Fundamentals of Business and Corporations Law - Assignment Example

Business and Corporations law Institution Course Lecturer Date Q 1 The area of law: Starting a company ss 112, 117 & 118. Bill and Ben want an advice of the type and class of a company they should incorporate. Discussion of law: S 112 of Corporation Act 2001 guides on the type of the company to be incorporated. Under the Act, there are a number of companies that are registered. Under public company, there are four classes; limited by shares, limited by guarantee, no liability company and unlimited with share capital. No liability companies are registered only if the company has share capital; its constitution states its mining purpose and indicates that it does not have contractual rights to recover the calls made on the company shares from those shareholders who fail to pay for them1. The company structure chosen depend on the nature of business run, the financial situation of shareholders, the level of control and individual circumstances. Public company is always an appropriate form for a business that requires large capital base, need an easy transfer of its share and would need to borrow from the public2. Incorporated companies are formed under Corporation Act 2001 and such companies come into existence only after they are registered with ASIC and given a certificate of incorporation. This is a popular mode by which most companies are incorporated. The company is therefore on a principle of limited liability of its members and the amount they contribute to the business. Under Corporations Act 2001,s 9 the company will have liability to its members. After choosing the structure of the business, s 117 and 118 provides the directions for registering and the ASIC requirements to be met for certification3. Application: The company that suits Bill and Ben is public company. The business structure is the best in accordance to their needs. Looking at their circumstances, both require more capital to start the company operations. They consider raising the money by selling some of the company shares to the public. The right to sell shares to the public is given to a public company but not applicable to proprietary private company. The business is intending to raise large capital and this will mean that there will be no limit to a number of shareholders they will contact. When shareholders are brought in, they will exercise their voting power and that means that shares in the business will be freely transferrable which will provide more liquidity to the shareholders. The requirements set in s 45A for proprietary companies hinder most of Bill and Ben’s intentions4. The plan to sell shares, expand in future and probably increase the number of employee makes it hard to consider proprietary company as the best choice. However, it suits their need to keep all the transactions private and confidential. Precisely, their intentions to mine minerals and manufacture the lotions are congruent to the requirements sets under s 112. Having no other means to raise the $ 2 million capital to start, this can be considered as the main reason for choosing public company. The choice is best as the company will not need to change in near future since public company suits most of the requirements of wide-range of operations that companies deals with. Conclusion: Bill and Ben should incorporate a public company due to their current financial circumstances, their business involvement with mining and manufacture which fits under no liability company as well as its future expansion intentions. Q 2 The area of law: Contract entered by a director without the board approval ss 180, 181 & s 588G. Discussion of Law: A director is directly involved with the strategies and business success. However, a director is not free in most circumstances to act alone. There are obligations and duties that a director requires to bear in mind. Potential liabilities follows and particularly where the decisions taken did not involve a collective action by the board of directors. A written resolution is provided by other directors on decisions that are approved by the majority. The director power and roles are defined in company’s articles though the managing director has extensive powers for day-to-day decisions as in s 180 and 1815. The Corporation Act 2001 s 588G establishes the director’s duty in preventing insolvent when trading on behalf of the company. A person is a company’s director by the time a company incurs a debt. There are instances that are further elaborated based on when a debt is incurred. Corporation Act 2001 emphasis on insolvency and a director owes a duty of care and highly when insolvency threatens the creditors. There are restrictions set to enter into certain transactions where a breach may ultimately lead to the director’s disqualification from acting as a director. In other cases, a director incurs personal liability and insurance can be obtained in order to cover some personal liability cases6. Application: Joe has entered a contract on behalf of the company whose amount exceeds the set limit of $200,000 without an approval by the board of directors. The articles of the company constitution stated it clearly that no transaction exceeding $200,000 will be carried by a single director. Joe’s action is a breach of company obligation and he did not take the necessary care or follow the set procedures. There are a number of issues to consider when such a breach is established. One, s 588G of Corporation Act 2001 emphasizes on a director’s breach