Corporate Liability and Statutory Derivative Actions

This assignment examines a scenario where Terry seeks to take legal action against two entities: CM and Lazarus Pty Ltd. The focus is on establishing CM's liability for the actions of its agent, CMS, potentially using the statutory derivative action under relevant legislation. The analysis also considers whether Lazarus Pty Ltd was formed fraudulently to shield CM from responsibility, exploring the concept of piercing the corporate veil. Relevant case laws like CSR LIMITED & ANOR -v- YOUNG and Smith, Stone and Knight Limited v Birmingham are utilized to support the arguments.

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Cover Page
Name of the student
Student ID
word count

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Contents
Solution 1....................................................................................................................................................3
Issue A.....................................................................................................................................................3
Law and application.............................................................................................................................3
Issue B.....................................................................................................................................................4
Law and application.............................................................................................................................4
Conclusion...............................................................................................................................................6
Solution 2....................................................................................................................................................6
Issue........................................................................................................................................................6
Applicable law.........................................................................................................................................6
Application of law....................................................................................................................................7
Conclusion...............................................................................................................................................8
Reference List............................................................................................................................................10

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Solution 1
Issue A
The first issue is to decide whether company is the right choice for Richard and his son’s (David
and Liam) to conduct their business.
Law and application
The choice can only be made after comparison the pro and cons of a company with a sole trader
ship and partnership.
A company is a business entity which is framed once a company is registered as per the statutory
requirements of lay down by ASIC. A sole trader ship is a business wherein the owner and
management lies in the hands of one person and there is no requirement of any kind of
registration, but, a partnership is a business wherein two or more people join together with a
common objective and with the aim to earn profits and share losses. (Gov, 2017)
However, it is found that a company as a business structure is found to be preferable because of
several reasons: (Cleardocs, 2010)
i. Limited Liability – In a company, the liability of the shareholders is limited to the
extent of their value of the shares. Thus, in case the company incur any liability then
the shareholders will only liable to pay to a limited extend;
However, in case of a sole trader ship or the partnership, the liability is not limited but
the sole traders or the partner are liable to face the liability to the fullest. The chances
of bankruptcy is very high when the business is not able to meet its financial
constrains.
ii. Loan – In a company, loan can be secured on the assets of the company and at times
upon the guarantee of the directors. thus, the personal assets of the shareholders or the
directors are not at risk;
But, in case a loan is to be taken by a sole trader or a partnership then it is the assets
of the sole trader or the partners which are at risk and thus makes them less favorable
when compared with a company;

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iii. Capital rising – In case of a company, the capital rasping is easy as the company can
offer its shares and thus raise capital. But, in case of a sole trader ship, raising capital
requires taking loan from banks and other financial institution which requires lots of
paper work and is expensive; (Price, 2014)
iv. Tax – The tax rate for a company is 28%-30% flat. A sole trader pays tax as per their
marginal rates. Whereas in the case of a partnership each partner is liable to pay their
own tax on their partnership income. Thus, there is no personal tax that is imposed on
the shareholders and the same is borne by the company as a separate legal entity.
v. Retain profits – The company has the power to retain profits which can later be used
for the growth of the company, but, the same is not permissible in case of a
partnership or a sole trader.
vi. Separate legal entity – The Company has a separate legal entity, thus, the directors
and shareholders are not same as a company and the acts of the company is its own
(Salomon v A Salomon & Co Ltd [1896]). But, in case of partnership and the sole
trader the acts of the partnership or sole trader are not separate but are considered the
acts of the partnership or the trade ship.
Now, Richard has a grove and has purchased his neighbor’s adjoining property with a view to
expansion. His two sons, David and Liam, want to establish business and need finance to expand
the business.
Sole trader ship is not possible as it can be operated only when there is a single person but now
including David and Liam and Richard, there are three people who intend to establish a business.
Also, they need require capital for expansion. Thus, operating by way of a company is a better
choice and it provides tax gains which is not present in case of a partnership.
Thus, operating by way of a company is a better choice.
Issue B
The next issue is the requirements that must be met in order to register the company.
Law and application

