The issue is to assess the significance of the findings of Salomon v Salomon & Co Ltd in relation to the concept of separate legal entity and piercing of the corporate veil.
The leading English case of Salomon vs. Salomon & Co Ltd [1897] AC 22 led to the establishment of the separate legal entity which is the most crucial feature of a company. In the case, there were seven subscribers of the shares of the company that were Salomon, his wife and five children. Salomon was a secured creditor as well in capacity of being the debenturholder. In the event of insolvency of the company, the amount for the payment to the creditors was insufficient. Thus, the creditors raised the argument that Salomon by virtue of being shareholder did not have the right in the remaining assets of the company. The argument was raised that the company and Salomon were not different person. However, it the court pronounced its judgement that though the business management was conducted by Salomon as in case of earlier proprietorship business, yet the company and Salomon were two distinct persons in the eyes of the law.
It must however be noted that such a corporate veil is not of permanent nature, and thus prevents the members of the company from carrying on the business in an inefficient manner, in the company name. According to the provisions of the Corporations Act 2001 (Cth), the courts can lift the corporate veil if the company has been formed and used as a vehicle for fraud, or when there is a known breach of fiduciary duties by the directors of the company, or engagement of directors in insolvent trading and the failure on the part of the directors to prevent the insolvent trading.
Other than the Companies Act 2016, there are also other laws that allow for the directors of the company to be personally liable for certain debts of the company. They are the Employees Provident Fund Act 1991and the Income Tax Act 1967 Other than the Companies Act 2016, there are also other laws that allow for the directors of the company to be personally liable for certain debts of the company. They are the Employees Provident Fund Act 1991and the Income Tax Act 1967The following segment highlights the judicial exceptions of the corporate veil. It is to be noted that when it comes to the judicial exceptions, there is no exhaustive list for the lifting of the corporate veil.
Post the reasoning of the court, there has been drawn varied legal implications of the incorporation of the companies. By the virtue of the principle of the separate legal entity, business contracts can be entered by the company in its own name using its own common seal. Thus, even if the contracts on behalf of the company are entered into by the directors, such contracts comprising the properties or assets would be in the name of the company. In addition, the corporate veil ensures the limited liability of the members of the company. This means that in the event of the insolvency of the company, the personal assets of the members shall not be used or called for addressing the dues of the creditors. The third implication is that the company can be sued by the outsiders in its own name and vice versa.
Conclusions:
On the basis of the discussions conducted in the previous parts, it can be rightly concluded that the principle of separate legal entity is central to the company formation and leads to varied implications in the manner of conduct of businesses by corporate.
The issue is to assess the varied business structures for the conduct of the business.
A proprietorship business structure is the simplest form of business structure wherein there is only one individual who is solely responsible for the conduct of the business as well as for the investment. In addition it is to be noted that the personal assets are not secure in the sole proprietorship and can be used if the business funds are insufficient to address the claims of the creditors (Australian Government, 2022). The yet another business structure is that of partnership. It refers to an agreement between two or more parties for the conduct of the business, and such a business must be on continuous basis (Small Business Development Corporation, 2022). The significant feature of this business structure is that there is a division of business management as well as capital sharing responsibilities. While this business structure is also easy to form and dissolve, there are certain disadvantages as well. For instance, as per the Partnership Act, 1891 there is unlimited liability of the partners, and one partner shall be responsible for the acts performed by the other partner in relation to the business, and partnership agreement. Further, the key features include the agency relationship, the disclosure of profits or contracts if any made to other partners. The third and most significant form of business structure is that of the company which is further divided into two categories namely the public company and private company. The most distinguishing feature of company formation is that the liability of the members is limited to the unpaid amount on the share capital held. Further, there is a longevity of the business, as the members are viewed as separate from that of the company. While in the public company, the shares are offered for subscription to the public at large, in case of the private company, the shares are held by the close family members, friend and likewise. The disadvantage of company formation are in form of complex business management, as the business must be conducted in accordance with the guidelines published by the Corporations Act, 2001 (Cth).
On the basis of the discussions conducted in the previous parts, it is recommended to form a proprietary (private) company for the conduct of business. In this manner the control of the company can be effectively retained with family members and an efficient drafting of constitution and the articles of the company can lead to the segregation of responsibilities and duties, matters of profits sharing, and other issues pertaining to resolutions of conflicts and internal management.
The issue is to assess the validity of the contract between Harmony, the director of MusicWithMe Ltd and Trevor.
In order for a contract to be valid in the eyes of the law, it must comply with certain conditions that are offer and acceptance leading to the agreement between the parties, presence of consideration, the presence of legal intention, the parties must possess legal capacity and that the terms and conditions must be certain. All the conditions must be satisfied simultaneously in order for an agreement to be regarded as enforceable at the courts of the law. It is imperative to note that the capacity of the parties has legal implication when the other party makes use of the disadvantage possessed by the other party to induce them to enter into contracts in a fraudulent manner.
In the given case, an offer for sell was made by Trevor to the Music With Me Ltd, which was accepted by Harmony upon signing the contract. Thus, there is an offer as well as acceptance. Though the contract prevents Harmony from entering into contracts solely, yet it is to be noted that as an outsider, rights of Trevor shall not be affected as he is not required to be aware of the internal management of company. It is to be noted that there is a consideration as well as certainty of terms and conditions. Further, Harmony was aware of the provisions of the contract and recognized that she did not possess the rights to acquire the instruments in the absence of Cadence at the time of purchase.
Conclusions:
The lack of compliance with the fiduciary duties by Harmony does not render the contract with Trevor as invalid according to Australian contract law.
The issue is to assess the obligations of Cadence and Harmony in relation to the preparation of a prospectus, and any legal issues that may arise along with the possible defence that may be used.
As per the guidelines of the Australian Securities and Investment Commission (ASIC), the prospectus of a company must be truthfully and comprehensively prepared and the presence of any false or misleading assertions therein would force the ASIC to take actions against the issuer. In such a case, the directors shall face civil and criminal liabilities for misleading the investors. However, there are certain defences available. The defence is available in the event of printing error being caused which cannot be controlled over by the directors in relation to the content on the page. In addition, it can be claimed that such statements were not significant, and that a reasonable investor’s decision shall no be influenced by the same.
Accordingly, in relation to the business of the company, the fact that the entire liabilities row is missing, the presence of inappropriate statistics on school music programs, and the misleading statements about consumer age; shall all fall in the category of false or misleading representations. Cadence and Harmony may make use of the defences listed as above.
Conclusions:
If the fact is proved that the error in question and misleading facts were known to the directors of the company, there shall arise criminal as well as civil penalties which can extend to imprisonment. In addition, Cadence and Harmony may also be required to return the profits earned if any, by virtue of the false or misleading representations.
References
Australian Government (2022). Business structures. Retrieved from:
https://business.gov.au/Planning/Business-structures-and-types/Business-structures
Corporations Act, 2001 (Cth)
Gilford Motor Co Ltd v Horne [1933] Ch 935
Partnership Act, 1891
Salomon vs. Salomon & Co Ltd [1897] AC 22
Small Business Development Corporation (2022). Partnership. Retrieved from:
https://www.smallbusiness.wa.gov.au/business-advice/business-structure/partnership
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