Business and Corporations Law Seperate Legal Studies

Question: Discuss about the Business and Corporations Law for Seperate Legal Studies. Answer: 1. A company has a separate legal status. In the case of a company, the liability of the owners, that is, the shareholders is limited to the amount unpaid on the number of shares held by them. On the other hand in case of a sole tradership business, the liability of sole trader who is the owner of the business for the debts of the business is unlimited[1]. If David incorporates Daves Boating Pty Ltd, then the individual would owe to the company only the amount left unpaid on the shares held by him in the company. David would not be personally liable for the debts incurred by the company. A company can appoint individuals as its agents who can enter into contracts and make sales on behalf of the company[2]. In this case Dave would not be held personally liable for any liabilities or obligations arising out of contracts entered into by such agents of newly formed company Daves Boating Pty Ltd. On the other hand if Dave is operating as a sole trader and enters into contracts on behalf of the business, then Dave would be personally liable for any such contracts as there is no legal difference between the owner and the business in case of a sole tradership. If Dave gets the individuals business registered as a company, the person would still be the owner of the business as holder of shares of the new company. Moreover, Dave would be entitled to a part of profits in the form of dividends. 2. David would have to choose a name for the company which is not identical to the name of an existing company. Further the individual would have chosen the type of company the person wants its business to be, like a public or private company or a not for profit company. Then the individual would have decided that the company would be governed by its own constitution or replaceable rules or combination of both. Further the individual is required by law to understand the persons obligations like maintain records of the company as its officeholder. Then the individual would have had to obtain consent of future directors, secretary and members of the company. David would have to submit an application with Australian Securities And Investment Commission in the prescribed form in accordance with the provisions of Section 117 of Corporations Act 2001 for the registration of Daves Boating Pty Ltd[3]. This application would contain information like the type of company to be registered, its proposed name, names and addresses of its proposed members, address of its proposed registered office and place of business. After the above application is processed by Australian Securities And Investment Commission, it would issue the company an ACN, register the company and give it a certificate of registration along with the corporate key. A companys internal management would be done according to the provisions of Corporation Act 2001 (Replacement rules), its constitution or a combination of both[4]. A companys constitution mentions the rules that its directors and members will follow with regard to their actions that influence its functioning. The constitution defines the relationship of these entities with the company. David would also have to construct a constitution, a document containing rules for internal management of Daves Boating Pty Ltd. A company can adopt a constitution before or after its registration. If Dave wants to adopt a constitution before the registration of the company, then a written consent of each member would be needed. If the constitution is to be adopted after registration, a special resolution of the members of the company is needed according to the provisions of the Corporation Act 2001. 3. Area of law applicable David entered into the contract with Perth Sea Rescue on behalf of Daves Boating Pty Ltd. As given this contract was entered in January 2016 and Daves Boating Pty Ltd got registered as a company in July 2016. In this case the relevant law is section 131 of the Corporation Act 2001 in which it is given that if a person enter into a contract on behalf of a company that has still not come into existence that, is, has not been registered by Australian Securities And Investment Commission, then the person would be personally liable for the contract unless the company is formed and it ratifies this contract within agreed or reasonable time. If this happens the company would be responsible for carrying out its obligation under the contract[5]. Discussion of law and relevant cases According to section 131 of the Corporation Act 2001 a person entering into a contract on behalf of a company that does not exist would be held personally liable if the company after coming into existence does not ratify and perform its obligations under the contract. In the past there have been cases where the individual entering into a contract on behalf of a non existing company could escape liability on the basis that a non existing company has no legal status and cannot enter into a contract. So the contract is not binding on the company as well as the person who claimed to be an agent of the company. This becomes clear in a judgement in a case Black V Smallwood Cooper (1966) where the High Court of Australia decided that there was no personal liability of persons who claimed to be agents of a non existing company and entered into a contract with two persons to work as directors of the company. In another case Newborne V Sensolid (GB) Ltd [1954] tinned ham was sold to Sensolid by a person in the name of a company that did not exist. Sensolid refused to take delivery of tinned ham and the contract could not be enforced as the company selling the product did not exist, had no legal status and could not enter into a contract[6]. The provisions of section 131 of the Corporation Act 2001 are meant to discourage promoters from entering into irresponsible contracts before the registration of the company by making them personally liable for such contracts. Application of law to given case Dave entered into the contract with Perth Sea Rescue in January 2016 when Daves Boating Pty Ltd was not yet registered as a company. According to Australian Law, a company which is not registered, does not exist in the eyes of law and does not have the legal capacity to enter into a contract even through an agent. But if the company is formed subsequently and someone has entered into a contract on its behalf before its registration, the company can ratify this contract. So the personal liability of Dave for the above contract depends on whether the members of Dave Boating Pty Ltd after its registration, approve the contract or not. Section 131 (4) of the Corporation Act 2001 provides that even if the company ratifies such a contract but fails to perform its obligations under the contract, the person, in this case, Dave would be personally liable for the contract. Conclusion The provisions given in section 131 of the Corporation Act are fair because a company is owned by its shareholders who should have an ultimate authority to enter into a contract on its own or give certain powers to its agents to enter into contracts on its behalf. Therefore any contracts entered into by a person on its behalf before its registration should need the approval of the members of the company after its formation to encourage more responsible behavior from promoters. 