Legal Definition of Business Structures and Corporations Act 2001 - Assignment Example

Corporations Law Name Course Title Instructor’s Name Date Corporations Law Part A Area of Law The area of law is the legal definition of business structures (partnerships, company and trust) and Corporations Act 2001. Discussion of Law A partnership in business is formed when (partners) two or more people, corporate or other business entities agree to do business jointly with an aim of making profit. All partners have equal responsibilities for decisions made by other partners for the business and legally all partners are perceived to be equal1. The partners agree on profit/loss sharing. A partnership does not have separate legal existence from the partners. Liabilities in partnership are joint and unlimited and hence a legal action can be taken against each partner and be obligated to pay all business debts. Additionally, in partnership, all partners are liable for the actions of other partners2. In the case Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103, Parkin and Garrod were partners in the business of car repair and letting out garages. Without informing Garrod, Parkin sold a car to Mercantile Credit without the permission of the car’s owner and therefore Mercantile didn’t own the car. The court ruled that the company was liable because in partnership there is no separate legal entity and therefore Garrod was also liable as partner and he had to repay Mercantile Company3. In companies, there is existence of a legal separate entity from the owners and the company directors. This means that unlike partnership, owners and directors are not responsible for the company’s debts. In the case Salomon v A Salomon & Co Ltd [1897] AC 22, Mr. Solomon sold the business to a limited liability company where he was one of the company’s directors and shareholders. The company experienced financial shortage and sought a loan from Mr. Edmund. The financial situation of the company became worse and the company was not able to pay the loan and a liquation action was carried against the company. Consequently, Mr. Edmund sought a legal action against Solomon for personal liability4. The High Court and Court of appeal ruled that Solomon was personally liable for the debt. However, after Solomon appealed the House of Lords overturned the decision and ruled that Solomon was not liable because there was a creation of a company which has a separate legal entity. It was held that a company is a legal entity separate and distinctive from company members and hence the members of the company cannot be held responsible for the company’s debts or insolvency5. Section 181 of the Corporations Act 2001 requires directors to act in good faith and for a proper purpose and in the best interests of the company. The Australian Securities and Investment Commission (ASIC) is responsible for regulation of Australian companies and ensures that companies carry their business in accordance with the law, maintain accurate records, in addition to reporting their activities6. Trusts involve trustee (a person or company) who holds specific assets in her/his name on behalf of beneficiaries. The trustee uses the property for the benefit of beneficiaries. Trusts enable asset protection and are flexible since income and assets can be distributed in a flexible manner. Unlike partnerships and companies, trust doesn’t pay income tax on earnings as long as the profit is entirely distributed to beneficiaries in the pertinent financial year7. Application of the Law Steve and Wonder want to form a business where they can keep their affairs private and confidential and be in charge of the business as much as possible and this can only achieved in partnership or company. In trust, a trust will be entirely in charge of managing their business. In partnership, both Steve and Wonder will be in charge of the business because as partners they have the sole responsibility of running and making decisions for the business and hence they will be able to maintain confidentiality of their business. In the company, the affairs of the business are run by directors and the shareholders (Steve and Wonder) can be directors at the same time8. This means they can manage their business although their activities will be governed by ASIC. In partnership, there is no separate legal entity and this means that Steve and Wonder will be responsible for all debts and risks associated with the business while on the hand as in the case Salomon v A Salomon & Co Ltd [1897] AC 22, companies have separate legal entity and this means that they will not be held liable for the business’ debts9. Therefore, the recommendable business form is company. Conclusion Company is the recommended form of business because Steve and Wonder will be in charge of the business as much as possible and maintain confidentiality as well unlike trust. Additionally, as a company, there is separate legal entity and thus there is no risk of being held liable for the debts of the business unlike partnership. Part B Question 1 Area of Law The area of law is requirements under Corporations Act 2001 to form contracts between companies and the authority of agents representing the company Discussion of Law Since a company is a separate legal entity, it can enter into contract by either having the company’s common seal being affixed on the contract according to the constitution of the company which is witnessed by 2 company’s directors or one director and the company secretary or by agents representing the company where the agents sign in place of the company because the company cannot write its name physically10. Under s 129(6) of the Corporations Act 2001, if the seal of the company is fixed on the contract document according to s 127(2) and the seal fixing was appropriately witnessed, it is assumed that the contact is formed by the company11. According to s 126(1) of Corporations Act 2001, the power of the company to form, change or fulfill a contract can be done by a person acting with the express or implied authority to represent the company12. Application of the Law Stevywonder Pty Ltd fulfilled various requirements under s 129(6) of the Corporations Act 2001 in regard to