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. Do not consider the effects of legislation potentially applicable other than that specifically identified. As a guide, students should write about 2000 words (+/- 10%), or about 1000 (+/- 10%) words per 20 mark allocation. Assessment Task Question 1 20 Marks 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. Question 2 20 Marks .
Terry was an employee of Cosmo Mining Services Pty Ltd (CMS). CMS is a subsidiary of Cosmo 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 2 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.
Assessment Criteria Fail You will have shown evidence of the following:
• the written expression is poor and difficult to understand (spelling and grammar require improvement)
• the answer is poorly organised
• referencing is generally inadequate
• lack of familiarity with the legislation and its application
• failure to identify and address the issues in the question
• reasoning and application of law demonstrated is poor. Pass You will have:
• made a conscientious attempt to address the topic and/or answer the question
• shown evidence of having done the required reading and of having understood the reading
• presented a reasonable argument to back up your conclusions
• demonstrated a reasonable level of spelling and grammatical usage
• used referencing but this may need improvement
• issues that may need to be identified and addressed in more depth. Credit You will have:
• addressed the topic and/or answered the question directly
• presented soundly based arguments and backed these up with reasons
• gone beyond description to analysis of key issues
• used the English language well
• shown evidence of reading widely
• demonstrated understanding of the reading
• used referencing that is satisfactory. Distinction 3 You will have:
• met the above criteria for a credit, and
• demonstrated a high degree of understanding of the concepts of the course
• demonstrated deep insight into the application of knowledge and skills required in the course to complex theoretical and practical situations
• used referencing correctly
• made reference to all appropriate legislation. High Distinction You will have:
• met the above criteria for a distinction, and
• demonstrated an outstanding level of achievement regarding the objectives of this course
• demonstrated an interesting and/ or original approach/ idea/ argument
• demonstrated mastery of the relevant referencing system
• ensured conclusions are backed by well-reasoned arguments demonstrating a detailed insight and analysis of issues
• ensured references are made to the appropriate legislation for particular issues.
Answer:
Answer: On account of the facts that have been given in this question, it is clear that some advantages will be accessible to Richard and his sons in case they go ahead and incorporate a corporation for the purpose of increasing their present trade activities. The reason is that it is easier for a company to develop business as compared to sole trader business or partnership business. It is true that the cost of registration of a corporation is higher in contrast with managing the trade as a sole trader or as a partnership. But it needs to be noted that in the long run, because that has been incurred on the registration of the company can be treated as running business expenses.
On the other hand, when the parties have decided to only register the business name, it can be less expensive as compared to registering a company. But if the parties have registered the company, there is no need for registering the business name. When a corporation has been incorporated, the full name of the company begins with "Pty Ltd" has to be used. At the same time, it is also necessary to regularly renew the registration of the business name. For this purpose, a fee also needs to be paid to the administration. On the other hand, when the parties have registered a company for running their business, the ASIC has to be paid an annual fee.
The major advantage related with the incorporation of a corporation is that the members of the company have limited liability towards the debts of the corporation. Consequently, it has been provided that after the registration of the corporation, its members are only liable to any sum unpaid on the shares of the company held by them. But this advantage is not available to the persons running their business as sole traders and partners (Sweeney, O’Reilly and Coleman, 2013). The reason is that these persons are treated by the law as being personally responsible for all business responsibilities. Some other relatives are also available when the parties have registered the company for running the business. For example, the rate of tax is lower in case of companies. As a result, the persons who are running their business by registering a business name have to pay income tax at the normal rate, but on the other hand, the registered corporations in Australia have to pay a flat rate of tax. This rate is less as compared to the rate applicable in case of individuals (Graw, 2011).
It also needs to be noted that in the eyes of law, a company is a separate legal entity. Due to this legal fiction, the company has the authority to whom property under its own name. Similarly, context can be created by the company in its own name. Therefore, it becomes clear that according to law, a company is distinct from its members (Latimer, 2016). Before going through the steps required for registering a company in Australia, it also needs to be determined if the business structure of a company will suitable for the parties in the present case. At the same, Richard and his sons have to decide the business sector will be most suitable for expanding their business. For the purpose of making this decision, it is necessary that all the available options are considered by the parties (Vermeesch and Lindgren, 2011).
In the present case, a successful business is being run by Richard. It is expected that his sons, David and Liam will also be joining the business. Under the circumstances, they are willing to expand their business. In order to achieve this objective, they have to select the business sector that will prove to be most suitable for them. After considering the facts of this question, it is clear that the business structure that allows them to raise finances easily, that are required for growing the business will be most suitable for them.
Another issue also exists in this question. While Richard wants the corporation name to be "Ridali", his sons want that the business should be named "Rich's Guaranteed Olives". It is worth stating in this regard that there is a difference between registering a company and only registering the name of the business. While deciding on the name of the business, the parties should consider certain issues. As a result, the name that has been chosen by them, should not be similar to any existing business name. Consequently, only the names that are not matching with the name of any business or corporation can be used by the parties. Therefore, it is a commendable that unnamed availability search needs to be conducted for the purpose of making sure that the name of the business that has been chosen by the parties is available.
At the same time, it is also provided by the law that when the parties have an identical name, it is available to the parties to register such name as the name of the business. However, certain words cannot be used in the name of the business as it is believed that they may mislead the public regarding the activities of the company. For example, the law does not allow the parties to use words showing any relationship with government, ex-servicemen or royal family.
