Introduction to
company law
Corporate Law: Law principles and practice
The origins of companies
Corporate entities have existed in many forms
historically (e.g. the church, municipal bodies).
Companies could only be formed by an act of parliament
or by the sovereign.
The British government passed a series of new statutes
allowing for the formation of limited companies by right
by a promoter who follows prescribed procedures and
conditions.
The Australian colonies basically copied the existing
English legislation.
Corporate Law: Law principles and practice
The development of corporate regulation
The states historically had control of company law, and
consequently the law began to differ between individual
states.
The Commonwealth began to assume power over
corporations as per s 51(xx) of the Constitution of
Australia, which gives the Commonwealth power to
regulate foreign, trading and financial corporations.
See Huddart Parker and Co Pty Ltd v Moorehead (1909)
8 CLR 330.
Corporate Law: Law principles and practice
The development of corporate regulation cont …
In the late 19th century, the states and the Commonwealth
agreed to introduce cooperative schemes in order to
institute uniform legislation throughout Australia (e.g. the
Companies Code).
The National Companies and Securities Commission
(NCSC)later known as the Australian Securities
Commission (ASC), and now ASIC was the overseeing
body.
The Commonwealth has increasingly assumed control of
companies.
Corporate Law: Law principles and practice
Introduction of the Corporations Act
The Commonwealth introduced the Corporations Act 1989
(Cth) to regulate corporations. In NSW v The
Commonwealth [1990] 90 ALR 355, the states challenged
the takeover of the legislation and the High Court decided
the Commonwealth could pass company legislation, but
could not regulate the creation of companies.
The Commonwealth later passed the Corporations Act
2001 (Cth), with the agreement of the states, and assumed
the role of passing new amendments to corporate law.
Corporate Law: Law principles and practice
The Australian Securities and Investments
Commission
The Australian Securities and Investments Commission
(ASIC) replaced the NCSC.
ASIC answers to the Commonwealth Treasurer, institutes
prosecutions through the DPP, conducts consumer
education regarding the economic sector and works
through various bodies to promote the application and
improvement of company law.
Corporate Law: Law principles and practice
Administrative functions and powers of ASIC
ASIC controls the regulation and administration of the
Corporations Act including registering companies;
operating the ASIC Business Centres; maintaining a
public ASIC database; and receiving company
documents, annual returns and financial reports.
ASIC now regulates the financial sector, which includes
banking, insurance and superannuation.
ASIC is responsible for regulating the futures and
securities industries and has the power to license
securities dealers and investment advisers.
Corporate Law: Law principles and practice
Administrative functions and powers of ASIC cont
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ASIC also has significant powers in respect of capital
raising by the issue of securities and ensuring compliance
with the disclosure regime.
ASIC publishes the ASIC Digest, which contains
information such as practice notes, policy statements and
media releases and the like, indicating ASIC’s views and
policies on various issues.
Corporate Law: Law principles and practice
Regulating financial services
ASIC is responsible for regulating corporations that
supply financial products and licensing and monitoring
financial services businesses.
ASIC has a role in protecting consumers against
misleading and deceptive conduct in the provision of
financial services. This covers financial service
contracts in banking, sales of stocks and shares, for
futures, for superannuation contracts and for savings
accounts.
Corporate Law: Law principles and practice
Regulating financial services cont …
ASIC’s website lists consumer warnings for consumers,
including notices of current scams. ASIC’s specific roles
in regulating financial services and markets include:
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In 2010 ASIC was given the power to supervise
Australia’s financial markets, a power previously
exercised by the ASX. ASIC is responsible for
supervising the trading activities of brokers on the
ASX.
ASIC has been given supervisory powers over trustee
companies that provide financial services such as
controlling managed investments and acting as
superannuation trustees, as well as the more traditional
trustee role of estate administration.
Corporate Law: Law principles and practice
Investigating and bringing legal proceedings
ASIC has investigatory and information-gathering
powers. Under s 19 of the Act, ASIC has the powers
to require persons to answer questions when
conducting an investigation.
Under ss 28–29, ASIC can compel persons to
produce books and records when conducting an
investigation.
Corporate Law: Law principles and practice
Other regulatory bodies under the ASIC Act 2001
The Takeovers Panel: the Takeovers Panel’s primary
function is to resolve takeovers disputes where there is a
claim of unacceptable behaviour.
