Step 1: Company name choice
As per the given facts related to the situation, it is apparent that an olive grove is owned by Richard and is based in NSW. At the present, it has 12000 trees but Richard intends to expand the business facilitated through the purchase of the nearby land. To pursue this lucrative opportunity, Richard is also joined by his sons so as to assist in the various expansion related aspects particularly raising capital. Also the family wants to change to a company business structure which would facilitate capital raising along with lower tax outflow. Thus, in wake of this, it is imperative to offer legal advice to Richard on how to go about registering and incorporating a company.
Before formally beginning the process of company incorporation, it is imperative that a critical discussion must be facilitated so as to deliberate if the company structure is apt for the current requirements of the business with an eye on the future goals. Further, comparison must be drawn with alternative business structures. In the scenario presented, considering the planned expansion and the requisite capital requirement, company structure does seem to be the appropriate choice. Another advantage that is offers is in the form of separation of shareholders and company which is critical to limit personal liability of the shareholders (Gibson and Fraser, 2014). Once a decision is reached in relation to the appropriate choice being a company, then the following steps ought to be taken for company incorporation and registration.
While choosing the name of the proposed company, it is essential that this name should not be assumed by any other existing company since it forms a part of the unique identity of the company. To assist in this regards, ASIC has provided a particular online facility whereby it can be checked if the proposed name for the company is available or not. Also, in regards to the characters that can be inserted in the name of the company, there are some restrictions as there are uncertain characters which cannot be used. However, for the names proposed in the given cases, these restrictions are not an issue and hence no changes would be required for the names proposed. Besides, it is also possible to reserve particular company names which can be facilitated through the use of Form 410. By filing this, no other entity can assume a particular name (ASIC, nd).
Also a critical component of the company name is the fact that the legal status must be aptly reflected. In order to ensure the same, it is imperative a proper suffix needs to be attached at the end of the proposed company name which would reflect the appropriate company type. For instance, with regards to the scenario presented, the company type proposed would be proprietary limited which would enable limiting the liability of shareholders to the share capital that has been poured in the business. With regards to proprietary company, mobilisation of funds through a public issue is not possible but private investors based funding option can be availed especially as the maximum shareholders allowed can go upto 50 in case of proprietary company. Thus, the twin objective of flexibility and capital infusion can be achieved through this company type (Australian Government, nd).
Step 2: Defining the governance
For the company’s governance, relevant details ought to be provided. In this regards, there are three possible options i.e. replaceable rules, company constitution or combination of both. The potential of replaceable rules to serve as an effective alternative to the framing of the constitution of company has been highlighted in Corporations Act 2001. Replaceable rules have the benefit of being automatically updated and hence no formal updating is required. This is not the case for a company constitution which requires periodic updating to be in synchronisation with the existing legal provisions. Also, if only one officeholder exists for a proprietary company, then there is no requirement for any constitution or replaceable rules. But as another director is appointed, it would become mandatory to have either replaceable rules or company constitution (Davenport and Parker, 2014).
Unlike other business structures, in case of company, the officeholders need to fulfil certain key obligations. One of the most noticeable factors would be the directors duties which have statutory status as they have been envisaged in the Corporations Act 2001 and hence the directors need to comply with these. Also, the directors need to satisfy certain pre-conditions that have been outlined in the Corporations Act. Besides, it is also essential that the company records need to be maintained and also updated on a periodic basis so as to reflect the latest situation (Pathinayake, 2014).
It is of paramount information that the various members of the company including shareholders should provide consent in relation to taking the chosen or requisite roles. Besides, it is also essential in case of rented premises acted as registered office, that the written consent of the owner must be obtained thereby allowing the premises to be used in the capacity of a registered office. Record should be maintained for the same as it could potentially act as a future residence if required (Lindgren, 2011).
The registration of the company can be completed through potentially two means. One of these involve directly dealing with ASIC while in the other case, the services of private agents may be used. These private service providers tend to have ASIC system direct access and application is filed for registration by charging a fee. If registration is done without using the private service provider, then Form 201 ought to be filled and sent to ASIC’s Victoria office. Also, the requisite registration fee is enclosed. After the company registration has been successfully completed, there is issuance of a registration certificate and also a unique ACN number is allocated (ASIC, 2014).
In the given case, legal advice need to be offered to Terry with regards to which company or combination of companies would be held liable for the harm caused to the residents of Gunbarrel along with former employees owing to contamination of water by operations of CMS.
With regards to the company structure, a specific feature which distinguishes it from other business structures is that it has a separate legal entity as highlighted in the famous Salomon v A Salomon and Co Ltd [1897] AC 22 case. The most critical implication of the above was that the liability of the company is to be borne by the company itself and outstanding creditors or other parties having a claim on the company must settle the same from the assets of the company and cannot demand clearance of any pending dues from the shareholders irrespective of the capacity to pay (Davenport and Parker, 2014).
