LST5CCL Company and Commercial Law for Mary Fred and Chris Lawyer

After several years Mary decides to leave the business and resigns. For years the business had then been operating as a registered company with Mary, Chris and Fred being directors.

As a farewell present to herself, Mary decides to get a new car. She goes to the car dealership and tells them to charge the company. The dealer checked the ASIC database online, which indicated that Mary is indeed a director as ASIC had not been notified about the change. Mary has now left the country and the dealer is pursuing the company for the debt.

b) Does the business have to pay for the car under statutory rules?

Answer 

1. a) Mary, Fred, and Chris started a real estate business in Melbourne by writing an agreement on a serviette. The term of the contract stated that equal amount is put by each party and future profits will be divided equally between them. The business is providing bespoke service to peoples entering in real estate market, and all three partners were managing the operations.

Issue

The key issue is related to the type of business structure Mary, Fred and Chris are in and understanding the legality of their contract since it is written on a serviette.

Rule

To establish a legally enforceable contract, few elements are required to be fulfilled by the parties of such contract. A legal contract needs an offer, acceptance, and consideration or a bargained for exchange. In other words, acceptance of agreement terms by parties and having a consideration in the transaction validates a contract which can be enforceable by law. There are four main types of business structures used by businesses in Australia: Sole trader, company, partnership, and trust.

In Sole trader business structure, the processes of business are operated by an individual who is responsible towards all aspects of the business. A company has a separate legal entity from its owners, and it is more suitable when the operation is expanding or growing. The Corporations Act provides regulations regarding the establishment of a company. In Partnership business structure, a number of people jointly decided to run a business together. The partnership is divided into two parts- general and limited; the Partnership Act provides provision regarding partnership structure. In Trust business structure an obligation is imposed on a party to hold an asset for the benefit of another party.

Application

In case of Mary, Fred, and Chris, they have entered into a partnership business structure. The agreement performed by them on a serviette is legally enforceable because it comprises essential elements of a contract which are offer, acceptance, and consideration. The intention of parties is also similar, that is to start a business of providing bespoke service for real estate.

The Lucy v Zehmer case is a good example; in this case, the court enforces a contract which was written on the back of a receipt for selling of property to another party. Zehmer provided that his intention was not available and the contract was written in jest, but the court decided that the circumstance surrounding were justified the seriousness of the contract hence it can be legally enforceable by law.

Conclusion

As per the provisions of Partnership Act, Mary, Fred, and Chris are in an unlimited partnership business structure. The contract performed on serviette is legally binding upon the partners because the fundamental principles of the contract are available, such as offer, acceptance, consideration, and intention.

b) Fred is a tax consultant who provides advice regarding tax implication in a property. While giving information to ‘X’, Fred made an unintentional mistake which causes ‘X’ monetary losses of $15,000 in tax. Without the advice of Fred, ‘X’ would not have purchased the property.

Issue

The main issues are regarding the liability of Fred or other business partners towards the loss suffered by customer X.

Rule

As per Tort Law in Australia, the negligence is a failure of maintaining proper care when a person has a duty of care towards other peoples, which causes low to such party. In case of misrepresentation, a party misrepresents particular facts to lure someone into entering a legal contract, due to which they suffered monetary loss. A negligent misrepresentation is an advice or fact which is given by a party honestly but is misleading or false, due to which another party suffers financial injuries. In negligent misrepresentation cases, the claimant has to prove three things, availability duty of care, defendant’s liability of care and pecuniary loss.

Application

Fred is operating a business of bespoke service which provides advice to peoples regarding real estate market. Fred is a tax consultant which depicted him as a tax expert. The information was given by Fred to X regarding the property, which causes damage of $15,000 is constituted as negligent misrepresentation. Fred has a duty of care toward his customers because he is considered as a tax expert; therefore, Fred has liability towards X regarding the misleading advice given by him. Mary, Fred, and Chris are in a partnership which makes other partners liable towards losses of X as well.

In Shaddock & Assocs. V Parranata City Council case, Shaddock asks PCC regarding any road widening proposal for a land in the future. The PCC said no and provided a written document for proof; Shaddock bought the property. Later PCC compulsory acquire such a for a road widening project due to which Shaddock suffer loss. He filed a suit against PCC and court decided that PCC has a duty of care which they failed to fulfill; they have to pay for the damages of Shaddock. In Hedley Byrne & Co Ltd v Heller & Partners Ltd case, the court establishes the provision of “reasonable reliance” which provides that when a person is in a particular position that other could reply over his/her advice, then such person must make an inquiry into the facts before giving any advice. The court gave a similar judgement in Esso Petroleum Co Ltd v Mardon case; the court provided that a person has a duty of care if he/she possesses or is expert in the particular field and give advice to another party based on such knowledge.

