MLL221 Corporate Law Exam Notes
Chapter One: Regulatory Framework
Study objectives
• EXPLAIN WHAT A COMPANY IS
o
A company is an artificial entity recognised by the law as a legal
person with its own rights and liabilities
o
Company and Corp are interchangeable
o
A company is a separate entity distinct from its shareholders, its
directors who control its management and its officers and employees
– therefore company may own property, enter into contracts and sue
and be sued in its own name
•
Understand what is meant by the following:
o
The company is separate legal entity
!
Meaning company has a lifespan that is potentially unlimited
!
Directors and shareholders may change but does not affect
!
the company’s existence as a legal person
Company is an artificial entity – same legal capacity and
powers as a human being – same rights as an individual
SEPARATE LEGAL ENTITY
•
On registration, a company becomes a separate legal person
•
S 119 a company comes into existence
•
S 124 a legal capacity of:
" A natural person
" Own property
" Contract
" Sue and be sued
" BODY CORP
" Issue shares
" Grant a charge
o
Perpetual succession
!
Company will continue regardless if shareholders or directors
change
o
Limited liability
!
Important characteristic of companies and is often one of the
main reasons why people choose to form a company to
!
conduct business
LL means shareholders are not personally liable for their
company’s debts
!
•
Limited to the amount they have not paid on the share
Question the strict application of the shareholder primacy model of in
company law
o
Transferability of shares is another significant characteristic which
distinguishes company from partnership
o
Shareholders able to transfer or sell shares free of any restrictions
and free transferability of shares is a requirement for listing on a
stock exchange
•
Understand the significance of stakeholders other than shareholders
o
•
Apply the statutory provision dealing with groups of companies to identify
holding companies and subsidiaries
o
Companies that operate large businesses, organize affairs in a corp
group structure with a holding company that controls a number of
subsidiary companies
o
Each company in a corp group is a legal entity separate from other
group members
o
Company formation (registration) is where company fills application
for registration with ASIC and paying the prescribed fee.
o
o
Then it is a legal entity and can operate anywhere in aus
Corporations Act makes formal distinction b/w ownership and control
of companies
o
Required to have shareholders regarded as owners of company
The Corporations Act 1989(Cth) which was designed to enable the Commonwealth
to assume complete control over all aspects of corporate law, could not take
affect because the HC rules that the Cth has no constitutional power to legislate in
respect of the formation of trading and financial companies
The corporations Act 2001(Cth) was enacted by the Cth government after the
states agreed to refer their powers over corporations to it
HISTORICAL DEVELOPMENT
o
Earliest incorporated bodies with legal personality were in England;
monasteries and local govn authorities
o
They required that ownership of property be conferred on a legal
entity separate from individuals and that this legal entity continued to
exist beyond lifespan of individuals
o
Medieval orgs were incorporated by Royal Charter
o
From early times business enterprises created by either by Act of
Parliament or Royal Charter or formed adapting the partnership form
so they possessed corp characterizes and suited to investment
o
The Bubble Act was passed in 1720 to prohibit the formation of
unincorporated joint stock companies sos that only corps
incorporated by charter could be formed
•
Explain the constitutional crisis created by s 51(xx) of the AC
o
th
Lack of uniformity in 20 century in aus company law as cth parl was
not given a clear power by AC
o
Closest power is s 51(xx) – gives cth power to make laws with
respect to foreign corp’s and trading and financial corp’s formed
within the limits of cth
o
HC then adopted a narrow interpretation of s 51 power – denying the
cth power to make laws with respect to formation of companys:
Huddart Parker & Co Pty Ltd v Moorehead (1901)
Conclusion based on strict interpretation of the word ‘formed’ –
meaning already in existence
o From 1960s onwards the cth and state entered inot various
agreements aimed at achieving greater uniformity in the regulation of
companies throughout aus
• Analyse the impact of NSW v Comm (1989) on the constitutionality of
commonwealth legislation regarding company or corp legislation
o The only issue that was considered in this case wwas whether or not
the provisions in the Corp Act 1989 (Cth) concerned company
incorporation were constitutionally valid
o The HC held that the Cth did not have the power under s 51(xx) of
