Corporations Law

Issue:

  • Whether the creation of a company absolutely remove James from any potential liability?
  • Whether James need any interactions with the ASIC or ASX if he set up a company?

Rules:

Corporations Act, 2001(Cth)

Application:

  • Incorporation of a company will remove James from liability, loss, or contracts made by his company (as the company is a separate legal entity)[1], if he does the business with principles and as per the law established, but the liability will arise if they indulge in any fraudulent activity. The liability of James being a shareholder will be limited to the amount of shares held by him which remain unpaid and no further liability can be established[2]. As per[3], the director of the company may be held responsible if there is any breach of directors’ duty[4] . Therefore, if any breach and fraudulent activity occur then only the director or the employee can be made liable[5]
  • To register a company, a person must lodge an application with ASIC[6], and if an application is filed as per[7], then ASIC according to[8] gives the company ACN, registers the company, and grants certificate of registration. Hence, James will need interaction with ASIC if he sets up his company. However, James does not need to interact with ASX as ASX being a securities exchange, interacting with it is required when the public company wishes to list its shares on the stock exchange.

Conclusion:

In light of the above, it can be concluded that the liability cannot be removed absolutely, though, it can remain limited if the acts of James do not infringe the law established.

Issue:

What is an agency and how it relates to a partnership?

Rules:

Corporations Act, 2001

Partnership Act, 1963

Application:

As per [9]agency means an agency, authority, body, or person. Agency is a type of agreement where the individual acts as ordered by the principal who is appointed as the agent. As per[10], Partnership is the collaboration between persons carrying on a joint business with a view to benefits, which entails a limited partnership that is incorporated. As a member of the partnership firm, while engaging with 3rd parties, partners performing partnership business serve as agents of the firm[11].

Conclusion:

Partnership Firm is the principal and partners are its agents.

Issue: Whether the clients should form a public or proprietary company for the purchase of a multi-million-dollar petroleum distributorship?

Rules:

Corporations Act, 2001

Application:

The clients should form a public company as the purchase is of multi-million-dollar petroleum distributorship. According to[12], there are certain restrictions on the Proprietary company which will not be suitable for the client. As per[13] Section 113(1) of the Corporations Act, 2001, a company must have not more than 50 non—employee-shareholders. This poses restrictions on the number of shareholders. Such a limit is not present in public companies. The second drawback of a proprietary company is that it cannot raise capital by way of issuing shares to the public whereas in a public company regardless of it being listed or unlisted on ASX it can raise capital from the public. Lastly, both have the option of limited liability to the shares held by the shareholders. Hence, a Public company will be a far better option than a proprietary company as issues related to restriction to shareholders’ limit and restriction of not having the power to issue shares to the public and raise capital from the public will not allow the company to expand its business operations. The size of the company also plays a vital role in deciding as to what type of company would be most suitable. The company being of a high stake can any time need funds for its business and issuing shares to the public is the best option in such cases. Proprietary company will not be suitable as it is for small size business which doesn't need any capital from public and needs less disclosure of documents to the regulatory bodies[14].

Conclusion:

When a company runs large business operations, it needs to have more flexibility and freedom compared to small companies. For that public company is the best option as though disclosure requirements are more stringent because of the large size operations and public money because the restrictions and limitations with regard to raising capital from the public are less compared to a proprietary company. Therefore, I advise my clients to register for a public company.

Issue: What are the principle upon which a company limited by shares is based and its significance?

Rules:

Corporations Act, 2001

Application:

According to[15] If the corporation is a company limited by shares, it is not required for a member to pay more than the sum (if any) of unpaid shares for which the member is responsible as a current or former member. A 'limited company by shares' is a company established under the concept that its members' responsibility is limited to the value of the amount (if any) that remains unpaid under the shares owned by its shareholders[16].

Consequently, if the members have paid their shares in entirety and the company gets into a financial struggle (for instance by paying more than the overall value of its assets), even then, the members would not be asked to pay any extra amount to the company in order to compensate for any such deficit. However, where members may have sums left unpaid on their shares, the amount left unpaid on their shares is the most such members will be expected to add to the deficit. The shareholder's limited company prevents the shareholder from being kept individually accountable, allowing them to take risks and expand their business. If there is uncertainty over the liabilities of the owner or shareholder, in that case, he will not be able to increase his enterprise operations as it is necessary to protect the interest of the shareholder[17].

