Legal Advice For A Café Business, Liability Of Directors, And A Shareholder Dispute - Essay.

Legal Business Structure for a Café Business

1. Denise and Freda operate a busy café in Melbourne’s inner east.  They have been running the business together for 5 years and share profits equally.

As the years progress, Denise and Freda notice that they do not have enough working capital to keep the café running.  Denise and Freda need to raise additional funds.  Also, due to the slippery floors, there have been some customers that keep falling over and breaking their legs.  Denise is really concerned about the liability for Denise and Freda. 

Denise and Freda are approached by Bruno who makes the best cakes in Melbourne.  Bruno wants to work with Denise and Freda in the café as the head pastry chef. 

Denise and Freda believe that if Bruno worked at the café then his expertise in cake making will bring in more business for the café. Denise and Freda come to visit your office and ask your legal advice to: 

a. What type of legal business structure is Denise and Freda currently operating? Provides reasons.           

b. Whether their current business structure is the most suitable for the café or whether they should consider another form of business structure, and, if so, which one? 

2. The board of The Best Coffee Ltd (TBC Ltd), a large coffee bean company listed on the Australian Stock Exchange, comprised of four directors, three of whom are executive directors and one of whom is a non-executive director:

• Brendan is the managing director of TBC Ltd. He has been on the board of TBC Ltd for several years.
• Stephen is a chartered accountant and is the Chief Financial Officer at TBC Ltd and is an executive director of TBC Ltd.
• David is an executive director of the board who has substantial experience in the coffee bean industry.
• Jane is a non-executive director who barely attends board meetings and is a hairdresser.

The board of TBC Ltd has recently entered into a number of investments, including a new coffee bean factory, and some investments which have been losing large sums of money.  At a board meeting in March 2016, the board considered the company’s financial statements relating to the loss making investments.  The financial statements were negligently prepared and showed a profit instead of a loss.  These financial statements were prepared by Stephen.

During the board meeting, Stephen failed to tell the director’s about the loss and David failed to ask any questions about the financial statements, and Jane (as per usual) was absent from the meeting.  Due to time constraints, Brendan failed to read the financial statements, believing that Stephen would discuss the statements with him if there were any important matters that required his attention. 

The board of directors do not identify the mistake and authorise further investment in the loss making business ventures.  By May 2016, TBC Ltd is insolvent.

Discuss any liability of the directors of Alex Ltd in relation to these events. What are the consequences, if any of a breach of the Corporations Act? Refer to relevant legislative provisions and case law in your answer.

3. Rick purchased two shares in Shoes R Us Pty Ltd for $50,000.  Shoes R Us Pty Ltd makes and builds customised shoes which they manufacture and sell to retail stores.  Rick, now a non-executive director of Shoes R Us, is unhappy with the state of affairs of the company.  The following occurred:

• Shoes R Us Pty Ltd revenue has increased 300%
• Rick has received no dividends to date and Rachel and Tanya, the two executive directors of Shoes R Us Pty Ltd, have decided to pay no dividends this year.
• Rachel and Tanya have voted themselves a large pay rise and bonus.
• Rachel and Tanya have arranged for Shoes R Us Pty Ltd, to lease two expensive cars for their exclusive use.

Rick attends his first directors’ meeting and questions the dividend policy and asks that he objection to the lease of the cars be recorded.

Partnership Business and its Limitation

Tanya and Rachel decide to remove Rick from the board.  They hold a members’ meeting and remove Rick from the board. 

Advise Rick as to his rights as a shareholder/member.
 

a). Demise and Freda operated a busy café in Melbourne. They have been running the business together for 5 years and have shared the profits of the business equally. In the recent years, they have noted a downfall in their business and have realized they lack in capital for the safe running of their business. Demise was worried about the business capital of his café and wanted to expand the running business of his café. Bruno approached Demise and Freda and wanted to work in their café as the head pastry chef. Demise and Freda believe that if they work with Bruno they might be able to make their business profitable and successful. Based on the facts, the question that arises here is what type of legal business structure does Denise and Freda is currently opening?

Before operating a business, it is important for individuals to consider the advantages and disadvantages of the business structures. It is important for people to understand the different kinds of businesses that are operating in Australia and to make use of the best of them. The most common type of business structures are:

• Company
• Sole Trader
• Partnership
• Trust

Denise and Freda are currently operating a partnership firm. In this kind of association, people come together to carry on a business as partners and receive the income from their business jointly[1]. An association of partnership is cheap to set up and easy to operate. In a partnership firm, the management and control of the business is shared between the partners of the firm. The partners are held liable for the debts and obligations of the business. For a business to be executed as partnership business the names of the partners should be registered under the ASIC. It is better to keep a partnership business as formal; however, this may not be necessary[2].

b). A partnership business is when; two or more persons come together with the purpose of, doing business together and to obtain profit out of the given structure. The partners of a given firm have similar goals and they come together to ensure that the aims and objectives of the business are met. In the same way, Denise and Freda are also doing a partnership business. In most cases, a partnership business is considered as the best kind of business and it has the best kind of features that are associated with it. A partnership business is generally of two types, a partners limited by liabilities and a partnership that is not limited by liabilities[3]. A partnership that is limited with liabilities is one of the best kinds of legal business structure[4].

