Rachel and Stacey Operating a Company: Issues and Concerns - Essay Example

Foundations of company and commercial law By student’s name Course code+ name Professor’s name University name City, state Date of submission Question 1(a) Rachel and Stacey have been operating a partnership. Section 5(1) of the Partnership Act 1958 defines a partnership as a relationship existing between people who carry on a business for the purpose of making profit. In this case, Rachel and Stacey are in a business relationship where they have been running a café that satisfies the requirement for a ‘business in common’. Further, they have also been making profits that they have been sharing equally. This means that the business structure complies with the requirements for the existence of a partnership. According to section 6(3) of the Partnership Act, the fact that a person receives a share of the profit from a business is evidence that the person is a partner. In this case, both Rachel and Stacey share the profit of the café equally which means that they are both partners.1 Question 1(b) Rachel and Stacey are in a general partnership where the liability from any conduct of either of the partners is to be paid by the partners. Section 13 of the Act provides that all the partners of a firm are liable for any obligations or debts that may be incurred while the partner was a partner. This means that the kind of partnership in which Stacey and Rachel are in would make them jointly liable for any liability including the one that arises from the injuries on the customers who slip and fall. This, therefore, is not the most suitable business structure for them. There is also the limited partnership provided under sections 50 of the Partnership Act. This partnership requires that there should be at least one general partner who has unlimited liability and there should also be other limited partners whose liability is limited to the extent of their investment in the partnership. However, the limited partners do not have control over the activities of the partnership. The general partner is solely responsible for running the partnership. This would not be ideal for Rachel and Stacey because of the liability of the general partner. The partnership does not, however, meet the criteria for an incorporated limited partnership as provided for under section 88 of the Partnership Act.2 A limited liability partnership would in this case be more appropriate for this business because of the fact that all the partners in the business have their liability limited to the shares or their investment in the partnership. In this case, the liability arising from the injuries of the customers who fell in the café would only be charged on the partners depending on their investments in the partnership. The partners are, therefore, not personally liable for the liabilities and other obligations of the partnership.3The limited liability partnership is a separate legal entity from the partners. In this case, Rachel and Stacey will be protected against any liability that arises from the injuries on the customers. Question 2 Vintage Dress directors have breached the provisions of the Corporations Act 2001 regarding the duties of directors. Tavid has breached Corporations Act, which prohibits directors and other officers of a companyfrom making improper use of their position in the company.4 Tavid recommended that Vintage Dress should acquire sewing machines from Sew West Pty Ltd, which was owned by Tavid and her daughter. This means that Tavid was using her position as a director in the company to gain an advantage for herself. Further, Tavid breached section 191(1) by failing to inform the other directors of the material personal interest in the purchase of the sewing machines from Sew West Pty Ltd. A director is also supposed to act in good faith by ensuring that their actions are in the best interest of the company. Tavid was the accountant of the company and she failed to inform the other directors of the financial position of the company leading to bad investments that contributed to the insolvency of the company.5 The three directors of the company breached section 588G by failing to prevent insolvent trading of the company. Tavid knew of the poor financial position of the company and still continued to allow the company to trade knowing that such a move would lead to insolvency. Susan, on the other hand, failed to read the financial statement that would have made her identify the errors in the financial statement and, therefore, prevent the insolvent trading. The fact that Dilara never attended the meeting means that she did not read the financial statement and could not identify the financial position of the company.In Woodgate v Davis6the duty not to trade while insolvent is meant to ensure that the directors of a company protect the welfare of the stakeholders of the company. By failing to prevent the insolvent trading of the company, the company directors failed to protect the interests of the company.7 Both Susan and Dilara breached section 180 which requires the directors to act in care and diligence. The court in Statewide Tobacco Services Ltd v Morley [1990] 2 ACSR 405 stated that directors should ensure that their judgment regarding the decision-making in matters related to the company is made in good faith and in a way that protects the interests of the company.8They are supposed to act with care and diligence that a reasonable person in a similar position would exercise. Susan knew that David had some interest in Sew West but failed to question her on the matter. Further, she had failed to read the financial statement which would have helped her identify the errors made. Dilara, on the other hand, never attended meetings. A director of a company has the responsibility to attend all meetings. She failed to attend the meetings and as a result she also failed to review the financial statements which would have directed her to the financial state of the company. Dilara also breached the duty to act in good faith when she decided to form a new company together with Second Hand Fabrics which created garments that made the company make profits but led to the collapse of Vintage Dress. She has the duty to ensure that all decisions were in the interest of the company. Forming the new company was not in the interest of Vintage Dress. Consequences for the breach of the Corporations Act The Australian Securities and Investment Commission (ASIC) has the responsibility under the Corporations Act9 to make an application to the court declaring that a person has contravened the Act and for a compensation order as a result of the contravention. In this case, since the company directors have breached the Act, the court may fine them under section 1317G since the actions of the directors cause material prejudice to the corporation. The directors may also be required to compensate the company for the damage that has contributed to the insolvency of the company.10 ASIC also has the power to apply to the court for the disqualification of a person from managing a company for contravening the Corporations Act.11 In this case, Tavid, Suzie and Dilara may be disqualified from managing a company because of their role in the insolvency of Vintage Dress. Tavid had prepared a false financial statement that led to the bad