BLAW2006: Commercial Law - COMPANY LAW FOR BUSINESS - Assessment Answer

December 26, 2018
Author : Sara Lanning

Solution Code: 1ABDG

Question: Commercial Law Case Study

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Commercial Law Assignment

Case Scenario/ Task

Question One

Discuss what factors Haili and John may have taken into consideration in deciding whether to form a proprietary company instead of a partnership. Please outline the characteristics of partnerships and proprietary companies and write notes on the advantages and disadvantages of each type of business structure. Your answer should include an analysis of the liability Haili and John would have under each structure, should the business incurs debts.

Discuss the procedure and the legal requirements that may have been required to be satisfied under the Corporations Act 2001 (Cth) to convert the company from Sparkle Pty Ltd to a public company.

Question Two

The Board of directors decide to dismiss Thomas from his position as the company’s marketing manager and employ Haili’s sister Collette in the same position. Advise Thomas whether he has any ground to enforce the Constitution of the company that employs him in the position of marketing manager.

Question Three

Glittering Floor Pty Ltd wants to bring an action to restrain both Haili and John from engaging in competing flooring business on the basis that they signed non-competing clauses  in their employment contracts. Haili and John argue that Sparkle Pty Ltd is a separate legal entity and it can do what it likes.

Advise Haili and John on whether Glittering Floor Pty Ltd is likely to succeed in preventing Haili and John from opening a flooring company.

Question Four

Advise Haili and John on whether they can cancel the contract with Asealia France Ltd on the ground that the Constitution of Sparkle Pty Ltd specifies that the company shall only operate the business of selling flooring materials.

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Solution: Commercial Law

Introduction of law

Factors that decides the formation of company from a partnership.

Conversation or a private company to a public company

Area of Law

In Australia, two of the most basic forms in which businesses can be established are by way of a Corporation or as a Partnership.

A corporation is an entity which is created upon registration. Once a corporation is created then it acquires a characteristic of a separate legal entity which is distinct from its members and has perpetual succession and limited liability and is rightly analysed in Salomon v Salomon & Co Ltd (1897).[1]  Some of advantages that are associated with a corporation are,

  1. First, it has perpetual succession and does not die even when all the member cease to exists;
  2. second, the liability of the shareholder is limited and when a debt is incurred then they are only answerable to the extent of their shareholdings;

  • third, the transferability of shares is very easy;

  1. fourth, property can be acquired by the corporation in its own name;
  2. fifth, suits can be filed in its own name.

But, some of the disadvantages are,

  1. first, the corporate veil can be lifted in few situations[2];
  2. second, it is very expensive and requires formalities;

  • third, company is not a citizen[3].

A Partnership is another form of business structure which can be formed by two or more persons to carry on a business on continuous basis to earn profits (Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (1996).[4] Some of the advantages of creating a partnership are,

  1. first, it is very easy and cheap to formulate and does not require registration;
  2. second, since only partners are involved in the business thus confidentiality is maintained.

  • third, there are few tax benefits that can be attained.

But, some of the disadvantages are that,

  1. first, the partners have unlimited liability and if the partnership incurs debt then the partners can be held personally liable for the same;
  2. second, there is no perpetual succession and the partnership is dissolved even when there is incoming or outgoing partner;

  • third, there are chances of occurring disputes amid the partners[5].

Now,

In order to convert a proprietary company into a public company the basic procedure and legal requirements are:

  1. As per section 162 (1) of the Corporation Act 2001, every private company limited by shares can be converted into a public company only after passing a special resolution on such behalf;
  2. As per section 162 (3) of 2001 Act, the copy of the special resolution must be filed to ASIC within 14 days of passing the same, the non compliance of which is a strict liability offense under section 162 (3A).

  • As per section 163 of 2001 Act, an application must be filed to ASIC along with the copy of the special resolution, constitution, document which determines the rights attached to issued or unissued shares.

The law is now applied.

Application and Conclusion

The two main issues that arose are:

  1. What factors should be undertaken by Haili and John prior deciding whether to from a proprietary company from of a partnership?
  2. What is the procedure which is required to convert Sparkle Pty Ltd into a public company?

It is submitted that both Haili and John were running business as a partnership. If they wish to convert their partnership into a company, then, the main points to be taken into consideration are:

  1. Since a company has a separate legal entity thus their liability will be limited in a company and they are liable only to the extent of their shareholding, that is, Haili is liable up to $ 500,000 and John will be liable up to $ 300,000.
  2. The company has perpetual succession.

  • Conflicts can be avoided and professionalism can be attained.

Further, both Haili and John should follow the procedure mentioned under section 162 and section 163 if they intent to convert their Sparkle Pty Ltd into a public company. The non compliance of which brings strict liability.

Conclusion

It is thus advised that Haili and John should convert their partnership into a company as the same is more safe and is an adequate option when the business is to be expanded as it requires more finance and stability.

Also, section 162 and section 163 must be comply with before the company is converted into a public company.

Answer 2

Introduction to law

Understating of Constitution of a company.

