Corporation Law Assignment Examining Cases Based On Business Laws & Legislations
The purpose of the corporation law assignment is to provide students with an opportunity to demonstrate their level of learning of the various key concepts taught in the unit and apply them in analysing and answering two case problems by citing the relevant legal rules and cases and applying these to the facts of the case.
Cousins Lilly Henty and Samuel Curley desire to launch a business. They have always worked as employees and have never opened much less run any sort of business enterprise in their lives. They want to run a business proposed business by as simply as possible by themselves. In addition, after their business is set up, they do not want the public to easily find out what kind of business they are running. Even though they do not have business experience, they are both proactive people and are committed to make their business a success. In the future, they anticipate that they will want to expand the business and so would need additional capital from outside sources to achieve this.
What type or types of business structure would suit them best? Explain your answer.
Kubo Yutaka is an executive director of Intoku Logistics Pty Ltd, an established company founded in Sydney in 1975. The company has 4 members/shareholders (including Yutaka), with each of them owning twenty-five percent of the company shares. According to Intoku’s constitution, all loan contract, to be valid, must bear the signature of at least two directors. Yutaka wants to retire in 2021. As he has been with the company since its inception, he believes he is now entitled to a reward for all his years of faithful service. He visits a yacht dealership in Coffs Harbour and orders a boat worth $200,000. Yutaka signs the contract as a director of Intoku Pty Ltd. When the boat is delivered and the dealer sends the invoice to Intoku, the board of directors are livid with anger and refuse to pay for the boat. They also want to take legal action against Yutaka. The boat dealer threatens to sue Intoku is the boat is not paid for.
Answer the following questions:
(a) Did Yutaka have authority to sign the contract to buy the boat?
(b) Is Intoku Pty Ltd legally obliged to pay for the boat?
CORPORATIONS ACT 2001
Australia’s Corporations Act 2001 undertaken in this part of corporation law assignmentis an Act, which makes provision with regards to companies and their finances. The 2001 Act sets out laws that deal with companies in Australia at state as well as national level.
Corporations Act 2001 lays down the framework for the incorporation of all types of companies in Australia and the Australian Securities and Investment Commission is the agency for the registration as well regulation of these companies.
Corporations Act lays down the types of companies under the Act; which can be either –
- Proprietary companies, or
- Public companies
Sec. 45A (1) of the Act defines the proprietary company under it. It is a privately held company which is either limiting through shares or is a share capital, known as an unlimited company. It is a basic business structure, which has a minimum of 1 member (shareholder) and a maximum of 50 members, and a director who lives in Australia. The shareholder’s liability is determined by the value of share they hold. The propriety limited company uses the abbreviation ‘Pty Ltd’.
Under the propriety limited company, shares limit implies that the shareholders are given higher security concerning the liability level with regards to debts of the company. Whereas in an unlimited company, the members or shareholders liability does not only limits to the company’s debt.
There are 2 bifurcations to a proprietary company:
- Small proprietary company
- Large proprietary company
Small proprietary company
A small proprietary company comes under Sec. 45A (2) of the Corporations Act 2001, it must satisfy any of the 2 criteria:
- At the end of a financial year, it must hold the assets worth less than $25 million.
- For a financial year, the gross operating revenue of the company should be less than $12.5 million.
- At the end of a financial year, the employees within the company must be less than 50.
Large proprietary company
As per Sec.45A (3) proprietary company can be categorized into a large proprietary company for a financial year if:
- At the end of a financial year, it must hold the assets of worth $25 million.
- For a financial year, the gross operating revenue of the company should be over $12.5 million.
- At the end of a financial year, the employees within the company must be at least 50.
The primary difference between a large and a small proprietary company is that, the audited accounts of large companies must be produced when demanded, whereas small companies need to produce the audited financial statements whenever the Australian Securities and Investments Commission demands from them (Chen, 2019)
Thus, to conclude the answer it is advisable for Lily Henty and Samuel Curley to start a proprietary small business in Australia, as they do not have much experience or expertise in the business field. The shareholders would have limited liability as well. In a small proprietary company, Lily and Samuel do not have to disclose their business to the public. They are also not open to investment by the public. Hence, they do not have to issue any prospectus, offer a statement of information or a statement of profile as per Sec 113(3) of the Corporations Act 2001. Generally, only public companies can take investments from the public, which makes it raising the funds quite easy. Which in return lays burden on the company regarding certain regulations to protect their prospective investors. Raising funds in a proprietary business is cumbersome as only private investors can invest after all disclosure documents are presented. Act states that a prospectus must be issued by a company when they wish to raise funds, which Lily and Samuel wish to do in the future.
No, Kubo Yutaka did not have the authority to sign the contract to buy the boat. Intoku Logistics is a Proprietary Limited company with 4 shareholders having equal share and the contract of the company clearly stated that all loan contracts, to be valid, have to be signed by minimum 2 members. There are range of duties of a director, which are specifically stated under Sec. 180-182 of the Act.
Sec.180Care and diligence
As a director of IntokuPyt Ltd Mr. Yutaka must use his powers and fulfill his duties with utmost care and diligence that a reasonable person would exercise if he/she were a director or officer of any company or had similar responsibilities as a director. The care and diligence of a director can be determined by how he balances the unforeseen risks that lay upon the company.
Sec.181Good faith – Civil obligations
As a director of IntokuPyt Ltd Mr. Yutaka it is his duty to take any action that is in good faith and in the best interest of the company. As a director acting in ethical and responsible manner towards shareholders is important for the best interest of the company.
Sec.182Use of position – Civil obligations
Mr. Yutaka being the director of Intoku must not use his position to gain any advantage for himself or cause any detriment to the company.
As a director of the company Mr. Yutaka has powers to take decisions which do not require a general meeting of all the shareholders (Geddes, Schmidt and Steffen, 2018)
Thus, Mr. Yutaka had no authority to sign the contract alone. Intokupyt ltd is legally not obligated to pay for the boat. Solely Mr. Yutaka is liable as the company is a limited company. It was of paramount importance that Mr. Yutaka disclosed his transaction to board of directors for further discussion. Such act of Mr. Yutaka can be considered reckless and dishonest and can be penalized. Under the Corporations Act 2001 all the shareholders can take action against Mr. Yutaka, who has failed to comply with his duties as a director, and can be made to pay a substantial fine. Such an act by a director can also lead to disqualification of the director from the company.
Chen, V., 2019. Enforcement of directors’ duties in Malaysia and Australia: the implications of context. Oxford University Commonwealth Law Journal, 19(1), pp.91-117. https://www.tandfonline.com/doi/abs/10.1080/14729342.2019.1616942
Geddes, A., Schmidt, T.S. and Steffen, B., 2018. The multiple roles of state investment banks in low-carbon energy finance: An analysis of Australia, the UK and Germany. Corporation law assignmentEnergy Policy, 115, pp.158-170. https://www.sciencedirect.com/science/article/pii/S0301421518300090