Corporations Law Assignment: Restraint of Trade and Company Law

This assignment report delves into key aspects of Corporations Law, addressing two distinct scenarios. The first part examines a case involving Benjamin, a former sales manager, and AlcoStores Pty Ltd, focusing on a restraint of trade clause and the formation of LiquorCheap Pty Ltd. The analysis explores whether AlcoStores can prevent Benjamin from operating LiquorCheap and if Commercial Bank Ltd can hold him personally liable for the company's debts, considering the doctrine of corporate veil. The second part of the report provides advice to Richard and his sons on converting their sole trading olive grove business into an incorporated company. It covers essential considerations such as setting up procedures, costs, taxation, paperwork, liabilities, and control aspects. The report references relevant legislation, including the Corporations Act 2001 (Cth), and legal precedents to support its conclusions, offering comprehensive insights into company law principles and practical implications for business operations.

Running head: COMMERCIAL AND CORPORATION LAW
COMMERCIAL AND CORPORATION LAW
Name of the Student:
Name of the University:
Author Note:

1COMMERCIAL AND CORPORATION LAW
Answer 1:
ISSUES:
The issues that are to be discussed in the present case study are as follows:
 Whether AlcoStores Pty Ltd can compel Benjamin to stop the working of LiquorCheap
Pty Ltd in Quessnsland,
 Whether the Commercial Bank Ltd can sue him for 100,000 $ personally.
RULES:
A restraint of trade clause in a contract between an employee and the employer prevents
the employees to engage in same type of business within any particular time period or
geographical area once the employment contract is once over between them (Sirchia 2017). It
refers to the condition imposed by the employer on his employees from carrying on a similar
type of trade or business like the previous one. This is done to provide protection of the
company’s best interest. However it must not be detrimental to the reasonable rights of an ex-
employee or against the public policy (Srinivasan 2015).
This clause is valid and enforceable when the restraint is only to protect the legitimate
interest of the concerned business. Hence the employee is bound by it if it is reasonable and
required for protecting the interest of the company as seen in the case of Southern Cross
Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460.
A unique feature of a company is its separate legal entity distinct from its owners,
directors or managers. In the landmark case of Salomon v Salomon [1897] AC 22, the separate

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identity of a company from that of its shareholders as well directors and managers is held. In this
case, it is decided by the House of Lords upheld the corporate personality doctrine so that the
creditors of an insolvent company cannot sue the share holders of the company to pay its unpaid
debts. This separation of the company’s identity from the identity of its managers, owners or
shareholders is enumerated in the doctrine of corporate veil that provides a protection to the
members of a company as seen in Peate v Federal Commissioner of Taxation (1964) 111 CLR
443.
However, in some situations, the directors and the managers of the company can be made
personally liable for the loss incurred by the company or to pay the debts of the company. This
occurs when the directors or the owners misuse the power entrusted to them and try to gain
personal benefits at the cost of the company’s interest. In these situations, the court can pierce
the corporate veil and make them liable for this as seen in Adams v Cape Industries plc [1990]
Ch 433.
Again this corporate veil shield can be lifted if it is seen that a company is being formed
to suppress any legal obligation that existed in relation to the directors or owners of the company
as observed in the case of Gilford Motor Co Ltd v Horne [1933] Ch 935. Similar type of
observation was made in the case of Creasey v Breachwood Motors Ltd [1993] BCLC 480. in
many situations, it is observed that a company was created to carry on its fraudulent activities. In
such case the owners or the directors can be made liable for the loss suffered by such company as
seen in the case of Sharrment Pty. Ltd. v Official Trustee in Bankruptcy (1988) 18 FCR 449.

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Application:
In the present case, it is observed that Benjamin used to work with AlocStores Pty Ltd as
its sales manager during the period from 2015- 2017. In the employment contract, there was a
term that he must not involve in similar type of industry for a period of 4 years. This amounts to
a restraint of clause and it is binding on Benjamin as it is not detrimental to his rights or against
the public policy. Thus it is enforceable by law.
However, in 2017, he left the company and formed a new company called the
LiquorCheap Pty Ltd where he owns 95 % of the shareholders of the company. His cousin
Penelope owned the remaining 5% shares whom he made that company’s managing director.
Being a managing director she signs an agreement with Benjamin where she appointed him as
the Sales Manager. This showed that the power and management of the company is in the hands
of Benjamin only. Penelope has no active part in the company’s working.
Further in her capacity, she signs a contract on the company’s behalf for taking loan of
500,000 $ as the starting capital. This can be considered as a set up created by Benjamin to enter
the alcohol business not violating the restraint of trade condition. Thus it is observed that the new
company was formed by Benjamin to escape from his legal obligation. It has been observed in
the case of Gilford Motor Co Ltd v Horne. Thus , the Alcostores can compel Benjamin to stop
the operations of the new company made by him.
Penelope was the only director of the company and owing to that position she signed an
agreement for the company with Commercial Bank in and took out 500,000 $. Hence, he violates
the terms of his contract for which he can be compelled by AlcoStores to stop his present
company. The Commercial Bank takes no security from the company. Though the newly formed

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company ran well in 2017 and 2018, but in the beginning of 2019, the company becomes unable
to repay the loan of 100,000 $ owed by Commercial Bank. In this regard, Benjamin cannot be
made liable in his personal capacity for such loan. This is because it is barred by the doctrine of
corporate veil as the loan was taken by the company and not by Benjamin (Macey 2018).
Further, Benjamin was not responsible for the non-payment of loan installment of the company
in 2019. This was discussed in the principle of separate legal entity of the company as
enumerated in the case of Salomon v Salomon that provides a shield to the directors or managers
of the company from encroaching on their personal liabilities.
Conclusion:
Thus, it can be inferred that
 AlcoStores Pty Ltd can compel Benjamin to stop the working of LiquorCheap Pty Ltd in
Queensland and,
 The Commercial Bank Ltd cannot sue him for 100,000 $ personally.
Answer 2:
Issue:
The issue that is to be analyzed in the present case involves the measures required to
incorporate as well as register a company. In this aspect, Richard and his sons have to be
advised.

