Corporations Law Lecture Notes PDF

Preview

Summary

entire course notes...

Description

THE NATURE OF THE COMPANY Company powers – Agent – Executing Documents Corporations Act 2001 (CA) s 124 – 127 • S 124(1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to (see CA for the rest of the powers…): • S 124(2) A company's legal capacity to do something is not affected by the fact that the company's interests are not, or would not be, served by doing it. • S125 Constitution may limit powers and set out objects • S 125(1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution. • S125 (2) If a company has a constitution, it may set out the company's objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution. S 126 Agent exercising a company's power to make contracts (1) A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal. S127 - Execution of documents (including deeds) by the company itself (1) A company may execute a document without using a common seal if the document is signed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary--that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company. (2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary--that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company. (3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2). (4) This section does not limit the ways in which a company may execute a document (including a deed).

___ Consequences of the Separate Entity Doctrine  “The law treats the members of a company and those who manage its affairs as separate from the company. Therefore, a company has a separate legal personality to those who own and manage it (even if it is operated by a single family). The law states that a

Corporations Law 1 Synopsis

company has the legal capacity and powers of an individual s 124(1). However, the court’s have also realised that, the mandatory application of the separate entity doctrine from Salomon’s case can adversely affect a wide range of people (ie: shareholders, creditors). Consequently the issue is now whether the corporate veil that shields the individuals behind the company can be lifted and those individuals behind it will then be held liable for the acts of the company.” •

•

s.125(2) – a company may have a constitution stating objectives and defining/restricting powers. However, merely because an act of the company is outside of the objectives/powers, does not automatically render the act invalid for that reason. S125 – and s125(1). Contract with outside party won’t be invalid merely because it’s contrary to those objects.

COMMON LAW LIFTING OF CORPORATE VEIL 

Fraud



Agency



Groups



Commercial justification



Tort/Contract Distinction



Improper conduct

Environment Protection Authority v. Caltex Refining Co (1993) 178 CLR 477 •

Facts: EPA requested Caltex provide certain documents. Caltex said no, citing the common law entitlement (below).

•

Held: The High Court held (by majority) that the common law right that an individual enjoys – being the entitlement to refuse to provide information that could tend to expose that person to a criminal charge – does not extend to a corporation

Foss v. Harbottle (1843) 67 ER 189 *Salomon v. Salomon & Co Ltd [1897] AC 22 •

Facts: Aron Salomon registered a limited company under the Companies Act 1862 (UK) to purchase his boot manufacturing business. A large part of the purchase price was left outstanding as a debt due from the company to Salomon. Pursuant to this legislation, Salomon enlisted 5 of his adult children and his wife as shareholders. When the company went into liquidation, Salomon’s secured debt would theoretically have priority over unsecured loans.

•

Held: Both at Trial and on Appeal, decision was for the liquidator. Reasoning being that Salomon Ltd was merely acting as an agent (trial) or trustee (appeal) for Salomon the individual. All JJ’s stressed the ‘scandal’ that would follow if they were to legalise such a transaction.

•

However, the House of Lords reversed the decision. The basis for this was that the corporate form is a ‘separate entity’ and is distinct from people behind it. The company had conducted business in its own right. The seven persons required for formation of the company did not have to be independent. Essentially, if the “i’s” were dotted and the “t’s” crossed upon incorporation, a company is formed and that company is a separate entity.

2

Corporations Law 1 Synopsis

Consequences of the decision include: •

no requirement that directors be independent – a sole trader could incorporate and other shareholders could be mere dummies – thereby paving the way for our current one-person company (s.114);

•

no requirement of substantial capital – there is nothing to dictate that a company should have a minimum capital – paved the way for the coining of the phrase “$2 company”;

•

the general presence of a corporate veil between the people who conduct the company and the company itself.

Macaura v. Northern Assurance Co Ltd [1925] AC 619 • • •

Case highlights the notion of separate entity. Macaura would be decided the same way today? NO – the Insurance Contracts Act would actually mean a different decision. Although the principle of Macuara would still equally apply today.

Macleod v The Queen (2003) 214 CLR 230; [2003] HCA 24 •

Facts: Macleod established a film production company and invited membership for fundraising (tax breaks for film investment at the time meant much interest). Raised $3million but only used $718,000 for company purposes; used the rest to buy shit for himself. Macloed argued that as he was the sole director, the company had, by implication, approved of his appropriation, as there existed no one on the board to contest it.

•

Held: Court differentiated between knowledge and intent and said, despite the separate entity knew what was happening there could not be the same imputed intent. A limited company cannot lawfully consent to its controller appropriating its property otherwise than when permitted by the Corporations Act.

•

MacLeod, the HC ruled against MacLead because: a company, eve though controlled by one individual could not authorise something was in breach of the purposes of company law + previous authority was to be doubted.

