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Corporations Law Principles

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Corporations Law Principles

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1. Richard, along with his two sons, has to face the legal issue regarding, “What steps are required to incorporate and register a company in Australia?”
2. Whether Terry can take any action against Lazarus Pty Ltd, CMS and CM, or not?

In Australia, there are majorly four types in which the business can be undertaken and these include sole trader, trust, partnership and corporation. The needs and requirements of the individuals finalize the type of business structure elected by such individuals (Australian Government, 2016). The company form of business has various advantages, including tax benefits and raising capital from public. To provide the advice to Richard and his two sons, regarding the selection of company/ corporation as a type of business for converting their family business, the various aspects relating to the incorporation, as well as, registration of the companies in Australia, have been elucidated.
A tort is a civil wrong, under which the actions of one person, result in a loss for the other person. In Australia, negligence is considered as a tort law (Latimer, 2012). For the actions of one party, the other party can be held liable. These are cases when the court finds it justified to lift the corporate veil, to deliver the proper justice. In the following parts, the advice has been formed for Terry regarding the success of his claims against Lazarus Pty Ltd, CMS and CM.
1. Rule
The Corporations Act, 2001 (CA) presents the various provisions, which are applicable over the incorporation and the registration of the companies in Australia. The first step in this regard is to finalize the type of company, which the person wants to elect. Broadly, there are two types of companies, as per section 112 of CA, public companies and proprietary companies. There are four sub-classifications of public companies, i.e., no liability company, no liability company, limited by guarantee, and limited by shares. On the other hand, the proprietary companies are classified into unlimited with share capital and limited by share (Australian Government, 2017). Though, the proprietary companies are not allowed to sell their shares to the general public, which is not the case in public companies (Australian Institute of Company Directors, 2016).
The next step in incorporation of the companies is the selection of the name. There are certain things, which have to be kept in mind, while selecting the name of the company. The name of the company cannot be identical to a pre-existing name as per section 147 of CA. The availability of the name can be checked online. Under section 148 of CA, the name of the company can be selected on the basis of ACN or the Australian Company Number or on the basis of name availability. Moreover, the name of the company has to be affixed with the specified terms, which denote the type of company. For instance, a no liability company must have No Liability, unlimited proprietary company must have Proprietary, limited company has the term Limited, and a limited company has the term Limited at the end of the company name. When a name is finalized, an application has to be made to the ASIC, as per section 152, to reserve the selected name (Australian Government, 2017).
Section 117 of CA provides the contents of the application, which has to be filed by the applicants with the ASIC, in order to apply for the registration of the company. In this application, the details of the person who wants to be a member, director, or company secretary of the company, their consent along with details like the type of company, the name of the company, the address of the proposed registered office of the company, the share details and the like, have to be clearly mentioned (Australian Government, 2017).
The next step is to select whether the company would be managed under the constitution or replaceable rules, or both. Part 2B.4 of CA contains the provisions to be followed regarding the constitution and replaceable rules. The replaceable rules are applicable over some of the provisions only, as are set out in section 141 of CA. These rules are elected when the members of the company, do not want to go for a constitution. The provisions regarding constitution of a company are covered in section 136 of CA. the companies can adopt the constitution prior to or subsequent to the registration of company (Australian Government, 2017). When the constitution is adopted prior to registration, then the members have to provide their agreement regarding the terms of constitution in writing. A special resolution has to be filed when the constitution is adopted subsequent to the registration (ASIC, 2017). Once a decision is made regarding the adoption of constitution or replaceable rules, or both, an application as per section 117 has to be made with the requisite fees (Australian Government, 2017).
As per section 118, when the ASIC is certain that all the elements of the application are complete in all aspects, it provides the company with the ACN, registers the said company and finally, issues the certificate containing details of company, for instance, its name or its type. The day, on which the company gets registered, it comes into existence, as per section 119. And the certificate of registration depicts the name of the company. Until and unless, the company is deregistered, it continues to exist (Australian Government, 2017).
