FOUNDATIONS OF COMPANY AND COMMERCIAL LAW Essay Example

  • Category:
    Law
  • Document type:
    Assignment
  • Level:
    Undergraduate
  • Page:
    5
  • Words:
    3595

FOUNDATIONS OF COMPANY AND COMMERCIAL LAW

QUESTION ONE (690 words)

Type of legal business structure is Rachel and Stacey currently operating

The current legal business structure in which Rachel and Stacey are operating in is a partnership business. The reason is that they are the two owners who share with each other the profits or losses incurred in the business. The two have also entered into the commercial dealings on the name of their firm that have a partner in. Both partners are liable of any debts incurred for the business since the partners are subject to unlimited liability as also found out by Van Riel & Van Bruggen, (2012).

Is their current business structure the most suitable for the café or should they consider another form of business structure, and, if so, which one?

Their current structure is not the most suitable and thus they should consider incorporating the business. The business structure that will be most appropriate for them will be the corporation. Corporation business structure will be appropriate in case they decide to include Bruno in their business. Incorporating the business will mean, that the business is a legal entity that is separate from the shareholders. The good thing is that the shareholders of the corporation will not be personally liable for any debts, obligations or even the acts of the corporation.

Advantages

There are various advantages attributed to the incorporation of a business that I advise them to consider. First, is that incorporating a business is essential in asset protection. Shareholders of an incorporated business usually are guaranteed of limited liability for the business debts and even the obligations. One of the main reasons for business incorporation they should consider is the protection of their personal assets (Van Riel & Van Bruggen, 2012). The law does not allow business creditors to pursue the personal assets of any incorporated business so as to recover debts.

The second advantage of incorporating a business is the ability to raise capital as explained by Loveridge, (2015). It would be easier for them to raise capital if they decide to include Bruno in the issuance of the company stock. They may also opt to provide more stock thus the company can raise the capital required so as to fulfill its obligations and also expand their company.

Thirdly, incorporating their business will also ensure continuity according to Lee et al. (2015). Most of the incorporated businesses usually have an unlimited life. Incorporating the business, will ensure the business still lasts even if one other partner passes on. Incorporated businesses tend to continue even if one of the partners is away.

Disadvantages

However incorporating a business has various advantages, there are various disadvantages attributed to it they should know to make an informed decision. The first major disadvantage is that incorporated businesses tend to pay taxes as twice on the same corporate profits generated in a fiscal year. There is the possibility of double taxation in case the corporation pays taxes as an incorporated business as posited by Loveridge, (2015).

In case they decide to sell the assets of their incorporated business, they may be subject to double taxation. It very apparent that the business law expects an incorporated business to pay taxes on the gain from selling or providing services, but at the same time the partners of the corporation pay individual taxes on the amount taken out of the business.;

Secondly, incorporated businesses tend to have many formalities and regulations compared to other business types and thus require more paperwork as found out by Loveridge, (2015). For this matter, they will have to file paperwork so as to incorporate and also pay the corresponding filing charges to the state of incorporation. In the incorporated business, the partners (Rachel and Stacey) will have to keep an accurate account of the company’s minutes and also the banking information so as to ensure credibility and transparency in the business. They will also be expected to file the annual reports and even the tax returns in time as also found out by Lee, et al. (2015).

QUESTION TWO (985 words)

Discuss any case law or statutory civil liability of the directors of Vintage Dress about these events. What are the consequences, if any, of a breach of the Corporations Act?

Directors of companies have a duty of care and diligence to their organization according to Morris, G. G. (2015). There are general laws governing to ensure this. The common laws and the rules of equity govern the relationship between the director and the company. These laws ensure there is fiducial relationship existing between the company and the company’s directors (“Hospital Products Ltd v. (1984) 156 CLR 41”).

The “Corporations Act 2001(Cth)” explains the statutory duties of the directors and officers of organizations. In the case of breaching common law or even statutory duties, a director or an officer is liable for prosecution. Failure for Dilara to attend meetings of the Vintage Dress Company without a reasonable explanation is a breach of the “Corporation Act of 2001”. He fails to offer due care, skill and diligence to the company.

According to the common law, directors owe a duty of care to their organizations especially in the case where they are the stakeholders. This is in accordance to the case law “AWA v Daniels(1992) 9 ACSR 383” and the “Re City Equitable Fire Insurance Co Ltd(1925) ch 407” where the directors are prosecuted for failing to offer care for their organizations as posited by Morris, (2015).

