Essence is an apple farmer living in Judbury in Tasmania. After a recent bad experience where she attempted to work with an apple juicer to expand her business opportunities she wants to take a cautious approach in business and correctly document any future business dealings that she may enter into.
A neighbour – Scarlett has recently purchased a small commercial building in Judbury. This building has received council approval to operate as a bakery/cafe. Scarlett knows that Essence is a good baker and has a number of recipes involving apples and other fruit that could be sold in the bakery/cafe. Scarlett spent $200 000 buying the building and asks Essence to invest $50 000 and to consider working in the bakery/cafe four days a week. Scarlett confirms she will work two days per week.
Scarlett suggests that they share any profit that the business makes as follows:
– 10% to be provided to the local council annually to use to enhance the local environment;
– 60% to Scarlett;
– 30% to Essence;
Scarlett suggests that this arrangement be reviewed after a year. Scarlett also informs Essence that she intends to invite two more friends of hers to become involved in the bakery/cafe if after a year the business is running profitably. Scarlett believes that these people will be able to invest funds into the business that will enable it to grow and extend it into a licenced restaurant and catering business.
1.
What type of business structure would you suggest that Scarlett and Essence consider and why?
In the aforesaid case, i will suggest Scarlett and Essence to form a partnership firm. Analysis of the scenario of the case suggests that the formation of a Partnership Company will provide a good advantage for both Essence and Scarlett for the smooth running and profitability of the business. It is also considered that the partnership company is less expensive to get itself registered under the provisions of the Partnership Act introduced by the Australian Government. The formation of a partnership firm provides the following advantages;
It is cost for forming a partnership is very less and easy.
It provides a Tax File Number to the business which provides the recognition to the business legally.
The applicant also gets the Australian Business Number for carrying on the business.
The partnership form of business will not work like sole trading business and that the business partners are liable for the debts and profits of the business.
The management and control are being shared by every partner involved in a partnership.
The partnership firm does not have to the pay the tax on income as prescribed by the Australian Taxation Office. The partners are personally liable to pay tax based on their incomes.
As compared to the company form of business the formation of a partnership firm is less expensive and less time consuming. In the aforesaid case, Essence seems to be the head of the business while Scarlet also acts as a partner to her. According to the suggestion provided by Scarlett they will share the profits and losses of the business in the following ratio;
60% to Scarlett
30% to Essence
This shows that the profit sharing ration is based on the investments made by both Essence and Scarlet towards the business. In future also Scarlett also wants to include two more friends into this business who can also act like the partners of the business based on their investment.
It is to be noted that it is a small business and is also a new start up firm. The formation of any other business structure in my opinion would be expensive and time consuming. A partnership firm will get the business a legal recognition. Analysis of the terms and condition and nature of the transactions that are being placed for this business shows that for this business the partnership business structure is more suitable as compared any other form of business.
Assume the company now has four directors – Essence, Scarlett, Marigold and Daisy. Neither Daisy nor Marigold work in the bakery/cafe but each have contributed money to enable the bakery/cafe to expand and Marigold does the business’s bookkeeping. All shares in the company are owned by the four directors in the following proportions:
iii. Marigold – 10 shares
The four shareholders have a disagreement when Marigold says she should be paid for undertaking the bookkeeping work. Scarlett calls a meeting and proposes that the other three shareholders pass a resolution removing Marigold as both director and shareholder. Marigold paid $20 000 for her shares but Scarlett believes the business has not increased in value so she proposes that Marigold not be repaid any of the funds she paid to acquire her shares.
2.
Provide some advice to Essence of the likelihood of such a resolution as proposed by Scarlett being successful and if Marigold might have any rights to contest such a resolution should it be passed by the company?