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In order to register any company the main requirements that must be met are: (ASIC, 2017)
i. The first step is that the intended party must make sure that the company is a right
choice of business establishment.
A company can be private or public. A private company is a company wherein the
liability is limited to the extent of the shareholdings of the holders.
It is submitted that Richard, David and Liam after considering the benefits of the
company establishes that the company is the best kind of business structure that must
be operated by them;
ii. The company name must be selected – When the name is to be selected then the main
requirements that must be observed are:
a. It must not be identical to some other name;
b. Some of the terms cannot be a business name, that is, incorporated, royal, trust,
bank, etc.
c. Any name that misleads the people regarding the activity of the company is not
permitted or if illegal or offensive.
d. A company must show its legal status, that is, whether it is Proprietary Limited or
'Proprietary'.
iii. How the company will operate must be decided, that is, by replaceable rules or
constitution, or by both.
iv. A proprietary company must have at least 50 non-employee and the company can
either be unlimited with share capital or limited by shares.
v. Every officer of the company must comply with the obligations as an officeholder,
that is, he must make all the financial statements, must update ASIC whenever any
changes are made, pay requisite fees, etc.
vi. Written consent from director, secretary and member must be attained that they are
fulfilling the respective positions.
vii. The company must then be registered either with the help of private service providers
(PSPs) or by lodging the application with ASIC.
viii. Form 201 must be filed with ASIC for the registration of the company.
ix. Once the application is processed then ACN and certificate of registration is
provided.

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x. A corporate key is also provided.
xi. Once the company is registered then the name must be displayed on the business, its
documents.
Thus, the above steps must be compl with for registration.
Now, the name Ridali can be use as the company name provided it is not identical to any other
name. The name “Rich’s Guaranteed Olives” cannot be used as a company name as it misguide
people that the company is provided guaranteed olives.
Conclusion
Thus, the company is the best choice and they can use Ridali as their company name.
Solution 2
Issue
Advise Terry if he can take action against Lazarus Pty Ltd, CMS and/or CM?
Applicable law
As soon as a company is registered, it is considered as a separate legal entity in the eyes of law.
The company is an artificial legal person and has the capacity to sue or being sued in its
individual capacity. But, since a company does not have a heart of its own thus it requires natural
person who represent the company and take actions on behalf of the company. The directors are
the authored person and have the ability to manage the affairs of the company. There are series
of duties that must be complied with by these officers. Since there is separation of ownership
with the separation of power to manage the affairs the company, thus, Statutory Derivative
Action (‘SDA’), are established to bring the balance amid the two powers. (Hofmann, 2005)
When the company is not willing to bring an action on its own wrongs that are committed by the
company itself, the SDA authorizes the shareholder and officers to bring an action against such
wrongful acts (Westgold Resources NL v Precious Metals Australia Ltd [2002].
As per section 236 of the Act, any member or former member; any person who is entitled to be
the member or anybody corporate or officer or former officer are authorized to bring proceedings

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on company’s behalf provided the requirements of section 237 are comply with. (Willcocks,
2001)
Section 82A of the Act submits that an employee or former employee of is also considered as an
officer of the company and thus is authorized to bring the SDA. (Macmillan, 2003)
As per section 237 of the Act, the applicant must satisfy to the court that are full chances that the
company itself will not take any actions for the wrongful proceedings; that the applicant is acting
in good faith (Swansson v Pratt [2002]); that if the leave is approved then it is in the best interest
of the company and there is a serious issue that needs to be tried.
It is necessary that if all the criteria are met, then, the court may grant the application for SDA.
Also,
Many a times the company’s separate legal entity principle is disregarded and the distinction
amid its officers and the company is set aside and the acts of the company are held to be the acts
of the officers. This is called lifting of corporate veil and is normally done in order to bring
fairness in the matter. Some of the instances wherein veil is considered to be pierced are:
i. In case of subsidiary actions - If it is found that any subsidiary is involved in any
tortuous action then the liability arose because of such tortuous act will fall upon the
holding company if the holding company is controlling the actions of the subsidiary
(CSR LIMITED & ANOR -v- YOUNG (1998). Also, if the subsidiary company is the
agent of the holding company then in such situation, the holding company will be
held answerable for all the actions of the subsidiary (Smith, Stone and
Knight Limited v Birmingham, 1939).
ii. In cases of façade or sham - Further, when company is made with the aim to incur
any kind of sham or façade, that is, the company is established to hide the true
intentions, then the company can be disregarded and the officers can be held directly
liable for the actions of the company.
Application of law
Action of Terry against CMS

