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Advantages of Incorporation

Discuss about the Business Structure for Supreme Pty Ltd.

In the first part of this assignment, it needs to be discussed, which business structure will be most suitable for Jack, Jill and Max, who are already running a successful business of selling trucks. However they have not yet organized a formal business structure therefore they want advice regarding the business structure that will be most appropriate for them. For this purpose, the advantages and the disadvantages that are related with the options available to them in this regard also need to be discussed.

In second part of the assignment, the liability of Child Toys Supreme Pty Ltd needs to be discussed regarding a statement made by a salesperson of the company, Betty. She had promised to the retailer customers of the company that the toys being sold by the company do not contain any harmful plastic chemicals but this statement was not true. The result was that the retailer customers of the company lost sales when the truth regarding the presence of chemical elements in the toys becomes known. At the same time, a child is also seriously injured as a result of these harmful chemicals. Under these circumstances, the liability of Child Toys Supreme Ltd needs to be discussed. Another issue that is present in this regard is if Child Toys can take action against Charles as he had formed a company that competes with the business of Child Toys in violation of the clause present in the employment contract of Charles.

In this case, the issue that needs to be decided is related with the business structure that will prove to be most suitable for Jack, Jill and Max. For this purpose, they want to know the advantages and disadvantages that are connected with the business structure that they can adopt in the future.

On the basis of the facts that have been provided in this version, you can be said that the incorporation of the company will prove to be most suitable for the parties. The reason is that several benefits will be available to Jack, Jill and Max if they opt for the incorporation of a company. For example, the benefit of limited liability will be available to the parties in this case. Consequently, if Jack, Jill and Max have registered a company for running their business, their liability will be limited as the shareholders of the company. The reason is that according to the law, the shareholders are generally not treated as liable for the debts that have been incurred by the company (Gillies, 2004.). In case of a company, the shareholders will only be liable up to the amount that has been invested by them in the company (Foss v Harbottle, 1843). Likewise, the creditors of the company are allowed to enforce their rights only against the company and the sides cannot be enforced against the shareholders (Macaura v Northern Assurance Co Ltd., 1925).

Disadvantages of Incorporation

Another benefit available in case of a company is that of perpetual succession (Graw and Sangkuhl, 2015). The existence of the company is not dependent on the shareholders/directors or other officers (Re Noel Tedman Holdings Pty Ltd. 1967). Consequently, the existence of the company will not be impacted by any changes made as a result of the death or retirement of members. The reason behind this position is that a company is stated as having its own identity.

By incorporating a company in the present case, the parties will also have a significant source to raise capital for the business. For example, a company can issue different classes of shares for the purpose of raising capital. One more benefit that is available in case of a company is that it provides prestige and credibility to the business.

However this does not mean that there are no disadvantages associated with the business structure of a company. Therefore when the parties decide to register Company, visit also keep in mind these disadvantages. The first disadvantages that the initial cost of setting up a company is higher as compared to the situation when the parties are running their business as sole trader or partnership (Hanrahan, 2010). The regulatory requirements that have been imposed on a company are also higher than the parties have registered a company. According to the law, the records of the company should be maintained diligently (Harris, Hargovan and Adams, 2015). The company is also required to elect their directors, hold their meetings and certain information is also required to be provided to the shareholders.

In this case, Jack, Jill and Max have been running their ranking business successfully. However there now, they are not organized in a formal business structure. Consequently, it can be advised that they should opt for the registration of a company for running their business.

In this part of the question, the issue is if Marty is responsible for the misrepresentation and negligence of Betty, who is a salesperson of Child Toys Supreme while Marty is the sole director of the company. Betty had promised to a retailer customer that the toys of the company do not contain any harmful plastic chemicals, but in reality, it was not true. The result was that the child suffered serious injuries and the retailer customer also lost sales. Under these circumstances, the issue arises if Child Toys can be held accountable to the injured child and the retailer customers.

Liability Issues for Misrepresentation

According to the law, it has been clearly mentioned that the principal will be liable for the acts of the agent when the agent was acting within its authority that has been conferred under the agency agreement.

As a result of this position under the law, if the agent has acted while furthering the interests of his or her principal and similarly it can be said that the actions of the agent are according to the agency agreement, it can be said that the legal liability arising out of such acts may fall on the principal (Vermeesch and Lindgren, 2011). In such a situation, it has been provided by the law that if any third party has been wronged as a result of the actions of the agent, such person can either sue the principal or the agent (Fleming, 2011). But if in such a case, the third party has decided to sue the agent, in such a case and option is available to the agent to enforce the right according to which, the agent can be indemnified by the principal (Khoury and Yamouni, 2010). Hence, it is very important that the principle remains aware of the scope of authority provided to the agent in accordance with agency agreement (Vermeesch and Lindgren, 2005). But in some cases, the law may presume that the agent will be held directly liable for such actions (Lambiris, 2011). In this context, an example can be given of the situation where there has been fraud or gross negligence committed by the agent (Lipton, Herzberg and Welsh, M, 2016). But even in such a case, sometimes the principal can still be considered as liable although the actions of the agent was beyond the authority that has been provided to the agent.

