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Business And Corporations Law

Question 1

Based on the given facts, it is apparent that before the formation of Urban Pty Ltd (a proprietary firm), the business was being run in the form of a partnership firm.  The various advantages of incorporating Urban Pty Ltd are outlined below.

  • As per s. 124 Corporations Act 2001, a company is a separate legal entity unlike the partnership business structure. This implies that the various contracts and documents are executed in the name of the company and thus the rights and obligations arising from the same also are attributed to the company. This ensures limited liabilities for the shareholders or owners. In case of a partnership firm, the partners are personally held liable for the business activities of the firm and hence the liabilities are potentially unlimited[1].
  • The earnings for Urban Pty Ltd would be taxed in accordance with corporate tax whose maximum rate is 30% and the actual applicable rate might be lower on account of concessions available. However, the marginal tax applicable for the partners in a partnership business structure may be higher considering that the firm acts as a pass through mechanism only, thus resulting in income being taxed at the end of the partners at personal income tax rates where marginal rates can be much higher.
  • Raising incremental finance through the issue of financial securities would be comparatively much easier in case of the company (Urban Pty Ltd). This is not true for a partnership firm where a new partner would imply a new partnership agreement and also the maximum number of partners is limited to 20[2].

The various disadvantages of incorporating Urban Pty Ltd are outlined below.

  • There are greater reporting requirements for a company structure in terms of financial reporting and also conducting of the AGM. These are significant ........
any is a separate legal entity unlike the partnership business structure. This implies that the various contracts and documents are executed in the name of the company and thus the rights and obligations arising from the same also are attributed to the company. This ensures limited liabilities for the shareholders or owners. In case of a partnership firm, the partners are personally held liable for the business activities of the firm and hence the liabilities are potentially unlimited[1].
  • The earnings for Urban Pty Ltd would be taxed in accordance with corporate tax whose maximum rate is 30% and the actual applicable rate might be lower on account of concessions available. However, the marginal tax applicable for the partners in a partnership business structure may be higher considering that the firm acts as a pass through mechanism only, thus resulting in income being taxed at the end of the partners at personal income tax rates where marginal rates can be much higher.
  • Raising incremental finance through the issue of financial securities would be comparatively much easier in case of the company (Urban Pty Ltd). This is not true for a partnership firm where a new partner would imply a new partnership agreement and also the maximum number of partners is limited to 20[2].
  • The various disadvantages of incorporating Urban Pty Ltd are outlined below.

    • There are greater reporting requirements for a company structure in terms of financial reporting and also conducting of the AGM. These are significantly lesser for a partnership business structure. Thus, a company has higher reporting costs.
    • A company must function within the ambit of Corporations Act 2001 and ensures that various provisions applicable are fulfilled. These are not required for a partnership firm and hence lead to higher compliance costs.
    • For a company structure, the incorporation costs and time required is comparatively much higher than a partnership firm which can be incorporated within a short period with minimal expenses.

    Question 2

    In order to register Urban Pty Ltd, there are certain procedural requirements to be followed. After, the owners are certain that they intend to form a company; the first step is to choose the name of the company which must not be the same as the other businesses already existing. Hence, the company name in this case would be Urban Pty Ltd assuming it is already available. The insertion of the word Pty reflects that the company would be proprietary. For the management of the company, two options are available in the form of Constitution and Internal rules. Section 194, 108, 201, 204 Corporations Act tends to outline various aspects that would be termed as replaceable rules.  Further, the intending directors and company secretary of the company must understand their obligations under the Corporations Act 2001 as the above entities have statutory responsibilities. A written consent then needs to be obtained from the intending directors, company secretary and all the members indicating their willingness for the registering of the company.  Also, written consent of the owners of the registered address must be obtained whereby they grant permission to list the given property as registered address for the company.  Finally, using a Form 201 an application for registering a company needs to be lodged with ASIC[3].

     

    Question 3

    The key section which is relevant in this given situation is Section 131, Corporations Act 2001. As per s. 131(1), any contract that is entered into on company’s behalf or for the benefit of the same before the registration, then after registration of the company, it is essential that such a contract should be ratified by the company within a reasonable time[4]. However, if the company fails to ratify the contract, then the person concerned who acting on behalf of the company would be held liable and the innocent contractual party can recover damages from the given individual as per s. 131(2). However, if the person concerned is sued for damages under s.131(2), then the court may intervene under s.131(3) so as to shift a part or complete contractual liabilities on the company especially if it has been a beneficiary of the contract.  Also, under s. 131(4), if there is a breach of the pre-registration contract, it is possible that the court may hold the concerned person liable even if the contract has been ratified by the company post registration[5].  In wake of the discussion of the above clauses, it is apparent that John would be liable to Curtin University irrespective of whether the pre-registration contract is ratified by the company after registration or not.

    Question 4

    1. Based on the given information, it is apparent that Vera who happens to be a sales manager and also director entered into a contract with WOW Ltd for the purchase of a machine which manufacturer colourful mobile phone cases despite being aware that such an activity was outside the scope of activities to be pursued by the company as per the objects clause. It needs to be ascertained if the underlying contract between Urban Pty Ltd and WOW Ltd can be terminated or not.

