LGST 201 Company Law

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LGST 201 Company Law

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LGST 201 Company Law

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Course Code: LGST201
University: Singapore Management University

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Country: Singapore

Question:
Issues
Identify and state the legal issues involved in the question. For example, does it involve contract law (if so, what aspect?), a trade practices issue (e.g. misleading conduct), a company law issue (e.g. breach of director’s duty), negligence?
 
HINT! Read the “requirements” of the question that usually will appear at the end of the case study. Often it will tell you or steer you towards the issue of law. 
Rules/Relevant Law 
Explain the legal principles (rules) relevant to the issues identified. Any relevant legislation and precedent cases should be used to support the explanation. That is, “tell the story of the law” in a logical way. 
Application/Analysis  
Use the law to argue for each party’s position or, in other words, apply the law to the hypothetical facts of the case study. This involves explaining the relevance of the law to the scenario and how it can be used by each party to argue their case.
 
You need to consider the law from each party’s point of view. This will develop an argument and might raise different legal interpretations.
Answer: 
The reason behind this position of law is that traditionally the regulation of corporate law has always been considered as a matter reserved for state legislation. However, a legislation was passed by the Commonwealth Government in 1989, through which an attempt was made to take over the regulation of corporate law. However review of the decision given in NSW v Commonwealth (1990), the High Court clearly stated that the Constitution of Australia does not provide a complete power to the Commonwealth Government to legislate regarding companies. Particularly the Commonwealth has not been given powers by the Constitution to make laws concerning the formation of the companies. However, in 2001, all States gave their legitimate power concerning the corporation’s law scheme to Federal Government. As a result, the Corporations Act, 2001 was passed by the Commonwealth. This legislation replaced different legislative components of the earlier corporation’s law scheme. 
Rule: as compared to a partnership or sole trader, a company enjoys distinct identity that is separate from the identity of its members. As a result of this legal fiction, the company enjoys the same rights that are available to an actual person. Therefore, a corporation can form a contract in its own name, it may incur debt and sue and be sued. The Corporations Act also provides that (s1.5.1) a company has separate legal existence, and it is separate from its managers, owners, operators or employees. A corporation owns property, rights and obligations. Similarly, a corporation can own assets in its own name. A company can also enter contracts in its own name.
Application: in the present case, even if Fred has been discussing the contract with the sales manager of the company, Mary, but he relented into the contract with the company, Colonel Motors Ltd.
Conclusion: the company has the legal capacity to own the car and also to enter into a contract with Fred  
Issue: Here the issue is if Eastpac Bank can successfully argued that the company cannot legally entered into a contract that allows the director to priority for his loan? 
Rule: a company is considered by the law as a distinct legal entity. As a result, it is separate from its members, directors and managers etc. Moreover, a corporation can also enter into a contract in its individual name.
Application: Therefore in the present case, the contract was created between Premium Plumbing Pty Ltd and one of its directors. This is a valid contract and needs to be enforced by the law.
Conclusion: Eastpac Bank cannot successfully claimed that the company cannot legally entered into contract which allows the director to priority his loan.  
Issue: issue here is if the directors, employees of shareholders of Premium Plumbing Pty Ltd can be held liable for the deaths of the company?
Rule: the law provides that the debts and obligations of the company can be imposed only is the company and not against the members or the directors of the company. The reason behind this position is that a company is considered as a distinct legal entity.
Application: In this case, the employees, directors and shareholders of Premium Plumbing cannot be held responsible for the debts of the company.
Conclusion: Hence as the company is a separate legal entity, it’s directors, employees or shareholders cannot be held liable for its debts.  