the AC to pass laws providing for the incorporation of trading and
financial corps and therefore the Cth did not have the power to take
over corp regulation in Aus
• Critically analyse the current arrangement of the referral of powers under s
51(xxxvii) of the const 1900
o The constitutional validity of the Corporations Law scheme was
successful challenged in a number of HC cases, creating legal
uncertainty that led to an overhaul of the regulatory scheme
o In 2000, the states and NT agreed in principle to refer to the Cth
their constitutional powers to make and amend laws dealing with
companies and securities
o S 51(xxxvii) of the Const gives the Cth the power in relation to any
matter referred to it by states
• Explain the role, functions and powers of ASIC, and ASX, the Takeovers
Panel, Financial Reporting Council, AASB, AuSB, Companies Auditors and
Liquidators Disciplinary Board, CAMAC and the Parliamentary Joint
Committee on Corp and Financial services
ASIC (Australian Securities and Investments Commission)
ROLE: main cth authority responsible for administering the Corp’s Act
FUNCTION + POWER: S 11(1) of the ASIC Act provides that ASIC has such
functions and powers as conferred on it by or under the corp legislation. S 5(1)
defined term ‘corp legislation’ to mean the ASIC Act and the Corp Act. S 11(2) and
(3) of the ASIC Act ASIC is given following functions:
! Provide staff and support facilities to the Takeovers Panel and the
Companies Auditors and Liquidators Disciplinary Board
! Advice minister about changes to Corp legislation
! Advise minister and make recommendations about corp law reform
! Compel a person to produce any book or record
! Can institute civil or criminal proceedings against the errant party
o
ASX (Australian Stock Exchange)
ROLE: operates Australia’s main financial markets for equities including shares,
derivatives and fixed interest securities. Major role ensure integrity of financial
markets so that they operate in a fair, orderly and transparent manner
FUNCTION + POWER: plays important role in corporate governance regulation.
Continuous disclosure regime incorporates both legislative regulation and ASX
Listing Rule requirements. Listen entities must inform the ASX of information
concerning company… plays a key role in promoting an informed and transparent
market
Takeovers Panel
ROLE: Takeovers panel was established under the predecessor of the ASIC Act.
The panel was set up as the primary forum for dealing with takeover disputes to
ensure such disputes can be resolved quickly by a specialist body and to prevent
the various parties involved in a takeover from slowing up the process by initiating
court litigation as either a defensive or aggressive takeover strategy.
FUNCTION + POWER: members appointed by the govn on basis of knowledge or
experience in bus, financial markets, law, eco and accounting. Therefore takeover
experts. The Corp Act gives panel broad powers in relation to takeovers. Can
declare circumstances in relation to takeover or control of company, unacceptable
circumstances: s 657A.
Financial Reporting Council
ROLE: Amendments made by Corp Legislation Act 2012 give the FRC additional
function of providing the Minister and profession accounting bodies with strategic
policy advice and reports in relation to the quality of audits conducted by Aus
auditors
FUNCTION + POWER: designed to ensure that while it had broad oversight over the
standards-setting process, it is not able to determine the content of particular
standards. FRC does not have any influence over AASB or AuASB
Australian Accounting Standards Board (AASB)
ROLE: office of AASB established under s 226 of ASIC Act as body that sets
accounting standards. Broad strategic plan and priorities are subject to FRC
approval.
FUNCTION + POWER: AASB must follow the FRC’s broad strategic and general
policy directions: s 232. Must take into advice on matters of general policy given by
the FRC.
Auditing and Assurance Standards Board (AuASB)
ROLE: AuASB was established under s 227A of the ASIC Act.
FUNCTION + POWER: functions and power mirror those of the AASB. Main function
is to make the auditing standards which are given legal effect by s 336 of the Corp
Act. The AuASB also required to participate in and contribute to the development of
a single set of auditing standards for worldwide use: ASIC Act s 227B
Companies Auditors and Liquidators Disciplinary Board
ROLE: established under Pt 11 of the ASIC Act is a disciplinary body which acts
upon applications made to it by ASIC in respect of the conduct of registered
auditors and liquidators
Corporations and Markets Advisory Committee (CAMAC)
ROLE: main corporate law reform advisory body of the corporations Act scheme.
Under s 148 of the ASIC Act CAMAC’s primary function is to advise ad make
recommendations to the govn on any matter connected with the operation,
administration and reform of the corp’s legislation.
