Questions:
Objectives
Answer the following questions with reference to the relevant statute law and general common law principles operating in Australia concerning the incorporation and registration of the company, the consequences of the company being a separate legal entity and the limits of the separate entity doctrine
Task
Q1.
Richard has an extensive olive grove in the Hunter Valley region of NSW. He has around 12,000 trees established and has recently purchased his neighbour’s adjoining property with a view to expansion.
His business is flourishing and his two sons, David and Liam, have recently moved from Sydney to help him expand the business. They see opportunities opening up in new markets and would like to become further involved in the business. They want the family business to be in a form that would allow it to expand as necessary and also make it easier to raise the capital required for this expansion. They have also heard that there are tax benefits in operating a business through a company structure rather than as a sole trader or partnership. They persuade their father to take advice on turning the family business into a family-run company. There is some contention regarding the naming of the company. Richard prefers to name the company after themselves – “Ridali” – whereas David and Liam prefer the name “Rich’s Guaranteed Olives”, in honour of their father.
Advise Richard and his sons of the steps that need to be taken to incorporate and register a company.
Q2.
Terry was an employee of Cosmo Mining Services Pty Ltd (CMS). CMS is a subsidiary of Co
smo Mine Ltd (CM) as CM owns 120 of the 200 issued shares in CMS. CMS owns and operates a lead, zinc and copper mine at Gunbarrel, Western Queensland. CM has an arrangement with the New Vision Bank Ltd whereby it leases all of the mining equipment and then subleases the equipment to CMS which pays CM a leasing charge per annum equal to the bank’s leasing costs plus 10 per cent.
Recently, CMS has attracted considerable media attention as scientists have discovered that CMS’s mining activities have contaminated a nearby river which supplies the water to the mine and Gunbarrel. A number of Gunbarrel residents and former employees, including Terry, have contracted cancer because they drank the contaminated water. The CMS shareholders call a general meeting for the purpose of addressing CMS’s potential liability to its employees (current and former) as well as the residents of Gunbarrel. The CMS shareholders unanimously vote in favour of selling CMS’s business to a newly formed company, Lazarus Pty Ltd, and winding up of CMS.
Advise Terry if he can take action against Lazarus Pty Ltd, CMS and/or CM.
Answers:
1.
If any person wants to carry out his business in the form of a company, then, it is necessary that the registration or incorporation requirements of such country must be met. In Australia, the Corporation Act 2001 and the guidelines laid down by ASIC provides with the steps that must be accomplish in order to establish a corporate entity. (Malbon & Bishop, 2006).
A company is of great significance as it is treated as a separate legal entity in the eyes of law. Upon incorporation a company acquires the status of an artificial legal person and has the capacity to carry out the tasks that can be undertaken by a natural person. A company has separate legal capacity, that is, a company is distinct from its officers Salomon v A Salomon and Co Ltd [1897].
Also, one of the significant advantages of a company is that the liability of a company is limited in nature. The limited liability of a company signifies that the debt that can be imposed upon the owners of the company is only to such an extent to which they hold shares in the company and rest of the liability must be borne by the company and no officer or director can be held personally liable for the same. (Rambarran Mangal, 1995)
So, in order to make a company incorporated, there are few steps that must be complying with: (ASIC, 2017)
Step 1
The company can be formed only when it is registered with ASIC. The first step that is required is that the person must select the kind of company that he is intended to purchase. The companies can be public and private (proprietary). A propriety company is a company that is normally established for small undertaking or for private investment entities and is preferred from any public company as it does not allow extension of unwanted ownership of the company. If any person wishes to carry out its business by way of a proprietary company then there are few requirements that must be met. Such as, every private company must have at least 50 non employees’ shareholders, also, there must be at least one shareholder and director in the company and at least one director must reside in Australia. If the private company appoints a secretary then at least one must ordinary stays in Australia. There is no requirement for the appointment of any auditor. Thus, when these requirements are met, then a person can operate by way of a proprietary company.
