Corporation Law - Suits-Sir Pty Ltd - Assignment Example

CORPORATIONS LAW I PROBLEM ONE Ruby and Manny applied for forming a company, Suits-Sir Pty Ltd, on 5 January, with themselves and Ezra and Golda as its shareholders and directors. Ruby signed a contract with Wax Builders as Suits-U-Sir Pty Ltd per Ruby, to extend their business premises on 10 January. On 19 January, Ezra purchased a vehicle from Ooroo Motors, by signing the contract as Ezra on behalf of Suits-U-Sir Pty Ltd. On 23 January Suits-Sir Pty Ltd was incorporated. Ezra neither informed the others about the purchase of the vehicle, nor did he attend the company board meeting on 16 February. During this meeting, Ruby and Manny approved the contract with Wax Builders and decided to purchase a computerised sewing machine from Sewaholics for $16,000. Golda, signed the contract, twice, as director when the latter’s representative arrived with the contract at the company on 19 February. The payment of this machine was misplaced. Manny received a $2,000 gift voucher from Sewaholics. On 30 April, representatives of Wax Builders and Sewaholics, demanded payment for the completed building work and the machine, respectively. Proprietary limited or Pty Ltd companies are commonplace. Their non-employee shareholder strength is limited to 50, and they are incorporated with share capital consisting of the shares of the initial members at the time of incorporation. The liability of the members is limited to the extent of their shareholding. Such companies can offer shares, only to the existing shareholders, employees of the company or its subsidiary.1 This type of company, with limited risk to their shares is ideal for Ruby and Manny. A Requirements under the Corporations Act (CA) 2001 The CA stipulates the following for Australian companies. First, every proprietary company should have at least one director, and at least one of these should be resident in Australia. Public companies should have at least three directors, at least two of these being resident in Australia. Second, public companies should have at least one Australia resident secretary. Proprietary companies are not required to have a company secretary. The directors of a proprietary company can assume the responsibilities of the company secretary, in the latter’s absence.2 A corporation enjoys full contractual capacity from the very instance of its creation. Section 124 of the Act states that a company acquires the legal capacity of an individual upon registration. However, a corporation has to rely on human actions, in order to form contracts. Such human intervention is indispensable, whether the contract is formed directly with the other party or whether the contract had been formed indirectly, via an agent who had been duly authorised to form a contract on behalf of the company.3 B Directors A company is governed by directors, on behalf of its shareholders. Section 198A (1) of the Corporations Act 2001 states that a company’s business has to be managed by directors or under their direction. Every director is vested with certain fundamental legal duties and responsibilities. These apply to a variety of organisational structures, such as public and proprietary companies.4 Moreover, the Corporations Act 2001 imposes certain duties upon the directors and officers of a company, such as; first, to exercise powers and duties with the care and diligence of a reasonable person. This includes adopting measures to obtain proper information regarding the financial status of the company, and ensuring that the company ceases to trade after becoming insolvent. Second, to exercise powers and duties in good faith and to promote the best interests of the company for a lawful purpose. 5 Third, to desist from abusing one’s position to procure an advantage for oneself or some other person, or to harm the company. Fourth, to abstain from making improper use of the information obtained via one’s position as a director or officer of the company, in order to benefit oneself or another, or to cause detriment to the company. As such, the company has to maintain proper financial records that correctly record and describe transactions and its financial position and performance.6 C Discretionary Trust A trust proves to be beneficial for business or trading purposes. It consists of a trustee who holds specific assets in his name for the benefit of a group of persons termed the beneficiaries of the trust. The property of the trust has to be utilised by the trustee, solely for the benefit of the beneficiaries. Trusts are preferred, as they provide considerable flexibility in tax planning, asset protection, and tax minimisation. In addition, they provide a flexible means of distributing assets and incomes.7 A discretionary trust constitutes a special type of trust. In such trusts, the entitlements of the beneficiaries are not definite. The trustee is vested with discretionary power, on the basis of a pre-determined agreement. This empowers the trustee to determine the beneficiaries who are to receive the income and capital of the trust. However, the trustee does not have carte blanche and is limited to make such distribution to beneficiaries of