Company Law Essay Example

Company Law

Question 1

Sue started a business, which later on transformed into a company. The change of business structure meant that the ownership and operational requirements also changed. The aspect of debentures was introduced and previous contractual requirements needed to be updated based on the classification of business structure. The incorporated, Bling Bling Pty Ltd, continued to operate effectively but later on, was faced with numerous challenges include theft and financial related crisis. The business became insolvent and was placed under receivership. The original insurance contract was between Sue when she was a sole trader with Good Luck Ltd, which was not updated to include the new business structure. In addition, the aspect of debentures is raised complications because the statutory bodies do not embrace similar views with Sue. The section discusses whether Sue can enforce her charge against Bling Bling Pty Ltd in terms of debentures and whether Bling Bling Ltd can enforce the claim against Good Luck Ltd.

  • Part A (Enforce her Charge [Security Interest] Against Bling Bling Pty Ltd)

Debentures are an important instrument for financial transactions to ensure the business continues to operate smoothly. Sue charging the corporation means that the company in future is supposed to pay Sue. The charge on Bling Bling Pty Ltd is a floating charge because it deals with changing goods: the stock keeps changing. In Re Yorkshire Woolcombers Association Ltd, the judge listed three features in defining a floating charge1. The three characteristics are changing stock over time, charging the company assets for the present situation and in the future, and the company can continue operating seamlessly until the intervention of the charge. From the Sue situation and changing the business structure, crystallization of the debentures has not been done and therefore, her debentures are still floating. If crystallization occurs, Sue will have right on the corporation and may seek compensation. In addition, section 9 of the Corp Act defines the floating charge and determines the preferential treatment to prevent losses to important assets of the company. For example, the employees have to be paid during liquidation before the creditors and investors can seek payments. The actions on floating charge are further discussed in Barcelo v Electrolytic Zinc Co, Tricontinental Corporation Ltd v Commissioner of Taxation, and Atkins v Mercantile Credits Ltd, which states that a floating charge is a present security that affects the assets of a corporation, but there are conditions to be satisfied before seeking compensation from the company2.

Based on these case law and common law, Sue has the right to enforce her charge against Bling Bling Pty Ltd. However, any compensation will be done after some of the individuals in the corporation are paid. For example, the employees’ compensation is considered before the charge.

  • Part B (Enforce the Claim against Good Luck Ltd)

Sue insured the business with Good Luck Ltd against certain threats but used her name. Later on, Sue “sold” the business to Bling Bling Pty Ltd’. The definition of a “Pty Ltd” is important and the role of Sue is also crucial in determining whether compensation is appropriate. Sue and

Bling Bling Pty Ltd’ is two different entities according to the Corporations Act 20013. The insurance contract agreement is between Sue and Good Luck Ltd but not between Bling Bling Pty Ltd and Good Luck Ltd. The incorporation of the business did not mean that the previous relationships and understandings continued into the new agreement. Sue was supposed to review previous decisions and contractual agreements and updates these agreements to reflect the changing operational requirements.

Therefore, Sue cannot enforce the claim against Good Luck Ltd because the individual who signed the insurance agreement (Sue) is different from the entity seeking compensation, Bling Bling Pty Ltd. It is attributed to the fact that there is no relationship between Bling Bling Pty Ltd and Good Luck Ltd.

Question 2

The business structure that Amy should use is a proprietary company4. According to Corporations Act 2001 section 45A, a proprietary company has the suffix “Pty Ltd” and such companies do not have the right to raise capital from the public5. A proprietary company offers numerous benefits to Amy.

  • Varied Liabilities

The appropriateness of the proprietary company understands the nature of a business and the challenges the business may face. For example, Amy’s current business is a restaurant, and any complication may result in litigation. The effectiveness of the proprietary company in such situations is the less personal liability. Amy will have limited or minimal personal liability when something goes wrong. The component of “limited liability” means that a person seeking claims will have to deal with the business rather than the owner of the business.

