Australian Securities and Investments Commission. [online] Available at: http://asic.gov.au/for-business/your-business/small-business/small-business-resources/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/#phoenix [Accessed 26 May 2016].
Asic.gov.au. (2016). Employees – Liquidation | ASIC – Australian Securities and Investments Commission. [online] Available at: http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-employees/employees-liquidation/ [Accessed 26 May 2016].
Australian Competition and Consumer Commission v TPG Internet Pty Ltd HCA p.54.
Bevan, C. (2007). Corporations law. Rozelle, N.S.W.: Lawbook Co.
Dasreef Pty Ltd v Hawchar HCA p.21.
Dignam, A. and Lowry, J. (2009). Company law. Oxford: Oxford University Press.
Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited HCA p.46.
Harris, J. (2009). Corporations law. Chatswood, N.S.W.: LexisNexis Butterworths.
Nolte, C. and Ghosheh, N. (2010). Working conditions laws report 2010. Geneva: Ilo.
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd HCA p.8.
The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal HCA p.36.