Posted: June 25th, 2022

TLAW202 Corporations Law

Question:

Objectives

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The following questions are based on the Australian statute law and common law principles that govern incorporation and registration. They address the implications of the company being a separate legal person and the limitations of the separate entity doctrine.

Task

Richard owns an extensive olive grove located in NSW’s Hunter Valley.

Richard has approximately 12,000 trees and recently bought the adjoining property of his neighbor with the intention to expand.

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His business is thriving and his sons Liam and David, who live in Sydney, recently moved to assist him with expanding the business.

They see new opportunities in emerging markets and want to be more involved in the business.

They want their family business to be able to grow as needed and to make it easier for them to raise capital.

They also learned that a company structure is better than a sole trader, partnership, or corporation for tax purposes.

Their father agreed to help them transform the family business into an family-owned company.

The company’s name is a matter of contention.

Richard prefers to name it after himself – “Ridali”, whereas David, Liam and Liam prefer “Rich’s Guaranteed Olives”, in honor of their father.

Remind Richard and his sons about the steps required to form and register a company.

Terry was employed by Cosmo Mining Services Pty Ltd. (CMS).

CMS is a subsidiary to Cosmo Mine Ltd (CM), as CM holds 120 of the 200 shares in CMS.

CMS operates Gunbarrel’s lead, zinc, and copper mine in Western Queensland.

CM has an agreement with New Vision Bank Ltd. It leases all the mining equipment, then subleases it to CMS. CMS pays a leasing fee per annum equal the bank’s leasing costs plus 10%.

CMS has been the subject of a lot of media attention recently. Scientists discovered that CMS’s mining activities had contaminated a nearby stream which supplies water to the mine and Gunbarrel.

Gunbarrel residents, as well as former employees, have been diagnosed with cancer after drinking the contaminated water.

CMS shareholders call a general assembly to address the potential liabilities of CMS to its employees (current or former) and Gunbarrel residents.

CMS shareholders unanimously vote to sell CMS’s business, Lazarus Pty Ltd, to a new company and wind up CMS.

Terry should be advised if he is able to take action against Lazarus Pty Ltd., CMS and/or CM.

Answer:

A person who wants to run his business as a company must meet the requirements for registration.

The Corporation Act 2001 in Australia and the ASIC guidelines outline the steps required to create a corporation.

Because a company is considered a separate legal entity, it is very important.

A company is able to perform the same tasks as a natural person when it is incorporated.

A company has its own legal capacity. This is different from its officers Salomon and Co Ltd [1897].

A company’s liability is also limited. This is one of the major advantages.

A company’s limited liability means that only the owners can impose a debt on them. The rest must be borne entirely by the company. No officer or director can be held personally responsible for this.

There are a few steps you must follow to incorporate a company. (ASIC 2017, 2017).

Step 1

Only ASIC registration can allow the company to be created.

First, the buyer must choose the type of company he wants to buy.

Companies can be either private or public (proprietary).

A proprietary company is one that is established to facilitate small business ventures or private investment. It is preferable from public companies as it doesn’t allow for the extension of unwelcome ownership.

There are very few requirements for anyone who wants to run their business through a proprietary company.

For example, a private company must have at most 50 shareholders. Additionally, at least one shareholder must be a director and at least one must live in Australia.

A secretary must be a person who is ordinarily resident in Australia if a private company has appointed one.

No requirement exists for any auditor to be appointed.

These requirements must be met before a person can form a proprietary business.

Step 2

A company cannot function without its name.

The second step in deciding on the type of company is to decide the name of that company.

The corporation law allows anyone to keep any name they like, provided that it is not identical or similar to any other company name or business name.

Two companies cannot operate under the same head.

Names that portray a connection between the company and any royal family or government are also prohibited.

Names must not be offensive or illegal.

A few names, such as banks, consumers and incorporation, are not allowed to be kept until they have been approved by the Australian government.

As the name that the company is known in the marketplace, it must be protected.

Step 3

Before a company is incorporated, it is important to determine the operating mode of the company.

The corporation Act 2001 contains replaceable rules that allow a company to bind itself.

These rules are applicable if the company doesn’t have a constitution.

If the company wishes to have their own rules and regulations, they can create a constitution.

A constitution is a document that outlines the rules for internal management.

If the company decides that it needs both the replaceable rules as well as the constitution to govern itself, then the company can use both.

Before a company is incorporated, it must decide how the company is to be managed.

Step 4

The company’s share details must be included.

The details of a company that is limited by shares must include information about its shares. This includes paid up capital and unpaid capital.

This information is necessary to provide accurate images of the capital structure of a company.

Step 5

Every company must ensure that its officers are aware of their responsibilities and duties.