According to the Partnership Act, (Sec 9) every partner in case of a partnership firm is considered as being jointly liable with the other partners regarding all the debts and obligations of the firms that have been incurred by the partnership firm at a time when such person is a partner and after the death of the partner, the estate of the partner is also severally liable regarding such debts and obligations so far as they are unsatisfied, but subject to prior payment of the separate debts of such partner. In this way, the liability of Bill and Ben is joint and several while they were operating the partnership.
A proprietary company has been defined by s45A(1), Corporations Act, 2001. After the registration of a proprietary limited company, the members of the company as well as the directors or managers of the corporation cannot be held personally accountable for the liabilities of the company. The $100,000 borrowed from Bigbucks Bank Ltd. is enforceable only against the company and not against its members. As a result, Ben, Bill and Pansy are not personally liable for this debt. However, it needs to be noted that Bill had given a personal guarantee for the loan. At the same time, the shares given to Pansy remain unpaid. As a result, these members can be held liable regarding the debt.
A proprietary limited (Pty Ltd) company is a company limited by shares. In this case, the shareholders are providing more protection regarding the liability faced by them concerning the debts of the company.

The other form is unlimited proprietary (Pty) company, which share capital, is similar to a limited company, but in this case, the liability of the members of the company is not limited. 
Issue: the issue is if the company formed by Ali can be treated as a separate entity and therefore Ali cannot be considered to be in breach of the covenant that was present in the contract concluded with Pop-a-Pill Drug Company Ltd.
Rule: A company is considered by the law to be having its own distinct identity. Therefore, after registration, it is considered that a distinct legal entity has been created. The result of this legal fiction is that accompanies considered to be separate from its members or directors. However, there are certain cases, where the courts may decide to let the corporate veil and considered the company and its members as one. This can be done by the courts where the company is being used as an instrument of fraud (Gilford Motor Co Ltd v Horne, 1933).
Application: In the present case, Gee Chemicals Pty Ltd is only being used as a facade for the purpose of evading the terms of the contract. That was created between Ali and Pop-a-Pill Drug Company Ltd. This clause provided that Ali will not compete with Pop-a-Pill Drug Company Ltd for a period of one year. However, Ali immediately became the managing director of Gee Chemicals after he resigned from Pop-a-Pill.
Conclusion: under the circumstances, the court may pierce the corporate veil and consider Gee Chemicals Pty Ltd and its managing director, Ali as one and impose liability for breach of contract. 
Issue: the issue here is if the formation of a no liability company will be suitable for the needs of Digger? 
Rule: A no liability company can be described as a type of public corporation that is limited by shares. A no liability company can be used only in cases where the main activity of the company is going to be mining or oil exploration. The Corporations Act (section 112(2)) provides that a corporation can be incorporated as no liability corporation only if the conditions mentioned below are fulfilled:
The company has the share capital
It is clearly mentioned in the Constitution of the company that its sole purpose is mining; and
The corporation does not have a contractual right of recovering calls made on its shares by the shareholders who fail to pay them.
Application: if the president is also, the sole purpose of the company that is going to be formed will be mining.
Conclusion: In the present case, the formation of a no liability company will be most suitable for the present needs.  
If Mary is going to incorporate a new company, still it will have to pay the debts of Contrary Pty Ltd if the assets of this company have been transferred to the new company. 
The five differences that are present in the characteristics of two types of companies can be described as follows:

Shareholder and director requirement

the thing we A proprietary company is limited in size by its constitution. It should have:
At least one shareholder
A maximum of 50 non-employee shareholders;
Is not required to have a company secretary
Should have at least one director
On the other hand, a public company is required to have:-
At least one shareholder;
At least 3 directors (2 should be living in Australia); and
At least one company secretary.