Upon incorporation, the company can commence its operations. Though, it has to be ensured that the company name is displayed whenever it conducts its business. Also, the allocated ACN or ABN has to be clearly printed over the company published documents. The companies are also required to keep its details updated, at all times (ASIC, 2017).
In order for Richard and his two sons to start a family-run company, they have to follow the steps covered in the preceding parts. The first selection has to be made regarding the type of company, which they want to incorporate. Since they want to raise money from the public, they need to go for a public company, which is limited by shares. The next step is to finalize the name of the company. The name can be elected only when it is available; as both names are available, any one of them can be selected. A decision has to be made regarding the name of the company. Ridali name can be elected as the company name, and Rich’s Guaranteed Olives can be selected as the name of the business (ASIC, 2017). Thus, resolving the dispute.
The next choice has to be made regarding the company being ruled under the constitution or replaceable rules. Since, the applicability of replaceable rules apply to certain aspects only, hence, Richard and his sons need to opt for a constitution. Upon following the rest of the steps, they can register and incorporate the company.
2. Rule
Liability of Lazarus Pty Ltd
Even though the companies are separate legal entities, there are cases, where this status of companies is revoked, and the court lifts/ pierces the corporate veil of the company, to hold the party responsible for the misdeed (Rudorfer, 2009).
When the court can establish that a new company has been formed for the purpose of evading the liability of the old company, it treats the new company as a sham/ façade (Cheng, 2011). And, the court, in such cases, pierces the corporate veil, and holds the old company, accountable for its acts, which gave rise to the claims.
Creasey v Breachwood Motors Ltd [1993] BCLC 480; 10 ACLC 3,052 is one of the examples of such instance. In this case, the judges pierced the corporate veil, in the interest of justice, in the matter of formation of Breachwood Motors Ltd. Breachwood Motors Ltd was then held accountable for the wrongful dismissal of the employee of Breachwood Welwyn Ltd, as the new company was held as a mere sham to avoid the liabilities of the old company (Griggs, 2017).
In the given case, Lazarus Pty was formed only for evading the liabilities of CMS, which arose due to its negligence, which resulted in harm for its employees, and for the residents of Gunbarrel. As the objective of formation of this company was a façade, Creasey v Breachwood Motors Ltd, denotes that the corporate veil would be pierced in this and Lazarus Pty would be made to compensate for CMS’s negligence.
Liability of CMS
Negligence is established when a person owes a duty of care towards some other person, and they fail to fulfill this duty, which results in loss or injury to the other person (Legal Services Commission of South Australia, 2013). Only when all the elements of negligence are present, can the claim against negligence be established. The elements are the duty of care, the violation of the duty, the resulting loss or injury, the direct causation, the injury to be substantial and not remove, and the foreseeability of such loss (DeMitchell, 2007). Donoghue v Stevenson [1932] UKHL 100 is a key case regarding negligence, where Stevenson was held liable in negligence, due to the snail that was found in his manufactured bottle, which was consumed by Donoghue (Latimer, 2012).
The company owed a duty of care towards the residents of Gunbarrel and towards their employees. The water was contaminated, as a result of operations of the company, a duty was breached, as this resulted in people getting cancer. This was the harm that both residents of Gunbarrel and CMS’s employees had to face. The foreseeability is clear as mining activities result in such diseases. Since all the elements of negligence are present, a case can successfully be made claiming the damages as a result of cancer.
Liability of CM
Even though holding and subsidiary companies are separate legal entities, the holding can be held accountable for subsidiary in some cases. These cases relate to the lifting of corporate veil to deliver a just and fair decision (Wibberley, Chambers and Gioia, 2017). When the court views the conduct of the company, as against the laws, it can pierce the corporate veil and hold the members or the owners of the company responsible for the debts incurred by the company (Vanderkerckhove, 2007).
