Tristan Summer and Bo Cheng are carpenters who live and work in the City of Fremantle, Western Australia. They first met in 2010, when they commenced employment with ‘We-Build-It-4-U Pty Ltd’, a business that designs, manufactures and retails wooden outdoor furniture. In early November 2015, both Tristan and Bo resigned from ‘We-Build-It-4-U Pty Ltd’ to set up their own business manufacturing and selling outdoor furniture.
Tristan and Bo sought advice on the type of business structure that may be suitable for their needs. Tristan, who owns assets to the value of $500,000, preferred the structure of a company over that of a partnership because of the limited liability of the company’s shareholders. Bo, on the other hand, thought that a company was ideal because it is a separate legal entity. Both Tristan and Bo were required to sign non-compete clauses when they commenced employment with ‘We-Build-It-4-U Pty Ltd’. These clauses prohibit them from competing with ‘We-Build-It-4-U Pty Ltd’ post-employment for a period of two years anywhere within the City of Fremantle.
Tristan and Bo therefore decided to incorporate a proprietary company called ‘Outdoor Oasis Pty Ltd’, and the company was registered on 25 January 2016. ‘Outdoor Oasis Pty Ltd’ has two directors, Tristan and Bo, and a total of ten shareholders (Tristan, Bo and family and friends of Tristan and Bo) each of whom hold 1000 fully paid shares. ‘Outdoor Oasis Pty Ltd’ has lodged a Constitution with ASIC. Clause 3 of the Constitution states that the company’s activities are ‘restricted to the manufacture and sale of outdoor furniture’. Clause 4 provides that shareholder Emily Summer, Tristan’s sister, shall become Outdoor Oasis Pty Ltd’s sales manager for life.
Eager to get the business started as soon as possible, Tristan and Bo entered into a number of contracts. Tristan negotiated the lease of a factory unit at 21A Harbour Street, Fremantle, with ‘Coastal Real Estate’. Tristan signed the contract (for the lease of the factory) on 18 January 2016, at a rental of $3000 per month, to commence in May 2016. However, on 29 January 2016, the factory/warehouse in 21B Harbour Street became vacant and is now available at $2000 per month. This unit is much more spacious and convenient. On 2 March 2016, Bo entered into a contract on behalf of ‘Outdoor Oasis Pty Ltd’ to build a wooden bathroom cabinet for Sven Larsen. Unfortunately, Bo underestimated the cost of the raw materials for the cabinet and is now hoping that there is a way the company can avoid its obligations under that contract.
Question One – 15 marks
‘We-Build-It-4-U Pty Ltd’ commences legal action to restrain Tristan, Bo and ‘Outdoor Oasis Pty Ltd’ from engaging in a competing furniture business. Bo argues that ‘Outdoor Oasis Pty Ltd’ is a separate legal entity and that it can do as it pleases. Tristan is not so sure whether Bo’s view is correct.
With reference to the above fact scenario, and using the four-steps-process, discuss whether ‘We-Build-It-4-U Pty Ltd’ is likely to be successful in in its legal action. Your answer must include a discussion of relevant cases and sections of the Corporations Act 2001 (Cth), sufficiently paraphrased in your own words.
Question Two – 6 marks
Emily Summer seeks your advice on whether clause 4 of Outdoor Oasis Pty Ltd’s Constitution is enforceable against the company. Discuss in your own words the key section of the Corporations Act 2001 (Cth) Emily needs to consider, and the case from your topic materials that you consider most relevant. Your answer should include citation of section number(s) and case names.
Question Three – 5 marks
Who may be liable under the contract for the lease of 21A Harbour Street, at $3000 per month? Refer to the key section of the Corporations Act 2001 (Cth) and briefly discuss one relevant case.
Question Four – 4 marks
Outdoor Oasis is registered as a Pty Ltd company. What is the capacity of that type of company upon incorporation? Who is (and who is not) liable for the debts of this company?