Corps Exam THC Template PDF

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Intro to Companies o A company is an artificial entity recognised by law as a legal person with its own rights and liabilities. It is separate from its owners and managers. o While the terms “company” and “corporation” are used interchangeably, there are differences (see s 9 and s 57A). o As at August 2018, there were 2,634,282 companies registered in Australia. o One important characteristic of companies is perpetual succession. For example, Westpac Banking Corporation (formerly Bank of NSW) was incorporated in 1817.  Terminology o Company / Corporation: See above. o Shareholders / members: Persons or entities who own the company. o Creditors: Persons or entities to whom the company is indebted.  o Directors: The persons appointed to manage the company. o Board of Directors: The directors acting in concert. o Subsidiary / parent company: Relationship where one company owns another company.  Formation o Historically, incorporation was a privilege that was conferred by Royal Charter or an Act of Parliament. For example, AGL was created under an “Act of Council, William IV” in the Colony of NSW on 7 September 1937. o Today, company formation is a straightforward process that involves filing an application for registration with ASIC and paying a prescribed fee. We will look at the registration process in Week 3.  Important features of companies o separate legal personality; o can incur obligations (form contracts) and hold rights, and sue and be sued, in their own name; o can contract with their controllers; o have perpetual succession despite changes in members; o can issue shares & secured debt (s 124) o are separate taxpayers; and o participants (in most instances) have limited liability.  Separate Legal Entity o As long as all the necessary formalities of incorporation have been satisfied, a new entity comes into existence that is separate and distinct from its directors and shareholders. o Concept applies whether the company has a large number of shareholders or is owned and managed by one person.  Limited Liability o Significance: one of the main advantages of the corporate form  over other types of business structures. o Meaning: Generally, shareholders (or management) are not personally liable for the company’s debts.

o Definition: In a company limited by shares, a member’s liability to contribute to meet the debts of the company is limited to the amount, if any, remaining unpaid on their shares (see s 516). o Effect: the risk of business failure is largely transferred from the company’s owners to its creditors. o Advantages  Facilitates investment and economic activity  Reduces need for monitoring by investors  Promotes liquidity and market efficiency  Facilitates equity diversification o However,  May encourage excessive risk taking  Affects trade creditors the most  Less relevant to small closely held companies (role of personal guarantees). Salomon v Salomon (1897): o Salomon owned a business selling shoes, sole proprietorship. o Had 5 sons. o Incorporated a company, ‘Salomon and Co Ltd’. He was a director, his 5 sons, his wife, and himself were each given 1 share each. o Company purchased the business from Salomon for 20,000 £1 shares, £10,000 of debentures and £1,000 cash.  After this transaction, S held 20,001 of the 20,007 issued shares in the company. o The company experienced financial difficulty and was wound up. o Unsecured creditors argued S should not be entitled to be paid before them in respect of the debentures. o Issue: Could Salomon get priority for (residual) £1,000 secured by his debentures? o HELD: A person may sell a business to a limited liability company of which the person is virtually the only shareholder and director. o The company is a separate legal entity distinct from its shareholders and directors. The company could borrow funds, on a secured basis, from its controlling shareholder thereby enabling that person to rank ahead of the company’s other (unsecured) creditors. o SIGNIFICANCE OF DECISION  Once the formalities (ie. of registration) are observed, the company obtains: (s 119)  separate legal personality  limited liability  The above applies even to ‘one man’ companies: s 114  A shareholder can be a secured creditor  Company was not Salomon’s agent Lee v Lee’s Air Farming Ltd [1961] AC 12 o FACTS:

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o Lee owned 2999 of the 3000 shares issued by Lee’s Air Farming Ltd. o Lee was governing director o Lee was killed and his widow made a claim for workers compensation. o Her claim was initially rejected on the basis that as Lee had full control of the company he could not be a worker. o HELD: o As the company was a separate legal entity distinct from its founder (i.e. Lee), it could enter into a contract of employment with him. One person could act in dual capacities. See also Macaura v Northern Assurance Co Ltd [1925] AC 619 o (shareholders have no legal or equitable interest in their company’s property) o Has more or less been undone due to statute but makes the point of separate legal entity. Application to Corporate Groups o Query whether the SLE concept was originally intended to apply in this way o Criticisms o Benefits: reducing risk and encouraging investment. o Will return to this question later in the semester . . . Lifting the Corporate Veil o The recognition that a company is a separate legal entity is often referred to as the “veil of incorporation.” o Courts generally do not look behind the “veil” to determine why the company was formed or who really controlled it. o Notwithstanding the general proposition set out above, in some instances the court will lift the corporate veil. Examples:  Director’s liability for insolvent trading (s 588G);  Fraud;  Avoidance of legal obligations;  Involvement in director’s breach of duty;  Attributing mind and will of the company;  Certain other corporate group scenarios (eg, for financial reporting). Lifting the Veil – General Legal Examples o Fraud:  Re Darby  Director/promoter ordered to disgorge profit made by ‘dummy company’ (that sold licence to another co he floated) o Avoidance of a legal obligation:  Gilford Motor Co  Use of company to avoid restraint of trade clause – injunction granted even though company was no a party to the service agreement  Jones v Lipman

Transfer of land to company to evade contract to sell to Jones. o Involvement in director’s breach of duty:  Green v Bestobell Industries  Green incorporated co to submit tender – company liable as it knowingly participated in breach of duty  Piercing the Veil - Corporate Group Context o Examples where good for the companies involved  Subsidiaries as agent or partners:  Smith Stone & Knight v Birmingham Corp o Holding company entitled to compensation as subsidiary conducted its business as its agent – six requirements.  Benefit of the group as a whole:  Equiticorp Finance Ltd v Bank of NZ – did NOT pierce o Had the transfer of funds not taken place the companies would have lost the bank’s support. o Examples where good for the corporate group’s opponent  Tort liability:  Briggs v James Hardie o Worker with asbestosis who worked for now-defunct JH subsidiary o Greater willingness?  Problem of moving targets:  Qintex v Schroders o ‘Tension between realities of commercial life and applicable law’  Now:  insolvent trading: ss 588V-X – holding company liability for subsidiary’s debts  consolidated financial statements and taxation consolidation now permitted Types of Companies  Classification Criteria o The Corporations Act classifies companies in a variety of ways including:  The liability of members  Their public status  The size of proprietary companies  Their relationship with other companies (e.g. Holding company / subsidiary)  Whether they are disclosing entities  Type of business conducted  Company Limited by Shares o Most common type of company. o These companies can raise funds by issuing shares to investors. o In a winding up the shareholder’s liability is limited to any unpaid amount on the shares (s 516). o This type of company MUST have the word “limited” or “Ltd” in its name (s 148(2)). 