Dilara also breaches the common law that expects a director to act in good faith for the best interest of his or her organization. As seen in the case law “Greenhalgh v Ardene Cinemas Ltd (1951). She even makes secret profits by forming a Second Hand Fabrics, which created garments successfully. This in turn generates him large profits that are secret to her partners.

She never exposed his decision to the other directors but instead decides to act on her own. She fails to fulfil the expectations of the Statutory Civil Liability which expects that a director has a duty of care to a company as a whole not as an individual as seen in the case “Greenhalgh v Ardene Cinemas Ltd (1951)” in the case “Foss V Harbottle” Mr. Foss brought the breach of duty of care by Mr. Harbottle in the court as noted by Morris, G. G. (2015).

From this is apparent that if both Tavid and Suzie come to the knowledge of what Dilara is doing they are capable of suing her for breaching the duty of care and also making secret profits. Dilara is also failing to ask about the financial statements of the company in the period of loss and even fails to attend the meeting. She is surely not acting in the best interests of the company and, therefore, she fails to meet the statutory civil liability Act.

Although Tavid is very active in the operations of Vintage Dress Company, he also broke the law as posited in the “Corporations Act of 2001.” He insists on telling both Suzan and Dilara that he and his daughter run the Sew West Pty Ltd. He recommends that the company to consider to purchase the new sewing machine from his company for him to make secret profits. He breaches the requirements of Director’s duties as posited in both the common law and the statute law that a director ought not to make a secret profit (Downes & Eggins, 2015). In the case “Kinsela v Russell Kinsela Pty Ltd (in liq) (1986),” Kinsela makes a secret profit that makes the company sue him. He breaches the common law of not making a secret profit on behalf of the organization and thus he is penalized for breaching the law.

Mr. Tavid also fails to draw any errors to the attention of the board of the Vintage Dress Company. He does not act in the best interest of the organization as seen in the case “Walker V Wimborne (1976).” He does not balance the subsidiary to the best interest of the company as explained by Downes & Eggins, (2015). He does not exercise his power properly for proper use as posited in the Statutory Civic Liability. For that reason, he fails to prevent insolvent trading with the entity (Morris, 2015).

Suzan also breaches the Directors’ duty of care law. She knows that Tavid has interest with the purchase of the new sewing machine from Sew West but does not make follow ups to ascertain it. She also never tells Dilara, and she carelessly fails to ask any details from Tavid. She fails to act in due care and diligence to expose the personal interest of Tavid.

She never acts for the proper purpose knowingly and thus breaches the Statutory Civic Liability Act (180). From the case “Daniels V Anderson (1995) 37 NSWLR 438”, Mr. Daniel sue Mr. Anderson for his attempt to make a secret profit at the expense of their company. He wins the case, and Mr. Anderson is declared to have breached the law and thus is prosecuted for breaching the Statutory Civic Liability Act (180).

The consequences of breach of the Corporation Act

Breaching the Corporation Act of duty, care and diligence have some consequences to the directors involved. First, it may lead to termination of the contract as explained by Morris, (2015). A shareholder’s agreement may be stopped if the company or court orders so as explained by Veitch, (2015).

Secondly, the director involved in breaching the duty of care and diligence is liable for any debts incurred when the company becomes insolvent (Veitch, 2015). He or she may be liable to pay any losses or debts incurred due to his or her breaching the duty of care and diligence as posited in the Corporation Act(2001). Finally, the court may also order for compensation for any losses or damages incurred by the director responsible.

QUESTION THREE (678 words)

Rights of shareholder/member in a company

A shareholder in a company also has his or her rights and liabilities in a particular company as explained by Small, K et al (2015). according to the Companies Act of 2006, the rights of any shareholder generally depend on the amount of shares the shareholder has in that particular entity. A shareholder gets a bundle of rights from investing in a particular entity depending on the type of shares invested in. The shares may be either ordinary or preference shares.

Rights of a shareholder often depend on the type of shares invested and in most cases preference shareholders have a wide array of rights compared to the ordinary shareholders according to Small, K et al.(2015). In this case, Leo is deprived of some of his various rights by the Thomas the Tank Engine PTY company and the executive directors (Ruby and Amanda). There are various rights I will advise Leo as a shareholder/member of the company.

First, he has the right to attend general meetings of the company. Leo has the right also to be included on the board in meetings to discuss important issues affecting the company. He also has the right to vote in case in particular circumstances but not all of them. The shareholders have a statutory rights to attend and even vote in general meetings of the company (GAO, N., & Mohamed, A. 2015).

