The Clients, Ben and Jerry, are in business together through the partnership structure. The issue that is in question is that Ben has gone against the formal partnership agreement, that states that any purchase over $1000 must be signed off by both partner and has purchased a computer package for $2000. Jerry was unable to be contacted by Ben. Therefore, Jerry argues that this is against the agreement and so the package must be returned to the supplier. The software supplier, however, has refused to refund the software as it wasn’t aware of the agreement and such saw the purchase as legal.
In a partnership each partner is an “agent” for each other partner and the firm. As such, a partner can bind all partners to any contracts in the course of the partnership. Even though as a partnership, partners are able to purchase “supplies” without the other partner’s authority, the partnership in question has a clause in the agreement that states that any purchases over $1000 must have both partners signatures. As such, Ben has gone against the agreement clause. Moreover, it can be seen that Ben has gone against the Actual Authority set out to him in the agreement. However,
1. It seems that the third party, OfficeJerks, was unaware of the authority agreement between Ben & Jerry and that Ben didn’t have authority alone to purchase the product at this price. OfficeJerks, as far as it seems, hasn’t been notified of this limited authority.
2. This transaction can be seen as being within the scope of the normal business, as all furniture and equipment are normally purchased from OfficeJerks. Furthermore, this transaction has been made in the usual way.
3. OfficeJerks, apart from not knowing of the lack of authority, would have believed that Ben is acting as a partner.
As such in short through partnership regulations OfficeJerks has accepted apparent authority and as such is bound by the unauthorised dealings. Therefore, it will be up to Australian industry regulations on returns, if Jerry wants to carry on with forcing a return. However, as legally Ben has broken the agreement and his Actual Authority, Jerry should take up the financial difference with Ben. On the other hand, as a compliance issue has taken place, Jerry will need to contact all suppliers and notify of the joint signature clause. As such for this time, accepting the cost of the program and just holding a reminder of the clause with Ben. This would be the more reasonable clause as in a partnership they both hold ownership, and one must partner must be able to get on with the other partner. Arguments wouldn’t help with that.
Q2)
A sole trader business is one that is owned and controlled by an individual. As such the sole trader bears full responsibility and legal liability for the business. Moreover, the business has no separate entity from the owner. As such in this case any legal requirement under Australian law for Lehmo to refund or replace or fix the issue will have to be done personally and not directed at the business. Therefore, if the “business” account is not financially strong enough to fund any resolution, of this issue, the sole trader (Lehmo) will have to personally fund this remainder. The client, under laws including Australian Consumer Law, has the right to request of the business to fix or resolve the damaged product and any other direct damage caused by negligence of the incorrect installation of the product. Moreover, as the business is a sole trader and has no separate entity from the owner, the client cannot take legal process with the business but directly with the owner. Therefore, to an extent, yes, the client can demand this.
Q3)
Can a company director be held personally liable for the debts incurred by the company? In short yes, but only in exceptional circumstances. In normal day to day activities, a director is protected by the “Corporate Veil”, the separate legal entity of the company. However, if the director breaches his/her fiduciary and statutory duties, then a director can be held personally liable for the debts incurred by the company. In this case they would be stripped of their protection and personal assets will be used to meet the debts.
There are 5 exceptional cases where this can happen. These are:
1. Director allowed the business to carry on trading when the business was insolvent.
2. Unreasonable director-related transactions.
3. Claims for loss of employee entitlements in insolvency.
4. Unpaid PAYG and superannuation contributions.
5. Personal Guarantees.
Q4)
The legal position which BuildPro Pty Ltd and Money Grabbers Pty Ltd are in business together is a ‘Joint Venture’. This is because a legal business entity hasn’t been created by the two groups with both parties having a share. As such this is not a de jure partnership, but at most a de facto partnership operating under a de jure joint venture. The two companies have come together to complete one project for individual gain and are not running a joint business that is planning to continue to trade after the completion of the project (Aka. This is an ‘One Off” Venture).
As a joint venture is one of a legal structure which has been formed by the two parties for individual gain and the venture is an ‘one off’ project, this “de facto partnership” is actually a “de jure Joint Venture”. Therefore, as BuildPro is the party at fault for causing the damage, they are normally legally required to foot the bill to fix the issue. Money Grabbers part of the agreement is to front up the finance to provide the ability for BuildPro to complete the project and as such hasn’t agreed to foot any finance any damage caused by the other party.