  • Perpetual Existence

A proprietary company outlives the owners of the business. From a legal perspective, a proprietary company is a different entity and investors (stakeholders) may not be worried about future of the company if the untimely demise of owners occurs. A proprietary company offers long term investment to the owners and other stakeholders.

  • Future Investment

Ownership and transfer of ownership of a proprietary company are easy. The directors of the company can decide to sell the shares and utilize the shares to raise additional revenues. The owners of a proprietary company can also distribute the shares as deemed but should integrate the legal requirements. Amy is a prospective parent and wants a family. It will become easier for Amy to transfer shares to the future husband or even the children easily6. In addition, Amy has current cash but requires additional funding to fulfill the requirements of expansion. The source of the funds can be from a loan or selling to an investor. A proprietary company business structure can easily fulfill these requirements because of the need of doing frequent audits and filing appropriate documents. Hence, seeking additional funds and guaranteeing future of the restaurant are some of the benefits associated with a proprietary company.

  • Tax Treatment

A proprietary company is a standalone entity meaning that the taxation liabilities are separate from personal tax liabilities7. The current Amy’s business model takes the approach of personal tax liabilities but changing the business structure means that the tax liabilities are separated. Amy will only pay taxes on the money that the company pays in forms of commission, salary and dividends. The company will then pay corporate taxes based on the profit the company will generate. Differentiating and clarifying on tax liabilities is important because it reduces personal exposure of certain forms of taxes.

  • Professional Management

Credibility is an important component when a sole proprietorship business transforms into a company. Many people believe and can do business easily with a company rather than a sole proprietorship business. It is attributed to the numerous documentations that the company collects from the company. In addition, the regulations and standards define the limits and requirements of the business entity. Moreover, a company has clear measures and approaches to address misunderstanding complexities. Therefore, professional management is important in the creation of the documentations and also reviewing the regulations8. Amy’s business model relies on Amy on most operations and any challenge that Amy faces affects the business. However, the presence of professionals would inculcate the aspect of professionalism into the business. Moreover, the employees may benefit through professional growth and development. For example, employees seek to work with a company that has a strong brand and a brand can be developed when a business is a company. Therefore, a company is the appropriate business structure that Amy has to employ.

  • Formalities Required to Implement the Advice

Choosing a company name is the starting point, or even Amy can transfer the current business name to a company name. Amy should understand difference exist between the current business structure to a proprietary company. Therefore, Amy has to define how the business operates and understand the numerous legal obligations as an officeholder. Amy then registers the company with the registering bodies and institutions. The owner should then understand their legal obligations regarding company name, ABN, and CAN. After registering the company, Amy has to update other documents including permits and names on important documents. It includes creating the important office positions such as secretaries and defining the manner and strategy of keeping appropriate company documents. The fundamental component of the entire process is validly registering the corporation with ASIC.

References

Albert Vincent Y. Yu Chang, Andrew Thorson, A Legal Guide to Doing Business in the Asia-Pacific (American Bar Association, 2010)

Alexander Mills, William Woodford, Company Accounting (Pearson Higher Education AU, 2009)

Corporations Law 2001

Dennis Campbell, International Protection of Foreign Investment (2nd Edition, Juris Publishing, Incorporated, 2010)

Roman Tomasic, Stephen Bottomley and Rob IcQueen, Corporations Law in Australia (Federation Press, 2002)

1Re Yorkshire Woolcombers Association Ltd discussed in Roman Tomasic, Stephen Bottomley and Rob IcQueen, Corporations Law in Australia (Federation Press, 2002) pp 499.

2 Ibid 501

3 Corporations Act 2001

4 Alexander Mills, William Woodford, Company Accounting (Pearson Higher Education AU, 2009) pp. 3

5 Corporations Act 2001

6 Albert Vincent Y. Yu Chang, Andrew Thorson, A Legal Guide to Doing Business in the Asia-Pacific (American Bar Association, 2010) p. 42

7 Dennis Campbell, International Protection of Foreign Investment (2nd Edition, Juris Publishing, Incorporated, 2010) pp. 65-67

8 Alexander Mills, William Woodford, Company Accounting (Pearson Higher Education AU, 2009) p. 6