Method of raising capital

Private companies are unlisted by definition. Therefore, they cannot be found on the Australian Stock Exchange. These companies are not allowed to raise capital by trading their shares to the general public. Instead, they have to generate funds from outside the public markets.
As compared, the public companies can be listed on unlisted. The shares of listed companies are displayed on the ASX. They are allowed to gather money by offering their shares to the general public.
Shareholder liability
A shareholder is an owner in part of the company. But the liabilities of the shareholders regarding the debts of the company are generally limited. There are two liability subcategories in case of private companies:
limited by shares
Unlimited share capital
Public companies have four liability sub-categories:
Limited by shares
Unlimited share capital
limited by guarantee
no liability
Regulators
The regulatory bodies in case of companies differ on account of the fact if they are:
Private or public company; and
Listed on unlisted company.
Disclosure requirements.
Usually, the disclosure requirements in case of private corporations are not as severe as in case of public companies. Least disclosure requirements are present in case of small private companies.
Issue: the issue is related with the breach of duty by Simon
Rule: the promoter is not a trustee or an agent of the company. The reason is that the company is not in existence as yet. Therefore the correct way in which the legal position of the promoter can be described is that he has a fiduciary position towards a company that is going to be formed.
Application: A promoter cannot be legally permitted to make secret profits. If it is discovered that in a particular transaction related with the company, the promoter had made a secret profit, the promoter will be liable to refund the same to the corporation.
Conclusion: in the present case, Simon is in breach of his fiduciary duties.
Issue: the issue here is if the telephone company has any right against the company or Simon?
Rule: the law provides that a contract created by the promoter can be enforced against the company only if the contract has been ratified by the company after its formation.
Application: If in the present case, the directors of Cosec Pty Ltd. decide to opt for another telephone system, the telephone company can claim damages from Simon.
Conclusion: the telephone company has the right of action against Simon and not the company.
Issue: the issue there is related with the indoor management rule, and his engines that can be made by third parties under the corporations act, sections 128 and 129
Rule: according to the corporations act, there are certain statutory exemptions that can be made by outsiders while dealing with a company. As a result of these statutory assumptions, it is available to the third parties to assume that while entering into a contract, all the rules related with internal management of the company have been complied with.
Application: in the present case, Dodgy Pty Ltd can assume that the directors of Digitup NL have the authority to enter into contracts for operating tourist business in outback Australia.
Conclusion: Here, Digitup NL will be bound by the contract created by its directors with Dodgy Pty Ltd.
Issue: the issue here is related with the enforceability of member’s contract.
Rule: according to the law, the Constitution of the company has to be treated as a contract created between the company and its members. However it needs to be noted that this contract and be enforced by the members against the company only in their capacity as the members of the company and not in any other capacity.
Application: in the present case, Gary Granite is trying to enforce a provision of the Constitution of the company in his capacity as the senior geologist, and not as a member of the company.
Conclusion: in the present case, Gary cannot rely on the clause in order to remain the senior geologist of the company.
Issue: the issue here is if Judy is bound to follow the orders to sell her shares to Bob Marley?
Rule: In Gambotto v WCP Ltd. (1995), the High Court had stated that the holders of shares have property interest, and consequently, the company can be allowed to interfere with the rights of the minority shareholders only if doing so is for a “proper purpose”.
Application: in the present case, the order has not been issued by the company for the proper purpose.
Conclusion, consequently, Julie is not bound to follow the order received by her.
Issue: the issue there is if the directors are right in issuing shares through a single investor?
Rule: in Australia, certain requirements have been prescribed for the companies that have to be fulfilled in order to raise capital publicly. In this regard, disclosure documents are required under chapter 6D, Corporations Act.
Application in this case, the directors of Indahouse Pty Ltd have decided to offer shares only to a single investor and the other members could not participate in it.
Conclusion: the directors of the company are not correct in issuing shares in this way.
Issue: the issue is related with the authority of Marie.
Rule: the law provides that the agent acting on behalf of the company who has express or implied authority may bind the company to the contract created by such agent on behalf of the company.
Application: in the present case, Marie was the managing director of the company. Generally the MD has the authority to enter such contracts.
