Company Law for Business - Lecture notes - TEST NOTES - Lecture notes, lectures 1 - 8 PDF

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Week 1 – Companies, Company Law and the Legal Nature of Companies – – – – – – – –

1. The use of a company for business purposes; 2. How companies are structured; 3. The historical development of companies; 4. The basic characteristics of a company; 5. Various sources of law applying to companies; 6. The corporate principle of separate legal entity; 7. The concept of limited liability; and 8. The role, functions and power of ASIC.

What is a Company? A company us an artificial entity recognized by the law as a legal person with its own rights and liabilities. Corporations Act 2001, regards a Company registered under its act as once type of corporation. Separate entity, distinct from its shareholders, its directors, officers and employees. Shares the same legal capacity and powers of a human being, thus it can enter into contracts, own property and sue or be sued. It enjoys Limited Liability; meaning shareholders are not personally liable for their company’s debts. Shareholders Liability is limited to paying the issue price of the shares that they own. Created by registration under corpartions Act: s119. Shareholders invest, directors manage. • Limited liability makes it easier for companies to raise funds by issuing shares. • With limited liability, risk if transferred from members to creditors. • Creditors may request personal guarantees and security. Sole Trader/ Partnership Growth and size can be restricted as owners carry full liability and owners therefore manager the business. Company regulations and various sauces of law There are three mains sauces of rule that regulate companies:  Legislation – Corporations Act 2001, Australia Securities and Investments Commission Act 2001 which established ASIC to administer and apply the Corporations Act 2001.  Case Law Based on established contractual and fiduciary principles. Doctrine of precent.  Companies Constitutions - Rules and regulations for internal management.  ASX listing rules and ASIC audits. Architecture of Companies  Must have atleast 1 member: S114  The Capital Structure: Funded by equity, debt or retained profits.  Managed by officers who are headed by directors. Members cannot normally make management decisions. The company secretary play and administrative role.

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History  Incorporation by royal charter  17th century – Joint stock companies  Inadequate Legilations: Bubbles act 1719- on royal charter incorporate could trade.  First Corporations Act 1844 (England) allowing non royal charters to be corporate and traded through the creation of registrar of joint stock companies , however limited liability was not introduced until 1855.  Over the years the grounds for case law and legislation grew for company law.  Australia: S51(xx) To make laws with respect to foreign corporations and trading and financial corporations formed within the limits of the commonwealth.  Huddart Parker V Moorhead and Strickland v Rocla Concrete Pipes

Ltd shows the evolution of corporation law and the commonwealths power.Powerr es t r i c t edt of or ei gn,t r adi ng andfinanc i al onl y . 

Attempts to unify the law in Australia: o Uniforms companies Act 1961 o The Co-operative scheme 1981-1991 o The Corporations Law 1991 to 2000 Wakim and Rv Hughes Only states could prosecute, commonwealth could not. Scheme cannot work if case law does not apply throughout Australia. o The Corporations Act 2001 Allows Commonwealth to prosecute, has been extended to 2016. ASIC

Australian Securities and Investment Commission, regulates Australian companies, financial services and financial service organisations and professions. Has a regional office in each state. Ascot database of information on companies and other corporate bodies registered under the Corporations Act. Functions: •

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Piercing the Corporate Veil and Companies and Business Panning – Understand the effect of the corporate veil; and piercing of corporate veil. – Understand the different legal and business characteristics of companies and other business entities; – Have a general understanding of sole traders, partnerships, trusts and managed investment schemes; Company is responsible for its actions and its debt. This is the veil of incorporation. If corporate veil is pierced, the participants could be made liable. Veil can be pierced under general law (case law) and CA. Company Used to Commit fraud:

ReDar by,expar t eBr ougham [ 1911]1KB95 • •

Facts: Co was floated to purchase licence from promoters at an overvalue. Profits shared by promoters. Co went into liquidation. Held: Co set up was dummy co. formed to perpetuate fraud.

Co. Cannot be used to avoid legal obligations Gilford Motor Co v Horne:

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Facts: Horne as Managing Director of Guildford Motor had a legal obligation not to compete with Co. He resigned and competed through Co formed in wife’s name. • Held: New Co was a sham. Co. Used to defeat contractual obligations Jones v Lipman • Facts: Lipman entered into a contract to sell his land. To avoid completing the transaction, he transferred the land into a company he controlled. • Held: The company was used as a device to avoid Lipman’s contractual obligations. The veil was pierced and company had to comply with Lipman’s contractual obligations. Lifting the veil within corp groups. In England subsidiaries have been treated as agents or partners Smith & Knight v Birmingham Corp • Facts: Government council compulsorily acquired land that was leased to subsidiary co by its holding company. Subsidiary was not entitled to compensation as the lease was less than one year. Holding company claimed compensation. • Held: Corporate veil of Subsidiary was lifted and treated as agent of Holding Co. In Australia, more is required than fact that Companies are in a group for the corporate veil to be lifted for group companies, eg. breach of fiduciary duty or tort. • Aust courts are prepared to lift veil of subs in tort cases: Briggs v James Hardie & Co Pty Ltd – where it was held that a Holding Co could be held liable for torts of subsidiary. •

Lifting the Veil under Corporations Act • S588G: A company is responsible for its debts. However, if directors allow insolvent companies to trade, the courts can lift the corporate veil and make the directors personally liable for company’s debts. • S588V: Holding company can be liable for insolvent trading of subsidiary company, if the holding company was aware of it. Companies and Business Planning Each business structure has advantages and disadvantages. Sole Trade • • • • • •

A Sole Trader is the simplest of business structure. The sole trader is a natural person and not a separate legal entity – the business and individual are indistinguishable. The person in control of the business is the person who makes all the decisions. ‘Sole’ means that there is only one owner. Sole traders themselves acquire all the rights and liabilities that are created in the course of running their business. The initial capital required to run a business must be provided by the sole trader from their own resources, or by taking out personal loans.

