Corporate Law Analysis

1. kate is the owner of a very successful business selling women's shoes. Kate's business is expanding rapidly and she wants to update her business structure from that of sole trader to a more appropriate structure. She seeks the advice of her accountant who tells her that she has a number of options, all of which have advantages and disadvantages. What would be your recommendation to Kate and why? What factors would influence your advice? 

2. Myra is the only shareholder and director of Kids Clothes Pty Ltd (Kids Clothes) whic makes cheap children's clothing. The company has 10 employees. In the past Kids Clothes hadoperated profitably, however since 2011 it has been running at a loss. In July 2012 Myra paid herself a large bonus. 

and then transferred all the remaining assets of Kids Clothes to a new company called Clothing for Kids Pty Ltd. The employees continue to be employed by Kids Clothes. Kids Clothes has no assets and owes each of its employees several thousand dollars in accumulated holiday, superannuation and long service leave entitlements. 

• What possible legal grounds might the employees have to claim their entitlements from Clothing for Kids Pty Ltd? 

• Could any action be taken against Myra personally?

(1).

Introduction:

A business can take up many different forms, in order to conduct its business activities. In the given case, Kate carries on the sole proprietorship form of business of selling women’s shoes. She is very successful in conduct of his business operations and therefore, wishes to update and expand the existing business structure, i.e., proprietorship concern to other form of business, which include unincorporated association, partnership, limited partnership, trust, limited company or a cooperative society. Each of these forms of business restructuring has its own advantages and disadvantages.

Analysis:

A proper analysis of the different options of business restructuring, along with its advantages and disadvantages are to carefully evaluated:

• Partnership: A partnership refers to a situation wherein, two or more legal persons enter into a legal contract to carry on the business in a mutual interest, with an objective of earning profits. In other words, it can also be said that a formal partnership agreement is common, but, not mandatory. In a partnership arrangement, the control and management of the business is shared among all its partners, in the proportion of the capitals invested by them in the business. 

Some of the main features of partnership are as follows:

• A partnership is an association of persons, who carry on the business as partners.
• Under partnership, there is joint ownership and control of all the partners.
• A partnership agreement can either take up a legal form or not.
• All the partners of a firm have unlimited liability. It means that in the event of liquidation of the partnership firm, all the partners of the firm are severally liable for disposition of all the firm’s outstanding liabilities and the creditors as on the date of liquidation.
• Since, there is joint control in partnership, the degree of control exercised by the sole proprietor, Kate in this case, gets dispersed among one or more of such partners.
• Partnerships are generally an inexpensive way of expansion and up gradation of business structure. 

• Company: A company is the most common legal form of carrying out a business. A company has a separate legal identity, which is distinct from its members, i.e. in a company, the members of the company are considered distinct from the company. In a company, the shareholders of the company, who are also referred to as the members can limit their liabilities in the company and are not liable to company debts. 

The most common features of company are as follows:

• The company has a separate legal identity than its owners.
• Transition of a business from a sole trader or a partnership to a company requires high set-up and administrative costs.
• The company must comply with the legal regulations of the Corporations Act, 2001.
• The company is required to prepare two basic documents: a memorandum of association and an article of association.
• A company can either be public or private, and a public company raises funds through issue of a prospectus.
• A company must have at least one member and each shareholder, holds a share which is attributable to the voting rights obtained by the shareholder in the management of the firm.
• The day to day management of the company is managed separate from its members, i.e., by a board of directors separately nominated by the company and its members. 

• Trust: Trusts are those forms of business structuring, which do not have any legal identity of its own, and are incorporated in nature. A trust is run by a small group of persons, usually known as the trustees, who are legally responsible for the day to day conduct and management of the trust. Setting up and maintaining a business trust is expensive and burdensome as it has its own trust deed which specifies the terms and regulations and also, there are yearend administrative tasks which are required to be performed by the trust. Some of the basic features of trusts are:
• A trust has the same identity as that of the trustees. It has no separate identity of its own.
• Functioning of a trust is highly expensive and burdensome.
• A trust is managed by a set of persons appointed by the member of the trust and they are usually known as the trustees.
• A trust holds the assets for the benefit of the members. 

Recommendation to Kate:

From the above analysis of the different forms of business to which Kate can upgrade her sole trader business to, the most suitable up gradation of the sole trader firm shall be to form a partnership firm.

