Course Code - LAWS3100 Corporations Law

QUESTION ONE

Issue- The current case is about two individuals who have set up their small scale business of online identity verification. The target market of this business is all the business who needs to assess the identity of its employees or clients. This business operates in Brisbane and getting famous in the regional locations of Australia (Tweedale, Czachor and Wright, 2017). James and Jodrians started this business together with an investment of $30,000 each for meeting the expenses of an entity. Both the individual utilizes their expertise in enhancing this venture. James handles the computer application while Andrian works on the marketing part. This venture has not registered under the court of law but has registered trademark and ABN business no.

Rule- Corporations act 2001 is an ultimate law of governing all the businesses in Australia. This law guides an entity in incorporating its business by electing the suitable structures. According to section 111J, conditions for an entity to consider as a small business given in this act. As per ASIC, a small proprietary venture considers as a small business subject to some conditions (Small buisness as per ASIC, 2019).

  • Annual revenue of the business should less than $50million
  • Employees of business are less than 100 at the end of the financial year
  • Consolidated assets of an entity are less than $25million at the end of the period

Business forms defined by the corporation act 2001 are sole proprietary, partnership, and company depending upon the nature of the venture (Corporations act 2001, 2019).

Along with the corporation act 2001, another act will include in this case to guide individuals in starting a business (Barnett, 2018). Partnership Act 1891, assists individuals in setting up a fair partnership by forming a legal deed.

According to section 6 subsection (1), (2) and (3), a business has joint ownership, participation in gross returns and sharing profits and losses is required. These characteristics are considering to call this association among partners as a partnership (Ritchie, 2018).

Different forms of partnership are a general, limited and limited liability. These assist individuals in considering the effective one as per the nature of their venture.

Analysis- The rule discussed above is compared with the current case of James and Andrian to help them in selecting their business structure. As per the nature of its online business, both have joint ownership, sharing gross returns and equally held responsible for profit and loss.

This case correctly meets the basic requirements to consider their collaboration as a partnership as per the partnership act 1891 (Némorin, Momartin and Junaid, 2019).

Moreover, the kind of partnership is yet to decide by analyzing the current conditions with all other parameters. Critically analyzing three kinds to filter it out the most effective for this partnership (Forms of buisness structures, 2019).

Parameters

General partnerships

Limited partnership

Limited liability

Setting up of business

It is easy to set up a partnership as compared to the other two kinds of partnerships.

It is slightly complex as general partners and limited partners are categorize.

It is very complex compare to the first two kinds.

Cost

The cost of a general partnership is less.

It is affordable but higher than general.

It is very expensive

Requirements

It requires a minimum of 1 general partner and a maximum of 20.

It requires at least 1 general and 1 limited partner

Only limited partners

Liability

Liability equally divide among the partners

Different proportions of the liability shared by general and limited.

Only limited liability as a partnership firm is a separate entity from partners.

Participation in management

All general partners take active participation.

General partners are active while limited partners play a passive role.

No contributions to the management.

Tenure

It is appropriate for long term

Limited to temporary projects

Can work for short or long term

Tax

Partners liable for tax

Limited partners are also liable for tax

Liable for tax

Asset protection

Mutual agreement among the partners for asset protection

No asset protection of the firm

The personal asset of partners is separate from an entity in case of default.

 

Considering the case law of Wang v Rong [2015] NSWSC 1419, that is about the dispute in the partnership firm due to breach of the agreement by one partner (Partnership dispute: Wang v Rong [2015] NSWSC 1419, 2016). James and Andrian are recommended to consider general partnerships by creating mutual deed to avoid disputes in the future.

Conclusion- It is summarized from this case that the general partnership structure considers incorporating the online business of the client. The nature of this structure matches with the existing venture of these individuals. This method is effective as compared to the company and sole trader. There are two partners of this entity so the sole trader is not suitable. But the partnership is better than the company as this is a small scale business.

 

 

 

QUESTION THIRD

a)

Issue- Heavy industries group of companies govern its subsidiary Light pty ltd by holding its majority of holdings. The subsidiary of heavy ltd monitored by Managing director and chief financial officer. This entity facing financial issues due to its negligence. Light Ltd compensates the penalties for affecting the environment. The manufacturing process of the company misuse the environmental whose result leads to an entity’s bankruptcy. Light ltd intentionally infused chemicals in the waterways that result in higher penalties. This negligence of an entity creates bad publicity among its creditors which leads to insolvency.

Rule- As per section 46 of Corporation act 2001, that specifies certain conditions for a parent company to called a holding company of its subsidiary (Corporations act 2001 for holding company liability, 2017).