investment decisions by the directors leading to the insolvency of the company. Suzie, on the other hand had failed to read the financial statement yet she was the managing director and, therefore, failed to see the errors in the financial statement. The failure by Dilara to attend meetings also contributed to the insolvency of the company. This means that ASIC would have sufficient grounds to apply for the disqualification of the three directors.12 Question 3 The state of affairs at Thomas The Tank Engine Pty Ltd was oppressive to Leo. The paying of dividends to the shareholders of a company is to be made in line with the provisions of the company Constitution. A company is allowed to pay dividends to its members where the assets of the company exceed the liabilities and such payment is fair and reasonable to the shareholders of the company. Further, the payment of the dividends must not prejudice the ability of the company to pay its creditors.13 In this case, the revenue of Thomas The Tank Engine Pty Ltd had increased by 300% which means that the company was in a position to pay dividends to its members. However, no dividends had been paid and none would be paid this year. Though there was no payment of dividends, the executive directors, Amanda and Ruby, had increased their pay and bonus and have arranged to lease two expensive vehicles for their exclusive use. This seems to be oppressive given that the other members had not received any dividends for that year. The fact that Leo questioned the decision by the executive directors led to the holding of a members meeting where Ruby and Amanda removed Leo from the board. Section 23214 states that a Court can make certain orders as a result of oppressive conduct of affairs in a company. These orders can be made by the court where the conduct of a company’s affairs or a resolution or proposed resolution of members of the company is oppressive and unfairly prejudicial to a member of the company.15There are several orders that the court can make regarding Thomas The Tank Engine Pty Ltd includes the winding up of the company, modification of the constitution of the company, regulation of the activities of the company in future or orders requiring a member of the company to do or refrain from doing a particular act.16 In this case, since Leo became a member of the company, no dividends have been paid. The fact that the executive directors decided to increase their salary and bonus without any such increment to Leo, the non-executive director, was discriminatory. Further, the two executive directors went ahead to lease expensive cars for themselves. This was unfair to Leo who received nothing even after the company had a 300% increase in revenue. The move to remove Leo from the board was also oppressive and discriminatory since they only did that because he had questioned the dividend policy and also objected to the lease of the cars.17 The court in Wholesale Society Ltd v Meyer18held that any burdensome, harsh and wrongful conduct amounts to oppressive conduct. The increments in salaries and leasing of the vehicles by the executive directors and the removal of Leo from the Board amounted to oppressive conduct. This means that Leo can apply to have the court make orders such thatthe dividend policy of the company be modified, that the conduct of the state of affairs of the company be regulated such that the executive directors cannot be allowed to make decisions that are oppressive to the other members and that Leo be restored to the board of the company. Leo would, therefore, be able to apply to the court for the reversal of the decision to remove him from the board and also the amendment of the dividend policy. Question 4 Section 249H19 provides that a 21 days’ notice of a meeting of a company’s shareholders or members must be given before the meeting. The constitution of the company may, however, provide for a longer period of notice of the meeting. The provision means that under the Act, the shortest period for which a notice of a meeting can be given is 21 days. A shorter notice is, however, not allowed in the case where the meeting is to remove a director, replace a director who has been removed or when removing an auditor of the company. The notice must be written and given individually to all the members who are entitled to vote at the meeting. The notice can be sent via post, through an electronic address, delivered personally or through other ways indicated under the Constitution of the Company.20 However, despite the notice requirements when calling for a meeting of the shareholders of a company, the Act further provides that a meeting or a resolution of the meeting shall not be invalidated as a result of any procedural irregularity unless it is proven that the irregularity has caused substantial injustice.21This section of the Act means that even if the notice requirements are not adhered to as provided, the court will not invalidate the meeting based on a procedural irregularity. Procedural irregularity in this case refers to the failure to give notice to a member of the company or the non-receipt of a person of the notice of the meeting. This means that a meeting will not be directly invalidated by the fact that a member of the company did not get notice of the meeting unless it can be shown that such failure caused injustice that cannot be remedied by any orders that the court may make. The provisions of section 1322 have the effect of reducing the strict nature of the notice requirements under section 249H.22This provides a loophole where directors of companies may fail to send notice of meetings to some members and are able to get away with it especially where substantial injustice cannot be proved. Further, the Act has not defined the extent to which a matter shall be considered to amount to substantial injustice which leaves it to the courts to decide on a case to case basis. This creates the potential for prejudice in so far as the members of the company are concerned. There is the possibility that some members may be left out of meetings for certain reasons and yet they may lack any judicial recourse due to the provisions of section 1322. There is, therefore, the need to have stricter notice procedures such that all the members need to be given notice of the meeting. Further, the approach taken by section 1322 opens flood gates where directors of companies have a defense where the notice for the meetings or other procedural irregularities has occurred. A stricter approach to procedural irregularities and notice procedures is necessary as a way to safeguard the rights of members of a company. References Corporations Act 2001 (Cth) Partnerships Act 1958 (Vic) Tomasic, R, Bottomley, S & McQueen, R 2002,Corporations law in Australia, Federation Press. Farrar, J H 2001,Corporate Governance in Australia and New Zealand, Oxford University Press, USA. Fletcher, K L 2000,The Law of Partnership in Australia & New Zealand, LBC information services. Cassidy, J 2008,Corporations law: text and essential cases, Federation Press. Cieri, R M, Sullivan, P F & Lennox, H1994, The fiduciary duties of directors of financially troubled companies,Journal of Bankruptcy Law and Practice, 3(4), 405-422. Callison, J W & Sullivan, M A 2012,Partnership Law and Practice: General and Limited Partnerships, West. Read More