Company Law Form of Business Structure

Question: Discuss about the Company Law for the Form of Business Structure. Answer: 1. a) What type of business organisation are Aysha and Dilara currently operating Dilara and Ayesha are currently operating a partnership business. A partnership business is a business that is carried on by and between two and more than two owners[1]. For entering into partnership business there are three criteria that need to be fulfilled. The criteria are: i) there must be an agreement between the partners before commencing the partnership business, ii) the object of the business should be to share the profits earned, iii) All the partners or any one of them who will act on behalf of them should carry on the business[2]. Any person being the manager, lender of money, wife or child of the deceased partner cannot be called partners. To be called as a partner, a person needs to get into agreement for working as a partner and to share the profits of the business[3]. Here, in this case, the winery called Ankita have been inherited by Dilara and Aysha from their Great Grandfather and were running the concern since then. But as they are sharing the profit of the busine ss equally among them, Dilara and Aysha at present are running a partnership business. b) Whether their current business structure is the most suitable vehicle for selling part of the Brothersglen Winery to Polat or whether they should consider another form of business structure, and, if so, which one? Since Dilara and Aysha inherited the winery from their great grandgather, he liked the old thinga in the winery because of which the winery was going down. After some years of business, Diara and Aysha found that they did not have enough capital to continue with the business of the winery[4]. They need a huge amount to spend on the winery to restore it. Polat who was a French winemaker wanted to buy a part of the winery where he would be working as a Chief winemaker. As the money of Polat and his expertise is very much needed for the winery, Dilara and Aysha can sell a part of the Ankita winery to Polat. By selling a part of the winery they will include one more partner in their partnership business[5]. They can sell a part by making an agreement with Polat that he will be working as a partner in winery and will be working as a chief winemaker. As the winery needs more capital to run its business, it will be a wise decision to make Polat a partner of the business. By admitting a new partner, the existing matters of the business will get affected like revaluation of the liabilities as well as the assets, accumulated profits of the organization and the losses, profit-sharing ratio, capital contribution as well as the good will of the partnership business. The goodwill of the business is the real asset of the business as it will enhance the earnings of the business[6]. Goodwill does not have any physical existence and is earned by the service provided by the business. Goodwill helps in the profits sharing ration between the partners. While admitting a new partner, the existing business will get certain capital which will be brought into by the new partner. This capital will added to the existing assets and the liabilities of the business. The new partner will also have the amount of shares according to the capital brought in. the profit sharing ratio may be equal as before, may be according to the ratio as before. The amount of the capital brought into the business will depend on the partnership agreement. The capital contribution may not or may be in their profit sharing ratio. Whenever a new partner is admitted, it is decided by the partners to make their contribution proportionate to their profit-sharing ratio[7]. Therefore, the current operating business, i.e., partnership business is the most suitable vehicle to sell the part of the winery as they will get more capital that can be spend to restore the winery as well as the goodwill that will enhance their business and as a result it will increase their profit which will be divided amongst the three partners, Dilara, Aysha and Polat. Hence, Dialara and Aysha need not consider any other business structure to sell the part of the winery. 2. Rights of Leo as shareholder/member The issue of the case is that two shares of the Thomas The Tank Engine Pty Ltd has been purchased by Leo for $500,000. The said company manufactures train and sells to the retail stores. Leo is the companys non-executive director and is upset with the activities of the company. The companys reveneu has increased by 300% but he has not received any dividend. Ruby and Amanda are the executive directors who have decided not to pay any dividend for the current year. Both of them have arranged the company to provide two expensive cars on lease completely for their use. Leo attended the board meeting for the first time and enquired about the dividend policy and also objected the lease of the cars. Amanda and Ruby hold a board meeting and removed Leo from the board. In this case as Leo is the shareholder of the company as well as non-executive member, he has got certain rights as a shareholder/ member of the company[8]. He has got the right to attend general meeting and vote- Each share has the capacity of one vote. But there may be some kind of shares which does not carry voting rights. Since in this case the type of shares is not mentioned, it can be held that it is an ordinary share that carries one vote per share[9]. Being the non-executive member he has the right to attend the general meetings and to vote at the meetings. He has the right to the share of the companys profit- A company share its profit by way of paying dividends to its shareholders as per the share it holds. The company only pays the dividends if it has made any profit and has decided to distribute the dividends to an extent. In absence of any of the provision mentioned above, the company will distribute the dividend according to the proportion of the shares held by each of the shareholders. In