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Law of business association Australian Corporate Law Essay Example

  • Category:
    Law
  • Document type:
    Essay
  • Level:
    Undergraduate
  • Page:
    3
  • Words:
    1737

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Question 1

Rohit, Ariel, Charn and Levi can start the company to market the medical app as either a company limited by shares or as a partnership. A company limited by shares is a popular business entity in Australia and elsewhere in the world. The reference to limited by shares means the liability of shareholders in the company is limited to the amount of capital contributed1. Limited liability protection means that the personal assets of the shareholder cannot be affected by debts and other liabilities incurred by the company. A company can either be limited by shares or limited by guarantee as is the case in a company funded by shareholder or director’ guarantee2. Companies limited by share can either take the form of public or proprietary companies3.

A public company is not suited for this situation as such a company is owned by the general public and listed in the stock exchange. The number of shareholders in a public company is not limited4. In contrast, the private or proprietary company is an investment structure where the number of members is restricted to 50 and transfer of ownership is tightly controlled5. Like public companies, the members of a proprietary company have the benefit if limited liability protection. Arguably, this would be the most suitable business structure for the four students and Charn’s father to use to start marketing the medical app they have come up with. This type of business structure will ensure that the shareholders are protected from liabilities that are incurred by the business. In many cases, the shareholders of the company cannot be sued for wrongs, torts and criminal actions of the company. Under, section 119 of the Corporations Act 2001 (cth), a company is a legal entity that has independent existence from its shareholders6. This view is accepted in courts since the landmark ruling by the House of Lords in Salomon v A Salomon & Co Ltd (1897) AC 227.

A partnership is one of the business structure options available to Rohit, Ariel, Charn, Levi and Charn’s father. A partnership is a business entity where two or more people join up to carry out business with the view of making a profit. Section 1, of The Partnership Act 1958 (vic) describes a partnership as business relationship between persons designed for the purpose of carrying out business with the view of making a profit. Under the Australian Corporations Act (cth), the number of partners in a partnership is limited to 208.

One of the main disadvantages of forming a business as a partnership is the absence of limited liability protection9. Unlike companies, a partnership does not have a separate legal existence from the partners. This mean that liability and debt obligations incurred by the business is treated as the responsibility of the partners in the business10. In case, Rohit, Ariel, Charn and Levi start their business as a partnership their personal assets can be attached to pay for debt liabilities incurred the businesses. In addition, the partners can be sued for crimes and torts committed by the person in charge of running by the business.

The exposure of partners to the liability of the business is even greater as a result of the clause in section 16 of the Partnership Act 1958 (Vic). Section 16 holds all partners in business severally and jointly liable for liabilities incurred by the business. This section means that outsiders dealing with the business can sue any of the partners for debt, torts and crimes. As espoused in Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 111, the law does not require the participation of the partner in incurring the liability for them to be considered liable. Moreover, all the partners of the firm are held jointly liable for the contractual and debt obligations of the firm under section 14 of the Partnership Act 1958 (vic).

For investors worried about the liabilities of a business, a company limited by shares would be the most appropriate investment structure. A company limited by shares will provide the Rohit, Ariel, Charn and Levi with the peace of mind that their personal assets cannot be attached to recover debts incurred by the company. In addition, the investors cannot be personally sued for torts, crimes and contractual obligation committed or incurred by the business. This contrasts sharply with a partnership where members are not afforded limited liability protection and are severally and jointly responsible for torts, contractual and debt obligation incurred by those running the business.

Question 2 (a)

.14. Section 16 on the other hand states that partners are jointly and severally liable for everything that any partners become liable for in the course of running the business13 asserts that the partnership is liable for any penalty incurred when a partner(s) commits a wrongful act or omission while acting on behalf of the partnership in the ordinary course of running the businessPartnership Act 1958 (vic) The partnership law considers all the partners agents and principals of the business. Therefore, each partner is held to be jointly and severally liable for the legal and business obligations of the partnership. Section 14 of the .12Partnership Act 1958 (vic)Liability under the partnership business structure is significantly large under the