where insolvency is prevalent, was foreseeable and the director did not exercise the due diligence to ensure that the company does not engage into a transaction that would lead to insolvency. That means the case is a personal liability where the company will require catering for the contractual requirements. Gilford Motor Co Ltd v Horne (1993), H argued that the company was not liable to pay for claims that its workers contravened. Since there was an agreement between H and G when H was leaving G as a car salesman, H had contractual agreements with G and it was wrongdoing for the H workers to contact G’s customers. The court held H Company and granted an injunction against the company7. Similarly, Ben’s and Bill’s company is liable to pay for the requirements arising from contractual relationships that the Joe entered. Since the contractual engagement did not lead to insolvency, the company will have to pay its obligations through the insurance. Joe’s act is simply an offense as compared to absolute liability. An offense under s 588G (3) states that a director commits an offense if a company incur debt at a time when one is a director of the company and a dishonest failure to prevent a company from incurring the debt. Little v ASIC is another case where ASIC claimed that Rich and Silbermann, the directors of One.Tel failed in exercise of due care due to failure to keep the board of directors informed of the company’s financial condition. NSW Supreme Court decided that it recognized some certain circumstances where a chairman of a board has special responsibilities that exceed those of non-executive directors. ASIC lost the case as they did not convince the court that the duty of care and diligence required was not met8. In this case, where Joe is seen to breach s 180 (1) but through business judgment defense provided by s 180(2), the company will take the liability of the contractual obligations. Conclusion: The company is bound to comply with the contracts that Joe entered on its behalf. Q3 The area of law: Company compliance to a contract entered by a director outside the company’s object clause, ss 125 & 180. Discussion of law: Ultra vires doctrine which is based on company’s objects clause is elaborated in s 125 and it remains fully in function for internal purposes9. Act 2001 requires the directors to observe the set constitutional limits that govern their powers. The failure to act within the limits can lead a director to have to pay compensation. A director who oversteps an objects clause may end up being disqualified. Section 180 of Corporation Act provides director’s civil obligations which should also be exercised by another person. The reasonable degree of care is required in exercise of powers as well as when discharging the duties. There is particular business judgment requiring the directors to make judgment for proper purpose and in good faith. The clause of the company requires the director to act when he/she rationally believe that their judgment is for the best interest of a company. However, directors do not wholly satisfy the level of care, diligence and skill required by delegating their roles to others in the company without paying further attention. It is expected that, at a minimum, the directors will take an active role and interest for the company affairs. Ultimately, they need to obtain general understanding of company’s business. The directors are required to pursue anything that the company face or comes to their attention. The Act provides that a company has a capacity and power to act in relation to its objects clause. However, the legal position currently cannot ensure that a contract that was entered into by a director beyond the power would be deemed void. The objects clause is only relevant for the company’s action against its director for any breach of a duty under s 125 for failure of observing the limits of constitutional power. Application: Bill and Ben set an objects clause in company’s constitution that states the activities and purpose for which each activity will be carried on. The objects clause will be used against Joe but the contract that was entered by Joe will take care of by the company. As much as the director is entitled to take the due diligence in the exercise of his powers, the company takes responsibilities of any liabilities taken on its behalf. The law does not treat the company as separate legal personality unless there is enough evidence of a director’s inattention to the requirements of a clause. Salomon v A Salomon & Co Ltd (1897) was a case where the judges held a unanimous ruling based on corporate personality. It involves Salomon £ 10,000 loan given to the company which was later put into liquidation. Courts legitimately disregard any assertion that a company is a separate legal personality. Where a fraud of a crime occurs, the company is in charge of any liability that arises10. The company cannot argue that it is Joe’s responsibility to take care of the contract entered or render it void. The company can claim that Joe breached the duties as set out by a company’s clause. Under Corporation Act, they can claim that Joe be penalized where the amount may range up to $200,000. Joe may be required to pay compensation or disqualify Joe from his position. Conclusion: Objects clause is only relevant for an action against a director who breached the constitutional requirements but cannot be used to render a contract void. The company will have to comply with the contract. 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