BAA215 - Business and Corporate Law: Karacal Kitchens Case Study

This case study examines the legal aspects of Karacal Kitchens, a small business considering expansion. It analyzes the suitability of a proprietary company structure, considering factors like control, capital requirements, and liability. The assignment explores the role of replaceable rules versus a company constitution, highlighting their benefits and implications for corporate governance. Furthermore, it delves into the duties of company directors and officers, including their obligations under the Corporations Act 2001, such as the duty of care and diligence, acting in good faith, and avoiding conflicts of interest. The case study also touches upon additional duties like preventing insider trading and insolvent trading, and their applicability to active and non-active directors. The analysis provides a comprehensive understanding of corporate law principles and their practical application in a business context.

Running Head: BUSINESS AND CORPORATION LAW 0
Corporate Law Assignment
5/22/2019
Student’s Name

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Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Question 3........................................................................................................................................5
References........................................................................................................................................7

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Question 1
Various kinds of companies can be registered under Corporations law, for instance, proprietary
company and public company. These companies can be further divided into sub-categories such
as a company limited by shares, limited by guarantee and unlimited company. The type of
company is important as the same decide entitlements and liabilities of members. In the given
case, Kara and Karl are already running a partnership business. They have enough control over
the affairs of their business. Now they want to expand their business by registering the company.
In such a situation, a proprietary company looks to be the perfect option. A proprietary company
is easy to establish, as the promoters have to approach the Australian Securities and Investments
Commission for the same. Such a company can be incorporated by spending $488 in Australia.
This seems to be the most suitable type of company for many reasons. Firstly, if Kara and Karl
would choose this type of business then they will not lose control from the management of the
company, as no public involvement will be there. They will have 50 shares each; it means 100
shares in total. These shares consist of 67 percent of total voting powers and hence they will be
able to manage and control the affairs of their business in a current manner. Here Karl and Kara
are not required to invest any new capital to the company, as they will acquire shares out of the
transfer amount of partnership property to the company. Section 111 of Corporations Act 2001
(Cth) (the act) stipulates that small business often use proprietary company structure as it gives
liberty to managers of business and has less legal compliances in comparison to public
companies (Legislation.gov.au, 2019). As per this section, such a company can have up to 50
members those too not inclusive employee shareholders (Gibson and Fraser, 2013). In the given
case, only Karl and Barbara will be included in the number of shareholders because Kara and
Adrian will also act as an employee and therefore cannot include in the total number of

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shareholders. Loan of Barry Brickle can be repaid from the funds that Adrian and Barbara will
provide to the company in consideration of shares. In this manner, no new capital will be there
for the company at the time of registration, but that does not seem to be an issue as the company
has expansion plans for the future.
They want to raise funds by 2020, that too possible in case of a private company. The company
can ask for funds from 48 more shareholders and further the same can take a loan from banks
and can borrow money from other financial institutions as well. Liability of members will also be
limited to the unpaid amount of their shares. In this manner, members will not be held personally
responsible for the conduct of the company. At last, to say, that company would have an option
to change its type to a public company in future if want so but for now, the proprietary company
will be the best option.
Question 2
Every company requires an identified working structure and manner of working to conduct its
business activities on a day-to-day basis. Replaceable rules play an important role here. These
are mentioned under Corporations Act 2001. These rules are a basic framework that can be
adopted by the company in the original form or with some modification. In order to understand
these rules, this is to state that the same provides provisions related to many of the topics such as
the appointment of a director, company secretary, rights of members, the manner in which
meeting of the board and members can be conducted, terms of dividend and many others.
Replaceable rules are applicable to every company in a default manner if the same does not have
a constitution. These rules prescribe the framework in which a company can operate. There are
many benefits out of the adoption of subjective rules. The adoptions of these rules are beneficial

