Corporate Law For Business Dealing Operations

Partnership

Describe about the Corporate Law for Business Dealing Operations.

As per the case information, it is apparent that Jack, Jill and Max are successfully engaged in operating a business dealing with sale of trucks for the last 12 months. However, it is imperative that the business structure needs to be formally organized. While there are choices with regards to business structures such as sole proprietorship, trust, company, partnership but the choices with regards to appropriate business structure in the given case is limited to either company or partnership. In order to ensure that the business growth is not hampered and business needs are adequately taken care of, the formal business structure has to be defined by the owners of the business (Latimer, 2005). The potential implications of both partnership and company business structure have been presented below.

In accordance with Section 6, Partnership Act, 1963, any relationship in which two or more people agree to operate a business with the intention of making money is termed as a partnership. The partners tend to have fiduciary duties towards each other as emphasized in Birtchnell v. Equity Trustees (1929) 43 CLR 384. Further, the mutual participation concept forms the basis of any partnership relationship as highlighted in Green v. Beesley (1835) 2 Bing N C 108.

The advantages of the partnership structure are highlighted below (Davenport & Parker, 2014)

The legal formalities associated with the formation of partnership are minimal and can be completed in a short time.
Since there are multiple partners, hence the workload is divided and also the means of raising financing is higher. Besides, knowledge sharing is higher as compared to a sole trader.
The sharing of profits and associated liabilities is well defined from the partnership agreement.

There is joint liability of partners with regards to actions enacted by individual partners also (Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11).
Interest transfer cannot be unilaterally implemented by a given partner without mutual consent amongst all partners.
The partners are personally liable for the liabilities of the business as highlighted in Re Buchanan & Co (1876) 4 QSCR 202 case.

A company structure operates under the aegis of Corporations Act 2001 and may be either limited by shares or guarantee (Pathinayake, 2014). The potential implications of this structure for the shareholders are indicated below.

The company structure has a legal entity of its own which is separate from the owners in accordance with Section 124.
The personal liability in case of losses and insolvency is zero for the owners unless personal guarantee has been explicitly extended.
Accessing capital markets for incremental funds along with transfer of interest by shareholders is highly facilitated thus providing higher liquidity and exit options.

There are legal hassles involved in the setting up of a company which takes cost and time.
The reporting requirements on a periodic basis are comparatively greater as compared to a partnership structure.

Recommendation & Conclusion

In the given case, considering that the Jack, Jill and Max are involved in the truck business, it would be advisable for them to opt for the company structure only. This is recommended as the business would potentially require high amount of capital for further expansion which can be easily raised through dilution of equity. The capital needs would be higher as the business is continuing to grow at a fast pace (Harvey, 2009). Additionally, the potential liabilities and losses in the business could be potentially large and hence it is best advised that in order to erase the personal liability of the owners, the company structure must be chosen. Also, it would provide tax benefits in the form of a host of concessions and also the tax rate would be the corporate rate which is beneficial (Lindgren, 2011).

On account of Betty’s actions, will there be any corporate liability for Child Toys Pty Ltd?
With regards to deeds of Charles after retirement, can Child Toys Pty Ltd potentially take any legal course of action?

Advantages

The liability of employers continues for the acts carried out by the employees during their employment. This is also true in cases when there is no intention on part of employer to indulge in the same as apparent from the verdict of the Amaba Pty Ltd v Booth [2011]. This liability on the end of employer stems from the understanding of the agency law whereby the employees are acting as agents of employers and hence, the liability of the actions of the employees eventually rests on employers as they in the capacity of the principal can potentially alter the conduct and behavior of the agent or employees (Paterson, Robertson & Duke, 2015).

Further, as represented in the Keramianakis v Regional Publishers Pty Ltd, [2009], employers have a vicarious liability and have to adhere to the accepted doctrine of ‘respondeat superior’ as per which the responsibility of the employee’s conduct and actions eventually rests with the employer on account of being the superior party (Lindgren, 2011). Also, Section 5Q of the Civil Liability Act, 2002 states that in the event of work being done by a particular defendant conducting a duty that is delegable, then the negligence tort and potential liabilities would fall on the defendant (Pathinayake, 2014). Also, in Maxwell v Highway Hauliers Pty Ltd, [2014] case, it was ruled that if a contract or sale deed has been enacted owing to misrepresentation by the defendant and the interests of the plaintiff are adversely impacted by the misrepresented information, then the defendant would be held liable for providing compensation to the plaintiff.

While restraint of trade agreements are frequently employed, however, in majority cases there are void. This is usually implemented in the form of a restrictive covenant whereby there is a certain cool off period during which the leaving employee cannot compete the employer in the same or similar line of business as he/she may possess confidential information about the business and the same may be used to adversely impact the valid business interests of the employer (Latimer, 2005).

In the Aristocrat Technologies Australia Pty Ltd v Allam, [2013],it was advocates that confidential information is present in every business and if the employee makes attempts to exploit the same that too for hurting the legitimate business interests of the ex-employer, then the employee would be acting in bad faith. In such cases, a restrictive covenant would be held enforceable as is evident from the verdict in the Wingfoot Australia Partners Pty Ltd v Kocak, [2013] case. Hence, with regards to enforceability of restrictive covenant, it would be valid and enforceable for protection of business interests provided it is not expansive in scope (Pathinayake, 2014).

Disadvantages

As per the case details, Betty is an employee of the company i.e. Child Toys since she is acting as a salesperson. She misrepresented material information with regards to the toys on purpose even though she was aware that the claim being made to the customer is false. The misrepresentation was made with the intention of ensuring the execution of contract but in the process, damage has been caused as a child has sustained serious injuries due to the chemicals present in the toy supplied by the company. The company i.e. Child Toys would have to bear the liability on account of Betty’s action as the employer is liable for the actions taken by employees. However, it needs to be also ascertained as to why Betty lied as if it was not dictated by the employer, then she has breached her fiduciary duties towards the employer.

As per the information provided in the case, it is evident that Charles owing to his senior position had a profound understanding of the requirements of the senior clients and also identifies them well due to frequent dealing. As part of his termination from the firm, a restrictive covenant has been enacted while prohibits him from competing with Child Toys for a period of two years. Despite this, he along with his wife has started a business which directly competes with the previous employer. Moreover, the new company tends to approach the clients of the previous employer for business. Apparently, this is violation of the restrictive covenant and the conduct of the Charles is clearly not in good faith as the information gained due to his position is being abused against the same clients as Child Toys. In this case, there is no denying that indeed restrictive covenant would be enforceable and legal action can be initiated against Charles by the company.

Conclusion:

Based on the discussion above, the following are the conclusion drawn

Child Toy would be liable for the misrepresentation caused by Betty.

The restrictive covenant would be enforceable on Charles and hence Child Toys can initiate legal action to safeguard their valid business interests.

References

Statutes and Case Laws

Section 20, Partnership Act, 1963

Section 6, Partnership Act, 1963

Section 124, Corporations Act, 2001

Section 444F, Corporations Act, 2001

Amaba Pty Ltd v Booth [2011]. 283 ALR 461;

Aristocrat Technologies Australia Pty Ltd v Allam (2013) 297 ALR 406