Lennards Carrying Co Ltd v Asiatic Petroleum Company Ltd [1915] AC 705 Tesco Supermarkets v Nattrass [1972] AC 153 VTB Capital Plc v Nutritek International Corp & Others [2012] EWCA Civ 808, [47]-[96].

CAN WE LIFT THE CORPORATE UNDER THE COMMON LAW? In what circumstances do we ‘pierce the curtain/veil’?  Generally, on the basis of: fraud, agency, groups, commercial justification, tort/contract distinction, improper conduct. FRAUD Gilford Motor Co. v. Horne [1933] Ch. 935.

3

Corporations Law 1 Synopsis



Facts: Horne had been employed at GM and had signed a covenant so as to prevent him soliciting clients if he were to leave GM. Upon ending his employment, H set up his own business and incorporated a company, under his wife’s name, to run that business. However, H conducted the company’s affairs. H argued that he had not breached his restraint of trade covenant, as it was the company (a separate legal entity) soliciting clients and not H the individual.



Held: The judges held that the company was a “sham” – however, did not contest that it had been properly formed. “Sham” related to the fact that it was a cloak/device, and was in operation for the specific purpose of allowing H to breach his obligations. However, Ford (p.127) argues that this case may not actually be a lifting of the corporate veil case and may be seen as a company being formed illegally in order to breach a contract.

Artedomus v Del Casale (2006) 68 IPR 577; [2006] NSWSC 146. AGENCY

*Smith, Stone & Knight v. Birmingham Corp. [1939] 4 All E.R. 116. (AGENCY)



Facts: City of Birmingham wanted to acquire land which was premises of Birmingham Waste Co Ltd, a wholly owned subsidiary of SSK. Council did not have to pay compensation to BW Co Ltd as the parent company could have terminated lease at any time. Therefore the issue was whether SSK, as parent company was entitled to compensation.



Held: Atkinson J upheld SSK’s claim that they were entitled to compensation, i.e. the veil was lifted and the two entities were treated as one. He said to look at 6 points, with the first point being determinative: 1) Were the profits of the business treated as profits of the parent? 2) Did the parent appoint the persons carrying on the business? 3) Was the parent the head and brain of the trading venture? 4) Did the parent govern the venture, decide what should be done and determine what capital should be embarked on the venture? 5) Did the parent make the profits by its skill and direction? 6) Was the parent in effectual and constant control?



Note that SSK Case has been followed in Australia in a number of subsequent decisions (e.g. Hotel Terrigal Pty Ltd v Latec Investments Ltd (No 2) (1969)). However, contrast the decision with Bird Cameron. The six criteria in Smith Stone are: relevant only to parent/subsidiary relationships. (you may also be able to argue ‘relevant to the agecy basis of lifting the corporate veil’).



*ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570; [2005] SASC 204



Facts: Negligence claim between two accounting firms. Negligent advice was given by Bird Cameron Pty Ltd (no assets), so plaintiff wanted money from the partnership (limited assets). Could the company been treated as separate and distinct from the partnership? It was argued that there was an implied agency relationship between the two entities.



Held: Sth Aus Sup Court went against SSK in holding that the veil should not be lifted. Ratio: Control by shareholders and complete unity by the shareholders and management will not be sufficient to lift the veil. Courts must look to the purpose

4

Corporations Law 1 Synopsis

behind the corporation – in this case the purpose was legitimate, it was for tax and superannuation purposes AND the company was conducting its own business.



ACN v Bert Cameron – the judge there said they need to find a proper commercial motive.



the corporate veil would have been lifted if: there was no underlying legitimate commercial purpose for the establishment of the separate entity. Part of the critical reasoning in this case was the idea that the company had been fomed many years before and there was no temporal connection between when the company was formed and the so called ‘transfer of assets and obligaitons’. If it only occurred 3 months before and if the accountancy rules had prevented it – you could argue that what they were tyring to do was insulate themselves from liability.

GROUPS DHN v. London Borough of Tower Hamlets [1976] 3 All E.R. 462. (GROUPS) A strict application of Smith Stone Knight. Very similar facts but, in this case, the Court of Appeal went even further to hold that treating two subsidiary companies and their parent as one entity for compensation purpose, without apparent concern as to whether the subsidiaries were really established with their own financial base and the other facilities to carry out their functions. Decision based on the US doctrine of “unity of enterprise”.



TORT/CONTRACT Briggs v. James Hardie Ltd (1989) 7 A.C.L.C. 841 per Rogers A.J.A. 847ff.



JH employed service companies to control the mines. They did this because mining is a dangerous industry. Briggs wanted to lift the corporate veil after being injured because service companies had no money. We should be more willing to lift the veil in the case of tort than in the case of contract (Rogers).

Lifting the Veil of Incorporation at Statute (s 588G CA) – INSOLVENT TRADING

 

“S588G CA makes directors of a company liable for debts the company has incurred if the company has traded when it was insolvent or there were reasonable grounds for believing it was insolvent. So 518 G; directors have a duty to prevent a company from trading/incurring debts when it becomes insolvent or when there are reasonable grounds for believing insolvent.