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for small businesses as it saves cost, time, and efforts that drafting of constitution demands.
Further, these rules grant the basic structure of corporate governance. Apart from replaceable
rules, companies can also develop it is own constitution which will provide a working
framework for the same. It means initial governance of the company can be structured by either
replaceable rules or constitution or a combination of both. As adoption of replaceable rules has
its benefits, similarly, the adoption of the constitution also has the same. If to discuss advantages
behind the adoption of the constitution this is to say that they are easy to understand in
comparison to replaceable rules. By the adoption of the constitution, the company can alter the
power and rights limit of directors. Further, it provides guidelines that are more comprehensive
for directors and officers of the company. In other words, this can be said that it provides enough
flexibility to the company so that the same can decide the operating rules. In addition to this, it
provides increased control on the share capital of the company as a company can decide the
manner of issues and allotment of different kind of shares (Legalvision.com.au, 2018).
A company can adopt its constitution at any time before or after its registration. If a company
adopts constitution then all the members have to be agreed upon terms of the same in writing. In
other situation i.e. adoption of the constitution after registration, the company is required to pass
a special resolution in member’s meeting. Public companies has to give a notice of 28 days for
passing of such resolution. This period is 21 days in case of another type of companies. To pass
the subjective resolution, at least 75% of votes must be in favor. The company cannot alter its
constitution in a manner that breaches provisions of Corporations Act 2001 (Asic.gov.au, 2019).
It means alteration can only be made under the limit of the act and if the company would insert
any provisions going outside of the limit of the act, then the same will be held void.

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Question 3
Directors/officers have some obligations while performing their job. They are bind with such
duties and in case of the breach with any such duties can attract penalties for them. General
duties of directors are mentioned under four sections namely section 180, 181 182 and 183 of the
act. In conjunction with these duties, some other duties are also there that are not general in
nature. Starting the discussion from general duties, this is to say that section 180 of the act make
it focus on care and diligence. It demands these two factors to exist in behavior of directors while
in the respective capacity. Subsection 2 of this section says Business judgment rule and prescribe
that while taking a decision on behalf of the company, directors must set aside their personal
interest and should act in a fair manner. The further director must only take those decisions that
are appropriate in their reasonable belief. As per section 181 of the act directors while
performing their duties, must act in the best interest of the company and their decisions and
activities must have a proper purpose. As per the provisions of section 182 of the act, It becomes
the obligation of all the directors and all the officers of the company to not to misuse their
position in order to gain personal advantages and to create benefits for someone else or in a
manner that can prove negative for the company (Premiers.qld.gov.au, 2019). At last, section
183 of the act says that every director as well officer of the company must not use business
information to attain personal benefits or to arrange such benefits for someone else
(Austlii.edu.au 2019). This section also prevents directors to use business information in a
manner that can prove adverse for the corporation. These all are general duties that are applicable
to all the officers and directors irrespective of the level of their involvement in business
activities. Apart from these duties, certain other duties are also there which directors and officers

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have to follow. As per section 191 of the act, it is duty of directors to disclose their personal
interest whenever exist in a transaction (Australia, 2011).
Prevention of insider trading is one of them. Division 3 of Part 7.10 of the act says that it
becomes the duty of directors of the company to prevent insider trading in the company.
Nevertheless, this duty cannot be applicable in cases of those directors that are not regularly
involved in the business, as they cannot check such activities (Companydirectors.com.au, 2019).
Further prohibition of insolvent trading is another obligation that is again cannot apply to those
directors who are not regularly involved in the business (Aicd.companydirectors.com.au, 2019).
As per section 588G of the act, a director is required to have sufficient knowledge of insolvent
status or poor financial position of the company and therefore non active directors have no such
responsibility.

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References
Aicd.companydirectors.com.au. (2019) Insolvent trading. [Online] Available at:
https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/
pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx
Asic.gov.au. (2019) Constitution and replaceable rules. [Online] Available at:
https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-
and-replaceable-rules/ [Accessed on 22nd May 2019].
Austlii.edu.au. (2019) Corporations Act 2001 - Sect 182. [Online] Available at:
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html [Accessed on 22nd May
2019].
Australia. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act
2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited,.
Companydirectors.com.au. (2019) Duties of directors. [Online] Available at:
https://www.companydirectors.com.au/dutiesofdirectors [Accessed on 22nd May 2019].
Corporations Act 2001
Gibson, A., and Fraser, D. (2013) Business Law 2014. Australia: Pearson Higher Education AU.
Legalvision.com.au. (2018) What are Replaceable Rules in the Corporations Act? [Online]
Available at: https://legalvision.com.au/replaceable-rules/ [Accessed on 22nd May 2019].

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Legislation.gov.au. (2019) Corporations Act 2001. [Online] Available at:
https://www.legislation.gov.au/Details/C2018C00424 [Accessed on 22nd May 2019].
Premiers.qld.gov.au. (2019) 7.3 Corporations Act 2001 (Cth) (the Corporations Act). [Online]
Available at: https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/
handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on 22nd May 2019].