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Rules:
The most striking fact of company is its separate and distinct legal entity from its
members which is not present in other forms of business structures. For converting a sole trading
business into an incorporated company, the following need to be discussed;
 Setting up steps as well as setting up costs,
 Taxation scheme,
 Paperwork volume involved,
 Business income assessment,
 Liabilities regarding business debts,
 Control of business.
The structure of a company for any business is mainly given in the Corporations Act
2001 (Cth). The setting up procedure of the company is comparatively difficult when compared
to that of sole trading business. A company must be registered with the Australian Securities and
Investments Commission, hereinafter referred to as ASIC by the use of Form no. 201. The
application for registering a company can be done according to section 117 of the said Act. The
ASIC imposes very strict control and supervision on the company’s operations. The set up of any
company is given in section 1.5.3 under Part 1.5 of the said Act.
However, the setting up method of a sole trading business is less complicated as it does
not involve compulsory registration method. In addition to this, a sole trading business can be
run in personal name of the person controlling it whereas in case of a company, a separate name
is required to be chosen and has to be registered too. Moreover, separate bank account is not

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needed as company where it is mandatory to have a separate bank account in the name of the
company. In sole trading business, personal bank account can be used.
In sole trading business, tax calculation is effected as done in case of an individual but
companies are taxed as a separate entity distinct from its managers, owners or directors. But in
case of sole trading business, business income is calculated along with the individual tax return
of the trader that highly increases the burden of taxation on the trader. However, as in a
company, since taxation is computed separately for the company only, the tax amount to be paid
by a company is less than that paid by sole trading business.
Moreover, for a sole trading company, money earned out of the business is considered as
the individual income. But deductions can be claimed in respect of the cost of running the
business. In case of company, income out of it is considered to be its income only.
The main point of difference between these two business structures is that the sole traders
are personally liable for the debts and losses incurred by it to the full extent which is absent in
case of company in general. The directors, owners or managers can be only made liable when
they are involved in insolvent trading, gaining personal benefits and others. Thus in sole trading
business, the personal properties of the trader can be encroached to pay for the debts or losses
incurred by it.
The sole trading business involves less paperwork as it is less formal when compared to
any company. Further running cost of the former is much less than the latter. Separation tax
calculation and lodging of tax return in sole trading business are not needed which are
compulsory in company. A company is required to keep its records related to finance for about 7
years at least. Further, the operations are under review of ASIC always. Running cost in

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company is more as it is needed to pay fees for registration, annual review as well as other
potential costs.
In sole trading business, total and absolute control lie in the hands of the shareholders
whereas in case of company, if there are more than one director, all of them will control it. Loan
options are easily available in company due to its proper business structure and paper work
which is not so easy for sole trading business.
Application:
In the present case, it is seen that Richard is the single owner of the olive grove. It is a
sole trading business. His sons Davis and Liam joined in recently to support him to expand the
business. They want to convert the family business into a form such that it can be expanded as
required and also that can raise capital from market. For this the best and most suitable model is
the company. Thus to convert it, they shall make an application as per section 117 of the said Act
in Form No. 201 by paying required fee for registration.
It is also seen that Richard wants to keep the name ‘Ridali’ where his sons prefer “Rich’s
Guaranteed Olives” as the name. Whatever name is chosen, it has to be properly decided as the
name has to be registered according to the provisions of the Act provided the name is available.
If it is available, then the name is to be registered by paying the proper fees. In addition to this,
separate bank account in the name of the company is to be opened.
Further, if they desire to collect capital form public, then they shall register the company
as a Public company else they can opt for proprietary company. Moreover, taxation will be done
as per the provisions discussed in the rules portion such that taxation will be done separately for
the company. Thus they can set up the company by following section 1.5.3 under Part 1.5 of the

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said Act. It will further need an Australian Business Number as well as a Tax File Number for
tax registration. After getting registered with ASIC, a Certificate of Registration will be sent to
the company.
Conclusion:
Thus the steps needed to incorporate and register a company are advised to three of them.
References:
Adams v Cape Industries plc [1990] Ch 433
Creasey v Breachwood Motors Ltd [1993] BCLC 480
Gilford Motor Co Ltd v Horne [1933] Ch 935
Macey, J.C., 2018. What Corporate Veil. Mich. L. Rev., 117, p.1195
Peate v Federal Commissioner of Taxation (1964) 111 CLR 443.
Salomon v Salomon [1897] AC 22
Sharrment Pty. Ltd. v Official Trustee in Bankruptcy (1988) 18 FCR 449.
Sirchia, G.D., 2017. An analysis of the fairness and constitutionality of restraint of trade
covenants in employments contracts and their effects in the market place(Doctoral dissertation,
University of Pretoria).
Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460.
Srinivasan, V., 2015. Restraint of Trade: Emerging Trends.

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The Corporations Act 2001(Cth)