formation of contracts between companies. This is because a company seal was affixed to the mortgage and this was witnessed by Wonder who is a director at Stevywonder Pty Ltd and Wonder’s son who is the company secretary13. Additionally, under s 126(1) of Corporations Act 2001 a contract can be formed by a person action with express or implied authority to represent the company and in this Wonder represented the company as an agent and signed on behalf of the company14. Conclusion A contract was formed between Stevywonder Pty Ltd and Bogus Bank because a seal was affixed to the mortgage and director (Wonder) and the company secretary (Wonder’s son) witnessed as per s 129(6) of the Corporations Act 2001. Question 2 Area of Law The area of the law is the protection of statutory assumptions and Indoor Management Rule in contract formation between companies. Discussion of Law Section 129 of the Corporations Act stipulates that an individual transacting with a company has the right to assume that the company has complied with its constitution and provisions of Corporation Act pertinent to the company and that any person who from the ASIC’s information appears to be a director or company secretary; has been appropriately assigned and has the power of exercising powers and performing obligations normally carried out by a director or company secretary of a such a company15. Section 129 of the Act further states that the third party can assume that: anybody representing the company as an agent or has been held out has been appropriately appointed by the company and given power to carry out duties normally performed by such a representative or agent of a comparable company; the company’s official and agents suitably carry out their duties to the company and lastly that the company’s official or agent responsible for issuing a document on the company’s behalf can also guarantee that the authenticity of the document16. S 129 (6) of Corporations Act 2001 states that, if the seal of the company is fixed on the contract document according to s 127(2) and the seal fixing was appropriately witnessed, an individual can presume that the company has completed the document appropriately17. In the case Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, Goldberg Group bought Brick & Pipe with its shares and used Brick & Pipe as a security for money borrowed for another company belonging to Goldberg Group. Afterwards, Goldberg did not pay and Brick and Pipe claimed that the outsider financier (Occidental) was excluded from relying on protection of statutory assumptions. The court ruled that the financiers (Occidental) could rely on Indoor Management Rule (statutory assumptions)18. The case Royal British Bank v. Turquand (1856) 119 ER 886 set the 'indoor management rule' which stipulates that states that third parties transacting with a company are supposed to presume that the company has conformed to its articles of association except if they have reason to deem otherwise19. According to this rule, third parties who contract with another company are not entitled to make enquiries into the company’s indoor management and any company’s wrongdoings that the third party did not notice cannot affect them20. Application of the Law In the case Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, the financier was allowed to rely on Indoor Management Rule and hence the contract between the two companies was declared valid. Similarly, the Bogus Bank can rely on Indoor Management Rule21. Similarly, Royal British Bank v. Turquand (1856) 119 ER 886 case it was assumed that third parties transacting with a company should assume that the company has complied with its articles of association unless if the third party believes otherwise. In this case, during the signing of contract between the Bogus Bank and Stevywonder Pty Ltd, provisions of Section 129 of the Corporations Act were fulfilled22. There was a company’s seal and also a company director and company secretary were present during signing of the contract. According to Section 129 of the Corporations Act, protection of statutory assumptions occurs to any person dealing with a company where the person assumes that the company has complied with its constitution and the official representing the company is a duly company’s representative23. In this case, Bogus Bank had the responsibility of searching the details of directors and company secretary of Stevywonder Pty Ltd before signing the contract. A company seal was affixed Wonder as the director and his son as the company secretary signed and thus the contract formation was witnessed by the company director and the company secretary24. Even though Wonder’s son was never appointed secretary of Stevywonder Pty Ltd, he was named as secretary in Stevywonder Pty Ltd most recent directors’ report and since this report is forwarded to ASIC, the Bogus Bank searched ASIC information and found his name there as the company secretary of Stevywonder Pty Ltd. Therefore, Bogus Bank met all requirements of contract formation between companies. Conclusion Under provisions of Section 129 of the Corporations Act 2001, Steve cannot succeed in declaring the contract relating to the bank loan invalid because the Bogus Bank fulfilled the required provisions in contract formation between companies under Corporations Act 200125. Similarly, as per the cases Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) and British Bank v. Turquand (1856) 119 ER 886 ‘indoor management rule”26 will be applied to indicate that Bogus Bank as a third party assumed that Stevywonder Pty Ltd complied with the company’s articles of association27. Bibliography Books Ford, HAJ, Ford and Austin's principles of corporation law (Sage, 2008) Jeff, Fitzpatrick, Business and Corporations Law (LexisNexis Butterworths, 2013) Tomasic, AF, Corporations law in Australia (Engelsk, 2010) Santamaria, JG, Takeovers and Reconstructions in Australia (Butterworths, 2008) Cases Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253 British Bank v. Turquand (1856) 119 ER 886 Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 Royal British Bank v. Turquand (1856) 119 ER 886 Salomon v A Salomon & Co Ltd [1897] AC 22 Corporations Act 2001 Read More