    Step 1: The relevant area of law that would apply to the given situation would be Corporations Act 2001. The specific aspects that would apply would relate to objects clause and the doctrine of ultra vires.

    Step 2: In accordance with s. 125(2) Corporations Act 2001, a given company can include an objects clause within the constitution. The object clause would identify the various activities that the concerned company would engage in as part of the business and thereby aims to protect the investors and creditors interest by limiting that business proceeds are used only for the intended purposes only[6]. If a company having an object clause intends to engage in activities that are not permissible by the objects clause, then the same would be held as untenable as per the doctrine of ultra vires[7]. As a result, any contract or agreement entered into for the implementation of the same would be declared null and void. This is apparent from the verdict in Ashbury Railway Carriage and Iron Company Ltd v. Riche[8]along with the Evans v. Brunner Mond& Company[9]case.

    Step 3: The given company i.e. Urban Pty Ltd does have an object clause which clearly states that the company would be engaged only in manufacturing of furniture. It is apparent that the machine for mobile phone cases is in no way related to the furniture manufacturing and hence is not quintessential for the company. Thus, in accordance with the doctrine of ultra vires, the contract enacted with WOW Limited would be declared as null and void since the company lacks the capacity to enter into such a contract.

    Step 4: The contract with WOW Ltd can be terminated on the limitations imposed by the constitution of Urban Pty Ltd through the insertion of the objects clause.

     

    1. It is apparent from the above that Vera did not have authority to enter into an agreement with WOW Ltd owing to the restriction placed by the objects clause. Further, he also entered into a contract with DistrustfulBankLtd to arrange for a loan to pursue the mobile case manufacturing. However, Vera lacked the authority to execute such an agreement. Thus, it needs to be discussed if the contract can be enacted on account of the lacking authority of Vera to execute the contracts.

    Step 1: The relevant area of law is Corporations Act 2001. The specific aspects that would apply would relate to statutory assumptions available to third parties and agency.

    Step 2: Even though the company is a legal entity but it requires agent to act on its behalf so as to execute contracts and documents. Hence, an agent is an entity who would act on the principal’s behalf for creation of legal relationship. However, it is expected that the agent must act within the sphere of authority extended in the form of express, apparent or implied. Express authority is available on account of the position or the designation one occupies while the apparent authority relates to the authority perceived by the third party as a result of the agent’s conduct[10].

    To extend protection for outside parties, s. 128 and s. 129 have been incorporated in the Corporations Act, 2001. As per s. 129, an outside party is entitled to make the following assumptions[11].

    • .The various rules highlighted in the company constitution along with any replaceable rules which may apply have been complied with by the company.
    • Also, the outside party can make an assumption that any person who on account of the public information appears to be either the director or the company secretary has been duly appointed and also possesses the relevant authority required to enact the contract considering the powers that a reasonable person would expect that such an individual would possess.
    • With regards to execution of the contract, if relevant subsection of s. 127 has been complied with, then the document has been correctly and appropriately executed.

     

    When entering into a legal relation with a company, the third party or outside party can make the above assumptions as per s. 128(1). These assumptions hold ground even when the given agent of the company behaves in a fraudulent manner (s. 128(3)). However, the above assumptions listed in s. 129 would not apply if at the time of execution of contract, the third party has any knowledge or suspicion about any misconduct on company’s part (s. 128(4))[12].

     

    A leading case which tends to highlight the immunity available to innocent third parties is Royal British Bank v Turquand[13]. This case highlighted the aspects that are now reflected in the Corporations Act. Infact after the Turquand case, the common law reflected the position taken in the case and provided for the doctrine of indoor management. As per this doctrine, an outside party in the absence of any suspicion or prior knowledge or irregularity may assume that the internal rules related to the company have been complied with and the concerned agent has the requisite authority.

    Step 3: Contract with WOW Limited

    For the given case, the protection would be available for WOW Ltd under the ambit of s. 128 and s. 129 of Corporations Act 2001. This is because WOW Ltd was not aware of the company constitution not permitting the purchase of the machine and to venture into the mobile case business. WOW Ltd on its part made attempts to speak to the MD so as to ascertain if they can proceed with the deal and the clerk provided them assurance that Vera was a senior executive which erased any doubts that they had. Thus, WOW can assume s. 129 statutory assumptions to be true as per s. 128(1). Hence, the contract cannot be termed unenforceable.

    Contract with DistrustfulBankLtd

    The protection would also apply for the bank which extended the loan as it relied on the statutory assumptions provided by s. 128 and s. 129. Also, the bank has no idea about the clause in the company constitution with regards to limiting the contract enacting power to contracts under $ 50,000. Hence, the contract cannot be termed unenforceable on the ground of insufficient authority for Vera.

    Step 4: Neither of the contracts that Vera enacted could be termed as void on the basis of the Vera lacking the necessary authority.