Step 2
No company can operate without its name. Thus, the second step after deciding the kind of company, it is necessary that the name of the company must be decided. As per the requirements of the corporation law, a person can keep any name he wishes provided the said name must not be identical or similar with any other name of the company or any business name. No two companies can operate under same heads. Also, the name which portrays that the company has connection with any royal family or with the government, then, such kinds of names are not permitted under law. No name must be offensive in nature nor must it be illegal. Further, few name, such as, banks, consumers, incorporation, royal are not permitted to be kept unless and until the same is approved by the government of Australia. (Lawpath, 2017)
Thus, the name of the company must be kept with all precaution as it is the name with which the company is represented in the market.
Step 3
Now, prior incorporation of a company, it is necessary to decide the mode through which the company must operate.
A company may bind itself with the help of replaceable rules which are part of the corporation Act 2001. These are the rules which are applicable when the company does not have the constitution. But, if the company wants to follow their own decided rules and regulations, then, the same can be done with the help of establishing a constitution. A constitution is a written document which lays down the rules which are required for the internal management of the company. However, if the company wants that it requires both the replaceable rules and the constitution for its governance, then, the company can operate with the help of both. Thus, how a company should be managed is one of the prime requirements that must be decided by the company before the same is incorporated. (Tomasic et al, 2002)
Step 4
It is also necessary that the share details of the company must also be provided. A company limited by shares must provide the details regarding its shares, that is, paid up capital, unpaid capital, etc. This is required to give true pictures of the capital structure of the company.
Step 5
Now, every company must be sure that its officers must know the duties and responsibilities that must be cater by them. Thus, awareness of the obligations of the officer’s is very essentials prior establishing a company under the corporation Act 2001. Every company officer should prepare the financial statements and keep it up to date. Also, it is required that the annual review fees of the company must also be paid by the officers of the company. If there are any changes that are made then it is obligatory upon the officers that the same must be brought within the notice of the ASIC. If there is a need to pass the solvency resolution, then, the same must be carried out by the officers of the company. If the address of the company is changed or if any new officer is joined by the company, etc, then it is obligatory that the officer must notify of the same to ASIC.
Step 6
When the officers of the company are appointed, that is the directors of the company or the secretary pr the member of the company. Then, prior granting them with the said position, it is necessary that their consent must be sought.
Step 7
Every company operates in a corporate office and thus it is necessary that there must be a registered office of the company, if the registered office is of the company then there are no consent requirements but of the office is jot under the ownership of the proposed company then the written consent of the owner must be taken where the head office is likely to be placed.
Step 8
The applicant must lodge Form 201 with ASIC along with fees in order to register the company.
Upon incorporation, the company is provided with a certificate, a key and a ACN number.
Step 9
Post registration the company must used its ACN on all papers and the name of the company must be displayed.
Advice –
Thus, it is advice to Richard that if he wishes to change his partnership structure then he must operate his business by way of a limited liability company as by operating by way of the company, his liability and the liability of his two sons, Liam and David, will be limited to the extent of their share holding.
Further, it is advice that Ridali should be the name that be kept for their company as it is distinct and is not offensive or illegal. The name Rich’s guarantee olives is a misleading name as it portrays that there is guarantee that is provided by the company.
So, a company with name Ridali must be kept by Richard and his son’s.
2. Issue
What actions can be taken up by Terry against CM, CMS, and Lazarus Pty Ltd?