4. Area of the law applicable According to Australian common law, a company has contractual capacity to the extent provided by the constitution of the company[7]. Those parties that enter into an agreement with the company with the purpose of forming a valid contract should be aware of any restrictions contained in the constitution of the company. In this case constitution refers to a document that contains the rules that govern the internal management of the company. However section 124 of the Corporations Act 2001 (Cth) provides same legal capacity to a company as an individual in the form of power to enter into a contract[8]. A company can enter into a contract either by using its common seal (Section 127(2) ) or through an agent acting on behalf of the company. According to section 125(2) an agreement by a company with outside parties will not be an invalid contract just because it is beyond the scope of the companys constitution. Such a company would not be able to escape its obligation under the contract if the court of law decides that the outside party had acted in good faith and was not responsible for any irregularities being committed in the other company or done by its agent[9]. In the given case, the court of law would decide whether the contract between Daves Boating Pty Ltd and Bioplastic Ltd is enforceable or not on the basis of the above provisions of the law. Section 129 provides for the protection of outsiders who have entered into a contract with the company through its agent which has acted beyond the persons authority. This is similar to the rule of Indoor Management. Discussion of law and relevant cases The Australian law has made provisions for protecting the rights of outside parties which enter into a contract with a company on the basis of good faith. The judgements in Australian courts in such cases have been based on case Royal British Bank Vs Turquand[10]. The judgement in this case led to the development of what came to be known as Indoor Management Rule. In this case Royal British Bank sued Turquand, the official manager of a company in Britain. A loan of two thousand pounds had been taken from Royal British Bank by Turquands company by issuing a bond which carried the common seal of the company and signatures of two of its directors. The company sought to escape its liability on the loan by arguing that any such loan by the company needed to be approved by a resolution of its shareholders in the general meeting. The company asserted that no such resolution had been passed. The judge held in this case that the company was liable to Royal British Bank for repayment of the loan as the bank was not supposed to be aware of the internal irregularities in the company regarding the procurement of the loan. The bank had advanced the loan in good faith and the other company should repay. The above provision contained in section has diluted substantially the application of doctrine of ultra vires in such cases, which states that companies cannot do what is beyond its powers or contents of the object clause of its constitution. The ultra vires assumption was applied in a case Ashbury Railway Carriage Iron Co. V Riche. In this case the company entered into a contract to construct actual railway when its object clause permitted making only actual railway. The contract was held ultra vires and thus void by court of law[11]. Application of law to the given case As given in the case, the sales manager of Daves Boating Pty Ltd entered into a contract with Bioplastic Ltd for purchase of high tensili plastic machine. Now the company is arguing that this contract is unenforceable. Each of the reasons given by Daves Boating Pty Ltd has been discussed below. The first argument provided by Daves Boating Pty is that the given contract is invalid because its constitution provides that it can make only fibre glass boats[12]. This argument by is not sufficient. In this case Bioplastic Ltd entered into the contract in good faith believing that the other company was acquiring the plastic machine for carrying out its usual business activities. There were no circumstances to create suspicion in Bioplastic Ltd regarding the contract and the company need not have made any further enquiries. Moreover, the sales manager did not mention to Bioplastic Ltd that the plastic machine was being purchased to make plastic boats, an act not allowed by the constitution. So the circumstances are similar to the case Royal British BankVs Turquand[13] , the contract is enforceable. The second argument put forward by Daves Boating Pty is that its contract with Bioplastic Ltd is not valid because Angela, its sales manager had no authority to purchase $ 40000 machine[14]. This argument by Dave Boating Pty Ltd is invalid. It is given that the constitution of Dave Boating Pty Ltd contains that the sales manager could make purchases upto $ 25000 without the approval of the managing director of the company. But the managing director could have approved purchase of $ 40000 by the sales manager. But the individual did not do so. Bioplastic Ltd is not expected by court of law to know about how the day to day activities of Dave Boating Pty Ltd are being carried out. The former is not expected to keep itself informed of any irregularities being committed in Daves Boating Pty Ltd, nor it can be held responsible for them. Daves Boating Pty Ltd would not be allowed to escape its liability under the contract on the basis of any such irregularities. Conclusion The contract between Daves Boating Pty Ltd and Bioplastic Ltd would be held enforceable. The Australian law has also drawn from the judgement given in the case of Royal British Bank Vs Turquand and the Indoor Management rule. The provisions given in the Australian law have been made to protect the rights of parties like creditors and customers who enter into contracts with a company. This protection for such parties by law seems justified but the rights of the companies also need not be ignored by law. Referencing Accountlearning.com, What Is Ultra Vires? (21 October 2016) https://accountlearning.com/doctrine-of-ultra-vires-objectives-effects-ratification-types/ Australian Contract Law.com, Capacity To Contract (21 October 2016) https://www.australiancontractlaw.com/law/formation-capacity.html Australian Securities And Investments Commission, Constitution And Replaceable Rules (21 October 2016) https://asic.gov.au/for-business/starting-a-company/constitution-and-replaceable-rules/ Australian Securities And Investments Commission, Starting A Company How To Start A Company (21 October 2016) https://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/ Clarkson, Kenneth and Miller, Roger, Business Law: Text And Cases (Cengage Learning, 13th ed, 2015) Furmston, Michael, Law Of Contract (Oxford University Press, 16th ed , 2012) Legal Process Outsourcing Services, Pre- Incorporation Contracts : Legal Enforceability (21 October 2016) https://legalonline.blogspot.in/2011/03/pre-incorporation-contracts-legal.html Lexology.com, The Indoor Management Rule Explained (21 October 2016) https://www.lexology.com/library/detail.aspx?g=469212cf-f6d8-458d-8a5d-2722c5d4ba99