Keeping in mind the current scenario of Denise and Freda, the best kind of business structure that should be followed by them is partnership that is limited by liabilities[5]. A partnership that is limited by liabilities is generally a type of structure wherein the partners come together to conduct a business and have their own personal liability that is restricted to the type of investment they have incurred in their business structure. They are therefore, liable only for the part they have invested their money. Initially, Denise and Freda were a part of a general partnership business where they were equally liable for the management of the business and both of them did not have any restraints as far as the obligations were concerned.  A partnership firm that is limited by liability has many advantages over all other kind of business structure, first this kind of liability is capped, meaning that the liabilities of each of the partners are restricted to the amount of they have invested in their business. Secondly, none of the partners have any personal liability; they are restrained to the company’s liability. A partnership that is limited by liability provides protection to the assets of the shareholders. The shareholders before investing their money have an assurance that their personal assets are safe and secure. Additionally, the benefit of a company that is limited by liability is that there are associated tax benefits. The benefit is that the company as a whole does not have to file taxes; in fact, the partners depending on their liability are liable for the payment of their taxes. The flexibility of a firm that is limited with liability is one of the most defining characteristic of this kind of firm. The partners in this kind of firm have the ability to decide the amount of contribution they want to make as a partner in the business. The partners in the business are under no obligation to attend meetings or consultations. Hence, this is the best kind of business structure that shall be suited for Denise and Freda’s business. It will help them in making their business profitable and successful[6]. 

Suitability of Legal Business Structure for a Café Business

The Best Coffee Bean Ltd is a larger coffee bean company and is listed in the Australian Stock Exchange. The Board of Directors consisted of four directors out of which three were executive directors and one of them was a non-executive director. The company had recently entered into a many investments and it was noted that some of the investments have been losing large sums of money. At a board meeting in March 2016, the board considered the company’s financial statements relating to the loss making investments. The financial statements of the company were prepared in a very negligent manner and it reported false details of the company’s investment. Instead of focusing on the loss of the company, the company proceeded with further investments making more loss, which made the company insolvent. Based on the facts, the issue that arises here is, whether the directors and the chief financial officer were liable for the insolvency of the company or not.

The directors are the people who manage the working of the company in behalf of the shareholders of the company. Section 198 (A) of the Corporations Act states that it is the responsibility of the director to manage and control the general working of the organization. The directors shall be responsible for the carrying out of certain responsibilities and duties. The duties of the directors are contained in the Corporations Act, 2001[7]. The term “director” has been defined under section 9 of the Corporations Act, 2001. The terms such as “de facto director” and “shadow director” is contained in this section. The non- executive directors are considered as good as the other directors of the company[8]. The non-executive directors of the company govern the organization along with the other directors of the company. The executive as well as the non-executive directors of the company have similar requirements that should be met as part of the Corporations Act, 2001[9]. As per the Higg’s Review of the United Kingdom non-executive directors mean, “Custodians of the governance process.”  Sections 180 to 183 of the Corporations Act, 2001, deals with the duties of the directors. According to section 180 of the Corporations Act, it is the duty of the director to act with care and diligence concerning the duties of the directors[10]. This means that at the time of discharging their duties the directors should exercise their basic sense of care and diligence. Section 181 of the Corporations Act talks about the director acting in good faith, this means that the director of the company should exercise their duties in such a way that it avoids conflicts of interest between the members of the company. Furthermore, the directors of the company, in case of any conflicts, should be able to manage the conflicts in an efficient and effective way. This is the “fiduciary” duty of the director that is considered as part of their duty imposed by legislation and general law of the company[11]. Section 182 of the Corporations Act imposes restrictions on the directors for the misuse of their position. The director should not take undue advantage of their position and should not use it for their personal gain or power of interests. It is the duty of the director to use his powers in such a way, which does not cause detriment to the working of the company. It is the duty of the director to use the given information in a proper way and not to use any information for his or her personal advantage or for the detriment to the working of the company[12]. This is enumerated in section 183 of the Corporations Act, 2001. Other than the statutory obligations, that governs the working of the director, the directors are also bound by the Federal or State laws which imposes liability on the directors for the health and occupational safety of the employees or members of the company or laws that are related to the environmental law or taxation law of the given country. The directors of a company have special duties at a time when a company is declared insolvent. Section 588G of the Corporations Act, 2001 imposes obligations on the directors of the company to prevent a company from becoming insolvent. A company is declared as insolvent when the it is unable to pay debts or falls in a situation where there is a likelihood that the company shall not pay its debts. Section 588M of the Corporations Act, 2001 entitles a creditor to hold a director responsible if the company has been declared insolvent due to breach of the duties of the director. In the case of New South Wales in International Greetings UK Ltd v. Stansfield[13], the Court held that when the Company wants to be reinstated then the procedure for the final winding of the company should not have been completed. If the liquidator has completed the process of winding up of the company then the company cannot be registered again. Additionally, the directors of the company also have obligations related to the financial reporting of the company. The Chartered Accountant of the company prepares the financial reports of the company that is checked by the directors of the company. It is the duty of the director to have appropriate skill, competence for checking that the financial reports of the company is properly stated, and that it does not contain any faulty or wrong statements.  Section 295A of the Corporations Act, 2001, deals with the declaration that is given by the CEO and the CFO of the Company. The directors have to ensure that such a declaration does not contain any faulty or wrong statement and that the statements are true with regard to the reports of the company. This is a very essential process in a company as, if a report is wrongly stated that the company might be declared as insolvent[14].