It is apparent that the above immunity could potentially be misused and hence in certain circumstances the corporate veil would be lifted by the court. In relation to the situation where there is parent subsidiary relationship, the corporate veil would be lifted by the court under the following conditions (Lindgren, 2011).
- When a liability arises on the account of subsidiary company actions as highlighted in the CSR Ltd v Young[1988] Aust Torts Reports ¶81–468. In this particular, the plaintiff was a resident of the nearby town who developed mesothelioma owing to the asbestos mining by the subsidiary company in the nearby area. When the matter landed in the court, the parent company (CSR) said that both CSR and ABA would be responsible if the plaintiff is an employee but with regards to the residents, only the subsidiary i.e. ABA would be held liable. However, the court rejected this reasoning and said that both the parent as well as the subsidiary would be held liable (Gibson and Fraser, 2014). Thus, given the above verdict, in the given case both CM (parent) and CMS (subsidiary) would be jointly held liable for both the damage suffered by the residents and also the former employees owing to the negligence which resulted in the polluting of the river.
- Further, unveiling the corporate veil is required in cases where the subsidiary acts as the implied agent of the parent firm as highlighted in Smith, Stone & Knight Ltd v Birmingham Corp[1939] 4 All ER 116 case. In the given case, Judge Atkinson highlighted the following criteria to decide whether the subsidiary was acting as the implied agent of the parent (Pathinayake, 2014)
- The subsidiary profits are treated as those of parent firm.
- The person who is managing the subsidiary is appointed by the parent firm.
- The head and brain of the subsidiary is essentially the parent firm.
- The presence of profits earned by the parent firm on account of the skill offered and direction given to the subsidiary firm.
- The effective control of the subsidiary lay in the hands of the control.
In the given case, the above criteria seem to be satisfied and hence it may be deemed that the subsidiary (CMS) is the implied agent of the principal (CM) and hence the principal cannot claim immunity on being an entity which is separate from the company(CMS) which has acted in a negligent manner. In this case, the conduct wouldn’t have gone unnoticed by the parent firm and hence the parent firm besides the subsidiary would be held liable.
- The corporate veil is also lifted when the subsidiary company is a façade or a sham which does not seem to be the case here (Gibson and Fraser, 2014).
After ascertaining that both CM and CMS would be held liable for the negligent conduct, the next question is whether the new buyer of CMS i.e. Lazarus Pty Ltd would be also held liable or not. The relevant case of importance would be Creasey v Breachwood Motors Ltd [1993] BCLC 48. Two aspects were highlighted in this case which are relevant. One is that the contract burden cannot be assigned to a third party in any manner except novation. However, in the given situation, there does not seem to be any novation between CMS and the acquirer company i.e. Lazarus Pty Ltd. Also, the concept of contract privity would be deployed. As per this, even if there is a contract between the two companies with regards to assumption of liability, claim cannot be put on either as Terry nor the other residents are the party of the same (Pendleton and Vickery, 2015). Thus, on account of the above discussion, it is apparent that no liability would be borne by Lazarus Pty Ltd.
Also, considering the act that CMS has declared itself solvent, then the major focus would be on the other parties responsible for clearing the outstanding liability. Thus, in view off the above discussion, it is apparent that CM would be held as the primarily one that is responsible for providing remedy to Terry along with the residents.
References
ASIC (nd) Starting a company – How to start a company, [online] Available at https://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/ (Assessed May 30, 2018)
Australian Government (2016), Steps for setting up your business [online] Available at https://www.business.gov.au/info/plan-and-start/start-your-business/steps-for-setting-up-your-business (Assessed May 30, 2018)
Davenport, S. & Parker, D. (2014) Business and Law in Australia 2nd ed. Sydney: LexisNexis Publications.
Gibson, A. & Fraser, D. (2014) Business Law 8th ed. Sydney: Pearson Publications.
Lindgren, K.E. (2011) Vermeesch and Lindgren’s Business Law of Australia 12th ed. Sydney: LexisNexis Publications.
Lipton, P. (2014), THE MYTHOLOGY OF SALOMON’S CASE AND THE LAW DEALING WITH THE TORT LIABILITIES OF CORPORATE GROUPS: AN HISTORICAL PERSPECTIVE,[Online] Available at https://www.monash.edu/__data/assets/pdf_file/0003/232527/lipton.pdf (Assessed May 30, 2018)
Pathinayake, A. (2014) Commercial and Corporations Law 2nd ed. Sydney: Thomson-Reuters.
Pendleton, W. and Vickery, N. (2015) Australian business law: principles and application 5th ed. Sydney: Pearson Publications.
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