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Company Limited by Guarantee o Large proprietary companies are required to prepare annual o Used for not-for-profit companies only. financial reports (s 292), have their reports audited (s 301), send reports to members (s 314), and lodge those reports with ASIC (s o Members’ liability is limited to amount that they have undertaken 319). to contribute in the event of a winding up (s 9).  Public Company o Member vs shareholder o Section 9 provides any company that is not a proprietary company  This type of company has no share capital. is a public company.  This type of company cannot raise capital from its members. o Public companies ≠ listed companies. o Typically used by clubs, charities and other non-trading o Companies limited by guarantee and no liability companies organizations whose capital needs are met from outside sources are always public companies (see s 112). such as donations, subscriptions etc. o Public companies must have three directors two of which are o A charitable company may, in certain circumstances, drop the ordinarily resident in Australia (s 201A(2)). word “limited” from its name (s 150). o Public companies must have a secretary (s 204A(2)). Unlimited Company o This type of company is very unusual – fewer than 1000 in o Public companies can issues shares, debentures or other securities Australia. to the public. o Members of an unlimited company have no limit placed on their o Public companies must appoint an independent auditor. liability (s 9). o Public companies must have a registered office open during No Liability Company business hours. o To be registered as a no liability company, the company must: o Companies limited by shares can be public or proprietary (s 112).  Have a share capital;  Have adopted a constitution stating that its sole object is mining; and  Must have no right to recover calls made on its shares from shareholders. o See s 112(2).  Must have the words “No Liability” or “NL” at the end of its name (ss 148(4), 149). Proprietary Company o Fewer SHs, fewer legal requirements. o Can be subsidiaries of public companies, family run businesses, tax planning vehicles, joint venture vehicles, etc. o Most popular type of company. Outnumber public companies by 100:1. o Large vs small proprietary companies. o Must have fewer than 50 non-employee shareholders (s 113(1)). o Listed Companies o Cannot engage in activity such as issuing shares or debentures that  Some larger companies have chosen to have their shares listed would require disclosure to investors (s 113(3)). on the Australian Stock Exchange (ASX), which operates a o Must have the word “Proprietary” or “Pty” as part of their name, number of financial markets where the buying and selling of immediately before the word “Limited” or “Ltd” (s 148(2). shares and derivatives takes place. o Like public companies, must have at least one member (s 114).  ASX listed companies are regulated by the Corporations Act o Must have at least one director who is ordinarily resident in and are also required to comply with the more onerous Australia (s 201A). disclosure and other requirements imposed by the ASX Listing Large and Small Proprietary Companies Rules. o Major difference is disclosure requirements. o Future Forms? o Under s 45A(2), a company is a small proprietary company if it  Proposal to create a hybrid form for social enterprise – satisfies at least two of the following criteria: “benefit company” – like the US “benefit corporation”  Consolidated operating revenue is less than $25 million;  See links in Additional Resources tab.  Consolidated gross assets is less than $12.5 million; and Company Registration  Less than 50 employees.  How Are Companies Created? (see ss 117-119)

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o Companies are created (or incorporated) by being registered with ASIC. o A person desiring to create a company lodges an application for registration with ASIC and pays the prescribed fee (currently $488 for for-profit cos & $403 for cos limited by guarantee). o Once registered ASIC issues a certificate of registration. o The day it is registered, the company is born and a separate legal entity comes in existence. Registration Requirements o The ASIC website provides that the following information must be done before filing a Form 201:  Decided on the type of company (public/proprietary, no liability, limited by shares etc.).  Decide on the company name:  See Pt 2B.6 of the Corporations Act.  You can only choose a company name that is not already registered to a company or business.  There is a list of words that you cannot use without special approval.  You can use the ACN in lieu of a name.  Use the National Names Index  Obtain consents:  Before applying to register a company, you must get the written approval from people who agree to fill the following roles: o director(s) o Secretary o member(s)  Identify the registered office.  Decide on share structure. Ongoing Registration Requirements o The Corporations Act imposes certain duties on officeholders of companies. These include the maintenance of up to date financial records, act honestly, avoid conflicts of interest etc. o Each year ASIC sends every company an annual statement with basic details about the company (directors’ names, registered office etc.). Every company must respond confirming the details or making amendments. See ss 346A, 346C. o Companies must pay an annual fee to ASIC. o Every company must pass a solvency resolution each year: s 347A. Registration of Existing Companies o All companies that carry on business in Australia must be registered with ASIC. o Accordingly, all foreign companies that carry on business in Australia must be registered with ASIC as foreign companies (Form 402). See ASIC Information Sheet INFO 32.

