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The given facts of the problem submit that Andy was a sole trader for many years. But, his children forced him to convert his business of a sole trader into a Company. The main intention of the children was to gain from the prosperity of the business by becoming the shareholders of the same. Andy converted his business into a company and two kinds of shares were issued. Class A shares has the voting rights and are fully owned by Andy & Class B shares does not has any voting rights but may receive dividends and are owned by his children and wife. The newly constituted company was financed by Andy by taking charge over all the company assets. However, due to economic slowdown the company was in financial crisis. During this time the company creditors were paid off. Andy being the secured creditor was paid first resulting nothing left for the rest of the creditors.
From these factual situations, there are few corporate law issues that originate which are considered after due understanding the relevant law. Thus, the main issues that arose are:
- Is the structuring of the company by Andy was as per the provisions of the law?
- Who is authorized to receive funds of the company on winding up, that is, secured or unsecured creditors?
- Is it necessary to wound up a company without paying the dues to all the creditors?
- Is it right to alter the internal rules of a company?
The Corporation Act, 2001 is the relevant law the deals with the given factual situation and raised issues. There are several types of companies that are registered, such as, private company, public company etc. whatever is the character of the corporation, it must be properly governed with adequate controlling system. This concept wherein a company is authorized adequately, controlled, managed, etc perfectly comes under the preview of corporate governance. It is necessary that there must be good corporate governance of a company so that the shareholders interest does not hamper at any costs. The concept of Corporate Governance was rightly established in the leading case of ASIC v Macdonald. [Hargovan A, 2009]
As per section 45A of the Corporation Act, 2001 a proprietary company is a company which has at least 1 shareholder [s 45A, Corporation Act, 2001]. Apart from that it was submitted under sub section 2 of section 45A that a proprietary company can be considered as a small proprietary company on the fulfillment of at least 2 important conditions. These are:
- The consolidated revenue must be at most $ 25 million for a financial year of the company including the companies controlled by the company, or;
- The consolidated gross asset revenue must be at most $ 12.5 million for a financial year of the company including the companies controlled by the company, or;
- The company including the companies controlled by the company must have at most 50 employees except the same is modified by any regulation.
If from the above stated conditions, any of the two are satisfied than a proprietary company can be considered as a small proprietary company.
Further, when a company is formulated than the first tasks that is normally done is the issue of shares. Shares can be equity, preference etc. further, when issuing the shares, specification can be made with respect to voting rights, that is, shares with voting rights and sharing without voting rights with right to receive dividends. [Australian Investor Association, 2012]
A company also requires finance to run a company. Persons who lend money to the company are considering as creditors of the company. These are secured and unsecured creditors. Secured creditors are those creditors which have the right to receive funds upon the dissolution of the company on priority basis. And un-secured creditors are those which receive funds after the dues of secured creditors are paid off. [ASIC, 2012]
Also, guidelines and rules are issued by ASIC that a company can in no circumstances can be wound up unless and until all the liabilities of a company is paid off. If any creditors remains unpaid than a company cannot be held eligible for winding up.
Also, as per section 111J of the Corporation Act, 2001 the Directors of the Company has power to alter the internal rules of a company. By using the voting right, a shareholder of a company has the power to change the guideline with respect to the borrowing strategy of a company. The change is held to be perfectly valid. [s 111J, Corporation Act, 2001]
Thus, these are some of the rules which are required for the analysis of the raised issues.
Application of law
After understanding the relevant law that guides the raised issues, the issues are dealt.
- Andy has formulated his sole trading business into a proprietary company. Further, Andy fulfills the criteria set out under section 45A (2) of the Corporation Act, 2001. Thus, the structuring of the company by Andy was as per the provisions of the law and is perfectly valid under the eyes of law.
- When a company is winding up than the first right to receive the dues is of secured creditors. It is only when the secured creditors are paid off than the unsecured creditors are paid.
- Andy needs to pay off all his liabilities before winding up the company as per the guidelines of ASIC.
- It is submitted that Andy is a shareholder with voting rights and thus has power to modify the internal management rules of the company. By altering Andy can make himself secured creditors and safeguard his position. But in no circumstances the company can be wound up before the liabilities of the company are paid off.
It is thus concluded that it is necessary that when a company is transformed from one way to another than all the legal provisions must be complied with. Also, it is the basic right of the secured creditors to receive their dues when the company is winding up. But a company can in no circumstances be wound up if the liabilities and the dues of the company remain unpaid. Further the internal rules of the company can be changed if the officer is authorized. Thus, the corporation Act, 2001 is an important legislation which guides the working and functioning of any company.