One instance where corporate veil can be pierced relates to the actions of the subsidiary involving tortuous liability. One of the cases, where this was established, is the case of CSR Ltd v Young [1998] Aust Tort Reports 81-468. For the purpose of liability, the judges considered that the holding and subsidiary companies had similar positions, as the control over the activities of the subsidiary was with the holding (Anderson, 2008). Moreover, the control was quite strong, and this resulted in the activities of subsidiary being treated as being undertaken by the holding.
Even when the subsidiaries act as the implied agents of the holding, the corporate veil is pierced. To elucidate this, the case of Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116 has to be considered. In this case, as the subsidiary was carrying the business solely for holding, the holding was established to be eligible for the compensation, arising due to operating the business of subsidiary (French, Ryan and Mason, 2016).
CM is the holding and CMS is the subsidiary in this case study. The above mentioned points have to be established, in order to hold CM responsible for negligence of CMS. Even though CMS was paying a leasing charge to CM, it was in addition to 10% of the leasing costs of the bank. The higher rates depict the strong control of CM. So, as per the first quoted case, i.e., CSR Ltd v Young, CM is responsible.
The second aspect is also fulfilled in this case. This is evident from the fact that the leasing was done, with the only objective of subleasing the same to CMS. This was to get the work done by its subsidiary. So, as per the case of Smith, Stone & Knight Ltd v Birmingham Corp, the operations of the company were, in reality, being done for CM. This allows the court to pierce the corporate veil and hold CM liable for CMS’s negligence.
From the analysis of the facts, with the rules, it can be established that Terry can take any action against Lazarus Pty Ltd, CMS and CM. and he would successfully be able to recover damages from all three companies.
The above analysis highlights the steps that have to be adopted by Richard and sons to incorporate and register a company.
Anderson, H. (2008) Directors’ Liability for Unpaid Employee Entitlements: Suggestions for Reform Based on their Liabilities for Unremitted Taxes. Sydney Law Review, 30 (470), pp. 478.
ASIC. (2017) Constitution and replaceable rules. [Online] ASIC. Available from: https://asic.gov.au/for-business/starting-a-company/constitution-and-replaceable-rules/ [Accessed on: 02/02/17]
ASIC. (2017) Starting a company – How to start a company. [Online] ASIC. Available from: https://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/ [Accessed on: 02/02/17]
Australian Government. (2016) Business structure. [Online] Australian Government. Available from: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure [Accessed on: 02/02/17]
Australian Government. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 02/02/17]
Australian Institute of Company Directors. (2016) Organisation definitions. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 02/02/17]
Cheng, T. (2011) The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S. Corporate Veil Doctrines. Boston College International and Comparative Law Review, 34(2), pp. 329- 412.
DeMitchell, T.A. (2007) Negligence: What Principals Need to Know about Avoiding Liability. Lanham: Rowman & Littlefield Education.
French, D., Ryan, C., and Mason, S. (2016) Mayson, French and Ryan on Company Law. 33rd ed. Oxford: Oxford University Press, pp. 135.
Griggs, L. (2017) A Note On The Application Of Enterprise Theory To The Problem Of Phoenix Companies. [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/journals/MacarthurLawRw/1998/3.pdf [Accessed on: 02/02/17]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, CSW: CCH Australia Limited.
Legal Services Commission of South Australia. (2013) What is negligence?. [Online] Legal Services Commission of South Australia. Available from: https://www.lawhandbook.sa.gov.au/ch29s05s01.php [Accessed on: 02/02/17]
Rudorfer, M. (2009) Piercing the Corporate Veil. Norderstedt: GRIN Verlag.
Vanderkerckhove, K. (2007) Piercing the Corporate Veil. Netherlands: Kluwer Law International.
Wibberley, J., Chambers, G., and Gioia, M.D. (2017) Lifting, Piercing And Sidestepping The Corporate Veil. [Online] Guildhall Chambers. Available from: https://www.guildhallchambers.co.uk/uploadedFiles/PiercingtheCorporate%20Veil.JW,MDG.pdf [Accessed on: 02/02/17]

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