Secondly, Leo is also obliged with the right to receive a share of the company’s profit (Small, K et al. 2015). He is eligible to receive dividends of a certain amount of his shares to the company. The decision of Ruby and Amanda not to pay dividends deprives his rights as a shareholder since the company makes a profit from their 300% revenue generation.

However, it is very important for Leo to understand that company are obliged to pay dividends only if it makes a profit and then decides to distribute the profit to its shareholders regarding dividends as claimed by Small, K et al (2015). Preference shareholders however have a better opportunity of receiving dividends. It is also important for Leo to understand that dividends are paid in proportion to the shares held by the various shareholders of the company.

Thirdly, Leo has also right to a final distribution in case the company decides to wind up .according to Gao, N., & Mohamed, A. (2015), for a case whereby a company decides to wound up, all creditors are usually paid first. The assets remaining are then available for division among the shareholders of the company. This often takes two critical steps that are: A return of capital and then division of surplus capital. However, it is important for Leo to know that some shares are usually given top priorities depending on the others and may even be excluded from participating in any division of the surplus capital of the company.

Fourthly, Leo has the right to receive copies of the company’s financial statements, annual accounts, and others. It is his right to be provided with the documents showing the progress of the company according to GAO & Mohamed, (2015). He also has the right to question the documents if he senses any malpractice occurring or even misuse by the company’s directors. For instance, it is his right for him to question the decision of the two executive directors (Ruby and Amanda) to lease two expensive cars for their exclusive use that is not beneficial to the company.

Finally, he has the right to ensure that the company is run in a lawful manner. He should report any breach of the law of the company to relevant authorities in case of any malpractices in accordance to the Companies Act, Common Law and even the company’s constitution (Small, K et al. 2015).. However, it is usually the company members who have the mandate to sue to ensure the company Act is lawful as claimed by Bruno, (2015). They also may have limited ability to sue under the common law rule in the case of “Foss V Harbottle”.

QUESTION FOUR (952 words)

Notice procedures provided by Corporations Act

Introduction

The Corporation Act has given guidelines for conducting a meeting referred to as notice procedures. According to the Act, failure to follow these notice procedures may lead to procedural irregularity that may make the resolution invalid as also noted by Weresh & Ahrendsen, (2015). Thus, these procedures are very essential when conducting a shareholders meeting.

The law expects the notice procedures, to be honest, accurate and also not misleading. According to the Corporation Act relevant information should be presented in a good manner that will not mislead the shareholders during the meeting. Notices ought to be clear explaining the objective of the meeting. The notices should be prepared in accordance to various important aspects.

The first procedure is the need to provide explanatory notes on every resolution to the shareholders according to Weresh & Ahrendsen, (2015). This applies if the resolutions assigned by the Corporation Act. Secondly, the notice should be compliant with principles of the Corporation Act and the common law.

The corporation Act also expects that the notices to be set at a reasonable time. The first procedure is ensuring that the notices are set at an appropriate location before the meeting. According to the section 249HA of the Corporations Act at least a twenty-eight day notice should be given before the day of the meeting.

This section also expects meetings to be held during the normal business hours. It requires the meeting to be held in a convenient location where by almost all shareholders reach. The most recommended location is usually the head office of the company or where the majority of the shareholders of the company reside. With the technological advances, it is easy to inform the shareholders easily to convey for the meeting.

Shareholders are usually encouraged to participate in meeting through direct voting or even use of proxies. It ii recommended that the notice include a very apparent reference that clearly indicates the right of the shareholder (Weresh & Ahrendsen, 2015). The next procedure to consider in notices is the adoption of best practice methods. There should be only the use of plain English easy to understand to communicate the relevant information (Solovy et al. 2014). There is also a need to employ structure or even format that ensures easy readability for quick understanding of the shareholders.

The third notice procedure is coming up with the resolutions that are interdependent but also linked so as to form a very significant proposal. Companies are also expected to give out clear guidelines that have resolutions in case of the elections of directors. Each candidate is to be considered separately in a different resolution. According to Chong & Van der Linde, (2014), during voting it is very important to consider the number of available positions that are on board. This procedure is essential since it also provides the voting method to use in cases of voting the new directors.

In the case of removal of office of a particular director, the procedure expects the company to give a very clear guideline. The first notice procedure in this is that the candidate for removal to be considered in a very different resolution as noted by Solovy, J. S. et al. (2014). The next procedure will be circulation to all the respective shareholders written statements that have been written by the director who is in a removal resolution.