  • Controlling the board of a subsidiary company
  • Having 50% control over holding company
  • Owing more than 50% share of the holding company

Furthermore, the law simplifies this complication by stating 5 test conditions where a parent company is liable for the debts of its subsidiary (Determinations tests for liability of holdiing over subsidiary, 2012).

  • Presence of parent company when the subsidiary incurred debt
  • Checking the insolvency status of subsidiary  before or after incurring debt
  • Reasons for proving the insolvency of  the holding company
  • Analyzing the insolvency status of the subsidiary company
  • Checking that debt incurred by the subsidiary after or before the commencement of the corporation act 2001

Analysis- Above 5 tests helps Heavy ltd in figuring out that they held responsible for the debt incurred by its subsidiary. The definition of considering as a parent of a subsidiary company clarifies the picture.

Firstly, check that heavy ltd has held in the light ltd by analyzing with the given criteria. Heavy ltd controls the light pty ltd by appointing managing director and chief financial officer. This entity also holds a majority of the control in its subsidiary. These two sets of information show that heavy ltd has a legal holding in its subsidiary company.

However, now its time to reveal the reliable fact by using the above mention 5 tests to determine the liability of the debt of light Ltd.

Heavy ltd correctly meets the 4 out of the 5 tests mention above to determine the liability of heavy ltd for all the debts incurred by its holding or subsidiary entity. These tests show that the debts of light ltd will compensate to the government by heavy ltd. Heavy ltd being a parent company pays off all the creditors as its subsidiary entity gets insolvent.

The current case of heavy ltd and light ltd is similar to the case-law of James Hardie Industries Plc v White (James Hardie Industries PLc v White, 2019). The court gives a verdict in favor of the plaintiff that is a subsidiary company that parent company holds responsible for the action of its subsidiary. Similarly, heavy ltd will reimburse for the environmental damages to the government due to the negligence of its holding company. The negligence of light ltd compensates y the parent as the majority of shares and the gross assets owned by the parent company.

Conclusion

It is concluded that heavy ltd held responsible for the debt of the light ltd and also for the environmental damages. The heavy ltd passes the determination tests given in the analysis section.

b)

 As per the legal doctrines, heavy ltd liable for the damages penalty and the debt incurred by the subsidiary company. This is due to the majority of the holding of an entity in its subsidiary entity. Heavy ltd has not made any mistake but compensates for the negligence of light ltd. As per the court of the law and verdict of the above case law, heavy ltd liable to pay off all the creditors due to the insolvency of light ltd.

Regardless of these legal criteria, heavy ltd should not compensate for the debt and the damages incurred to the environment. By doing this a parent company covers up the intentional mistake of its subsidiary. Light ltd declared insolvent and all of its creditors demand to shut up the business. Considering the viewpoint on this case, heavy ltd should not compensate for the damages and the debt incurred. The intentional mistake of light ltd affects the image of the heavy ltd group of companies as they are controlling this entity. Light ltd should shut down and the proceeds of its assets utilized in paying off all the debts and the damages.

 

 

REFERENCES

Books and Journals

Barnett, K., 2018. A Reconsideration of s 1324 (10) of the Corporations Act 2001 (Cth): Damages in Lieu of an Injunction.

Némorin, S., Momartin, S. and Junaid, M., 2019. Community partnership with Rohingya refugees in Sydney, Australia: a systemic approach towards healing and recovery. Intervention. 17(2). pp.225-230.

Ritchie, B., 2018. Working in partnership: Christian schools across Australia. Nurture: the voice of the National Union of Associations for Christian Parent-controlled Schools. 52(4). p.4.

Tweedale, D., Czachor, N. and Wright, I., 2017. Queensland's environmental laws prevail over Cth Corporations Act. Australian Environmental Law Digest. 4(2). p.5.

Online

Corporations act 2001 for holding company liability, 2017. Available through: <  https://www.dundaslawyers.com.au/holding-company-liability-for-debts-of-subsidiary/> [Accessed on 13th April].

Corporations act 2001, 2019. Available through: < https> [Accessed on 13th April].

Determinations tests for liability of holdiing over subsidiary, 2012. Available through: < https> [Accessed on 13th April].

Forms of buisness structures, 2019. Available through: < https> [Accessed on 13th April].

James Hardie Industries PLc v White, 2019. Available through: < https> [Accessed on 13th April].

Partnership dispute: Wang v Rong [2015] NSWSC 1419, 2016. Available through: < https> [Accessed on 13th April].

Small buisness as per ASIC, 2019. Available through: < https> [Accessed on 13th April].

 

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