It is submitted that in Australia, there is no single business structure that can be formed. Generally, there are three basic business structures that are available, that is, sole trade ship, a partnership and a company. A sole trade ship is carried out by a single person whereas a partnership is an association of two or more than two person who carry business with the main aim to earn profit. But, a company can be formed only when the same can be registered. (Ibp 2009)
It is submitted that since there are three people who want to run a business, that is, Jack, Jill and Max, thus, a sole trade ship is not possible. Thus, a choice has to be made amid partnership and a company.
It is now submitted that if a partnership is created then there are few advantages: (Seal & Penrith 2008)
- It is very simple to establish;
- Cheap and less complicated;
- Since only partners are involved thus there is presence of confidentiality;
- Tax gains;
- Professionalism is achieved.
But, there are few disadvantages: (Seal & Penrith 2008)
- All the partners are agents of the firm and of each other and any action of one will lay upon others. Thus, the liability created by one will be borne by all other partners;
- The liability of the partners is unlimited and their personal assets can also be acquired to set off the liability of the firm;
- Dissolution is very easy;
- Chances of conflict are high as every partner is involved in the business.
Likewise, there are various advantages that are associated to a partnership: (Gillies P 2004)
- A company has a separate legal entity and thus a company is distinct from its members. So any act which is carried out is in the name of the company only and the member will not be held accountable; the liability of the members is limited and thus their personal assets cannot be acquired for the debts of the company;
- A company can sue in its own name;
- property can be acquired by the company in its own name.
Also, there are few disadvantages:
- The formation of company is very complex and costly;
- A company is not a citizen thus cannot seek the rights of a citizen.
After comparing the pros and cons of both the partnership and the company, it is submitted that Jack, Jill and Max must establish their business by way of a company. The opinion is provided after considering various factors. Such as:
If a company is established then there liability will be limited,
The company has perpetual scission and dissolution is not easy,
The transferability of shares are easy,
There are tax advantages,
Experts can be employed for the better performance of the company.
It is thus concluded that the advantages of a company are much more and the disadvantages are much less when compared with a partnership. Thus, Jack, Jill and Max should formulate a company.
There are two major issues that are raised in the given scenario.
What types of corporate liability can Child Toys Pty Ltd be exposed to because of Betty’s actions?
How can Child Toys Pty Ltd take possible legal action against Charles because of his actions?
When a company is formulated then the person who manages the affairs of the company are called directors and other person who act on behalf of the director are called his agents. When an agent acts on behalf of the company then he can bind the company by his actions provided the actions are undertaken within his authority. There are two kinds of authority that can be imposed upon the agent of the company, such as, the authority which are expressly allotted are express authority and the one which are provided by implication are called ostensible authority (Freeman and Lockyer v Buckhurst Park Properties (1964). Any action which is undertaken by an agent under his authority will be held liable upon the principle. (Thampapillai, 2015)
Now, if any contravention is undertaken by an agent then it is the company and its director who are held answerable for the same.
In law, the concept of corporate liability that prevails which imposes liability upon the company for the actions or omissions undertaken by the person employed by it. A company is not a real person but is an artificial person in the eyes of law thus a company can be vicariously held liable for the actions which are undertaken by its agents which are employed by them. There are two kinds of corporate liabilities that can be imposed upon the corporation, such as:
Criminal liability – some of the criminal liabilities that can be imposed are Imprisonment, Fines and Community service orders
Civil liability – some of the civil liabilities includes Injunctions and damages
Further in law, the clause which limits the actions of the person to undertake an activity which is similar to some other activity for some specific time limit are called non-compete clause. The clause to be valid must be reasonable and not against public policy. A clause is valid if protects the legitimate interest, confidentiality and good will of the company. If such clause is valid then penalties can be imposed such as, damages, compensation or injunction. (Tomasic et al. 2002)
But, when in order to avoid the application of a non-compete clause, a person incorporates a new company under different name but carrying out the same business then can such clause is said to be violated.
It is held that once a company is formed then it is distant from its officers and the actions of the company will not made the officers liable for the same. But this separate legal personality can be pierced if the sole intention of the forming company is to incur fraud, that is, avoidance of non-compete clause. The same was held in Gilford Motor Co Ltd v Horne (1933), wherein the directors and shareholders of the company are not considered as distinct from the company because the main object of establishing a company was to incur fraud, that is, avoidance of non-compete clause and thus the veil of the company was priced considering the company and its officers and one.
Application of law
The law is now applied to the facts of the case.
Marty is the director of Child Toys which makes and sells cheap toys. Betty is the sales person and has promised the customers that the plastic used in the toys is not harmful which a false statement was. One of the children was injured because of the harmful chemical in the toys.
Betty was the agent of the company which has the sole director Marty. Betty was acting within the express authority provided by the company and thus any liability raised by Betty’s action will be imposed upon the company. Thus, because of Betty’s action there are corporate liabilities that can be raised upon the company. In such situation, the company can be imposed with both criminal and civil liabilities, such as, injunction, damages, fines, imprisonment to the directors of the company by making them personally liable for the action so caused.
Also, Charles was the operations manager of the company for last five years. He is fully acquainted with the identity and the requirements of the company’s major clients. He decides to retire in March. The company has entered into a non-compete clause with Charles according to which he cannot compete with the company for two years.
It is submitted that the clause was valid as the same is only for a limited time periods and is not against public policy. The clause is valid because if the same is contravened by Charles then it will hamper the confidentiality and good will of the company.
However, Charles and his wife May has started a company in June under the name of Better Toys Pty which competes with Child Toys. Both May and Charles are the shareholders and May is the sole director. It is submitted that in such situation, the veil of the Better Toys Pty should be pierced and the company and its shareholders and directors must be treated as one because the main aim of incorporating Better Toys Pty is to avoid the non-compete clause imposed upon Charles. Thus, a fraud is conducted by Charles in the name of Better Toys Pty.
Thus, there is full applicability of the non-compete clause.
It is thus concluded that the company must be held liable for both criminally and civil liability for the actions undertaken by Betty on behalf of the company. Also, Child Toys can take legal actions against Charles by piercing the veil of Better Toys Pty and treating the company and Charles as one and a same person.
Harris et al (2012) Australian Corporate Law, 5th edition, Chapter 3, 7, 8 by Lexis Nexis
Freeman and Lockyer v Buckhurst Park Properties (1964).
Gilford Motor Co Ltd v Horne (1933).
Gillies P (2004) Business Law, Federation Press.
Ibp U (2009) Australia Company Laws and Regulations Handbook, Volume 1, Int'l Business Publications, 2009.
Seal & Penrith (2008) Live & Work in Australia, Crimson Publishing.
Tamasic et al (2009) Corporations Law in Australia, Federation PressThampapillai et al. (2015) Australian Commercial Law, Cambridge University Press.