Liability of Directors in a Coffee Bean Company

In the given scenario, Brendan, Stephen, David and Jane shall be liable for breach of duty as a director under the Corporations Act. The negligent and the careless attitude of all the directors have led to the insolvency of the company and the creditors and the stakeholders of the company can hold the directors of the company liable for breach of the general duties and breach of their duties concerning the proper reporting of the financial statements of the company. Stephen can be held liable under Section 295A of the Corporations Act, 2001 for preparing the financial reports in a negligent manner. Jane can be held liable under sections 180 to 183 of the Corporations Act, 2001 for not complying with the general duties and not taking interest in the general working of the business TBC. He may also be held liable for the breach of fiduciary duties as a director. Brendan shall also be held liable for breaching his general duties, as he did not recheck the financial statements of the company correctly and because of this, the company was declared as insolvent[15].

Conclusion:

In case of breach of duties of the directors, the following remedies may be available to the person who suffered loss or damage due to the breach of the duties of the directors; they are as follows:

• Injunction
• Damages or compensation
• Restoration of the property of the company
• Rescission of contract
• Accounts of profit[16]

Therefore, the creditors may file a suit against the directors of the company for any of the above-mentioned remedies. 

Rick has purchased two shares in Shoes R Us Pty Ltd for $50,000. Rick is a non-executive director; however, he is unhappy with the current affairs of the company. Rick has received no dividends this year and Rachael and Tanya have decided that they would not pay the dividends to the shareholders this year. It was noted that Rachael and Tanya were making use of the benefits of the company for their personal use and they were continuously breaching their rights as a director. Based on the facts, the issue that arises here is, whether Rick has any rights as a shareholder against the directors of the company.

Section 1.5.6 of the Corporations Act, 2001, deals with the shares and shareholders of the company[17]. A shareholder of the company has many rights and powers in a company related to the exchange in the company. A shareholder is considered as a part owner of the company. A shareholder is considered as a legal entity of the company. Companies should have at least one shareholder in the company and they have the right to hold up to fifty shares in the company. The general rule is that, because of the investment that a shareholder holds in a company they receive equivalent rights in the company[18]. Generally, many companies have one only one class of share but in Australia a shareholder can hold many other classes of share. A shareholder enjoys the following rights in the company: firstly, the shareholder of the company has voting rights on specific issues such as election of a director or dismissal of the director (sections 250E, 254A--254B)[19]. Secondly, shareholders have the right to transfer their ownership to some other person. However, a restriction is imposed in such a situation. The shareholders of the company have the right to receive reports and announcements. The shareholders of the company have the right to receive dividends and other distribution (sections 1091D--1091E)[20]. A company is entitled to pay dividend twice a year and shareholdings come with franking credits. Shareholders of the company are entitled to receive dividends from the company. This is a very important right of the shareholder and they are entitled to receive it after it from the company. Part 2F. 1A of the Act has given the right to the shareholders to bring an action against the directors or against the company[21].

Consequences of a Breach of the Corporations Act

In this case, Rick can hold the directors liable for breaching their general duties under sections 180 until 183 of the Act. An action may be brought by the shareholder against the directors for the breach of their duty or the shareholders against the company for claiming the compensation that they are liable to receive may bring an action. In the same way, Rick as a legal shareholder of the company may bring an action against the directors of Shoes R Us Pty Ltd. Additionally, Rick may also file a suit against the director for injunction, compensation or rescission of the shareholder’s right. 

Conclusion:  

The rights and powers of the shareholders of the company are related to the voice they have in the running of the company. However, the rights of the shareholder differ from one company to the other company and depends to the class of shares that each of the shareholders hold. There are related differences depending on the percentage of shares they hold in the company[22]. However, this does not make the shareholders devoid of their rights and in case of oppression; they may make the directors or the company liable for their actions.  

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