In conclusion, as this “de facto partnership” is actually a ‘de jure Joint Venture”, as set out in the agreement, and the fact that the agreement states that Money Grabbers only legal liability is the initial project funds, Money Grabbers are not liable and can make BuildPro foot the bill of the issue. If BuildPro were to still refuse, the government would have to go after the partners of the joint venture separately, as in a Joint Venture it is not a separate legal entity.
Q5)
As a company is a separate legal entity, it makes it possible for the shareholders to have a limited liability. This limited liability can happen in two different ways:
• A company limited by share: When the company has been formed on the principle that the liability of the members is limited to the amount unpaid against the shareholdings. A company under this structure can be a public or proprietary company. Moreover, once the shareholder has fulfilled all of his/her unpaid share related finance, he/she cannot be sued for finance by creditors.
• A company limited by guarantee: When the liability of the company’s members is the amount they agree to cover if the company is wound up. This amount is normally set out in the agreement before the member signs on.
As such the major difference between each type in short is when the capital contribution takes place. In a company limited by share, the amount if up front or over a short period, whereas by agreement capital is only contributed when the company gets wound up. Furthermore, a company limited by shares can be a public or proprietary company, whereas the company limited by guarantee must be a public company.
Q6)
A. The small business guide summaries the main rules in the Corporations Act 2001 that regard to proprietary companies limited by shares. As such it is a help for small businesses to understand and comply with registration and management requirements of the Corporations Act 2001.
B. One way a company can be a proprietary company is to have shareholder members. These members are normally external people and not employees. However, since the company uses shares as a major form of finance, many proprietary limited companies will create employee share schemes to benefit their employees. This gives the employee by either gift or by salary sacrifice the ability to have a share of the company that they work in, to an extent giving them a better ability to shape their workplace. Furthermore, employees with higher salaries are able to obtain shares through performance bonus’, or a remuneration instead of a higher salary.
As such the proprietary limited company can benefit employees is through a share scheme. Which is then used to attract, retain and motivate staff as the business starts to align the staff members interests with shareholder interests. Moreover, these shares normally have low or no brokerage fees attached to purchase and sale of the share, meaning there could be a good tax benefit for the employee.
C. The maximum number of shareholders allowed for a proprietary limited company is: 50 non-employee shareholders.
D. Due to the fact that a proprietary limited company name must include the word proprietary or use the abbreviation PTY and state the level of liability of shareholders, the name of the business must change. Normally an already used business name can’t be used, in this case Lookatmoi Holdings can be used but with above changes. As such the business name could be: Lookatmoi Proprietary Holdings Ltd, or, Lookatmoi Holdings PTY LTD.
E. The difference between small and large proprietary companies is: Large companies have to follow tighter reporting laws than small businesses. More specifically, large companies have to annually prepare and lodge audited accounts with ASIC, whereas a small business doesn’t have to. Moreover, a company is only classed as large when:
• Their consolidated revenue for the financial year is $25 million or more.
• The value of the consolidated gross assets at the financial year end is $12.5 million or more.
• The company has 50 or more employees at the end of the financial year.
F. Using the structure of the proprietary limited company, Kath and Kim can raise capital by preparing a prospectus and issue the related shares. In turn selling those shares to gain a finance stream. This process will be the first method of capital by the business. Moreover, an employee share scheme can be made, so finances can be financed as a normal share scheme but this time targeting the employees. The 2nd method would also mean the business could get the staff better motivated because they would have a share in the business. This in turn would help the business to grow by the people who actually work there.
In some situations, when a proprietary limited company takes over from a partnership, there will be a contract between the company and the vendors of the business in which the price of the business is fixed. In turn then, the vendors may agree to shares being issued to them for the value of there part of the business. This obtain some starting capital for a small business.
Q7)
When signing or publishing a document on behalf of a company, it must be executed in accordance with:
• Corporations Act 2001.
• Provisions for executing documents, contained in the business’ constitution or regulations.
Section 127 of the Corporations Act 2001 set out the ways in which a document may be executed by a company.
Execution through these manners can be done through by fixing the company’s common seal and the process of which must be witnessed by:
• Two directors of the company; or
• A company director and a company secretary; or
• If the business is a proprietary company that has a sole director who is also the secretary, then he/she must witness it.