The liability of the members should also be revealed by the name of the company. As a result, if the liability of the members is limited in case of the debts of the corporation, the name of the company has to end with the words, "proprietary Ltd." similarly, when the members have unlimited liability in this regard, it is provided that the name of the company is going to end with the word "proprietary". However, if it is desired by the parties that a different name should be exhibited, the law provides an alternative in this regard. Therefore the parties can register any other name as the name of their business. Hence, in this case also, Rich's Guaranteed Olives can also register "Ridali" as the business name. This name can be displayed by the company on all signage.
Question 2
Answer: After considering the facts in this question, the issue appears if Terry and other staff of the company can sue Cosmo Mine Ltd (CM). This issue arises on account of the fact that these were the employees of Cosmo Mining Services Pty Ltd (CMS). In this context, it is worth mentioning that Cosmo Mine Ltd is a subsidiary of CMS. resolution was passed by the shareholders of CMS, which provided that a new corporation was going to be established. The trade of CMS was to be sold to this new corporation. Under these circumstances CMS was going to be wound up. In view of this situation, the question arises if the employees can take any action against the parent company CM or from CMS, their employer.
The general rule of the corporations’ law provides that in the eyes of law, a company has its own distinct identity. The role related with the distinct identity of a corporation has been firmly established after the ruling given in Salomon v Salomon (1896). Here the court clearly stated that a corporation has distinct identity. As a result of this rule, each corporation has a distinct identity after it has been incorporated. Due to this doctrine, a corporation is allowed to enter contracts in its own name, and similarly a company can also own property. At the same time, this rule also provides that the obligations of the corporation (Terry and Giugni, Harcourt, 1994). Only the obligations of the company and they are enforceable only is the company itself. In this regard, it is worth mention that the company can sue and be sued under its own name. It is also provided by the notion of limited liability of a corporation that the members of the corporation are not personally liable regarding the obligations of the corporation (Cheffins, 1997). The effect of this doctrine is that the obligations of the company are enforceable only against the company itself and not against its members.
But it needs to be noticed that the above-mentioned rule is a general rule and an exception is present regarding this general rule. This exception is called the piercing of the corporate veil. It has been provided by the corporations’ law that there are some cases where the courts have been allowed by the law to ignore the principle of separate identity and the courts may decide that the corporate veil needs to be lifted (Khoury and Yamouni, 2010). This decision can be made by the court in cases where the court wants to enforce liability on the persons controlling the company. Such an obligation can also be imposed by the tort law, where it is provided that a negligence cases, and relationship of proximity should exists between the parties.
A comparable obligation exists in the case of piercing the corporate veil. For example, in Barrow v CSR Ltd (1988), the court had stated that a company can be held liable to employees for the torts of its subsidiary company. As a result, if the negligence of the subsidiary company has resulted in asbestosis among the employees of the company, it was stated by the court that in such matters, it is not significant if the principle of agency law is used for describing the case or if the proximity between employees of the two companies has been used or if the doctrine of piercing the corporate veil has been relied upon, or the issue has been decided in context of the control enjoyed by the patent company (Parker, 2002). It was the opinion of the court that in all the above-mentioned cases, same final effect will be produced. In the same way, the court had stated in Briggs v James Hardie (1989) that the issue is related with negligence. Therefore, the court was required to deal with the issue of piercing the corporate veil and also the concept of foreseeability.
On account of the decisions delivered in cases mentioned above, the current legal position regarding the issue appears to be as follows. Therefore if the subsidiary does not have enough funds to provide compensation to the other party, the other party is allowed by the law to claim compensation from the corporation having ultimate control over the subsidiary company. As a result of this position, it can be computed in this case also that a claim can be initiated by Terry against the parent company, CM also.
The shareholders of CMS had collectively decided to wind up the corporation and sell its trade to the new corporation, Lazarus. But under the circumstances it can be stated that this new corporation is being formed only with a view to evade the liability of CMS towards its employees and also the residents of Gunbarrel Town. All these persons suffered from cancer as due to the mining activities of the company in the area, the drinking water in the area was contaminated. Now, sufficient resources are not available with the subsidiary company to pay compensation. Conversely, the parent corporation has 120 shares out of the total 200 shares of the subsidiary company. Another point worth mentioning is that CS enjoys full control on the activities of the subsidiary CMS and the mining equipment was also leased from CM.
in view of these circumstances, the conclusion can be made that along with its employer, Terry can also sue the parent company, CS, as well as the newly incorporated Lazarus to seek compensation. In this case, it is possible for the court to lift the corporate veil, and holds the patent company CS liable for the actions of CMS over which it had complete control.
References
C Parker, 2002, The Open Corporation: Effective Self-regulation and Democracy, Cambridge, Cambridge University Press
Cheffins, B.R., 1997, Company Law: Theory, Structure and Operation, Oxford, Clarendon Press
Latimer, P, 2016, Australian Business Law CC, Edition.
Stephen Graw, 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters.
Sweeney, O’Reilly & Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis.
Khoury, D. and Yamouni, Y., 2010, Understanding Contract Law, 8th Edition, LexisNexis Butterworths
Vermeesch,R B, Lindgren, K E, 2011, Business Law of Australia Butterworths, 12th Edition
Case Law
Barrow v CSR Ltd (1988) Unreported
Briggs v James Hardie& Co Pty Ltd (1989) 16 NSWLR 549
Salomon v A Salomon & Co Ltd [1896] UKHL 1