Conclusion therefore in the present case, the contract created by Mary is enforceable against Tipsy Ltd.
Issue: in the present case, the authority of Pierre had to be considered. 
Rule: agent should have express or implied authority to bind the company to the contract created by it.
Application: Pierre was the company secretary as a result, he did not have the express or implied authority to enter contracts on behalf of the company.
Conclusion Tipsy Ltd is not bound by the contract created by Pierre. 
Issue: if the contract created by Renee is enforceable against the company?
Rule: the person should be acting as an agent of the company at the relevant time and authority should be provided to such an agent with binds the company to the contract created by such an agent.
Application: in this case, the contract created by Renee can be enforced against the company.
Conclusion: Tipsy Ltd. is bound by the contract created by Renee.
Answer 12: there are certain circumstances where it is not necessary to comply with the requirement of providing a disclosure document (prospectus) while raising funds. Therefore, a prospectus may not be required if the offer is in personal offer and if it has been made to less than 20 persons in the last 12 months, or if the new offer will not effect in raising more than $2 million in such twelve months.
The Corporations Act provides that proprietary limited companies having less than 50 non-employee shareholders can raise funds (i) from the present shareholders and employees of the company or its subsidiary; and (ii) from the general public, if a disclosure document is not required for the fund-raising. 
Section 710 provides that a prospectus should contain all information that would be reasonably required by the investors and their professional advisors for making informed evaluation of the matters that have been mentioned below. However, the prospectus should contain this information (a) only to the extent that reasonably expected to be found in the prospectus by the investors or their professional advisors or (b) under the circumstances, should have reasonably obtained information by making inquiries.  
In the present case, StuffUp Ltd is required to issue a supplementary or replacement prospectus. These need arises when there is a way to affecting any issue present in the prospectus or a major new method arises after the prospectus has been lodged with the ASIC due to which the information mentioned in the prospectus may become false or misleading or when new circumstances arise, which need to be mentioned in the prospectus. 
Preference shares come within advantage of high priority claim regarding the assets of the company in case of insolvency. These shares also receive a fixed dividend distribution. Generally these shares do not have voting rights attached and they can be converted into ordinary shares.
On the other hand, the ordinary shares have a lower priority for the assets of the company. They only receive dividend at the discretion of the management of the company. Generally these shares are entitled to one vote per share. 
Share reduction takes place when the shareholders of the company are required to shell a part of their shares back to the company. In case of share repurchase, the company repurchases the shares back from the shareholders. 
Issue: the issue here is related with minority oppression.
Rule: the law provides that when the majority shareholders of a particular Corporation has acted in a way that is unfavorable for the minority shareholders, a remedy has been provided by the law to the minority shareholders.
Application: the majority has passed the resolution according to which the dividend rate for preference shares was going to be reduced from 10% to 8%.
Conclusion: in the present case, Rupert may seek a remedy from the court if it can be established that the conduct of the majority shareholders can be described as oppressive.  
The doctrine of capital maintenance provides that a corporation should get suitable consideration for the shares issued by it and having got the funds, it should not pay it back to the members apart from under certain cases. Like this, the doctrine provides a basic principle of the corporation’s law and is still alive. 
(i) A share buyback is a mechanism which allows the corporation to buy back its own shares from all of some members of the company. According to Corporations Act, 2001, the share buyback is regulated by the ASIC. Therefore, Rich, Ltd. is required to follow the procedure provided by the ASIC in this regard.
(ii) Selective share buy back takes place when the company is not going to offer the buyback to all the shareholders of the company equally and it conducts a selective buyback. In the present case, Poor Ltd is required to follow the procedure related with selective buyback.
(iii) An equal access buyback takes place them all the shareholders of the company are provided an equal opportunity to access the buyback, in proportion of the shares held by them. In this case, Massive Ltd. is involved in equal buyback. 
References
Gambotto v WCP Ltd. (1995) 128 CLR 432
Gilford Motor Co Ltd v Horne [1933] Ch 935
NSW v Commonwealth (1990) 169 CLR 482
Legislation
Corporations Act (section 112(2))
Section 1.5.1 Corporations Act, 2001
Section 45A(1), Corporations Act, 2001
Section 9, Partnership Act

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