If no seal is used, then the above persons must sign the document.
The person who is executing the publishing of the document can also follow the basis of the process stated in business’ constitution. The constitution will set out a provision setting the manner in which the company should execute the documents under this manner. This could include the authorisation of execution of documents by alternative means by resolution by the board of the directors.
Moreover, if the document is a contract and an agent is exercising the company’s power to make such document then a company can authorise the agent or another director to sign the document.
Therefore, if Section S127 is followed, people who read the document can assume that the document has been duly executed by the company. Furthermore, the reader will be able to assume that anyone who signs the document and states next to their signature that they are the sole director etc of the company.
Finally; the company’s name, ABN or CAN must be present on the document when every public document is signed or published by or on behalf of the company.
Q8)
The agreement that has been drawn up by the company’s “promoter” with Anastasia is called a Pre-Registration contract. The issue brought up is that the company’s board of director has decided after registration not to formalise/ratify the contract. Furthermore, to fulfil the contract upon ratification, Anastasia has committed time, expertise and money. This means that when the board refuses the contract, Anastasia will be losing out on a valuable contract and the pre -contract costs.
This refusal of the contract brings up some legal issues under s131(2) of the corporations’ act. S131(2) states that: “a person is liable to pay damages to each other party to the pre-registration contract if; the company is registered but doesn’t ratify the contract. As such since no ratification has taken place, Anastasia has right of recovery against the promoter. The financial cost to the promoter from damages will be the same as if the contract had been ratified but had then been breached by the company. Since there seems to not be a single release for the promoter in the contract, the promoter will be fully liable for the damages.
Q9)
A quorum is the legally fixed minimum number of shareholders who must, physically or by proxy, be present at a meeting before any official business may commence or a decision becomes legally binding.
Q10)
The role of the board of directors is to hire the CEO of the business and assess the overall direction and strategy of the business. The board also selects officers for the board. There are six major points of responsibility of the board of directors, these are;
o Recruit, evaluate and supervise the CEO and C Suite. This is major in value-added boards where they will aggressively search for the best possible candidate for the position, as the CEO controls and make a lot of major decisions of the business.
o Provide direction for the organisation. These include the board’s strategic function in providing the vision, mission and goals of the organisation.
o Establish a policy-based governance program. These focus on defining the rules of the company and how it will function. These policies allow the board and CEO the ability to achieve the company’s goals.
o Monitor and Control. This includes the board’s job of being in charge of the auditing process and hiring of the auditor. As such it is in charge of making sure the audit is done in time.
o Fiduciary duty to protect the company’s assets and member’s investment. The board keeps the member’s interest at heart and in turn make sure the company assets are kept in good order.
o Govern the organisation and the relationship with the CEO. Development of a governance system.
Q11)
A.
In short, Sheldon and Leonard have not acted properly in fulfilling their duties as directors. Everything they have done in the lead up to the purchase of Compare the Market Ltd and afterwards are in direct contravention of the Corporations Act and the duties of a director.
Sheldon:
Sheldon has many charges of failing of his director duties and breaking of the corporation’s act. Firstly, Sheldon has failed to disclose the fact that the Executive Director of Compare the Market Ltd is his brother to the board. This is a conflict of interest, which is in contravening of the Fiduciary duty to avoid conflicts of interest. Furthermore, this also contravenes sections; S180, S181, S182 & S183 of the Corporations Act 2001. This would also be a contravention of his contract with Big Bang Ltd.
His conflict of interest comes to the front when he uses insider information to inform his brother, Leonard, the fact that Big Bang will be looking to takeover Compare the Market Ltd. This in itself is contravening director duties and the corporations act. This contravention increases more where he decides to use the insider knowledge for personal gain (s182&s183) to purchase shares. He would also have the knowledge that the future takeover of Compare the Market Ltd would cause the share prices to rise and as such purchase’s shares prior to the takeover at the lower cost will cause a profit after the takeover.
Leonard:
Leonard, like Sheldon, has contravened many director duties and the corporations act. Though gaining insider knowledge from his brother about the future takeover, he has gone and increased his shareholding. This use of insider knowledge for personal gain contravenes many sections of the Corporations Act, but more specifically s183. This use of insider knowledge could also cover the use of business knowledge when he went and set up a competitor company to Compare the Market Ltd. Moreover, he has taken I.P that belongs to Compare the Market to his new business. This is I.P theft as he legally doesn’t own the software, the business does.