o Likewise, the registration requirements extend to companies which were incorporated in Australia prior to the enactment of the Corporations Act. Constitution and Replaceable Rules  Corporate Constitution o Typically, a constitution sets out the rules governing matters such as the rights of shareholders, the conduct of shareholders’ and directors’ meetings, powers of directors and their appointment and remuneration. o Prior to 1998, all companies were required to have a constitution consisting of articles of association (internal document) and a memorandum of association (external document). o Post 1998, companies have a choice regarding the rules governing  their internal management. They can adopt the replaceable rules in the Corporations Act, draft a constitution that suits their circumstances or a combination thereof (see s 134).  Replaceable Rules o Section 141 contains a table which lists the provisions of the Corporations Act that apply as replaceable rules. o A company may be formed with a constitution that replaces or modifies any one or all of the replaceable rules (s 135(2). o Some replaceable rules ONLY apply to propriety companies (s 135). For example, s 203C. o Some sections are regarded as replaceable rules for proprietary companies but mandatory for public companies (e.g. s 249X).  Special Situations o One Person Proprietary Companies: A proprietary company with a single shareholder who is also a director does not need formal rules governing its internal management. Accordingly, the replaceable rules do not apply to these companies (s 135(1)). o No Liability Companies: These companies need a constitution and s 112(2) requires that the condition provide:  its sole objects are mining purposes; and  the company had no contractual right to recover calls made on its shares from shareholders who fail to pay them. o Companies Limited By Guarantee: Some of these types of companies may need to have a constitution (see s 150(1)). o Listed Companies: They must have a constitution that is consistent with the ASX Listing rules.  Legal Capacity and Powers o A constitution may have an objects clause which defines and restricts the businesses and activities in which the company may engage (s 125(2)). o Prior to 1984 all companies were required to have an objects clause. o Section 124 provides that a company has the legal powers of an individual. Furthermore, s 124 gives companies additional powers not available to individuals (e.g. issue shares).  Abolition of Doctrine of Ultra Vires

o Historically, the doctrine of ultra vires provided that any act of the company outside its stated objects was beyond the power of the company. The doctrine provided that any such contracts or transactions were void and had no legal effect. o Example: Ashbury Railway Carriage & Iron Co v Riche (1875) LR 7 HL 653.  Railway company in UK entered in contract to invest in railway in Belgium  Backed out of the contract.  Claimed outside of the objects, not binding. o The doctrine of ultra vires and the related doctrine of “constructive notice” have been abolished (see ss 124 and 125). Effect of Constitution and Replaceable Rules o 140 Effect of constitution and replaceable rules  (1) A company's constitution (if any) and any replaceable rules that apply to the company have effect as a contract:  (a) between the company and each member; and  (b) between the company and each director and company secretary; and  (c) between a member and each other member;  under which each person agrees to observe and perform the constitution and rules so far as they apply to that person. o The main purpose of s 140 is to provide a way for the parties to the statutory contract to enforce compliance with the company’s constitution and any applicable replaceable rules. o The statutory contract is different from other contracts:  The remedies are more limited (limited to declaration or injunction);  Can be modified without consent of every party;  Written contract but not signed; and  No consideration given. o Contract with members (Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] 1 Ch 881).  H went to sue the association.  Had a clause saying you can’t sue and have to go to arbitration first.  Court held that the constitution was valid and forced to do arbitration. o No contract with non-members (Forbes v NSW Trotting Club Ltd [1977] 2 NSWLR 515).  Members of the public not in the corporation have NO STANDING and can’t enforce contract o Contract between members (Re Caratti Holding Co Pty Ltd [1975] 1 ACLR 87).  Constitution empowered majority shareholder to compulsorily acquire minority shares.  HELD: Enforceable between the members themselves. o Directors’ contracts for service  (Carrier Australia v Hunt [1939] 61 CLR 534).

Hunt had service agreement (Regular contract) which provided that he was going to act as managing director for 5 years and could only be terminated if he ceased to be a director.  Constitution had a means of removing directors from their office.  Was removed under the Constitution, was he entitled to damages?  HE COULD BE REMOVED, but entitled to damages for the removal.  Ely v Positive Government Securities  Ely was a shareholder  Employee of the Company.  Constitution said that he would be the employee for X period of time, and the company terminated him.  He sought to enforce the constitution.  HELD: Court agreed with his argument, but stated that he was standing in two capacities with the company, and must enforce it in one of the capacities.  Since he was enforcing the rights as an employee, the constitution does not apply in that capacity so no standing. Alteration of the Constitution o A company can adopt a constitution:  On registration (s 136 (1)(a));  After registration by passing a special resolution (s 136 (1) (b)). o A company can modify or repeal its constitution or a provision thereof by special resolution. o Section 9 provides that a “special resolution” is a resolution passed by at least 75% of the votes cast by members entitled to vote on the resolution. Limits on Constitutional Alteration o Entrenching provisions (s 136(3). o Section 140(2) provides that members are not bound by alteratio...