Question

Sarah had a farm in Margaret River where part of the land was used for growing grapes. Her business involved growing the grapes and selling the crop to a local winery that was run by Jane. Two years ago, Sarah and Jane decided to go into business together and register a company Sarah Jane Pty Ltd, with the intention that Sarah would look after the growing of the grapes and Jane would extract the wine and promote the sale of the wine. Before the company was registered, Sarah’s accountant, Horace Rumpole, ordered some winemaking machinery from Joe Machinery Ltd under a contract, which he signed as “agent of Sarah Jane Pty Ltd.” Sarah Jane Pty Ltd issued 300,000 $1 shares to Sarah and 200,000 $1 shares to Jane. Both Sarah and Jane transferred their businesses to the company in exchange for the shares. Sarah and Jane were made the directors of Sarah Jane Pty Ltd. The business was very successful and required more capital, so a year ago Sarah and Jane decided to convert Sarah Jane Pty Ltd into a public company, ‘Sarah Jane Ltd’ with the following constitution:

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

1.Horace Rumpole shall be the company’s accountant until 31 December 2016.
2.The company shall only grow grapes and operate a wine making business Sarah Jane Ltd now has a large number of shareholders through the issue of 1 million shares to the public and the directors of the company are Sarah, Jane and Kate.

Six months ago, the directors of Sarah Jane Ltd decided that since they did not require all the land for growing grapes for their winery, they would grow wild flowers on a portion of it. This decision was based on recommendations from Horace Rumpole. Being confident of the wild flower crop, Sarah Jane Ltd entered into a contract to supply Hilda Florists Ltd. However, the soil in the vineyard proved to be unsuitable for growing wild flowers and Sarah Jane Ltd could not supply Hilda Florists Ltd. Hilda Florists Ltd had to purchase replacement flowers at great expense and demanded compensation from Sarah Jane Ltd. The directors of Sarah Jane Ltd have argued that their company could not be liable as it was beyond its capacity to enter into such a contract and Hilda Florists Ltd should have known this. With reference to the relevant sections of the Corporations Act (2001) (Cth) and case law, answer the following four questions:

Note: the 4-step process is not required for this part.
Question One – 4 Marks

Advise Sarah and Jane of the advantages and disadvantages of operating their business:

(i) As Sarah Jane Pty Ltd; and
(ii) As Sarah Jane Ltd.

Answer 1

(i) Sara Jane Pty Ltd. -

In this case, company is registered as a Private Company. Private Company adds ' Private limited' at the end of it's name.

Advantages of private company are:

1) Separate Legal Entity- It has separate existence in the eyes of law and is a artificial judicial person.

2) Perpetual Succession- Until legally wound up or struck off by MCA, company can work till lifetime. It is not affected by death, resignation or/and retirement of members.

3) Limited Liability- No personal liabilities of members.

4) Capacity to sue and to be sued in it’s own name.

5) Separation of Ownership & Management- Director's are accountable and responsible for management.

6) Easy incorporation because of lesser compliance.

7) Easy fund availability.

Disadvantages of Private Company are:

1) Restriction on free transferability of shares.

2) Maximum number of member’s are also limited.

3) Invitation to public is prohibited.

(ii) Sara Jane Ltd. -

In this case, company is registered as Public Company. Public Company adds 'Limited'at the end of it's name.

Advantages of public company are :

1) Liability of shareholders is limited.

2) Capital can be easily raised through Public Issue.

3) Separate Legal Entity i.e., it has separate existence in the eyes of law.

4) Shares are easily transferable.

Disadvantages of Public Company are :

1) Lack of flexiblity as it is binded by rules and regulations.

2) Lack of secrecy - because of public involvement.

3) Mostly suitable for high scale businesses.

4) Involvement of High Costs in registration.

Sare and Jane should keep these points in mind and make their decision accordingly.