this case, it is seen that the company has earned increase revenue by 300% but is not paying the dividend to its shareholders. The shareholder has the right to ask for the dividend to be paid by the company. He has the right to get final distribution on the winding up of the organisation- During winding up of the organisation; the remaining assets of the company will be distributed among the shareholder/member of the company after distributing it amongst the creditors. Here it has been seen that at the time of winding up, Leo has been removed from non-executive director and also did not get any assets as a shareholder[10]. The shareholder has the right to ask for the copy of the companys annual accounts by which he can look into the yearly financial activities of the company[11],. Leo has the right as a shareholder / member to get the copy of the companys annual accounts and also have a look into the share register so that he can go through the yearly activities. He has the right to see whether the company is running lawfully- the member/ shareholder has the right to see whether the company is working according to the Corporation Act and following the constitution of the company[12]. Only the members of the company has the right to sue the company if it working unlawfully. In this case, it is seen that the two executive directors Ruby and Amanda has decided not to pay the dividend for the current year although the company has earned revenue by 300%. They have also arranged the company to lease two expensive cars for them which will be used by them exclusively[13]. These activities of the company are quite unlawful and Leo being the member/ shareholder has the right to object such activities and sue the company for the same. 3. Discuss any liability of the directors of TACH Ltd in relation to these events. What are the consequences, if any of a breach of the Corporations Act The case referred herein is that the TACH ltd has entered into many new investments which includes a new coffee bean factory, and some other investments which is making a loss of money. The company held a board meeting to discuss about the loss incurred by the company. But the financial statement prepared by Erol instead of loss showing profit. Erol did not succeed to provide answer to the directors about the loss and Vanessa did not succeed to ask the questions regarding the statement made by Erol. The mistakes could not identified by the board of directors and has asked for more investigation[14]. According to section 180,181, 182, 184, of the corporation act 2001; it is the duty of the directors to work according to the provision mentioned in the sections[15]. Sec.180 of the act states that a director should discharge their duties with proper care that has been done by a reasonable person if he would have been the director of a company. Any judgment made by the directors of a company should meet up the requirements mentioned in subsection (1) of section 180. The judgment made by them should for the interest of the company. In this case, Vanessa being the managing director and Erol being the Chief Financial Officer of the TACH Ltd. and also the Non-executive member of the company should have worked with due care and diligence. Erols negligence in work has gone against the interest of the company. Therefore, there is a breach of section 180 and Erol is liable for the civil penalty under section 1317E of the Corporation Act. Section 181 and 182 states that the director or any other officer are bound to use their power and discharge the duties in an effective way and in good believe that it will proved to be a benefit for the company. The director or any other officer of the company should not use their position in a wrong way which will cause damage to the company. Erol has made the financial statement in a negligent manner that has caused a huge loss to the company. He is liable for the civil penalty[16]. Section 184 of the corporation act states that a director or any other officer is guilty of committing an offence if they do their work recklessly, failed to exercise their powers that has been provided to them because of their position and also fails to discharge their duties. The work done by the officer is in good belief but not for the companys benefit and is not been made for the proper reason. If any of the director or officer is acting against the said provisions, he will be guilty for the breach of the section. Erol is responsible for the breach of the section and is liable for the civil penalty. Section 189 of the corporation act states that if the director of any organization relies on the information provided by an employee or other officer of the corporation whom the director has the faith and believe to be competent in the matters concerned and can be relied upon; or is an expert or professional advisor of the matter concerned; or is another officer or director in relation to the matter within the authority of the director and the reliance made by the director was in proper belief and after self-governing estimate of the knowledge made by the director in respect to the directors information about the complex nature of structure of the corporation and also the reason for reliance of the director on the information or advise determines that the director has performed his part of duty, the reliance on the information or advise by the director is considered to be reasonable unless it is proved to be contrary. In this case, Vanessa has completely relied upon the information of the financial statement made by Erol as he is the Chief Financial Officer and has the expertise in it. Being the Managing Director of the company, it was the duty of Vanessa to go through the statement made by Erol. But due to lack of time she was not able to do so. Rather she relied on the fact that if there would have been any problem in making of the statements, Erol would have discussed the matter with her. But this reliance on Erol has proved to be contrary to the section 189. Therefore, Vanessa is also liable of the civil penalty for the negligence done on her part. According to the section 347A of the corporation act, the director should pass a solvency report or a resolution after every review date. If the company directors have submitted a financial report with ASIC between a time period of 12 months prior to the date of review, the subsection (1) does not apply. The offence on this section is an offence of strict liability[17]. In the case referred herein, as the directors of the company failed to identify the mistake of the financial statement made by Erol and further investment in the ventures making loss, the directors of the company could not pass solvency report after reviewing the financial statement and therefore, the TACH Ltd. become insolvent. 