Area of law

Section 140 of the Corporation Act 2001 submits that the constitution of the company has the effect of making a contract under seal amid the company and its directors and company secretary and the company and each of its members and amid the members themselves.

When any contract is made as per the provisions of the constitution then the main contractual effect of such contracts was analysed in the leading case of Eley v Positive Life Assurance Co Ltd (1876) wherein it was analyzed that no common law rights are provided to any other person in any other capacity. In the leading case, Eley was made part of the company at a position of a solicitor for life.  He was also the member of the company and it was the articles of the company under which his appointment was made (an article of association is part of the constitution of the company). After some time, the company has removed him from the position of the solicitor. Eley sued the company for breach of contract. It was held by the court that the rights which accrue to Ely in regard to the articles are only with respect to a member and no other right are conferred to him under the constitution. Thus, his removal from the post of a solicitor has not hammerer any of the rights that are conferred to him under the article as a member and thus there can be no action that can be maintained by him against the company.[6]

In the leading case of Hickman v Kent or Romney Marsh Sheep?breeders Association (1915), it was specifically provided by the articles of the company that if any dispute will arise amid any member of the company and the company itself then the same must first be referred to an arbitrator. But when the dispute arises amid, the member directly avail the rescue of the court without first referring the dispute to an arbitrator. The company successfully was able to take a stay at the proceedings and it was held by the court that the provision of the constitution is a kind of contract amid the company and its members and is enforceable by them. However, if any right is provided to him in a capacity of an outsider, such as, a director, promoter, solicitor, etc, then, he is not allowed to enforce any right under the constitution other than that of a member by treating him like a contract that is established amid him and the company. Mainly, a constitution is categorized as a kind of contract that is established amid itself and the members and is enshrined under section 140(1)(c) of the Corporations Act 2001 (Rayfield v Hands (1960)).[7]

The law is now applied.

Application

The main issue that arose is whether Thomas has any ground to enforce the Constitution that employs him in the position of marketing manager?

As per the facts, on 1st March 2016, Haili and John forms a company Sparkle Pty Ltd. The company has to follow the replaceable rules, except that Thomas was appointed as an employee and a shareholder of the company. He is appointed as the marketing manager of the company and has acquired $ 2000 shares. Later the board decided to dismiss Thomas and appoint Haili’s sister (Collette) in his place.

It is submitted that the appointment of Thomas was made under the provisions of the constitution. But, as per section 140 of the Act and as discussed in Eley v Positive Life Assurance Co Ltd, it is submitted that if any member is appointed under the constitution as an employee or outsider, then, he cannot confer any right under the constitution apart from the rights of the member. He can only enforce his member’s right and nothing else.

Conclusion

Thus, Thomas has no ground to enforce the Constitution that employs him in the position of marketing manager as he being at the position of a marketing manager is an outsider and not the member of the company.

Answer 3

Issue

Non-Compete Clauses

Relevant Law

Non-compete clauses are the clauses which are made part of the contracts and have the capacity to restrain the parties from indulging into similar business in a specific area or for some limited time frame, etc.  In Sidameneo (No 456) Pty Ltd v Alexander (2011)¸it was held that all kinds of restrain are void unless and until the restrain are reasonable in nature. The party who is relying on the non-compete clause has the obligation to prove the reasonability of the clause. It is the time when the non-compete clause was made part of the contract and what was agreed by the parties that determines whether the clause is reasonable or not[8]. If the non-compete clause is safeguarding the legitimate interest of the party who is relying on the clause, then, the same is reasonable otherwise not.  the legitimate interest may comprise, such as, to protect goodwill, to protect trade secrets, confidential information, etc. A non-compete clause should also not be against public policy and is rightly held in Idameneo (No 123) Pty Limited v Dr Teresa Angel-Honnibal (2002). If the non-compete clause is reasonable and not against public policy then the same is liable to be honored by the parties upon whom the same is imposed. However, if the clause is violated then various consequences can be faced by the parties, such as, injunction can be imposed[9]; compensation can be claimed by the aggrieved party.[10]

It is now important to evaluate whether the non-compete clause is considered to be violated when the restrain party continue the restrain under a new company and shield themselves under the law of separate legal personality of the company.

It is submitted that when a company is incorporated then such company acquires a distinct feature of a separate legal personality, that is, a company is considered to be a separate legal artificial person in the eyes of law who is distinct from its members and all the actions which are undertaken by the company is in its own name and will not hold the members liable for the same. Thus a veil is established amid the company and its members who make a distinction amid the two.

However this feature of separate legal personality is at times disregarded by the courts and the actions of the members of the company is considered to be the actions of the company. This action of the court if called the piercing the corporate veil of the company and the members are held accountable for the actions of the company like their own action. There are various instances wherein the veil of the company can be pierced, such as, fraud, agency, face, sham, unfairness, injustice, group enterprise etc.[11]

Now, it is important to understand the concept of separate legal personality and piercing of veil in the context of non-compete clause.

