Discuss the procedure and the legal requirements

Discuss the procedure and the legal requirements

Haili Wu and John William became friends while they were studying Business Law at Curtin University. After a few years of working with Glittering Floor Pty Ltd as marketing and sales executives, they resigned from Glittering Floor Pty Ltd in December 2015 and decided to set up their own business of selling timber flooring and tiles. They initially thought a partnership would be the best option. However, ultimately on 1 March 2016 they registered a proprietary company called Sparkle Pty Ltd. The company’s business is financed through the issue of 500,000 $1 shares to Haili, 300,000 $1 shares to John, and 2000 $1 shares to Thomas. Thomas is John’s cousin. Haili and John became the directors of the company.

Sparkle Pty Ltd has the following inserted into its constitution:

“The Replaceable Rules of the Corporations Act 2001 (Cth) shall apply to this company except for the following:

1. Thomas, an employee and shareholder of the company, shall be the company’s marketing manager.

2. The company shall only operate the business of selling flooring materials.”

The company has appointed John as the managing director to manage the day-to-day business of the company. Haili and John have decided to expand their business and sell kitchen furniture along with the flooring material as the house owners often look for purchasing both the products. On 1 July 2016, John entered into a contract to purchase 50 pieces of French provincial large kitchen cabinets from a French company Asealia France Ltd. However, Haili found this contract to be quite unreasonable. John is now hoping that there is a way that the company can avoid its obligations under the contract on the ground that the Company’s constitution does not allow the company to sell kitchen cabinets.

Whilst working with Glittering Floor Pty Ltd, Haili and John had signed non-compete clauses. The clauses prohibited Haili and John from competing with the business of Glittering Floor Pty Ltd during their employment as marketing and sales executives and postemployment for a period of three years. Haili and John believe that the non-complete clauses cannot bind Sparkle Pty Ltd as it is not a party to the employment contract.

Haili and John plan that if their business is successful they will require more capital. In order to raise the capital they will convert Sparkle Pty Ltd into a public company. With reference to the relevant sections of the Corporations Act (2001) (Cth) and case law, answer the following four questions:

Question One – Discuss what factors Haili and John may have taken into consideration in deciding whether to form a proprietary company instead of a partnership. Please outline the characteristics of partnerships and proprietary companies and write notes on the advantages and disadvantages of each type of business structure. Your answer should include an analysis of the liability Haili and John would have under each structure, should the business incurs debts.

Discuss the procedure and the legal requirements that may have been required to be satisfied under the Corporations Act 2001 (Cth) to convert the company from Sparkle Pty Ltd to a public company.

Question Two – The Board of directors decide to dismiss Thomas from his position as the company’s marketing manager and employ Haili’s sister Collette in the same position. Advise Thomas whether he has any ground to enforce the Constitution of the company that employs him in the position of marketing manager.

Question Three – Glittering Floor Pty Ltd wants to bring an action to restrain both Haili and John from engaging in competing flooring business on the basis that they signed non-competing clauses in their employment contracts. Haili and John argue that Sparkle Pty Ltd is a separate legal entity and it can do what it likes.

Advise Haili and John on whether Glittering Floor Pty Ltd is likely to succeed in preventing Haili and John from opening a flooring company.

Question Four – Advise Haili and John on whether they can cancel the contract with Asealia France Ltd on the ground that the Constitution of Sparkle Pty Ltd specifies that the company shall only operate the business of selling flooring materials.

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