4. An auditor owes a duty of care to their clients, and not usually to third parties who rely on the auditors report. What is the policy reasoning behind this concept? An auditor is a person who is appointed to check the accuracy of the financial records of the business carefully. An auditor can be an internal auditor, external auditor or an independent auditor that can work for the accounting firms in the private or public sector. The auditors might work for other different organisation like the state government, IRS etc. An auditor has or in other words owes a duty to their clients because there is a contract existing between the auditor and the client[18]. The auditor has an implied term in the contract which is not expressed in proper words that the auditor will perform his function with reasonable care and will use his skill while undertaking the audit done for the client. There is the presence of duty of care under the law of Tort of negligence because of the close relationship between the client and the auditor. Negligence is the way by which different types of harm may cause to a person, by not taking any proper precautions as a person should have taken in the particular situation to prevent or avoid the harm as can be foreseen. Any harm caused negligently though a person was not careless but tried to be careful and then it will not be considered as negligence. The plaintiff if fails to meet the level of care which is required for its own safety and protection which helps in incurring loss is c alled contributory negligence. It is held that the duty of the auditor is to check on the work of the management and the board and the financial activities of the management and the auditor cannot give any sort of excuses for the fault done by the management by just showing the reason that he is in the position of an auditor and not the management. It is the statutory duty of the auditor to direct and advise the client about its financial position and the risks that the firm or organization can have[19]. The auditor should provide the annual report of the financial position of the concerned firm or organization. The auditor should make the report of the foreseen damage, i.e., loss that can be incurred by the firm while making any financial dealings and the auditor should advise and help them to avoid that damage. In the famous of AWA, it was for the first time held in Australia, that the contributory negligence by the activities of the client have been accepted as one of the reason to subdue the damages that has been caused to the client because of the negligence of the auditor. But before charging an auditor, the duty of care on the part of the auditor needs to be established. This can be done with the three-stage test for the duty of care. To prove negligence, the claimant should successfully prove the claim by proving that there was an existence of duty of care that was owed by the defendant, i.e., the auditor. While deciding whether the defendant or the auditor in this case owes any duty of care, the court goes for a test in three stages. Whether there exists any relationship of proximity amongst the parties. Whether the damage as claimed by the claimant was foreseeable and could have been avoided by the defendant. Whether it is just, fair and reasonable to enforce the duty of care upon the defendant. If these tests taken by the court satisfy the court that the auditor is liable for the damage caused to the client by the negligence of the auditor, the auditor will be punished for the negligence done on his part. Therefore, it can be seen that the auditor owes the duty of care to the client and not to the third party. What must a third party prove in order to be successful in negligence against an auditor? Do you agree or disagree with this concept? The High court of Australia in the famous Esanda case has established that the duty of care of the auditor to the third party under the negligence in law of Tort only exists in the case where the auditor himself bring on the third party to rely on the final audited financial report. The auditor can issue a privity letter in which they confirm a reliance of the third party on an audited financial report. The main reason for this letter is to build a relationship with proximity to establish the duty of care to the third party by the auditor. Therefore, the third party in order to prove the negligence successfully against the auditor, need to show that there has been an existing relationship between the client and the third party as the auditor has provided a privities letter. The third party has to prove that the financial report on which they have relied on has been negligently misrepresented by the auditor. This misleading financial report has caused huge damage to the third party. The third party should also prove that the false representation of the final audited financial report was foreseen and could have been easily rectified. Bibliography ASIC. (2016). Members of company. Retrieved from asic.gov.au: www.asic.gov.au For business Running a company ATO. (2016). Choosing your business Structures. Retrieved from ato.gov.au: www.ato.gov.au Business Starting your own business ATO. 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