The sections 203A – 203F of the Corporations Act 2001 (Cth), Australia provides the rules and guidelines for the resignation, retirement and removal of the directors. The following are some of the grounds and conditions on which a director of a company can be removed from the his/her directorship;
By way of Resignation
Invalid Appointment
Removal by Members
Breaching of the provisions provided by the company
Becoming insolvent
Death
Disqualified from managing a corporation
In the aforesaid case, Marigold can be removed as director of the company by the removal of the members. Here, all the other three directors of the company had an disagreement regarding the proposal made by Marigold to get him paid for the work done by him for the company. If Scarlet, Essence and Daisy are of the opinion that they should remove the Marigold from her current directorship, they can do so by passing a resolution. According to the provisions provided under section 203C of the Corporation Act 2001, a proprietary company can remove a director from the office and also pass a resolution for a appointing another director in the place of the removing director. The existing directors of a company can remove the director of a company by voting of the majority of the directors, if the constitution allows. However, there are certain exceptions to such removal such as if an individual is the executive director of the company the other directors should keep in mind that there must not be unfair dismissal of the director. As Executive directors are employees as well as directors of the company and their dismissal as employees is governed by employment law.
Here, Marigold is not the executive director of the company though she has invested some amount of money in the business. She is also not an employee of the company. The other directors can remove her from the post of the director. There are no specific provisions for the rights of removed directors according to the Corporation Act 2001.
In case of a public company, the board or other directors does not have the authority to remove a director. It is because a public company cannot remove a director from the directorship without the agreement of the shareholders. According to section 203E of the Corporation Act “Any resolution, request or notice of any of the directors of a public company which purports to remove another director is void”.
A customer – John becomes ill when he eats a chicken pie made in the bakery/cafe. On the day when John eats in the bakery/cafe neither Essence nor Scarlett where working. They had left the new apprentice, Azalea in charge. She had not prepared the chicken correctly, leaving it out of the fridge for too long. She also did not cook the pie for the required cooking time.
3.
Advice Essence if the company or Azalea is liable for any compensation that John might claim as a result of his illness and the time had to take off from work to recover from the food poisoning?
In the aforesaid case, it is clear that Essence is not responsible for the conduct of Azalea. Here, the company is liable for the claim of the compensation filed by John, Azalea was an employee of the company and she is representing the company as a supervisor or manager. The law does not recognize Azalea but the company for this kind of conduct.
In this case, John can file a case in the consumer court against the company for the illness he suffered and claim for the compensation for such illness. In such scenario the company as a artificial and separate legal entity has to pay such compensation to john. According to the provisions of the Corporation Act 2001, once a company gets registration, it gains the separate legal status. The members of a ‘limited’ company are not liable (in their capacity as shareholders) for the company’s debts.
According to the provisions of the company law , a company has legal existence distinct from its members and that it is separate from its directors, managers, owners, operators and employees. A company can have its own property and has its own rights and liabilities. The money and other assets of the company belong to the company only and it will be used for the company purposes. A company also has powers as that of an individual such as Own or dispose of assets and property Can enter into Contract Can sue and can be sued
Here, the company will be liable for the acts done by its employees as they work as the representative of the company. The law does not recognize its employees of the company but the company. The company as a artificial person will face the consequences of the illness suffered by john.
Essence, Scarlet or any other directors of the company are also not liable for the damages suffered by john as they act as only the agents of the company. Though they have made investments in the company and are the shareholders of the company but they are not liable for any loss or debt of the company. In case of Liquidation as well the directors of the company does not have the liability to suffer from such kind of situation. The company is liable for its loss and debts.
References
Alistair Jaque and Swaab Author. (2008, December 17). Australia: You’re Fired! – Dealing With The Removal Of Directors From The Board .
Commission, A. S. (n.d.). Directors’ liabilities when things go wrong. Retrieved from https://asic.gov.au/: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/
Commission, A. S. (n.d.). Passing a Company Resolution . Retrieved from https://asic.gov.au/: https://asic.gov.au/for-business/changes-to-your-company/passing-a-company-resolution/
Commission, A. S. (n.d.). Replaceable rules outlined. Retrieved from https://asic.gov.au/: https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-and-replaceable-rules/replaceable-rules-outlined/
Commission, A. S. (n.d.). Resigning as a director. Retrieved from https://asic.gov.au/: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/resigning-as-a-director/
directors, A. I. (2017, October 31). Resignation or removal of a director .
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