Law
A company is one of the methods in which business can be operated in Australia. In order to make a company there are various compliances that needs to be met. But, after the compliance of all the requirements of a company a company is said to be registered. (Cassidy, 2006)
A registered company is a separate legal entity in the eyes of law which signifies that the officers of the company cannot be in any manner be held accountable for the acts that are carried out by them in the name of the company. The consequences which follow the acts will hold the company liable and the directors or officers are no where associated with the same. There is a veil that makes a distinct amid the company and its officers. But, with the passage of time it has been observed that several frauds, shams and injustice is caused to people or outsiders or the employees of the company because of this separate legal personality of the company. Thus, at times this veil that makes a distinction amid the company officers and the company itself is pierced and the acts of the officers are not held to be the acts of the company but are considered as their own acts. Some of the instances include: (Hofmann , 2005)
- When the holding company has established a subsidiary company and the holding company is the true controller and the manager of the subsidiary company, then, if the subsidiary company has indulged into some negligent actions then the liability that is originated because of such tortuous actions will be imposed upon the holding company and the veil amid the holding and subsidiary company will be pierced and is held in CSR v Young, (1998). It is necessary that the holding comioanu should be reasonably foresee the actions of the subsidiary company and there is proximity amid the subsidiary company and the aggrieved party, then, the aggrieved party can sue the holding company for tort for the wrings incurred by its subsidiary company;
- Also, when a subsidiary company is established by the holding company and the acts of the subsidiary company is carried out under the control, directions and supervisions of the holding company, then, the subsidiary company is considered to be the agent of the holding company and any acts that are taken by such implied agent will bind the holding company. Thus, any loss incurred by such subsidiary under his capacity as an agent will make the holding company liable and is rightly established in Smith, Stone andKnight v Birmingham Corporation 1939;
- Further, at times a company is established by the owners so that fraud can be conducted on some persons. It is an act of fraud, sham or façade and it is observed that the courts are not reluctant to pierce the corporate veil of the company and to disregard the corporate structure of such company and the acts that are carried out by such newly established company was considered to be the acts that are undertaken by the creators of such company. In the leading case ofSharrment Pty Ltd v Official Trustee in Bankruptcy (1988) & Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) veil was pierced considering that the company was created in order to incur sham.
Also, the employee of the company is also authored to bring an action against the company of he can prove to court under section 236 and section 237 that the action is required because the owners themselves are not willing to bring any action and it is in the best interest to continue with the proceedings. Once the proceedings are found to be justified, then, the company can be wound up (Westgold Resources NL v Precious Metals Australia Ltd [2002].
Application and conclusion
Terry can take an action against CM as CM is the holding company of CMS. CMS has acted negligently because of which the residents and Terry suffered injuries. The act of CMS is foreseeable by CM and Terry is in proximate relationship with CMS. Thus, the veil if pierced and the cats of CMS will fall upon CM
Terry can also take action against CMS under section 236 and section 237 of the 2001 Act as CMS will not take action for its own wrong and it is in the interest of justice that proceedings should be brought against CMS.
Action can also be taken against Lazarus Pty Ltd because the company is incorporated by CMS to curb its own liability and thus to incur fraud. Thus, a sham is incurred and the veil must be priced and the Lazarus Pty Ltd must be considered to be the company of CMS and no distinction should be made.
Reference List
Julie Cassidy (2006) Concise Corporations Law, Federation Press, 2006 -.
Malbon & Bishop (2006) Australian Export: A Guide to Law and Practice (Cambridge University Press, 10-Jul-2006).
Rambarran Mangal, (1995) An Introduction to Company Law in the Commonwealth Caribbean, Canoe Press, University of the West Indies.
Tomasic et al. (2002) Corporations Law in Australia, Federation Press.
CSR v Young, (1998).
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
Stone and Knight v Birmingham Corporation (1939).
Salomon v A Salomon and Co Ltd [1897] AC 22.
Westgold Resources NL v Precious Metals Australia Ltd [2002] WASC 221.
ASIC (2017) Steps to register a company (Online). Available at: https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/. Accessed on 6th October 2017.
Lawpath (2017) (Online). Available at: https://lawpath.com.au/blog/infographic-how-to-choose-a-company-name-in-australia. Accessed on 6th October 2017.
Melissa Hofmann (2005) The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore. Bond University.