Conclusion

Fred is a tax consultant so it can be constituted that he is expert in tax laws, the advice of Fred influences the customer's decision to invest in a property, and therefore, he has a duty of care towards customers. Fred made a tort of negligent misrepresentation by giving false information to X, which causes X financial loss. Fred did not fulfill his duty of care which makes him liable towards X. other partners in the firms will also be responsible towards X, as per the provision of Partnership Act.

c) Fred has given wrong advice to X which causes him a financial loss, it is considered as negligent misrepresentation, and Fred is liable towards X. the advice given by Fred was passed by X to his friend Y, due to which Y bought a property and suffered a loss of $18,000.

Issue

The key issue is whether Fred and /or other partners of the firm can be held liable for negligent misrepresentation towards Y’s loss.

Rule

The tort of negligent misrepresentation applies to the parties who are directly in relation to the transaction. While giving advice, an individual has a duty of care towards all such individuals who are relying upon his/her opinion on a specific matter. The advisor is not liable towards third parties who are not directly relying upon the information provided by him.

Application

The false advice given by Fred to X is considered as negligent misrepresentation because Fred has a duty of care towards X. X is a client of Fred which proves that Fred has a duty of care towards X. but, in case of Y, Fred did not have any direct connection with him. Fred is not liable towards loss to suffer by Y because he did not have a duty of care towards Y. The advice of Fred was given the position of a professional; such opinion cannot be applied to other individuals.

In case of Ultramares Corp. v Touche, it was held that accountants could not be held liable in case any third party suffered loss due to the negligent audit made by them. In the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd, a bank (Heller and Partners) give a report regarding the creditworthiness of their client (Easipower Ltd) to another bank. Based upon such report, a third party company (Hedley Byrne & Co Ltd) grant credit to such client. Easipower Ltd went into liquidation and Hedley Byrne file a suit against Heller and Partners for negligent misrepresentation. The court provided that a professional cannot be held liable for his/her advice which was shared with the third party, due to lack of duty of care. Therefore, Heller and Partners cannot be held accountable for negligent misrepresentation because they did not have a duty of care.

In Esanda Finance Corporations v Peat Marwick Hungerfords case, Esanda accepted a guarantee from Excel Company based upon their auditor’s report. Esanda suffered loss, and they file a suit against the audit firm. The court provided that auditor has no duty of care toward Esanda hence they cannot be held liable for negligent misrepresentation. In this case, Fred and /or other partners of the firm cannot be held accountable towards the losses of Y. to recover his damages; Y can file a suit of negligent misrepresentation against X because he shared the wrongful advice with Y without checking its validity.

Conclusion

Fred cannot be held liable towards the loss suffered by Y because Fred advise his client X and his duty of care was limited to his client. Any professional advice share by a person to the third party cannot make such professional liable towards such third party because he/she did not have a duty of care. Y can file a suit of negligent misrepresentation against X because he shares the advice of Fred with Y without enquiring in the matter.

2. a) The business of Mary, Fred, and Chris if proliferating, they prefer to expand it further in the market. To develop their business, Mary, Fred, and Chris require raising capital for its operations. They prefer to limit their liabilities in the business and also prefer to limit the number of investors. They also prefer to choose the persons who can or cannot invest in the business.

Issue

The main issue is regarding selection of a business structure which assists in the expansion of Mary, Fred, and Chris business. They also prefer to limit the number of investors who can invest in their business.

Rule

As discussed above, a Company is more suitable for businesses which are growing or expanding their operations because it allows them easily takes investment for investors. The Corporations Act provides provisions regarding incorporation of a company, an enterprise has separate legal entity from its owners, and they cannot be held personally liable for the actions of such corporation, as provided in Salomon v A Salomon & Co Ltd. An enterprise is considered as artificial person meaning it has various rights such as it can sue or get sued, incurred debt and own a property in its name. The company is more complicated to operate, and it requires a high level of capital and expertise from the members.

The key aspects of a corporation include separate legal entity from the members, limited liability of owners, complex procedures, mandatory to be registered, submission of the annual return, and compliance with the provisions of Corporations Act. A company has perpetual succession meaning the death of enterprise’s members did not have any effect on the corporation’s entity, unlike partnerships, which dissolves as soon as members died, unless provided otherwise. A company can raise a large number of investment by issues its share in public, family, friends or relative. The structure of an organization allows it to expand more swiftly and more efficiently which is beneficial for its members.  