Following enactment of Corporations Legislation Amendment Act 1990 (cth) (the
Corp Law Scheme)… the corp law was a law of each individual Australian state and
territory but operated as commonwealth law
Parliamentary Joint Committee on Corp and Financial services
ROLE: Part 14 of the ASIC Act provides for the appointment of a Parliamentary
Joint Committee on Corps and Financial Services at the commencement of the first
session of each parliament. The purpose is to add an additional level of
parliamentary supervision over the Corps Act scheme. S 243 of ASIC says duties
are to inquire and report into the operation of the corps legislation generally, ASIC
and the Takeovers Panel
Chapter 2: Registration and its Effects
Study objectives
• Appreciate the importance of the limited liability corp
o
LL means the shareholders are not personally liable for their
company’s debts
o
The extent of a shareholder’s liability depends on the type of
company; s 112
o
It is only when the comp has insufficient assets to pay its debts that
o
the issue of whether shareholders may be liable arises
Effect of LL is that risk of bus failure is largely transferred from
company’s shareholders to its creditors
o
LL achieves various goals
" Facilitating enterprise
" Reducing monitoring
" Promoting market efficiency
•
" Encouraging equity diversity
Understand what is meant by the following:
o
Registration or incorporation of a company
" Creditors are more prepared to lend large amounts of money
to companies b/c the comp’s assets are partitioned and
shielded from the personal creditors of the company’s
shareholders
" Locking in shareholders capital allows comp’s to enter into
long term relationships with various outside parties and to
develop org structures and intellectual capital
o
Separate legal entity
" Corp Act sets out various characteristics described above,
clear that original companies legislation was drafted primarily
to meet the needs of large scale bus’s with large numbers of
investors
•
Appreciate the significance of the company as a separate legal entity
•
Analyse the case of Salomon v Salomon & Co Ltd (1987) and its
significance as far as company law is concerned
o
Mr. Salomon was a cobbler and sole trader – decided to incorporate
the company and transfer assets to company
o
At the time of case, needed to be more than 1 shareholder – he
wanted to maintain control of company … did this by giving himself
20,000 shares and 6 shares to Salomon family
o
Previously he was 100% now he is 99% - he was also director of
company and his two sons were fellow directors – effective
controller and owner of company
o
o
Company had contract to make army boots
Lets try recover debt from Salomon directly – he said no not going to
pay these are company debts not my debts
o
Court said ‘HE WAS RIGHT’ – liability, as shareholder was limited…
o
Famous case Salomon – full implications of concept that a company
is a separate legal entity was clarified – especially in relation to
what were in reality one-person companies
o
The Corp Act allows the formation of public or proprietary companies
with a single shareholder: s 114
o
Principle of Salomon’s case has been applied in many cases so that
its operation has expanded to include many situations which the
HoLords judges would not have anticipated
HELD
o
Company is a separate legal entity even though a single person manages
o
and controls it
A company can contract with its controlling participants
Compare Salomon and Lee v Lee’s Air Farming Ltd (1961)
o
Company owned by Mr. Lee, one share owned by solicitor because
legislation at the time said company had to have more than one
shareholder
o
Lee was director, shareholder and pilot and employed by company as
a crop duster – plane crashed and he died
o
Mrs Lee worried, doesn’t know what to do, where is she going to get
income – decides to make workers compensation claim – legislation
at the time provided employees of companies to get compensation if
they die/injured at work
o
Mrs. Lee said she’d bring the claim, in the course of doing his job that
he died
o
Insurance company in control rejected workers compensation claim
b/c it said Mr Lee and Lee’s company were the same thing and you
can’t enter into a contract with yourself you cant be employer and
employee at the same time – not entitle to claim
o
A one-person company is a separate entity from its controller who
o
may also be its sole employee
The recognition of a company as a separate legal entity may work
against the person responsible for the formation of the company
HELD
o
Company is a separate entity from its controller – who may also be its sole
employee
o
Company is a separate legal entity and a person may concurrently have a
variety of legal relationships with that company
Even if all shareholders and officers of company dies, companies existence is
unaffected
Macaura v Northern Assurance Co Ltd
o Mr. Macaura owned a forest, he owned a forest (lumberjack)
o Wanted to take out an insurance policy to protect assets from fire or
damage
o Took out an insurance policy IN HIS OWN NAME
o Assigned his rights to the timber to a company he was the sole shareholder
of
o Low and behold there was a fire, forest burnt down, tried to claim on his
insurance policy
o At the time there was insurance legislation in place, saying you had to have
an insurable interest – only take it out over something you own
o Insurance company refused to pay on the claim because after he assigned
his interest in the trees he had effectively lost his insurable interest
HELD
o Once you assigned interest of the trees to the company, it was a companies