. Rohit should have made the partners aware of the legal implications of entering into a partnership as the four are now exposed to criminal and negligence prosecution as a result of entering into business as a Victorian partnership. Unfortunately, some of the partners of the firm may be found liable for crimes and torts that were committed by other partners in the firm.15As a consequence, Rohit, Ariel, Charn and Levi are jointly liable for the illegal acts of the business. All the partners of the business can be sued for building an app that encourages people to do their own surgery. In addition, under section 14 and 16, any of the partners can be sued solely or jointly with other partners for negligence as the use of the app resulted in injury to some consumers

Question 2(b)

. In contrast, Rohit has designed the app to divert half of the sales revenue to him in contravention of section 28(1) and (4). Rohit claims that he is entitled to half of the sales revenue as the app belongs to him. Rohit’s claims go against the principle of partnership law that assert that profits may either be shared in a way agreed to by all members in the partnership agreement, or equally in the absence of the partnership agreement. In addition, section 28(4) prevents partners from making a claim for share of profits before the profits of the firm are ascertained. 17. However, a partnership agreement can describe the mechanism for sharing profits that does not depend on the equal share principle. In many cases, the profit sharing ratio is dependent on two factors; capital contribution and profit sharing. Under the assumption that the Rohit, Ariel, Charn and Levi partnership does not have a partnership agreement, the partners are entitled to an equal share of profits. However, the partners can only claim a share of this profit after profits have been ascertained as set out Section 28(4)16In the absence of a partnership agreement, all partners are entitled to an equal share of profits as set out in Section 28 (1) of the Partnership Act 1958 (vic)

Question 2(c)

Charn’s father can be considered a partner in the business as he has contributed most of the capital needed to start the business. Under the Partnership Act 1958 (vic), section 28 (5), any partner is entitled to participate in the management of the business18. In this case, Charn’s father has a valid complaint that Rohit, Ariel, Charn and Levi are not giving him a say in the way the business is run. However, Charn’s father participation in the management of the business can be managed by a partnership agreement which can limit the level of participation.

Charn’s father is also has a right to view the records of the business anytime he wishes. Under section 28 (9), a partners is entitled to view the records of the business anytime he wishes. These records should be kept at the place of business of the partnership and be accessible for view by any partner. The partnership act also obligates the partners to render true account and full information of all matters affecting the partnership to other partners or their legal representatives19. These subsections which operate in the absence of partnership agreement mean the partners have an obligation to allow Charn’s father to inspect the partnerships record and participate in the management of the business.

The problems experienced by the partnership indicate the need for a partnership agreement to govern the problematic issues. A partnership agreement will describe how profits should be shared and how partners can participate in running the business20.

Bibliography

  1. Articles/Books/Reports

Clark, Eugene, and Ram Vemuri. «Conducting business in Australia: Prospects and strategies for international managers.» Global Business and Organizational Excellence 27, no. 5 (2008): 49-64.

Wilkes, F.M. Brayshaw, R.E., Financial Management and Decision Making (International Thomson Business Press, 1999)

Salomon v A Salomon & Co Ltd (1897) AC 22

Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1

  1. Legislation

Corporations Act 2001 (Cth), s 57A(2)

Partnership Act 1958 (vic), s. 14

1
Corporations Act 2001 (Cth), s 516

2
Corporations Act 2001 (Cth), s 57A(2)

3Wilkes, F.M. Brayshaw, R.E., Financial Management and Decision Making (International Thomson Business Press, 1999)

5
The Corporations Act 2001 s 45 (A) (1)

6
Corporations Act 2001(cth), s. 119

7
Salomon v A Salomon & Co Ltd (1897) AC 22

8
The Corporations Act 2001 (Cth) s 115

9
Clark, Eugene, and Ram Vemuri. «Conducting business in Australia: Prospects and strategies for international managers.» Global Business and Organizational Excellence 27, no. 5 (2008): 49-64.

10
See, Wilkes and Brayshaw, above n 3

11Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1

12
See Eugene, and Vemuri, above n 8

13
Partnership Act 1958 (vic), s. 14

14
Partnership Act 1958 (vic), s. 16

15
See, Wilkes and Brayshaw, above n 3

16
Partnership Act 1958 (vic), s. 28(1)

17
Partnership Act 1958 (vic), s. 28(4)

18
Partnership Act 1958 (vic), s. 28(5)

19
See, Wilkes and Brayshaw, above n 3

20
See, Wilkes and Brayshaw, above n 3