a specific nominated class. This specific class is clearly defined in the terms of the trust deed.8 As such, in a discretionary trust, the trustee is at liberty to select the beneficiaries to receive income and capital, as well as the amounts they are to be provided between them. It is possible to achieve limited liability with discretionary trusts, by the use of a corporate trustee. However, this is subject to the provisions of the Corporations Act 2001. Discretionary trusts are commonly encountered in businesses conducted by a family. Trusts, on the whole, tend to be better tax effective structures as holding entities for investment, commercial real estate and other fixed assets. This is due to the decision of the Australian Government to impose a capital gains tax on the disposal of assets from September 1987. With respect to individuals, it is to be noted that they are provided with a 50% exemption from capital gains tax. This exemption is extended to discretionary trusts, wherein the potential beneficiaries are individuals. Significantly, companies or organisations cannot claim such exemption.9 D Company Seal in Australia The Company Law Review Act 1988, has declared that a company seal is not essential. With regard to companies formed prior to the date of this Act, the constitution of the company could oblige it to use a company seal. If a company seal is used, it has to include the Australian Company Number (ACN) and the complete legal company name. The ACN is a number of nine digits, and it is prefixed by the words Australian Company Number or ACN. Section 127(2) of the Company Law Review Act 1988, stipulates the use of a company seal and the manner of affixing it legally.10 Section 131(1) of this Act declares that it come into effect, whenever a person forms, or intends to form a contract on behalf of, or for the benefit of a company prior to its registration. The following possibilities are encompassed by this section. First, the promoter purports to enter into a contract as a trustee or agent of a proposed company. Second, the promoter enters into a contract on behalf of the company, with full awareness of the fact that the company does not exist at that juncture. Third, the promoter enters into a contract as an agent for the company, under the misapprehension that the company exists at that point of time. From these provisions it becomes evident that this section establishes two forms of liability for the company and the promoter, namely a direct and an indirect one.11 II PROBLEM TWO The name of a new company should be different from that of a company that has been registered. A proprietary company limited by shares should include the words Proprietary Limited in its name, which can be condensed to Pty Ltd. In addition, a proprietary company can adopt its ACN as its name. In such instances, its name should incorporate the words Australian Company Number, which can be shortened to ACN.12 A register of shareholders and a register of charges have to be maintained by a company. These have to be available at the registered office of the company, its principal place of business, a place dedicated to the maintaining of such registers, of a location that has been approved by the Australian Securities and Investments Commission (ASIC). Registers can be bound, loose leaf books or in digitalised form on a computer.13 Ruby and Manny have to maintain the company register in an appropriate manner. The board of directors of a company is at the helm of the organisation. Its primary responsibility is to ensure that the activities of the company comply with the extant laws and regulations. It conducts periodic reviews of the performance of the company, its general policies and objectives, and amends them wherever necessary. In general, the board of directors take the important decisions of the company. These include, appointment of the chief executive officer, the costlier acquisitions and investments, determining the benefits and salary of the senior executives, risk identification and mitigation strategies. In order, to facilitate decision making, the constitution of the company permits the delegation of powers of the board to a subcommittee of the board, which could consist of one or more directors. This subcommittee can take certain decisions, as a delegated body of the board of directors.14 A Primary Liability of the Company Section 131(1) of the Corporations Act 2001 states that a registered company that ratifies a pre-registration contract, within the agreed upon time, or within reasonable time in the absence of any agreement regarding time, becomes bound by the contract. Under these circumstances, the company becomes entitled to the benefits of the contract. This rescinds the common law rule, requiring the ratification of a pre-registration contract by a company.15 III PROBLEM THREE It is required to determine whether Wax Builders and Sewaholics can successfully claim their debts, and whether Manny can retain the $2,000 voucher. On 1 May, summons were delivered to Suits-U-Sir Pty Ltd’s business premises suing for payment of the vehicle purchased from Ooroo Motors. In our present problem, Sewaholics can successfully claim for their dues against the company for the supply of the computerised sewing machine. Golda signed the invoice under the name of director. Section 129(2) of the Act relates to information furnished by a company to ASIC. If such information, which is then publicly available, makes it appear that an individual is a director or secretary of a company, then it is justified for a third party to presume the following. The appointment of the director or secretary has been lawful. In addition, a third party can assume that such director or secretary has been authorised to exercise the powers and carry out the duties, normally done by a director or secretary of a similar company. 