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QUESTION 1 A company business structure is as a separate legal entity created by registration under section 119 of the Corporations Act with the Australian Securities and Investments Commission (ASIC). According to the Corporations Act 2001 (Cth), this means that a company has a separate legal existence that is distinct from that of its owners, managers, operators, employees and agents. ASIC is the main regulatory body overseeing companies in Australia, which undertakes most of its roles under the Corporations Act. The creation of separate legal entity by registration facilitates limited liability.

The principle of a separate legal identity is one of the most fundamental and enduring concepts in company law. The concept that a company is distinct from its owners indicates that people, either natural or corporate, who start a company can limit their liability to a fixed amount. This notion that a company is a separate legal entity is known as the Salomon principle, which exists from the case of Salomon v Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. Salomon's case laid down the idea that a company's control and management remain independent from its ownership. A company has its own property, its own rights and its own obligations, separate to those running or owning the entity. A company’s money and other assets belong to the company and must be used for the purposes of the company (Corporations Act 2001 (Cth)). Therefore, the decision defined the concept of 'separate legal entity' and its corollary, the 'corporate veil' between the company and its owners, including the situation where a single shareholder primarily own a company.

Because a company has the powers of a legal person, the main features of a company as a separate legal entity include the powers to own and dispose of property and other assets of any kind in its own name, enter into legally binding contracts, and sue and be sued. A company can own real properties, such as land and buildings, tangible assets and intangible assets. Moreover, a company can contract with its participants (members and those that manage its operations). As a result of a contractual relationship, a company can incur debt. A company is an artificial person who can sue or be sued in its own name. This implies that if a company wants to engage in some form of legal action, it is free to do so on its own. For example, when a company is being sued and charges against the company are taken, the company is on its own as a legitimate person and the owners' possessions are not at risk of being confiscated.

As a legal person, a company is separate from the people that own and run the company. A company’s obligations are its own, not those of its participants. A company’s existence continues unchanged even if the identity of the participants changes. A company is also obligated to pay taxes. Once a company is registered, its separate legal status, property, rights and liabilities continue until ASIC deregisters the company.

QUESTION 2 When incorporating a company in Australia, section 141 of the Corporations Act outlines the provisions of the Act that companies may use as replacement rules. The replacement rules provide a useful and basic framework for the operation of a company, covering issues such as appointment and powers of directors, rights to inspect financial records, arrangements for directors’ meetings, arrangements for members’ meetings and rules relating to shares. Certain replaceable rules are only applicable to proprietary companies. For instance, section 254D of the Corporations Acts outlines the pre-emption clause for new issues of shares by a proprietary company. Conversely, some replaceable rules are compulsory for public companies. For example, section 249X of the Corporations Act (appointment of proxy) must be implemented by public companies but is replaceable for proprietary companies. Furthermore, the rules may need to be updated over time to better accommodate changes in the company as it progresses.

A company may implement the replaceable rules or disregard them by forming its own constitution. Given the circumstances where a company precisely does not want to use specific replaceable rules, the company may use a combination of a company constitution and replaceable rules to suit the specific nature and circumstances of the company. Under s 140(1) of the Corporations Act, a company constitution and any replaceable rules that apply create three statutory contracts, including contracts between the company and each member, the company and each director and company secretary, and a member and each other member. A company that just relies on replaceable rules cannot be a Australian Securities Exchange (ASX) listed company as they must have a constitution.

Furthermore, a company that just relies on replaceable rules cannot issue different classes of shares. “A class of shares is a category of shares which differs sufficiently in respect of rights, benefits, disabilities, or other incidents, as to make it distinguishable from any other category of shares.” There is no provision in the replaceable rules for a company to issue shares with

different rights attaching (different classes of shares), but this is a permissible share capital transaction under section 254A of the Corporations Act. If a company wishes to issue three classes of shares of which the shares of the first class provide one vote per share, the shares of the second class provide five votes per share and the shares of the third class provide fifty votes per share, it shall not rely solely on the replaceable rules as its rules for internal governance. A company must have a constitution in order to earn the flexibility to issue different types of shares. The constitution sets out the different classes of shares a company can offer and what rights and restrictions attach to each different class.

When a company attaching a specific set of rights and entitlements to some shares, different to those attached to other shares, different class of shares are being created. The different rights are referred as ‘class rights’, and these rights may only be varied by the company if the company follows the procedure in section 246B of the Corporations Act. Depending on the constitution formed by the company, a company with classes of shares can only vary or cancel the rights attached to shares if, in addition to a special resolution of the members passed at a general meeting, the members of that class pass a separate special resolution to agree to the change. Rights and entitlements may differ according to voting rights, receipt of dividends, and access to any surplus capital on winding up. In most cases, companies who issue different classes of shares wants either a type of share that retains control of the company or a type of share that pays dividends in preference to other shareholders.

REFERENCE

Corporations Act 2001 (Cth). Available from https://www.legislation.gov.au/Details/C2008C00031

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Sweeney, B. (2016). Law in commerce. ProQuest Ebook Central https://ebookcentral.proquest.com https://hallellis.co.uk/separate-legal-entities-meaning/...