Companies are also expected under the corporations act that they give a very clear guidance on the recommendations provided by the director. The first procedure in this expects that the notices to contain an adequate representation of all the views regardless of whether it is the assenting or dissenting directors as also noted by Chong & Van der Linde, (2014). Contrary views need to be presented in the case of director supporting a resolution unanimously. There is a need of placing the guidance on the recommendation by the director after each resolution.

There is a need for companies to give attention to notices which have complex resolutions. These resolutions should in most cases include a short form statement explaining them. In the case of any conflict of interest among shareholders, there is a need for the companies to provide notices showing the clear guideline on resolving them as claimed by Weresh & Ahrendsen, (2015). Finally with the new technology companies are expected to come up with their website. Companies are expected to send their notices of meeting via electronic means in case the shareholders request them. Shareholders should be provided the annual reports via electronic means. They should also be allowed to vote electrically to ensure maximum efficiency.

Should notice procedures be stricter?

I think notice procedures need to be stricter. There is a need to use stricter approaches to curbing procedural irregularities in companies. Stricter notice procedures will ensure defined boundaries as also claimed by Solovy, J. S. et al. (2014). Rules regarding shareholders meeting will be followed to the letter since they will be consequences of breaking the rules.

More strict notice procedures will ensure that time is followed and no late coming to the meetings according to Chong, J., & Van der Linde, K. (2014). The meetings will be focused on the success of the companies. This will only turn out the shareholders who are dedicated to achieving significant in the company. Stricter notice procedures will ensure no failure of any shareholder or even a director to the meeting. Therefore, it will ensure there is an exercise of duty, care and diligence to their organizations by both the directors and the shareholders.

REFERENCES

Bruno, S. (2015). Legal Rules, Shareholders and Corporate Governance. The European Shareholder Rights’ Directive and its Impact on Corporate Governance Of Italian Listed Companies: The Telecom SPA Case. The European Shareholder Rights’ Directive and its Impact on Corporate Governance Of Italian Listed Companies: The Telecom SPA Case.(February 27, 2015). Corporate Ownership and Control, 12(2).

Chong, J., & Van der Linde, K. (2014). Tax issues arising from the amalgamation or merger procedure in the Companies Act 71 of 2008. Stellenbosch Law Review= Stellenbosch Regstydskrif, 25(3), 471-500.

Downes, K., & Eggins, S. (2015). Bringing proceedings on behalf of a company: Applications for leave under s237 of the’Corporations Act’.

Gao, N., & Mohamed, A. (2015). Shareholder Rights and the Effects of Acquirer Cash Holdings on Merger Performance.

Lee, J., Sung, S., Song, M., & Choi, I. (2015). A BUSINESS PROCESS SIMULATION FRAMEWORK INCORPORATING THE EFFECTS OF ORGANIZATIONAL STRUCTURE. International Journal of Industrial Engineering, 22(4).

Loveridge, R. (2015). Incorporating Business Professions; Communication, Governmentality, and Epistemic Arbitrage. In 27th Annual Meeting. Sase.

Morris, G. G. (2015). Model Business Corporation Act as Adopted in Louisiana. La. L. Rev., 75, 983-1399.

Small, K., Kwag, S. W., & Li, J. (2015). Do shareholder rights influence managerial propensity to engage in earnings management?. Journal of Economics and Finance, 39(2), 308-326.

Solovy, J. S., Marmer, R. M., Chorvat, T. J., & Feinberg, D. M. (2014). Federal Rules of Civil Procedure, Rule 23.1, Derivative Actions. Moore’s Federal Practice-Civil, 5.

Van Riel, C. B., & Van Bruggen, G. H. (2012). Incorporating business unit managers’ perspectives in corporate-branding strategy decision making. Corporate Reputation Review, 5(2-3), 241-251.

Veitch, E. (2015). When the Court Finds a Breach of Fiduciary Obligations, Should Equitable or Legal Remedies Flow. UNBLJ, 66, 200.

Weresh, M. H., & Ahrendsen, A. W. (2015). RECTIFYING RENDA: AMENDING THE IOWA ADMINISTRATIVE PROCEDURE ACT TO REMOVE THE LEGAL FICTION OF LEGISLATIVE DELEGATION OF INTERPRETIVE AUTHORITY. Drake L. Rev., 63, 591-667.