Factors to be considered to select the most optimum form of business structure:

The various factors justifying the up gradation of Kate’s sole trader firm to partnership are as follows:

• The costs incurred in the transfer of Kate’s sole trader firm to partnership shall be very low.
• Unlike company, the degree of control shall be dispersed closely, i.e. control shall be distributed only to the number of partners Kate wishes to tie up with.
• The shift from a sole proprietor to partnership shall involve preparation of only one document, which is the Partnership Deed, which is less complex than the memorandum and articles of association as required by the company and is easily understandable.
• Partnership does not require adherence and compliance to a separate set of rules or Act as companies require compliance to the Companies Act.

Conclusion:

As per Kate’s description of the business given in the case assignment, it will be the most feasible for her to transfer and upgrade her business from sole trader to a partnership form of business, as this restructuring is very expensive and will not require any separate set of laws to be complied with. Kate should enter into a partnership agreement with one or more partners and continue the business. 

(2).

Introduction: In the  given case, there is a transfer of assets of the company to the new company. And, it is also mentioned that Myra, has allowed a large amount of bonus for herself before making payments to employees, on account of their entitlement benefits due by the company.

Analysis:

In the given case, it is discussed that Myra, who is the only shareholder of the company, Kids Clothes Pty Ltd (Kids Clothes) transfers all the assets of the company to a new company, Clothing for Kids Pty Ltd. Along with a transfer of all the employees to the new company. Myra paid a large bonus to herself before making payment of the employee entitlements, which the company was liable to pay.

As stated in the “Employment and employee benefits in Australia”,

In case of insolvency of the company or the transfer of the firm, employees receive priority treatment and priority discharge of liabilities as compared to the shareholders and owners of the company. The employees are even ranked above the unsecured creditors. 

According to the stated provisions, the act done by Myra is incorrect, and before making any such payments to herself by means of bonus, she should have discharged the outstanding liability of the employees on account of employee entitlement benefits. 

According to ‘Employment business transfers’, the new employer automatically substitutes the old employer and all the duties and liabilities of the old employer is borne by the new employer, there from.

So, if the transfer of employees along with the employment benefits, accrued to them, are transferred by Myra’s company to the new company, then, the new company shall be liable for the previous discharge of liabilities relating to the employees.

The possible legal grounds that the employees might claim for their entitlements from Clothing for Kids Pty Ltd are discussed below:

• When there arises a transfer of the business through the transfer of the assets of the company, the employment of the transferring employees terminate in the old company and as per the terms and conditions of the new company, they become the employees of the new company. In such a case, all the benefits relating to accumulated holiday, superannuation and long service leave entitlements, of the old business or company becomes the liabilities of the new company, if such terms and conditions are prescribes on the date of such transfer. (Employment and employee benefits’)
• The contract for purchase/ sale of the business must include terms and conditions of transfer of all the employee entitlements shall be transferred as liability to the new company. (Business acquisition and employee entitlements)
• The new employer has the right to elect whether he desires to take up the existing employees or not.(Employment and employee benefits in Australia)

No, the employees cannot take an action against Myra, even though she is the only shareholder and thereby, the director of Kids Clothes Pty Ltd (Kids Clothes). If the company has transferred to the new company rights and liabilities of the employees also, then Myra would not be personally liable.

All the entitlements due to such employees from the employer, Myra’s company, shall become the liabilities of new company, Clothing of kids Pvt. Ltd. Also, an employee’s superannuation benefits continue to remain with the employee, unless such benefits have been specifically transferred by the old business to the new company.

Conclusion:

The act of Myra is incorrect. But, if the transfer has been made of the assets along with the employee liabilities, to the new company, then the new company shall substitute the old employer and all payments shall be made by the new company in respect of employee entitlements.

List of References

• Cliffe, Dekher and Hofmeyr Employment business transfers.
• Dickfos, J; Nehme, M; Hyland, M; Dahdal, A (2013) Australian Corporate law (4^th edition).
• Williams, G; Tehan, M; Williams, D; Ellison, M (2013), Employment and employee benefits, Practical law company, Australia.
• Online resources: Australian legal Information Institute

• Bozdas, J; Stwart, P (2011) Business acquisition and employee entitlements, Coleman Greig Lawyers.
• Employment and employee benefits in Australia: overview, Practical law, a Thomson reuters legal solution, Australia.
• Skene, H.; Shaw, S.; Perry, D; Bulat, (2015), Employment and employee benefits in Australia: overview, Australia.

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