In the leading case of Gilford Motor Co Ltd v Horne (1933), an agreement is created amid an employer and an employee wherein a non-compete clause was signed amid them. The employer has restrain the employee to establish his own business of care dealer and the clause was found to be reasonable and as per public policy. However, the employee in order to avoid the effect of the non-compete clause has established a company which deals with the business of car dealer. The court in the leading case has pierced the veil of the company and submitted that no shield can be granted to a company to support an unjustified action and no company can be created to avoid the effect of the non-compete clause.[12]

The law is now applied to the facts of the case.

Application

The main issue is whether Glittering Floor Pty Ltd is likely to succeed in preventing Haili and John from opening a flooring company?

Haili and John were initially working with Glittering Floor Pty Ltd as marketing and sales executives. During their employment they signed a non-compete clause which prohibited them from competing with the business of Glittering Floor Pty Ltd during their employment as marketing and sales executives and postemployment for a period of 3 years. They resigned from Glittering Floor Pty Ltd in December 2015 and established Sparkle Pty Ltd which is indulged in the business of selling timber flooring and tiles. They believed that the non-compete clause is not operational on the new company.

It is submitted that the non-compete clause that was made amid Haili and John and Glittering Floor Pty Ltd is valid as the same was resonate and is not against public policy. The clause was made to protect the goodwill or the company and to protect trade secrets and was for a definite period.

However, the new company Sparkle Pty Ltd which was established by Haili and John cannot was dealing in the business which is similar to of Glittering Floor Pty Ltd. in such situation, Haili and John cannot take the shield of separate legal personality of the company and incur fraud or sham on Glittering Floor Pty Ltd. by relying on the decision of Gilford Motor it is just that the veil of  Sparkle Pty Ltd must be pierced and Haili and John should be held liable for the violation of the non-compete clause.

Compensation

Glittering Floor Pty Ltd can sue Haili and John for injunction and monetary compensation.

Answer 4

Issue

Analysis of Corporation Act 2001.

Relevant Law

In common law, the general principle is that an agent can bind the company by his actions provided the actions that are under ken by him are within the object clause of the constitution of the company.  Actions which are found to be outside the objects of the constitution are considered to be ultra virus in action and are not binding upon the company.

However, section 125 (2) of the Act 2001 submit that just because a contract which is undertaken by the officers of the company are not within its object clause will not make such a contract invalid and is binding upon the company. Likewise, if certain restrictions are imposed on the powers of the members under the constitution, then, any contract which is made which is beyond such powers will not make such contracts invalid.[13]

The law is mow applied.

Application

Whether Haili and John can cancel the contract with Asealia France Ltd?

 

Haili and John has incorporated a company, Sparkle Pty Ltd with the main business of selling flooring materials mentioned in its constitution. However, they intent to sell kitchen furniture and thus on 1st July 2016, John entered into a contract with Asealia France Ltd.

It is submitted that the actions of John was outside the scope of the object of the constitution, but, by applying the section 125, it is submitted that just because the actions are in contravention of section 125 will not render the same as void and is applicable upon the company.

[1] Puig GV, A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine, 2000, Volume 7, Number 3 (September 2000).

[2] Daimler Co Ltd. v. Continental Tyre and Rubber Co. (1916).

[3] Balakrishna A, Notes on company law, 2016. Viwed on 30th August 2016< https://hanumant.com/CompanyLaw-ByAvinash.html>.

[4] Egert G, ‘Defining a Partnership: The Traditional Approach Versus An Innovative Departure - Do Queensland Appeal Court Decisions Point to the Need for a Review of the Traditional Approach to Interpretation Adopted by Australian Courts?’ 2007, Vol 1, Issue 1, Article 5.

[5] LegalVision, ‘Business Structures: The advantages & disadvantages of operating under a partnership model’ 2015. Viwed on 30th August 2016 <.https://legalvision.com.au/business-structures-the-advantages-disadvantages-of-operating-under-a-partnership-model/>.

[6] Sydney, ‘The Law of Corporate Governance, Topic 5, 2016.

[7] Farrar’s Company Law, 4th ed (Butterworths, London, 1998) at 119-120.

[8] Cactus Imaging Pty Ltd v Peters (2006).

[9] Idameneo (No 123) v Butterworth (2013).

[10] TressCox, ‘Beware of Restraints of Trade’ 2016. Viwed on 30th August 2016 <https://www.tresscox.com.au/page/our-news/newsletter/beware-of-restraints-of-trade/>.

[11] Ramsay & Noakes, ‘Piercing the Corporate Veil in Australia’ 2001, 19 Company and Securities Law Journal 250-271.

[12] Cheng TK, The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S. Corporate Veil Doctrines’ 2011, viewed on 30th August 2016 < https://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=1660&context=iclr>.

 

[13] Chapple & Lipton, ‘CORPORATE AUTHORITY AND DEALINGS WITH OFFICERS AND AGENTS’ 2002, viewed on 30th August 2016 https://law.unimelb.edu.au/__data/assets/pdf_file/0004/1721164/2-Larelle-Chaple.pdf.

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