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It is submitted that Terry is an employee of Cosmo Mining Services Pty Ltd (CMS) which is the
subsidiary of Cosmo Mine Ltd (CM). Recently, it was found that the CMS’s mining activities
have contaminated a nearby river which supplies the water to the 2 mine and Gunbarrel. Now, a
number of Gunbarrel residents and former employees, including Terry, have contracted cancer
because they drank the contaminated water.
Now, it is necessary that actions must be taken by the company shareholders itself against the
action of CMS. If no action is undertaken than Terry can take a SDA action alginate CMS. As
per section 82A, Terry is the former officer of CMS. Thus, if Terry comply with the
requirements of section 237 of the Act then he can apply for the proceedings of SDA.
It is submitted that there are full chances that CMS will not any action alginate its own
wrongdoings. Also, Terry is acting in good faith and if the leave is approved then it is in the best
inters of the company itself and it is a serious issue that needs to be tried as it is hampering the
hazards of many people.
Thus, Terry can take SDA action against CMS.
Terrey action against CM
Now, CM is the holding company of CMS. CSM is involved in a tortuous actions and thus the
liability of its negligence will fall upon CM as CM is controlling the actions of CMS. Thus, CMS
is an implied agent of CM. thus, by applying the rules of CSR LIMITED & ANOR -v- YOUNG
and Smith, Stone and Knight Limited v Birmingham, it is submitted that Terry can hold CM
liable for the actions of CMS.
Terry action against Lazarus Pty Ltd
Now, Lazarus Pty Ltd is formed by CMS shareholders so that the business of CMS can be sold
to Lazarus Pty Ltd and CMS can be wound up in order to shed away its liability. Thus, it is an
action of sham as the true purpose of creating Lazarus Pty Ltd is to protect CMS from its
liability.
Conclusion

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Thus, Terry by complying with the requirements of section 237 of the Act, can take SDA action
against CM. Also, the veil can lifted and CM can be held directly liable for the acts of CMS as
CMS is an agent of CM. Also, the establishment of Lazarus Pty Ltd can be disregarded as it is
an action of sham and façade.

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Reference List
Books/Articles/Journals
Fiona Macmillan (2003) International Corporate Law, Volumes 2-2002, Hart Publishing.
Melissa Hofmann (2005) ‘The Statutory Derivative Action in Australia: An Empirical Review of
its Use and Effectiveness in Australia in Comparison to the United States, Canada and
Singapore’ Bond University.
Case laws
CSR LIMITED & ANOR -v- YOUNG (1998).
Smith, Stone and Knight Limited v Birmingham (1939).
Salomon v A Salomon & Co Ltd [1896] UKHL 1.
Swansson v Pratt [2002] NSWSC 583.
Westgold Resources NL v Precious Metals Australia Ltd [2002] WASC 221
Online Material
ASIC (2017) Steps to register a company (online). Available at:
http://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/. Accessed on
4th October 2017.
Cleardocs (2010) Companies vs Sole Traders: Things you need to consider (online). Available
at: https://www.cleardocs.com/clearlaw/business-structuring/companies-vs-sole-traders.html.
Accessed on 4th October 2017.
Gov (2017) Business structure (online). Available at: https://www.business.gov.au/info/plan-
and-start/start-your-business/business-structure. Accessed on 4th October 2017.
James price (2014) Pros and cons of business structures: Sole Traders, Companies and
Partnerships (online). Available at:

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http://www.jpabusiness.com.au/blog/james-price/2014/04/13/pros-and-cons-of-business-
structures-sole-traders-companies-and-partnerships. Accessed on 4th October 2017.
Peter Willcocks (2001) Shareholders' Rights: Statutory Derviative Actions (online). Available at:
http://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=http://
www.tved.net.au/PublicPapers/
November_2001,_Lawyers_Education_Channel,_Shareholders__Rights__Statutory_Derviative_
Actions.html. Accessed on 4th October 2017.