Note also: he Parliamentary Joint Committee on
Corporations and Securities, which contributes to law
reform and the development of law.
Corporate Law: Law principles and practice
The Australian financial reporting system
The Australian financial reporting system was reformed by
the CLERP 9 and operates through:
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the Financial Reporting Council: s 225 of the Australian
Securities and Investments Commission Act 2001 (Cth)
established the council, an advisory body that sets
standards for the financial reporting of companies
the Australian Accounting Standards Board (s 226)
the Auditing and Assurance Standards Board (s 227A)
the Company Auditors and Liquidators Disciplinary
Board: s 203 established the board with the power to
cancel or suspend an auditor’s registration
the Corporations and Markets Advisory Committee (s
148).
Corporate Law: Law principles and practice
Australian Securities Exchange
The ASX is a public company traded on its own exchange,
on which a public company can choose to be listed.
The ASX self-regulates but also cooperates with ASIC in
setting standards of behaviour over companies and entities
which are listed and operating on the ASX. Listed
companies must comply with both ASX rules and general
company legislation.
Listed companies are required to make continuous
disclosure of their financial situation, unlike other
companies which need only report once a year.
Corporate Law: Law principles and practice
Australian Securities Exchange cont …
The ASX also has a regulatory role to play in both
company and securities regulation. This includes:
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supervising market participants (stockbrokers)
listing companies
monitoring and enforcing compliance by listed
companies to the ASX rules.
Corporate Law: Law principles and practice
Australian Securities Exchange cont …
The ASX Corporate Governance Council created the
Principles of Good Corporate Governance and Best
Practice Recommendations:
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Lay solid foundations for management and oversight
Structure the board to add value
Promote ethical and responsible decision-making
Safeguard integrity in financial reporting
Make timely and balanced disclosure
Respect the rights of shareholders
Recognise and manage risk
Remunerate fairly and responsibly.
Corporate Law: Law principles and practice
Corporate Law Economic Reform Program
The government embarked on a program to simplify
company, and other regulatory, law to make it easier to
do business in Australia.
The reform was the First Corporate Law Simplification
Act 1995 (Cth) (which introduced single-person
companies). It would later be known as the CLERP,
which is now up to its ninth amendment.
Reforms have been introduced after reports from The
Corporations and Markets Advisory Committee
(CAMAC), the Parliamentary Joint Committee on
Corporations and Financial Services and ASIC.
Corporate Law: Law principles and practice
Theories of the corporation
What is the entity of a corporation?
What are the components of a company?
Does a company always protect members and officers?
What is the responsibility of a company to the community,
if any?
Corporate Law: Law principles and practice
Some theories of the corporation
The company as a fiction: a company is a convenient
fiction that performs a social purpose. The company is
not a legal person in the same way as a human.
Realist theory: a company is a real ‘person’ brought into
existence by a group of individuals acting together for a
common purpose. As a real rather than a fictitious
person, its existence does not depend on state
intervention but is deemed to be a real person with
organs, allowing it to think and act. A company can
therefore be liable for crimes and wrongs because it can
think.
Corporate Law: Law principles and practice
Some theories of the corporation cont …
Contractual theory: the company is a nexus of contracts
between various constituencies—shareholders, managers,
creditors and employees—who have an interest in the firm.
The law is designed to allow the different parties to make and
enforce various legal relations (e.g. limited liability).
Aggregate theory: related to contractual theory and based on
the idea that individuals form associations or aggregations to
carry out some common purpose; in the case of a company it is
usually a commercial purpose.
Political or stakeholder theory: a company is a distinct social
entity, rather than the product of private contract, and has
various stakeholders, including the community itself. The
company is responsible to the whole community, not just to
shareholders.
Corporate Law: Law principles and practice
Some theories of the corporation cont …
Communitarian theory: a company is a social institution
and operates within a community. It has a responsibility to
all members of the community, and is not just as a profitmaking institution for the shareholders and officers of the
company.
Concession theory: sometimes referred to as privilege
theory, concession theory states that a company is created
by the state and the status of separate legal entity is
conceded, or alternatively granted, as a privilege to a
body. The company, in turn, has responsibilities and duties
to society when making decisions that affect the
community.