Conclusion:

Company is a separate legal entity and therefore, the liability of its shareholder is limited to the extent of shares held by them which encourage the public to invest in the company.

Issue: What is the liability of the company towards the bank for the actions of the CS?

Rules:

Corporations Act, 2001

Application:

The company will be liable to pay the $50,000 to the bank as they cannot put the responsibility on the CS and not pay back the amount to Bank as the bank is not concerned with the internal matters of the company and also the said amount has gone into the account of the company and not to the personal account of CS. Though CS breached the constitution of the company, he shall be made personally liable for such a breach and the company is free to recover the damages from him if they wish to. But the liability of $50000 cannot be ignored by the company by stating that as CS exceeded the authority the company is not responsible for inappropriate lending by the bank, and that the bank needs to find some solution against the company secretary personally. Company Secretary is appointed by the company, not by the bank and hence CS being a representative of the company Bank lent the money to the company. 

Conclusion:

In light of the above, it can be concluded that the Company is liable to pay $ 50,000 to the bank and take appropriate action against the CS for breaching the constitution of the company.

Issue: What shall the company do?

Rules:

Corporations Act, 2001

Application:

This is purely a commercial decision rather than legal because the management of the company has to assess whether its tangible and intangible assets are significant enough to revive the company then the board of directors can certainly think of reviving the company. It is possible for the board of directors that it can allow the other manufacturer to produce the product of its brand under a license to form a company and sell the product under its brand name and earn profit out of it. The board of directors should carry out the SWOT analysis of its financial conditions, demand for its product in the market, competition, and opportunities available in the future with few diversifications in the business. It is quite possible that by making the change in key positions in the management a company can be revived and if there is a possibility of the same then it is always advisable to revive the same by bringing certain changes and renegotiating the terms of loans with the financial institutions.

Conclusion:

Hence, it is advisable to revive the company.

References for Potential Liability

Legislation:

Corporations Act, 2001

Partnership Act, 1963

Section:

Corporations Act, 2001 s (1.1).

Corporations Act, 2001 s (516).

Corporations Act, 2001 s (1.3).

Corporations Act, 2001 s (5.3).

Corporations Act, 2001 s (117(1)).

Corporations Act, 2001 s (117).

Corporations Act, 2001 s (118).

Corporations Act, 2001 s (9).

Partnership Act, 1963 s (6(1)).

Corporations Act, 2001 s (113).

Corporations Act, 2001 s (113(1)).

Corporations Act 2001 s (156).

Corporations Act 2001 s (9 & 156).

References

Armour John and Michael John Whincop, ‘The proprietary foundations of corporate law’ (2007) 27(3) Oxford Journal of Legal Studies, 429.

Barnes Lisa, ‘Corporate Governance and Company Directors: Are they Alice in Wonderland?’ (2019) 3(1) Frontiers in Education Technology, 1.

Ireland Paddy, ‘Limited liability, shareholder rights and the problem of corporate irresponsibility’ (2010) 34(5) Cambridge Journal of Economics 837.

McQuaid Ronald W, ‘The theory of partnership: why have partnerships?’ (2000) 19 Routledge Advances in Management and Business Studies 9.

[1] Corporations Act, 2001 s (1.1).

[2] Corporations Act, 2001 s (516).

[3] Corporations Act, 2001 s (1.3).

[4] Corporations Act, 2001 s (5.3).

[5] Lisa Barnes, ‘Corporate Governance and Company Directors: Are they Alice in Wonderland?’ (2019) 3(1) Frontiers in Education Technology, 1.

[6] Corporations Act, 2001 s (117(1)).

[7] Corporations Act, 2001 s (117).

[8] Corporations Act, 2001 s (118).

[9] Corporations Act, 2001 s (9).

[10] Partnership Act, 1963 s (6(1)).

[11] Ronald W. McQuaid, ‘The theory of partnership: why have partnerships?’ (2000) 19 Routledge Advances in Management and Business Studies 9.

[12] Corporations Act, 2001 s (113).

[13] Corporations Act, 2001 s (113(1)).

[14] John Armour and Michael John Whincop, ‘The proprietary foundations of corporate law’ (2007) 27(3) Oxford Journal of Legal Studies, 429.

[15] Corporations Act 2001 s (156).

[16] Corporations Act 2001 s (9 & 156).

[17] Paddy Ireland, ‘Limited liability, shareholder rights and the problem of corporate irresponsibility’ (2010) 34(5) Cambridge Journal of Economics 837.

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