The test is: DID THE COMPANY TRADE WHILE INSOLVENT?

 s95A(2)1: Is the person able to pay all their debt’s, if and when they become due and payable? This is a test of cashflow and not just based on the balance sheets. (If not- then not solvent)  95A(2): A person who is not solvent is insolvent.

5

Corporations Law 1 Synopsis

- Two presumptions of insolvency  s588E(3) - if company insolvent at any time during 12 months before winding up, then company presumed insolvent for whole 12 months  s588E(4) - failure to keep financial records = presumption of insolvency OR At that time, reasonable grounds for suspecting company is (or would become) insolvent  objective test: judged according to director of ordinary competence The director failed to prevent company incurring the debt where  the director was aware that there were reasonable grounds for suspecting insolvency (“subjective”), or  a reasonable person doing that director’s job in that company would have been aware that there were reasonable grounds for suspecting insolvency (“objective”) – higher standard *Onus is on third party seeking to make director liable on the balance of probabilities. (ASIC v Pinnen (?) DEFENCES There are certain defences to a s588G action which include:



Where the director had reasonable grounds to suspect the company was solvent: s588H (2);



Where the director relied on competent and reliable officer who claimed the company was solvent: s588H (3);



Where the director was ill or had some other good reason not to partake in management of the company: s588H (4);



Where reasonable steps were taken to prevent the company from incurring a debt: s588H (5) see also s588H (6);

Consequences of breach: Section 588G:  Civil penalty order  Criminal penalty order  Compensation  Can be ordered by court in civil or criminal penalty proceedings;  Also, liquidator can seek compensation;  Also, if liquidator agrees or in set circumstances an  unsecured creditor can seek compensation;  For benefit of unsecured creditors, not secured creditors.



Note s.588V - that a holding company may be liable for insolvency of subsidiary company (i.e. more evidence of lifting the corporate veil)

CASES TO SUPPORT Morley v. Statewide Tobacco Services [1993] 1 VR 423 

Held: (Mrs M) could not claim to be a passive director. (objective standard) A director is obliged to inform himself as to the financial affairs of the company to the extent necessary to form each year the opinion of solvency required for the

6

Corporations Law 1 Synopsis



 

 



directors statement under s.295(4), and they cannot avoid liability by claiming that they have never learned to read financial statements. In this case mr and mrs moorely supplied cigaretes to railway stations. Mr moorely died and in an informal meeting mrs moorely asked her son to carry on business of the company and he agreed to do so. Son didn’t give resports on companies affairs nd told her little about the business. Although mrs M saw herself as the owner it was son who had managerial power. Company became insolvent and Mrs M was sued (it made more sense to sue her as she had company assets). If someone doesn’t have money there is no point suing them. Here it may have been easier to sue son but Mrs M had money. Held: not a q whether director directly authorised incurring the particular debt, but rather q show it was incurred without his or her authority. If person does know debt will be incurred and has power to do so, he or she may be said to impliedly authorise the incurring debt. In this case mrs M knew her son in ordinary course of his duties was incurring debts, she had agreed that he would continue to manage on her and her daughters behalf and consequently she conferred authority to her son which is sufficient to authorise the incurring of the debts; and the debts were therefore incurred with he mplied authority. S under s588G(2). Case showed direcotrs take upon certain responsibilities. And therefore each directors must have a rudimentary understanding of C’s affairs and sole responsibility can’t be deferred to other directors they must each have active role in the business. Director is not entitled to hide behind ignorance of company’s affairs, the financial woes of company continue and are caused by the failure of directors to ask questions etc. D’s are expected to be diligent.

 Commonwealth Bank v Friedrich & Ors (1991) 9 ACLC 946 

   

   



A director is unable to avoid liability for insolvent trading by claiming that they had never learned to read financial statements, even where he is a volunteer. Held: “A director is required by law to be capable of keeping abreast of the company’s affairs, and sufficiently abreast of them to act appropriately if there are reasonable grounds to expect that the company will not be able to pay all of its debts in due course and he has reasonable cause to expect it.” (Tadgell J) activities of the national safety council F was the CEO of it. NSC was a private company designed to be a private rescue service. No gov role or public obgliations. Latest technology for land and sea rescues Board of directors: Mr Eise (former mayor of VIC) and worked in voluntary capacity. F was the CEO perpetuated various falsified the companies … Company became insolvent and bank sued F and whole board (inc mr eise). Court actions against individual board members were settled except for that against Mr Eise. F declared himself bankrupt, put his assets in wife’s name and committed suicide so no action could be taken against him. Mr Eise ; was a non executive director, he was voluntary director and court HELD in favour of the bank for 93million. Legal principles: Mr Eise was a non exec ...