Australian Company Law: Working in Shiba Pty Ltd (Case Study Sample)

AUSTRALIAN COMPANY LAW
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Date of Submission
(Word Count- 2223)
Question 1
(a)
Issue
A major issue presented in this case is the breach of duty of care that an employer has over their employees. After working in Shiba Pty Ltd’s factory for 10 years, Gigi was diagnosed with kidney disease; not only was the condition rare, but the doctor attributed it to her being exposed to harmful substances used in the manufacture of the nitrogen-based chemical. As it stands, Shiba Ltd is wholly owned by Chow Ltd, and hence the issue of whether the former is a subsidiary of the latter arises.
Rule
According to the Corporations Act 2001, Section 46, a subsidiary is a body corporate in which another body owns more than half of its shares, controls its board composition, and/or can influence more than 50% of votes to be cast during its general meeting. In this case, Shiba Pty Ltd can be identified as a subsidiary of Chow Ltd, as the latter owns 100% of its shares and thus has control over matters pertaining to board composition. Under Australian law, a subsidiary, even when wholly owned, is a separate legal entity; hence, directors of such a body corporate are subject to regulatory and statutory duties prescribed by law (Eroglu 2008, 260). Furtherance, such directors should dispense their duties prudently and not consider their positions as nominal ones. A parent company’s liability over actions undertaken by its subsidiary only arise when it can be established that the former appoints executives for the latter and exercises a form of control over the execution of these individuals’ duties (Latimer 2012). Currently, Shiba Ltd only owns assets worth $10,000, which is less than the sought damages of $3.5 million. However, Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] established that a court can compel a firm to dispense such an obligation even if it means piercing the corporate veil to make the directors accountable as was the case in Macaura v Northern Assurance Co Ltd [1925].
Application
Based on the above legal considerations, Gigi’s legal claim for compensation can only be brought against Shiba Ltd and not Chow Ltd. However, Shiba Ltd only owns $10,000 worth of assets and thus is not in a position to pay the $3.5 million compensation by the employee. To ascertain that she gets awarded the claim, Gigi should first establish that Shiba Ltd had prior information on the risk of chemicals it exposed workers to, but did not share this with its employees.
Conclusion
As her employer, Shiba Ltd has a duty of care towards Gigi, and proving prior knowledge could make it culpable of both criminal offenses and tortious breach.
(b)
Issue
Shiba Ltd and Chow Ltd have the same directors, which establish the need to pierce the corporate veil to have the parent company’s directors made liable for its breach of contract.
Rule
As previously highlighted, a parent company bears liability from a subsidiary’s actions if it exercises a form of control on it. Jones v Lipman [1962] established that the corporate veil could be pierced where the court establishes that a company was formed as a façade to avoid liabilities. Furtherance, Gilford Motor Co Ltd v Horne [1933] stipulates that a firm and its shareholders will be treated as one when it is established that such an entity was formed as fraudulent front to divert liability.
Application
In this case, Chow Ltd owns all the shares in Shiba Ltd, a form of control that is strengthened by its directors being the same as those of the subsidiary. The registration of Shiba Ltd to protect the parent company from risks associated with dealing with the chemical product highlights that the directors were aware of the danger they exposed their employees. Consequently, a piercing of the corporate veil may be pursued to institute criminal charges against these persons for their negligence and unethical business conduct, which will lead to loss of lives.
Conclusion
Chow Ltd is liable for the exposing Gigi to hazardous chemicals without her knowledge, which resulted in her contracting a rare kidney disease. The $3.5 million claim should be made against this entity, as it is the one operating behind the cover of Shiba Ltd.
Question 2
(a)
Issue
The contract issue in Down Under Pty Ltd is on the legality of the agreement made by Xander and Cordelia, which pertains to the law of agency. Whether Cordelia was within her agency parameters to enter into a contract for the firm will determine the validity of this agreement. Additionally, Collie Pty Ltd can raise the issue of whether this contract was void or voidable; the latter would mean that both companies can resolve the conflict without rescinding the agreement. The stipulations of the Down Under Ltd’s laws indicate that the directors should be involved when signing a contract.
Rule
Contract law in Australia requires that the parties involved have the legal capacity to initiate the contract. A firm’s by-laws and the 2001 Corporations Act govern the capacity companies have in initiating contracts. Before making a contract with another party, the regulations of the company and the constitution governing it are taken into consideration. All the essential elements of making the contract must be applied to render the agreement valid. Additionally, a contract’s validity is dependent on an organization’s by-laws and any legal structures established within it.
Based on the facts of the case and the assessment of the Corporations Act of 2001, the validity of such an agreement can be determined. Sections 126 and 127 evaluate the execution of a contract concerning the signing of such agreements with the organization. Section 127 of the Act indicates that the use of the common seal in cases where there is more than one director in the company is required. The Australian Law states that it is a requirement that at least two directors or one with the company secretary should sign the contract to bind the business. The use of more than one director or the involvement of the company secretary is a critical aspect of contract formulation, without which an agreement is voidable.
Under section 126 of the Act, provision of the power of business to make a contract should be exercised based on the implied authority given by the management. In addition, the aspect of implied authority should be given and the partners consulted before an individual makes a contract on behalf of the company (Latimer 2012, 363). The agent should be given the power to sign the contract, which should be from the management in the business. Under the legislation set by Down Under Pty, the board of directors must approve all contracts of over $50,000. In addition to the laws established by the company and those of Down Under Pty, the legislation of Collie Pty should also be considered when signing the contract. The level of involvement of directors in both firms is a critical aspect of determining whether Down Under Pty is bound to the contract.
Application
The assessment of the Down Under Pty company legislation and the 2001 Corporations Act, the law states that the directors of the company are required to make a contract binding with another business. The company’s constitution has indicated that the board needs to be consulted regarding contracts that exceeded $50,000, which Xander and Faith did not pursue. In addition, the 2001 Act states that the directors need to be made aware of the operations concerning contracts and, at least, one, with the knowledge of the others, should be notified. Faith abused her power as the purchasing officer and deposited $10,000 towards the contract. Based on the laws set in the company and those of sections 126 and 127 of the 2001 Act, Faith and Xander entered a contract for the company without legal capacity. The directors of the company need to be aware of the operations being taken, and Collie Pty Ltd should be informed that the two are not directors, thus any decision they make is subject to consultation with the board before approval.
The assessment of the stipulations in the 2001 Corporations Act and those of the business, Down Under Pty, highlight that the latter is not bound by the contract as the directors were not made aware of it. Furthermore, Collie Pty Ltd made the contract based on the knowledge that they were operating with the company directors. The consent that was given by the directors was to attend the book launch on behalf of the individuals (Gibson and Fraser 2013, 323). The authority that Xander was offered did not involve making business decisions with the individuals involved.
Conclusion
Down Under Pty are not bound by the contract as it was made under the false directorship of Faith and Xander, which qualifies as fraud by the two individuals. The question as to whether the company would be bound to the contract if Xander had made the deal is still invalid as the directors were not notified regarding the contract made. The lack of compliance with the constitution and the law shows that Down Under Pty is not bound by the contract made.
(b)
i.
Issue
Down Under Ltd is proprietary company and that means directors can vote out one of themselves by a simple majority. Nonetheless, Cordelia’s termination raises the issue of whether prior notice is required before such an action is taken. In addition, the need for a justifiable reason for removing a director is another pertinent issue that will help resolve this case.
Rule
Under section 203C of the Corporation Act of 2001, directors of a proprietary company such as, Down Under Pty Ltd can pass a resolution to ...