It is essential that all officers are aware of their responsibilities before establishing a corporation under the Corporation Act 2001.

Each company officer must prepare and maintain the financial statements.

The company officers must also pay the annual review fees.

The officers must notify the ASIC if there are any modifications.

The officers of the company must pass the solvency resolution if necessary.

It is mandatory that any officer notify ASIC if the company’s address changes or a new officer joins the company.

Step 6

The officers of the company include the directors or secretary of the company.

Before granting them the position, their consent must first be sought.

Step 7

A corporate office is the place where a company works.

Step 8

To register the company, the applicant must file Form 201 with ASIC with all fees.

The company receives a certificate, key, and ACN number upon incorporation.

Step 9

After registration, the company must use its ACN on all papers. The company name must also be displayed.

Advice

Richard is advised to operate his business through a limited liability company if he wants to change his partnership structure. By operating through the company, his liability will be limited as well as that of his sons Liam and David.

It is also recommended that Ridali be used as the company name. Ridali isn’t offensive or illegal.

Rich’s guarantee olives is misleading as it implies that the company offers a guarantee.

Richard and his sons must keep a company named Ridali.

Issue

Terry can take what actions against CM, CMS and Lazarus Pty Ltd.

Law

One of the ways in which businesses can be run in Australia is through a company.

There are many requirements that must be met in order to create a company.

A company is registered only after it has met all of the requirements.

A company registered under the law is considered a separate legal entity. This means that officers cannot be held responsible for any acts they perform in the company’s name.

The company will be held responsible for the consequences of the acts and its directors or officers cannot be held accountable.

The veil makes it clear between the company and its officers.

With the passage of time, it became evident that many frauds, shams, and injustices are caused to people, outsiders, or employees of the company by this separate legal entity.

This veil, which is used to distinguish between company officers and company employees, can sometimes be pierced. The acts of officers are not considered the acts or the company.

These are just a few examples: Hofmann, 2005

If the holding company establishes a subsidiary company, and the holding firm is the true controller/manager of the subsidiary, then liability for any tortuous acts by the subsidiary company will be imposed on the holding company. The veil between the subsidiary and holding companies will be broken and will be held in CSR Young (1998).

If the holding company is able to reasonably foresee the actions and there is close proximity between the subsidiary and aggrieved parties, then the aggrieved can sue the holding for tort for the damages incurred by its subsidiary.

The holding company can also establish a subsidiary company. If the subsidiary company’s acts are carried out under its control, direction, and supervision, then the subsidiary company will be considered the agent of that holding company. Any acts taken by such implied agent shall bind the holding corporation.

Accordingly, Smith, Stone and Knight v Birmingham Corporation (1939), any loss suffered by such subsidiary in his capacity of agent will render the holding company liable.

Sometimes, a company may be established by its owners in order to commit fraud on others.

It is fraud, sham, or facade. The courts do not hesitate to cut the corporate veil of a company. They also ignore the corporate structure of the company. Furthermore, the acts carried out by a newly established company were considered acts of fraud by their creators.

The veil was broken in the case of Sharrment Pty Ltd. v Official Trustee in Bankruptcy (1988). This was because the company was set up to make sham.

The employee can also bring an action against company if he can show to court that section 236 or section 237 require it. This is because the owners are unwilling to take any action, and it is in their best interests to continue the proceedings.

After the proceedings have been deemed to be valid, the company may be wound up (Westgold Resources NL v Precious metals Australia Ltd [2002]).

Application and Conclusion

Terry can bring an action against CM, as CM is the holding firm of CMS.

CMS has negligently acted, causing injuries to Terry and residents.

The act of CMS was foreseeable by CM. Terry has a close relationship with CMS.

The veil will be pierced, and CMS cats will descend upon CM

Terry can also bring action against CMS under section 236, and section 237 of 2001 Act. CMS won’t take action for its own mistake and it is in the best interest of justice to bring proceedings against CMS.

Lazarus Pty Ltd can be sued as well because it is incorporated by CMS in order to limit its liability and avoid fraud.

This is how a scam is committed and the veil must also be priced. The Lazarus Pty Ltd must then be considered the company of CMS.

Refer to the 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

Federation Press, 2002 Corporations Law in Australia.

Dennis Willcox Pty Ltd V Federal Commissioner of Taxation (1988), 79 ALR 265.

Sharrment Pty Ltd V Official Trustee in Bankruptcy (1988), 82 ALR 531.

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).

Retrieved 6 October 2017.

Lawpath (2017) (Online).

Accessible on October 6, 2017.

Melissa Hofmann, 2005. The Statutory Derivative Actions in Australia: An Empirical Study of Its Use and Effectiveness in Australia, Comparing to the United States and Canada.

Bond University.

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