Company Law: Incorporation Analysis for a Second-Hand Book Shop

This report provides an analysis of the advantages and disadvantages of incorporating a business in Australia, with specific advice for Nicola and May, who are partners in a second-hand book shop. It discusses the concept of separate legal entity, limited liability, and perpetual succession as key benefits of incorporation, while also addressing the disadvantages such as regulatory compliance and incorporation costs. The report recommends incorporating as a proprietary company due to its simpler legal compliance and the ability to limit the number of members, ensuring that Nicola and Mary can expand their business while mitigating potential liabilities. Additionally, the report addresses a scenario involving Zio Pty Ltd, where the constitution of the company and the rights of a company solicitor are examined, concluding that Claire, the solicitor, has the legal right to challenge her termination without a special resolution. Desklib offers a wealth of similar solved assignments and study resources for students.

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Company Law

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Answer 1
In Australia, parties can choose between different business structures while operating their
business. A company is a popular form of business structure which is selected due to its
characteristics which provides various advantages to parties. The Corporations Act 2001
(Cth)1 provides key provisions which govern the companies which are operating in Australia.
In order to advice Nicola why incorporating a company is suitable for her, it is important to
evaluate both advantages and disadvantages of companies. Firstly, one of the key benefits
of incorporating is a separate legal entity of the company. Salomon v Salomon & Co Ltd2 is a
landmark case in which this element was established by the court. It was held that a
company is a legal person that has a separate personality from its members, directors,
employees, and others3. It has the right to form a contractual relationship, and it can sue or
get sued by third parties. The court held in Lee v Lee’s Air Farming Ltd4 case that based on
this legal entity, the company is separate from its members due to which they have limited
liability as well. It means that when a company is unable to pay off its debts, then the
creditors cannot hold its members personally liable to settle the debts (Section 124 (1)). This
provides a key advantage to investors since they are not personally responsible for the
debts; they are more likely to take risks in the business which contributes to its success.
Another advantage of incorporating is that the company can issue its shares to the public in
order to raise capital. A public company can issue its shares in the public and collect money
from them which are invested in the operations of the company. The number of
shareholders in a public company is unlimited, whereas, there are maximum 50 members in
a proprietary company (Section 45A)5. Another advantage of a company is perpetual
succession. It means that the company did not end if all of its members died, transfer their
shares or change in its ownership. The company can easily trade anywhere in Australia, and
it has wider options to raise capital for its operations, other than issuing the capital6. The
company can take a loan under its name, and its liability will not be imposed on its
1 Corporations Act 2001 (Cth)
2 (1897) AC 22
3 David Kershaw, Company law in context: text and materials (Oxford University Press, 2012) 325.
4 [1960] UKPC 33
5 Legislation, Corporations Act 2001 (2018) < https://www.legislation.gov.au/Details/C2017C00328 >.
6 Enshen Li, Business and Corporate Law (Lawbook Co., 2016).

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members. However, along with advantages, there are many other disadvantages as well
which are faced by parties while incorporating. One of the biggest disadvantages of a
company which is faced by parties is that parties have to comply with a large number of
legal regulations. The companies have to comply with various disclosure requirements in
which they had to prepare books of accounts and lodged them as well. The cost of
incorporating is expensive as well because parties have to pay registration fees and other
charges7. Moreover, the separate legal entity principle can be overlooked by the court to
hold the directors personally liable for the actions of the company by piercing the corporate
veil as given in ASIC v Adler8 case9. However, these disadvantages are not available for all
companies. There are different types of companies each of which has a separate legal
structure.
The types of companies include public, proprietary, unlimited public, public limited by
shares, unlimited proprietary, proprietary limited by shares and others10. In the case of
Nicola, incorporating a company will be beneficial because it will provide more benefits.
Firstly, the liability of both Nicola and Mary will be limited based on which they will not be
held personally liable for the debts of the business. It will provide them the opportunity to
expand their business by raising capital for its operations by issuing of shares or taking a
loan under the company’s name. Moreover, even if one of them decided to leave the lease
will be under the company’s name which means that it will not terminate the business
based on the element of perpetual succession. In this case, incorporation of a proprietary
company will be most appropriate. The reason for that is that the legal compliance of a
proprietary company is fewer based on which the parties will not have to deal with a
complex legal framework or heavy incorporation costs11. They can also limit the number of
members and introduce a constitution in which they clearly define the role and liability of
each member. Thus, incorporating a proprietary company will provide all the benefits of a
7 Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations law in Australia (Federation Press,
2002) 504.
8 [2002] NSWSC 171
9 Michael Adams, ‘Leighton’s character, complexities and conflicts’, (2013) 65(11) Keeping Good Companies
676.
10 Lee Roach, Company Law (Oxford University Press, 2016) 9.
11 Martin Petrin, ‘Assumption of Responsibility in Corporate Groups: C handler v C ape plc’, (2013) 76 (3) The
Modern Law Review 603-619.

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corporate structure to Nicola and Mary, and they will not have to deal with its
disadvantages.
Answer 2
A company can manage its operations through a constitution or replaceable rules which are
given under the Corporations Act. Section 140 of the act provides that the constitution
create a contract between the company and its directors, members, and secretary. It also
forms a contract between all members. Section 136 of the act defines the constitution and
its impact on the company and its members. This section also provides that the corporation
has the right to make changes in its constitution and its terms. Subsection 2 of this section
provides that the constitution can be changed or modified by passing a special resolution12.
The court is required to make an appeal in the court regarding making the modifications,
and a copy of the special resolution must be lodged with ASIC within 14 days. In Eley v
Positive Life Assurance Co Ltd13 case, the court rejected the claim of a lawyer of the company
who claimed that his rights given in the constitution are violated because his membership
rights were not affected by the dismissal.14
However, parties whose rights given under constitution are violated can file a suit against
the company. In the case of Zio Pty Ltd (Zio), the constitution of the company provides that
Clare is the company’s solicitor. However, Angus and Max have decided to remove Clare by
sending her a termination letter. Claire has the rights as her name is included as the solicitor
of the company based on which she can make a legal claim against the decision of Angus
and Max. Claire cannot be removed without passing a special resolution in the company.
Therefore, the termination of Claire is not valid, and she has the legal right to make a claim
against the decision of Angus and Max.
12 Austlii, Constitution of a Company (2018)
<http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s136.html>.
13 [1876] 1 Ex D 88
14 Michael Ottley and Mike Ottley, Q&a Company Law 2013-2014 (Routledge, 2013) 38.

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Bibliography
Books/Articles/Journals
Adams M, ‘Leighton’s character, complexities and conflicts’, (2013) 65(11) Keeping Good
Companies 676.
Kershaw D, Company law in context: text and materials (Oxford University Press, 2012).
Li E, Business and Corporate Law (Lawbook Co., 2016).
Ottley M, Q&a Company Law 2013-2014 (Routledge, 2013).
Petrin M, ‘Assumption of Responsibility in Corporate Groups: C handler v C ape plc’, (2013)
76 (3) The Modern Law Review 603-619.
Roach L, Company Law (Oxford University Press, 2016).
Tomasic R, Bottomley S and McQueen R, Corporations law in Australia (Federation Press,
2002).
Cases
ASIC v Adler [2002] NSWSC 171
Eley v Positive Life Assurance Co Ltd [1876] 1 Ex D 88
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Salomon v Salomon & Co Ltd (1897) AC 22
Legislation
Corporations Act 2001 (Cth)
Others
Austlii, Constitution of a Company (2018)
<http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/
s136.html>.

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Legislation, Corporations Act 2001 (2018) <
https://www.legislation.gov.au/Details/C2017C00328 >.