A company is registered with Australian Securities and Investments Commission (ASIC) and the directors are requiring complying with the regulation of Corporations Act. A firm is divided into various parts according to their features and purposes, but mainly they are two types: Public and Proprietary. The public company is more prominent than compared with the proprietary company because proprietary corporations can only have less than 50 members. A public organization can be listed on the stock exchange, and they can raise capital from the public.

Application

Mary, Fred, and Chris can convert their partnership into a corporation to expand their business; they prefer to raise capital and decrease their liability from the business. They also want to limit the number of investors and select the individuals by themselves who can invest in the business. By converting their partnership into a company, they can fulfill their requirements. The company will be able to raise funding from investors other than Mary, Fred, and Chris, by issuing shares.

Mary, Fred, and Chris can decide whether to incorporate a public or proprietary company. The benefits of a public company include a large number of investors, faster expansion, more revenue, large size and limited liability. The stock market provides better and easier option of rising funding then compared to the proprietary firm. But, there are several issues in choosing a public company such as complicated regulations to be fulfilled, more disclosures, ownership & controlling issues, vulnerable to takeovers and initial financial commitment is higher. The process of managing a large number of shareholders is significantly complicated in a company.

The proprietary company has various advantages such as a limited number of investors, lower regulations, less risk of takeover, more control on operations and fewer disclosures. The member of proprietary firm usually distributed share between their family members and close relatives, it provides them better control over the process of business since it is easier to conduct meetings and implement the decision. Along with various benefits, there are several disadvantages of the proprietary company as well, such as expensive procedure, legal obligations, and complex government regulations. A proprietary firm is further divided into two parts: limited and unlimited.

In the case of Mary, Fred, and Chris, transforming their partnership into the company is a better choice for them. They can analyse their requirement and select the type of corporation which is more suitable for them. In case of public company, they can expand their business significantly and collect a significant amount of invest from the public. In case of a proprietary firm, they can select the investors and limit the number of members. In a limited proprietary company, Mary, Fred, and Chris will be able to limit their liabilities in the business.

Conclusion

For Mary, Fred, and Chris business, the registered company is a more suitable option than compared to the partnership. A company structure will provide them various benefits such as the expansion of operations, raising a large number of investments, and selection of investors. Mary, Fred, and Chris can evaluate their requirement to select the most suitable type of company to fulfill their requirements.

b) Mary decided to leave the company which she was operating with Fred and Chris. The notification of Mary’s resignation was not sent to ASIC by Fred and Chris. Mary decided to buy a new car and charge such amount on company’s accounts. After checking the online database of ASIC, car dealer gives Mary her new car. The dealer is now asking for money to the company.

Issue

The key issue is whether the company has to pay for the car of Mary, as per the statutory provisions.

Rule

As per the Corporation Act, a registered company is required to notify the ASIC regarding the resignation of a director within 28 days unless the director has already given his resignation notices to ASIC. It is necessary that director has fulfilled the entire essential requirement so his/her name can be removed from the records of a company as a director. After receiving the notification, ASIC updates the director's list on their website to avoid any confusion.

Application

Mary has resigned as a director of the company, but Fred and Chris failed to notify ASIC regarding the same. A corporation must notify ASIC regarding the change in corporate structure to avoid any confusion. In this case, Mary purchased a car by showing the dealer that she is a director with Fred, and Chris on the portals of ASIC; the dealer is demanding money from the company. The principle of vicarious liability is applied in this case, in which employer held liable for the illegal actions of its employees.

The judgement of Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited case applies to this situation. In this case, company secretary of the firm purchase a car and enter the bill in companies name; such company was held liable to pay the bill because they are accountable for the actions of their employees. A similar judgement was given in Meridian Global Funds Management Asia Limited v Securities Commission case, in which the court provided that if directors use companies name to conduct any fraud to another party, then such corporations shall be held personally liable towards such deception.

Conclusion

A company must notify ASIC regarding the resignation of its directors; a corporation is also liable towards the fraudulent actions of its directors. In this case, Fred and Chris are accountable towards the car dealer who sold his car to Mary due to the principle of vicarious liability. They also failed to send the notification of Mary’s resignation to ASIC due to which Mary was able to buy a car under the company name, which also makes them liable towards the car dealer.