interest and a company is a separate legal entity
o Therefore no insurance money
•
Explain why companies in a group of companies are still seen as separate
legal entities
o
The shareholder of a one person company does not have a legal or
equitable interest in the companys property
o
Companies in a group are treated as separate legal entities even
though they are part of a group
o
Directors of a comp that is a member of a group cannot act in the
best interests of the group and disregard the interests of that
company’s shareholders and creditors
PIERCING THE CORPORATE VEIL
o
Obligations of the company is not obligations of shareholders
o
The recognition that a company is a separate legal entity is often
referred to as the ‘veil of incorporation’ or ‘corporate veil’
o
This is b/c once a company is formed, the courts usually do not look
behind the ‘veil’ to inquire why the company was formed or who really
controls it
o
When the separate entity concept is coupled with LL the corp veil
ensures that shareholders are not personally liable to creditors for
their comp’s debts
o
In the case of a company limited by shares, their liability is limited to
the amount unpaid on the nominal value of their shares: s 516
o
Eg. Moneybags Pty Ltd only has $2 assets, may be liable for much
more but that’s all it has … can Mr. Bump ‘pierce the corp veil’ to
recover damages from wealthy Moneybags? Answer is no –
obligations remain with the company and can’t be imposed onto
shareholders
o
Court will look behind the veil of incorporation if authorized to do so
by legislation
o
Corporate veil wont be lifted simply because a company cannot pay
its debts
CRIM LIABILITY OF A COMPANY AND A COMPANY’S LIABILITY IN TORT
o
The application of Salomon’s principle to corp groups has enabled
holding companies to avoid liability to tort creditors of subsidiary
companies b/c the holding company si a separate legal entity distinct
from its subsidiaries and therefore not liable for the debts of it
subsidiaries
o
Where they are tort creditors rather than contract, raises a number of
complex eco, social and ethical questions, especially where the
subsidiary is under-capitalised and cannot meet its tort liability
Where company used to avoid existing legal duty
•
Corporate veil may be pierced where company formed for sole or dominant
purpose of avoiding an existing legal duty – OK to form a company to limit
personal liability for future obligations, but not to avoid existing obligation
Gilford Motor Co Ltd v Home
- company formed for sole or dominant purpose of avoiding a noncompete clause
• Jones v Lipman
- company formed for the sole or dominant purpose of avoiding a contract
for the sale and purchase of land
INSOLVENT TRADING
• Insolvency = company cannot pay its debts as they fall due for patment
• Corp act lifts corp veil when company trades while insolvent and imposes
personal liability on directors for the company’s debts (s 588G)
• S 588G: Directors become personally liable if the fail to prevent the
company incurring a debt when there are reasonable grounds to suspect the
company is insolvent
•
Lifting the corp veil of group companies
“…the court is not free to disregard the principle of Salomon merely because it
considers that justice so requires. Out law for better or worse, recognizes the
creation of subsidiary companies, which though is on sense the creatures of their
parent companies, will nevertheless under the general law fall to be treated as
separate legal entitled with all the rights and liabilities that would normally attach to
separate legal entities: Adams v Cape Industries
SITUATIONS WHERE LEGISLATION HAS LIFTED CORP VEIL IN CORP GROUP
•
Taxation consolidation
•
Consolidated financial statements
•
Holding company’s liability for insolvent trading by subsidiary
•
The benefit of the group as a whole
• Pooling in liquidation
REFER TO TEXT BOOK FOR DEFINITION OF THEM
COMPANY LIABILITY for crimes and tots
Can a company be liable for a crime or negligence?
•
VICARIOUS LIABILITY
o Legislation may provide that company may be convicted for actions
of its agents without the need to impute a guilty intent to the
company
o
Under common law, an employer (company) is vicariously liable for
the acts of its employees in the court of employment
o
•
Actor is personally liable and company is vicariously liable
DIRECT LIABILITY – organic theory
o Company may be primarily liable when the act/intent of a person are
taken under the ‘organic theory’ to be the act/intent of the company
itself
o
Company liable for the act/intent of employees ‘who represent the
directing mind and will of the company, and control what it does’ HL
Bolton (Engineering) v TJ Graham and Sons Ltd (1956)
o Whether person constitutes the mind and will of the company
determined on case-by-case basis
o Seniority is key factor
Tesco Supermarkets Ltd v Nattras (1972)
• Tesco Supermarket chain, own half of the UK
• Shop assistant in UK, 1000 of shops, who was low in hierarchy of company
• Offering sale on shopping powder, put out there at a higher price then
advertised, was a problem because it was an offence under legislation to
sell things at a higher price then they are advertised
• Tesco was prosecuted – run argument that we as a company can’t be liable
for crime, not our fault the shop assistant did this, obviously not controlling
mind of company
THE PROCESS OF REGISTRATION (OR INCORPORATION)
How to create a company
•
Lodge application from 201 with ASIC & pay fee
•
S 117 CA sets out the prescribed contents of the application: