Question

The Parties:

• Kara & Karl Kelsey – owners of Karacal Kitchens
• Barry Brickle – Karl’s cousin and retiring employee of Karacal Kitchens
• Adrian Anthill – Friend of Kara and Karl and recently qualified kitchen designer
• Barbara Black – Friend of Kara and Karl

The Facts:

Kara and Karl Kelsey own and operate Karacal Kitchens, a small business operating from premises at Coleman Street in Moonah. The business custom designs, manufactures and installs bespoke kitchens. The business began operating in 2010 and by the end of 2018 it employed two cabinet makers and two designers.

Up until March 2019 Barry Brickle had worked for Karacal Kitchens. He lent the partnership $100 000 when it commenced business. Kara, Karl and Barry have all agreed that it is time that Barry stopped working for the partnership and for him to be repaid his $100,000.

In order to repay Barry this money Kara and Kelsey are considering registering a company and expanding the business to include friends Barbara and Adrian. Adrian has recently finished qualifications in design and manufacture and Barbara has always spoken about wanting to become involved in Karacal Kitchens in some capacity if the opportunity ever arose.

Adrian, Barbara, Karl and Kara meet and decide that they wish to incorporate a company. They propose:

1. That two directors be appointed – Kara and Adrian. They will each also be employed by the company to work 40 hours per week;
2. That 150 shares be issued at $ 2,000 per share;
3. That the existing partnership assets are worth $ 200,000;
4. That Barry Brickle is owed $100 000 that needs to be repaid from any funds raised by the registration of the company and the creation of shares;
5. That Adrian purchase 25 shares with the payment of $ 50,000;
6. That Barbara purchase 25 shares with the payment of $ 50,000;
7. That Karl and Kara each ‘acquire’ 50 shares by selling the partnership assets to the company;
8. That the company set a dividend policy that provides that 50% of any profit that the company makes each year is returned to the shareholders in proportion with their shareholding;
9. That the company consider fundraising at the end of 2020 should they need to borrow any funds to expand their operations and move from their current rental premises in Coleman Street;

Issues:

You are approached by Adrian and Barbara who seek advice on the following issues:

1. What type of company structure would you suggest is the best appropriate and why?
2. What is the role of the ‘replaceable rules’ and the benefits, or otherwise of adopting a constitution for any company that they may establish. What are the ways that a constitution can be adopted and the major legal limits that exist in relation to altering a constitution?
3. Does the Corporation Act 2001 (Cth) mandate that companies need to have regular meetings? Barbara works as a geologist and spends at least three months of the year out of the country. How can she participate in meetings during her time overseas?
4. What options would be available to Barbara should she decide to sell her shares in the company at a later date, should her work as a geologist mean that she is unable to remain involved in the business? Are there mechanisms that can be put in place at the time that the company is registered to deal with how and to whom she may sell her shares?
5. What are the basic duties of directors and are they different for directors that work within the business and those that are not directly ‘hands on’ within the business?
6. What liability might the directors face should any of the kitchens that they install be faulty and cause injury to customers?

Required:

You must answer question 1 plus any two other questions (three questions in total)

Please use case law and/or legislation to illustrate your answers

Prepare your answers in report format, in any way that informs the parties of their legal obligations and/or rights in relation to the proposed incorporation.

Answer 1

1. The most appropriate business structure for Karacal Kitchens is the Limited Liability Corporation (LLC).

The chief characteristics of Limited Liability Company (LLC) are as follows:

• It is formed by one or more individuals who bond through a special written agreement
• The written agreement needs to specify and enumerate all the terms and features of the business
• LLC can be used for banking and finance oriented business as scope of liability is less
• The business owners are given liability protection in this business formation
• Though the LLC business has to pass through taxation, there is no involvement and scope of double taxation

The various advantages of a LLC are:

• Quite adequate as well as valid protection is given to the personal assets of the owners and they cant be ceased in any kind of debt scenario
• There is no scope of double taxation, thereby limiting the liability of company
• Foreigners can also become owners in LLC as there is no kind of ownership restriction
• Quite flexible form of business

2. The replaceable rules have been defined in the Corporation Act. These rules can be adopted as well as modified to suit the business and governance needs of any company. However, to facilitate the changes in a replaceable rule, the company must have a Constitution.

The benefits of adopting replaceable rules are as follows:

• The internal governance of the company can be easily managed with the help of replaceable rules
• The replaceable rules specially benefit a newly formed business as it is cost effective
• The scope and objective of replaceable rules is quite flexible
• Gives the right and power to minority shareholders so that they can protect their sanctity in business

Constitution is another entity which helps in the internal management of the company. Constitution is considered more comprehensive than replaceable rules. It can be considered as a contract between the company and its members as well as directors. Constitution can be adopted both before and after the company’s registration. If adopted before registration, each member of the company must affirm to the constitution in writing. If the constitution is adopted after company’s registration, a special resolution must be passed by company’s members to facilitate the same.

The terms and conditions stated under a constitution can be changed by passing a special resolution. The resolution needs at least 28 days prior notice in case of publicly listed companies and 21 days prior notice for other kind of companies. The resolution needs at least 75% of votes in its favour, to make the changes effective and applicable.

3. The corporation Act makes it mandatory for public listed companies to have annual general meetings, every year. In private companies, there is no mandatory clause of conducting annual general meeting every year.

It is desired that all the directors of the company must attend the annual meetings. A prior notice of the meeting is dent to the members. Members need to confirm heir presence or else must mention the proxy who can attend the meeting on their behalf. It depends on the terms and conditions laid in the company’s constitution to give permission to a proxy to cast vote, on behalf of the actual member. Barbara can send proxy to represent her in meetings which she can’t attend herself.