In the present question, it has to be seen that the Australian Consumer Law prohibits any misleading or deceptive conduct that may take place in context of trade and commerce (Williams v Pisano, 2015). This provision is a part of section 18 of the Act. Therefore in this case, Betty had made a misrepresentation while he was acting as a salesperson of the company or in other words, was the agent of the company (Lambris, 2010). Under these circumstances, a misrepresentation has been made by Betty and it can be said that this statement was made by Betty in furtherance of the business of the principal (Seddon and Ellinghas, 2008). As a result, in this case Child Toys will be held responsible for the misrepresentation and the loss and injuries suffered by the third parties.

Non-Compete Clause Violation

The issue arises in this part is if any action can be taken by Child Toys Pty Ltd against Charles for his actions. The issue arises due to the fact that there was a clause in the employment contract of John's according to which he was prohibited from competing against Child Toys Pty Ltd for two years after he has retired. But soon after his retirement, Charles decided to start a business that was in direct competition with Child Toys. With this objective in mind, Charles and his wife formed a company, Better Toys Pty Ltd. In this company, the sole director was Charles' wife, while both of them were the shareholders of the company. Under these circumstances, it has to be determined if the restrictive covenant that was present in Charles' employment contract with Child Toys can be enforced against the new company, Better Toys Pty Ltd.

For this purpose, the corporate veil may need to be lifted. According to the basic principle of corporations’ law, a company is considered as having its own distinct identity and therefore it is separate from its members (Graw, 2011). The doctrine of separate legal identity was mentioned by the court in Salomon v Salomon (1896). However with the passage of time, a number of exceptions have been developed to this rule (Graw, 2008). Therefore, there are certain circumstances when the court may set aside the distinct identity of a corporation and hold the members of the corporation, liable for his actions (Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Ltd., 2010). This action is called lifting the corporate veil. Such an action was taken by the court in Gilford Motor Company Ltd v Horne (1933). The facts of this case resemble the issue present in this question. Mr. Horne was acting as a managing director of Gilford Motor Company and after he had left the company, he established another company and started soliciting the customers of Gilford Motor Company. The section was in breach of the non-competition covenant that has been mentioned in this employment contract. Therefore while deciding the issue, an injunction was granted by the Court of Appeal against Horne and his company. The court stated that the new company can be considered as a cloak that has been used by Horne to breach the non-competition covenant. A similar decision was given in Jones v Lipman (1962).

In this case also, Charles had incorporated Better Toys Pty Ltd with a view to evade the breach of covenant according to which, Charles will not compete with the business of Child Toys for two years after he has left the company. In this way, the court may decide to let the corporate veil and the covenant can be imposed against the members of Better Toys Pty Ltd.

Hence, action can be taken against Charles and Better Toys for the breach of covenant.

References

Fleming, J., 2011. The Law of Torts. Law Book Company.

Gillies P., 2004. Business Law. 12th ed. Australia: Federation Press.

Graw, P., and Sangkuhl, W 2015 Understanding Business Law 7th ed LexisNexis Butterworths

Graw, S 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters.

Graw, S., 2008. An Introduction to the Law of Contract. 6th ed. Australia: Thomson.

Hanrahan, P., 2010. Commercial Application of Company Law. Australia: CCH.

Harris, J. Hargovan, A.  Adams, M. 2015, Australian Corporate Law LexisNexis Butterworths 5th edition,

Khoury, D., Yamouni, Y., 2010. Understanding Contract Law. 10th ed. Australia: LexisNexis

Lambiris, M., 2011, First Principles of Business Law, Australia: CCH.

Lambris, M., 2010, First Principles of Business Law, Australia: CCH.

Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition 2016 Thomson Reuters

Seddon N.C. and Ellinghas M.P., 2008, Cheshire and Fifoot’s Law of Contract, Australia 27th ed. Butterworths

Vermeesch, R B, Lindgren, K E, 2011, Business Law of Australia Butterworths, 12th Edition

Vermeesch, R. B., and Lindgren, K. E., 2005, Business Law of Australia, 11th ed. Australia: Butterworths.

Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Ltd and Another ChD (2010) EWHC 1178

Foss v Harbottle (1843) 67 ER 189

Gilford Motor Co Ltd v Horne [1933] Ch 935

Jones v Lipman and Another ChD ([1962] 1 WLR 832

Macaura v Northern Assurance Co Ltd [1925] AC 619

Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561

Salomon v Salomon & Co Ltd [1896] UKHL 1

Williams v Pisano [2015] NSWCA 177.

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