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Sole traders can trade under their own name, or under a different trading name. If the sole trader trades under a different name then that name must be registered. Registration of trade names is now governed by Commonwealth under a uniform law Business Names Registration Act 2011 (Cth) (BNRA) There is no special legislation governing sole traders, but various statutes apply to running businesses, for example: • A sole trader needs to register for an Australian Business Number (ABN). • A sole trader who generates a turnover of more than $75,000 must register for GST purposes with the Australian Taxation Office (ATO). Liability – unlimited, the sole trader (proprietor) is personally responsible for the debts incurred. Taxation – taxed at the personal rates although allowable deductions may reduce income tax. Goodwill – rests either with the proprietor or the business name. Profit and losses – retained or incurred by the proprietor. Sole trader - is not an employee of the business and is not considered to receive wages. Limited life – if the sole trader dies the business comes to an end (unless there is a succession plan to pass on the business).

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Partnerships Business carried on by persons together with a view to make profit. Applicable law (common law, contract, equity, agency and relevant state legislation) Partnership Act 1895(WA). Creation of partnership: For a number of reasons, e.g. Expansion. Partnership agreement can be written, oral or implied.

General Partnerships Liability of each partner is unlimited Size: Minimum-2; Maximum 20. Can exceed 20 for certain professional partnerships where Corporations Act applies. Relationship of partners to outsiders – Agency law applies – Joint and Several liability. Relationship between partners – fiduciary. Limited Partnerships Limited liability of some partners Composition: At least one general and one limited partner Size: Limited partners: unlimited; General Partners: min 1; max 20 Formation by registration: Register records limit of the liability of the limited partner

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Management: Limited partner does not take part in management. However limited partner is liable for liabilities of limited partnership, as if a general partner if they take part in management. International Context Partnerships are a recognised business structure in other jurisdictions such as Malaysia, Singapore and Hong Kong. The legal nature of partnerships is very similar in all these jurisdictions. All three jurisdictions have partnership legislation that is similar to Partnership Acts found in Australia. Trust A ‘Trust’ is an obligation on a person (trustee) as the legal owner of certain property (trust property) to deal with that property for the benefit of another person (beneficiary). 3 parties: settlor, trustee and beneficiary Settlor creates trust. Trust deed defines the trust. Trustee is legal owner of trust property and manages the property Beneficiary is entitled to the benefits of the trust.

Charact Owner    Fiduciary relationship: whereby trustee must use and preserve property for beneficiary. Different types of trusts: Discretionary trusts; Fixed trusts; Unit trusts.

Managed Investment Schemes • Governed by CA and Managed Investments Act 1998 • Public collectively invest in a venture and share profits/losses. If > than 20 participants, need to register with ASIC. • Manager manages the day to day management • Scheme requires a constitution. COMPARISONS

Company

Partnership

Trust

Minimum Participants

1 member; 1 director for a pty coy; 3 directors for a public coy

2 partners

3 parties - Settlor - Trustee

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Maximum Participants

Separate legal entity Liability

- Beneficiary (1 person can be 2 of these) Infinite

50 non-employee members for a pty Restricted to 20 S115 coy; Corporations Act 2001 Infinite members for a public coy; (Cth); Infinite directors Greater numbers for professional partnerships (eg accountants) Yes No No Liability of company for its debts is Partners jointly & Trustee liable. May be the responsibility of the company. severally liable for debts indemnified by trust Members liability to company incurred by partnership depends on type of Coy

Party to Enforce legal rights

Company

Partners

Duration of existence

Perpetual

Fixed or death/change of Life in being + 21 yrs or partner 80 yrs

Transfer of interest

Share transfer

Transfer of partner’s Beneficiary may assign interest requires consent

Regulation

Greater regulation under Corporations Act 2001 (Cth)

Lesser regulation & expense

Lesser regulation & expense

Disclosure of financial reporting + audit

Required by large pty and public coys

Not required

Not required

Management & ownership

Separate

Raising capital

Shares or debentures. May need prospectus Coy pays

General partners own and manage Own funds or borrowings Partners pay

Trustee manages, ownership split Borrowings

Income tax

Trustee or beneficiaries

Trustee/ Beneficiary pays

Types Of Companies registered under the Corporations Law S112

PUBLIC COMPANIES

PROPRITARY COMPANIES

Limited by Shares

Limited by Shares

Limited by Guarantee

Unlimited with Share Capital

Unlimited with Share Capital No Liability 8

Companies Limited by Shares: • S9: members liability is limited to unpaid amount on share capital. • s254M: Company can make a call on partly paid shares. • S148: must use limited or Ltd • S112: can be public or proprietary company Unlimited with share capital/ Unlimited company: • S9: members have unlimited liability • Company has contractual right to force members to pay for company’s outstanding debts • S112: Can be public or proprietary and must have share capital Companies Limited by Guarantee • S9: members liability is limited to amount guaranteed • No share capital • S148: must use limited or Ltd in its name • S112: Only public companies can be limited by guarantee No liability Company • S112(2): Must have share capital and a constitution • Only mining companies can be No Liability Companies • Company has no contractual right to enforce amount unpaid on shares: S254M(2). Shares are forfeited and sold if call is not met. • S148(4): Must use NL at end of name Public and Proprietary Companies • S45A: Pty Co’s can be large or small • Satisfy 2 of 3 criteria:...