Corporate Law: Law principles and practice
The company as a legal person
Company as separate legal entity
A company is a separate legal entity that comes into
existence at the beginning of the day of its registration: s
119.
A company takes the legal capacity and powers of an
individual in and outside the jurisdiction. It can issue
shares and other securities, including rights to put
charges on company property: s 124.
A company, once created, is a separate legal entity from
its owners (members), its operators (directors, officers
and employees) and any other agent who is contracted by
the company.
Corporate Law: Law principles and practice
The consequences of being a separate legal entity
Members have limited liability (i.e. limited to their paidup shares).
Organic theory: the directors and officers form the will
and mind of the company and the various agents
(employees), as organs, carry out the functions of the
company as a body.
Tesco Supermarkets v Nattrass [1972] AC 153
Corporate Law: Law principles and practice
The veil of incorporation
The creation of a company (an artificial entity) creates a
barrier between the members and operators of the
company and its creditors.
Salomon v Salomon & Co [1897] AC 22
Lee v Lee’s Air Farming Ltd [1961] AC 12
The separate entity is created through ‘the veil of
incorporation’.
If a company entity is misused for improper purposes
(e.g. fraud, tax evasion, evasion of contractual
obligations) then a court may ‘lift the veil of
incorporation’ and disallow the separate entity of the
company from its owners and operators.
Corporate Law: Law principles and practice
Lifting or piercing the corporate veil at common law
The first assumption is that a company is a separate legal entity
from its owners and operators.
Industrial Equity Ltd v Blackburn (1977) 137 CLR 567
Courts may pierce the corporate entity, or look behind it, if they
believe the company entity has been used improperly to cover a
wrongdoing, or the company entity has resulted in some
unfairness to members separated from the company.
Green v Bestobell Industries Pty Ltd [1982] WAR 1
Courts are reluctant to pierce the veil.
McLeod v The Queen (2003) 214 CLR 230
Sometimes a member may request that a court pierce the veil
(i.e. reverse piercing).
Macaura v Northern Assurance Co Ltd [1925] AC 619
Corporate Law: Law principles and practice
Reasons for piercing the veil
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to determine the residence of a company for tax
purposes
in the case of fraud or the breach of an agreement
being the basis for incorporation—when an
individual is attempting to avoid a personal
agreement (Gilford Motor Co v Horne [1933] Ch
935)
in the case of inequitable or unforeseen
circumstances (Ebrahimi v Westbourne Galleries
Ltd [1973] AC 360; [1972] 2 All ER 492)
Corporate Law: Law principles and practice
Statutory lifting of the corporate veil
Provisions in various statutes may determine that an
individual is liable for various offences and cannot have
the protection of the separate entity of the company.
Employees, agents and officers may be liable along with
the company for offences committed personally or on
behalf of the company
Corporate Law: Law principles and practice
Piercing under the Corporations Act
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paying dividends out of capital—company directors
will be personally liable if they authorise the payment
of a dividend when there are insufficient profits and
the company becomes insolvent (s 254T)
trading while insolvent (s 588G)—this places liability
specifically on directors
employee entitlements—directors will be personally
liable when a company enters transactions that put in
jeopardy employee entitlements such as
superannuation (pt 5.8A)
uncommercial transactions—when directors,
employees or some related person enter into any
agreement at the expense of creditors (ss 588FB–
588FF).
Corporate Law: Law principles and practice
Piercing under other statutes
Statutory piercing occurs under tax law, occupational
health and safety legislation and environmental
legislation, to name but a few statutes.
Corporate Law: Law principles and practice
Criminal liability of corporations
A company can be convicted of a crime, even
manslaughter.
R v Denbo Pty Ltd (1994) 6 VIR 157
A company can be convicted of personal crimes requiring
a mental element (mens rea), where the wrongful
intention (will and mind) can be inferred to be that of
management.
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
Corporate Law: Law principles and practice
Statutory criminal liability
Legislation may make a company liable for wrongful acts
even where the company did not authorise an act. This is a
form of strict liability.
Competition and Consumer Act 2010 (Cth).
The Criminal Code Act 1995 introduces the principle that
a company may have a corporate culture that promotes
wrongdoing.
Corporate Law: Law principles and practice
A company’s liability for torts
A tort is a wrongful action that allows the person suffering
an injury to sue for damages. A company is liable for torts
committed by its management, employees and agents on
behalf of the company.