16 Section 131 of the Corporations Act 2001 provides for the allocation of liability, with respect to a contract formed between a corporation, prior to its registration, and the promoter. However, it also protects the interests of the other party in that contract. Moreover, Section 133 of this Act states that the grant of rights and allocation of liability in such contracts supplants any common law rights and liabilities.17 According to section 129(2), Sewaholics can lawfully assume that Gilda was authorised by the company to do so. As such, the company is liable for the debts raised by its directors to third parties. The Wax Builders will be successful in their claim against the company, with respect to their debts. This is due to the fact that Ruby and Manny approved of the contract in the first board meeting conducted on 16 February. In accordance with Section 131(1) of the Corporations Act, if the contract is approved by the company after its formation, the company will be liable for the benefits and liabilities. Manny cannot retain the gift voucher for himself and he has to utilise it for the benefit of the company, as all the benefits accruing after formation of the company belong to it. In the present problem, Ruby and Manny ordered the computerised sewing machine from Sewaholics on 16 February, subsequent to a decision in the board meeting. On 19 February a sales representative of Sewaholics arrived at the company, and Golda signed the invoice as a director of the company. In accordance with Section 129(2) of the Corporations Act, the authority of a director will be a valid presumption for the purposes of establishing the liability of a company. Thus, Sewaholics can successfully claim from the company for the contract formed with them by Golda who had signed twice as a director of the company. IV PROBLEM FOUR On 19 January, Ezra purchased a vehicle from Ooroo Motors, by signing the contract as Ezra on behalf of Suits-U-Sir Pty Ltd. This was unknown to Manny and Ruby. On 23 January their company was incorporated. The payment for the vehicle should have been made on 18 February. However, this agreement had not been ratified by the company after its formation. Consequently, the company is not liable for this purchase. According to Section 131(2) of the Corporations Act, the promoter is rendered liable when the pre-registration contract is not ratified by the company after its formation. A Primary Liability of the Promoter The promoter is rendered liable for the payment of damages to the other party, under the following circumstances. The company is not registered, or the registered company fails to ratify the contract within the time stipulated in the contract, or in the absence of such contractual stipulation, does not ratify the contract within reasonable time after the contract. This constitutes the gist of Section 131(2) of the Corporations Act.18 The promoter bears the responsibility and risk for registration or ratification that does not take place. It is this section and not the contract that generates liability of the promoter, under these circumstances, to pay damages. This section declares that the promoter is liable to pay the damages that the company would have had to pay for breach of contract.19 According to the provisions of the Corporations Law, Ezra would be personally liable for the payment due to the Ooroo Motors. This is because, pre- registration contracts have to be ratified by the company after its formation. In our present problem, Ezra failed to ensure the ratification of the transaction by the company. Hence, he is personally liable to the motor company, according to the provisions of the Corporations Law. BIBLIOGRAPHY A Articles/Books/Reports Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (Federation Press, 2002) B Legislation Corporations Act 2001 (Cth) C Other Australian Companies – Corporations Act requirements (2015) Hopkins Corporate Solutions Companies in Australia (2 February 2015) State Library Victoria CORPORATIONS LAW – Part 1.5 – Small business guide (30 October 2010) Insolvency for directors (2015) Australian Securities & Investments Commission Lumsden, Andrew, The role and responsibilities of directors on board sub-committees (August 2004) Rostron, Greg, What is a discretionary trust and what are the benefits? (2015) Business Structures in Australia ( July 2010) Schweizer Kobras What are the duties of directors? (2015) Australian Institute of Company Directors What is a Company Seal? (2015) Company Seal Read More