As per the given facts of the case Leo and Melanie formulated a private company under the name of Halcyon Daze Pty Ltd. The company was established to carrying on the business of internet service provider. Upon incorporation of the company Leo took a lease of a property in his own name and the company was operating from the said lease property. In order to understand the actions of Leo with respect to the newly formulated company it is important to analyze the relevant law. Further, there are few issues that are raised which can only be sought out after due consideration to the relevant law.
- Whether the company named Halcyon Daze Pty Ltd was formulated and is required to have a public office (company) as per the law of the country?
- Whether a company is liable to pay lease amount when the lease is taken on the name of the company officer?
- Whether the company is liable to pay the lease amount if the business of the company is carried on the leased property?
- Under what circumstances a company is obligated to pay lease amount?
Under the Corporation Act, 2001 there are few types of companies that can be formulated, such as, public company; private company, limited liability Company etc. however, section 45 of the Corporation Act, 2001 deals with the private/ proprietary company. There are few rules and guidelines which are submitted with respect to the registration of a private company. One of the rules that is stated for a private company as per section 142 & section 145 of the Corporation Act, 2001is that there is no obligation to have a public office for the operation of a private company. [Corporation Act, 2001]
In a company there are several officers that help in the working of the company. Section 164 of the Corporation Act, 2001 deals with the powers of the officers and directors of the company. One of the power that can be associated is that the officer can take lease on his personal name. though the working of the company may carry on the same property regardless whether the lease of the property is in the name of the company or not. When the lease is in the name of the officer than in no circumstances the company is liable for the lease of the property and it is the officer of the company who is authorized for the payment of the lease. Further, even if the business of the company is conducted on the said lease premises than also the company in no circumstances can be held to be liable to pay lease for the premises.
However, the rule is not stringent always. In few circumstances the company can be held liable to pay the lease for the property.
It is submitted that as per section 111J of the Corporation Act, 2001 the Directors of the Company has power to alter the internal rules of a company. By using the voting right, a shareholder of a company has the power to change the guideline with respect to the company obligation with respect to lease amount of a company. The change is held to be perfectly valid. [s 111J, Corporation Act, 2001]
Also, the officers of the company may transfer the lease property in the name of the company. In such circumstances, the company is liable to pay the lease amount as the company is obligated to honor all the contracts that it enters in its personal capacity as being a separate legal entity. when a property is transferred regardless whether the property is in the name of the officer, still the company is liable to pay for the lease amount. (ICNL, 2004).
Thus, these are some of the rules which are required for the analysis of the raised issues.
Application of law
- As per the provisions of the Corporation Act, 2001 a private company is under no obligation to open a public office of the company. Thus, Leo is under no obligation to open a public office.
- Thus, it can be submitted that a company is under no common or statutory law obligated to pay the lease if the lease is undertaken by the officer of the company in his name and not in the name of the company.
- It does not make any difference whether the business of the company is run upon the leased property or not. If the lease is not in the name of the company than a company is not liable to pay except in few circumstances.
- A company is thus obligated to pay the lease amount when the property is transferred to the company regardless whether the property is in the name of the officer. A company has to honor all his contracts as a company is distinct from its officers.
It is thus concluded that a company is a very important form under which a business can be carried on. There are various functions of the officers of the company and is liable to honor the contracts which are entered into the personal capacity of the officer. However, with respect to the leased property, if the officer transfers the property to the company than the company is under legal obligation to pay the lease amounts. Thus, it is the company who has to pay the lease amount.
- Australian Investor Association (2012) [Online]. Available at: http://www.investors.asn.au/education/shares/understanding-shares/types-of-shares/. [Accessed on 26th August, 2013];
- ASIC (2012) [Online]. Available at: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Liquidation_guide_for_creditors.pdf/$file/Liquidation_guide_for_creditors.pdf. [Accessed on 26th August, 2013];
- ASIC v Macdonald  NSWSC 287;
- Corporation Act, 2001 [Online]. Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed on 26th August, 2013];
- Hargovan A (2009) Corporate Governance Lessonsfrom James Hardie [Online]. Available at: http://www.mulr.com.au/issues/33_3/33_3_12.pdf. [Accessed on 26th August, 2013];
- S 45A. Corporation Act, 2001. [Online]. Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s45a.html. [Accessed on 26th August, 2013];
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