B.
In this case, both parties will face consequences of their conduct. They’re breach of duty of good faith, use of position and information (s181, s182&s183) quite possibly result in them being liable for a civil penalty, prohibited from their management position and have to pay compensation (in regard to use of I.P.). Breaches of s181-183 are criminal charges and such jail time is also possible. This will also be possible if convicted under s184 which will cause them to be fined $220,000 or up to 5 years of jail time for each conviction.
In regard to the breaks of s180, only civil penalties will be enforced if convicted. This could include banning of the parties from being directors in the future, financial penalties (up to $20,000) or a pecuniary penalty.
C.
The “Business Judgement Rule”, of the Corporations Act 2001, serves the role of the officer’s/director’s “safe-harbour” of greater protection in respect of any bona fide decisions. More specifically the rule provides a director a safeguard from s180 consequences if they have made a ‘business judgement’. As such the director must have “acted in good faith and for a proper purpose, to not have a material personal interest in the subject matter at hand, be informed about the subject matter to the degree determined reasonable appropriate and hold the belief that the judgement is in the best interests of the entity.” (KPMG). This regulation, however, doesn’t reduce the level of director accountability.
In this case this rule cannot be ruled out but not fully accepted as reasonable. There isn’t enough evidence to point either way. However, by taking the available info at hand, I personally don’t think the rule can be used as a defence. Sometimes business decisions don’t go through and the information could have been useless in the end, and as such is covered under the rule. Though, in this case the deal did go through. Therefore, they cannot prove that they broke all the sections as for the best interests of the entity. Therefore, the rule is not relevant in these circumstances.
Q12)
S588(G) is The Insolvent Trading Rule. This is when a director allows the business to continue to trade even when the business has been deemed legally insolvent. Breaking of this rule will remove the ‘corporate veil’ and allow creditors to directly sue the director personally.
However under s588H(2) a director may be able to raise a defence in relation to their duty to prevent insolvent trading, if the director can prove that at the time of the debt was incurred, the director had reasonable grounds to expect the company was solvent not insolvent and as such would remain solvent. Moreover, a defence can be used that the director had reasonable grounds to rely upon information regarding solvency supplied by a competent and reliable person.
Q13)
A.
o A duty of care must be owed by one person to another;
o There must be breach of that duty;
o Any loss, injury or damage, must have occurred as a result of that breach of duty.
B.
The ‘Good Neighbour Principle’ states that a person/company should take reasonable care to avoid any acts or omissions that they could have reasonably foresee as likely to cause injury to the “neighbour”. This is significant, as seen in decomposing snail in a ginger beer case, that even if a plaintiff hasn’t e.g. purchased a product him/herself, the company/person must give a duty of care for all people involved with itself (in case of the snail case, all consumers where there was no chance to immediately check their drink). As such companies or other people in day to day life must also take into consideration what their actions or products could do directly and indirectly to everyone around in the present or the future. Moreover, this principle has led the ability to sue companies directly for negligence.
C.
Once the case has established that the duty of care is owned by the defendant to the plaintiff, the plaintiff has to then establish the standard of care that applies in the circumstances and to what extent the standard has been breached. Moreover, the Civil Liability Acts sets out the factors in which should be considered by a court in deciding whether a “reasonable” person could have breached the standard of care. These points are considered under the law in court to determine breach of standard of care:
o The probability that the harm would occur if care was not taken. The more serious the harm is most likely to be, the more likely a reasonable person would have taken precautions to negate any risk of the activity.
o The chance of seriousness of the harm.
o Any burden of taking precautions to avoid the risk of harm.
o Any social utility of the action that makes the risk of harm.
D. Defences available to a defendant when negligence action is brought against them:
o Contributory Negligence; When the defendant may argue that the harm was caused by the plaintiff themselves, partly or fully. To use this defence, the defendant must be able to prove that the plaintiff hadn’t taken good precautions to prevent injury/damage or how the plaintiff acted would always cause injury/damage (including intoxication).
o Voluntary Assumption of Risk; This is when the plaintiff has accepted the risk and danger of injury of the defendant’s conduct. To prove this the defendant must establish that the risk was such that a “reasonable” person in the same position would have taken steps to avoid the risk.