Salomon v Salomon Corporate veil[ 6558] PDF

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Download Salomon v Salomon Corporate veil[ 6558] PDF

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1"

Company"Law"in"Context"

! Law!! • • •

dispute!resolution! Consumer!protection! Rules!about!conduct! o Civil!(private)!law! o Criminal!(public)!law!-!against!the!state!

!

Company! • • • •

Artificial!entity!recognised!by!the!law!as!a!legal!person!with!rights!and!liabilities! Has!shareholders!(or!members)!-!regarded!as!the!owners!of!the!company!and!usually!enjoy! limited!liability! Has!directors!-!usually!given!the!power!to!control!the!management!of!the!company’s!business! Can!be!proprietary!(private)!or!public!

!! Business!Structures! •

Decision!on!business!structures!is!influenced!by!a!number!of!factors:! o Size!of!business!and!possible!expansion! o Duration! o Setup!costs!and!ongoing!costs!of!structure! o Exposure!to!liability! o Ability!to!participate!in!management! o How!to!deal!with!profits!and!losses! o How!to!deal!with!taxation!liabilities! o Degree!of!importance!attached!to!privacy!of!financial!information! o Risk%and%consequences%of%business%failure%and%who%bears%the%liability!

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Sole!Trader! • • • •

Simplest!business!structure! Sole!trader!is!the!business,!owns!all!assets,!takes!all!profits! Unlimited!liability! Very!few!regulatory!requirements!

!!

Partnerships! Legal!requirements! • Two!or!more!persons!must!work!together!in!the!same!business!enterprise! attempting!to!make!a!profit! Partnership+Act+1892+-+Sect+1:! (1)+Partnership+is+the+relation+that+exists+between!persons+carrying+on+a+business+in+ common+with+a+view+of+profit+and+includes+an+incorporated+limited+partnership.! !! Principles! • A!partnership!is!not!a!separate!entity! • Each!partner!is!both!a!principal!and!agent!of!the!business! • Based!on!mutual!trust!->!must!act!with!honesty,!loyalty!and!put!interests!of!the! partnership!ahead!of!own.! !! Consequences!

• •

Each!partner!may!incur!liabilities!-!liability!is%joint%and%several%>%one%partner%can% become%liable%for%entire%debt! Each!partner!liable!for!debts!and!obligations!

!! Joint!and!Several!Liability! Joint:!each!partner!is!jointly!liable!for!the!obligations!of!the!business! Several:!one!partner!can!be!held!liable!for!entire!debt! !! Rights!and!Obligations!of!Partners! • Set!out!in!partnership!agreement! § Otherwise!the!Partnership+Act+1892!(NSW)!applies! Sect!27:! • The+partners+share+equally+in+the+profits! • The+firm+must+indemnify+each+partner+for+payments+incurred+by+them! • Every+partner+may+take+part+in+the+management+of+the+business! • A+partner+can+retire+by+giving+written+notice+-+thereby+ending+the+ partnership! • A+partner+should+not+compete+with+the+firm! !!

Joint!Venture! • • •

Association!of!parties!to!engage!in!some!common!undertaking!for!joint!profit!-!or!to! generate!a!product!shared!among!participants! No!legal!partnership!or!corporation! Liability!is!individual!and!several!

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Trust! •

• • • •

Created!when!the!owner!of!property!("Settlor")!legally!transfer!that!property!to!a! second!person!who!is!trusted!("Trustee"),!to!be!held!in!trust!for!the!benefit!of!a!third! person!("Beneficiary").! Trustee!has!legal!title!to!property! Beneficiary!has!the!beneficial!or!equitable!interest!in!the!property! Trust!is!governed!by!equity!and!the!Trustee!is!a!fiduciary! Trusts!are!mainly!used!for!tax!planning!

!!

Association! • •

Group!of!people!connected!for!non-profit!making!purposes,!e.g.!sport!and!recreation! clubs! Can!be!incorporated!to!create!separate!legal!entity!and!limit!liability!for!members!

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Companies! • •

•

Registered!or!"incorporated"!under!the!Corporations+Act+2001! Types!according!to!liability:! • Limited!by!shares! • Limited!by!guarantee! • No!liability! • Unlimited!liability!with!share!capital! Types!according!to!size:! • Proprietary!(private)! • Public!

!! Why!companies?!

• • • •

Separate%legal%entity%-%all%the%rights%of%a%person%and%more!(s124!Corporations!Act)! Limited%liability%for%shareholders%(limited%to%invested%capital)! Tax!advantages! Risk!Management!-!risky!assets!can!be!quarantined!in!a!separate!legal!entity!

!! Disadvantages! • Higher!setup!costs! • Possible!reporting!and!disclosure!obligations! • Ongoing!compliance!costs! • Directors!and!officers!are!subject!to!strict!duties!to!outsiders!and!to!the!company! itself!-!subject%to%higher%liability! !! ASIC! • Formed!under!ASIC+Act+2001! • Enforces!Corporations+Act+2001! • Registers!new!companies! • Maintains!business!register! • Regulation!of!financial!services!and!markets! • Powers!of!investigation! § Can!compel!any!person!to!give!reasonable!assistance!and!answer!questions! under!oath! § Can!compel!persons!to!produce!books!and!records!in!a!wide!range!of! circumstances! • Power!to!bring!legal!proceedings! § Power!to!initiate!civil!proceedings!where!it!believes!it!is!in!the!public!interest! to!do!so! § Power!to!initiate!class!actions! § Power!to!bring!criminal!prosecution! • Overlap!with!the!DPP! • As!a!result,!must!have!regular!meetings!to!cooperate!where!agencies! have!a!common!interest! • Education! !! !!

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Registration"and"its"Effects"

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Nature!of!a!Company! !! • • •

The%company:!An!artificial!entity!recognised!by!law!as!a!legal!person!with!rights!and! responsibilities.! Shareholders:!regards!as!the!owners!of!the!company! Directors:!usually!given!the!power!to!control!the!management!of!the!company's! business!

!!

Effects!of!Registration! S124!Corporations+Act! !! • Lifespan!of!a!company!-!unlimited! • Who!owns!company!property?!-!the!company! • Who!can!sue!if!the!company!is!harmed?!-!the!company! !!

Limited!Liability! !! Limited%Liability:!Members!of!a!company!are!generally!not!liable!for!the!company's!debts!-! members!personal!assets!are!not!at!risk.! !! Advantages! • Facilitates!enterprise!-!encourages!risk!taking! • Reduces!need!for!shareholders!to!monitor!management! • Facilitates!diversified!share!portfolios! • Facilitates!transferability!of!shares! • Is!essential!for!efficient!operation!of!stock!markets! !! Disadvantages! • Transfers!risk!of!company's!insolvency!to!creditors! • The!impact!depends!on!type!of!creditor! o Secured/unsecured! o Victims!of!company's!negligence!(tort!creditors)! !! • S%588G%%of%the%Corporations!Act!recognises!the!risk!of!excessive!risk!taking!and! makes!Directors!personally!liable!for!company!debts!incurred!during!insolvent! trading.! !!

!Salomon's!Case!and!Applications! !! Salomon!v!Salomon!&!Co!Ltd%(1897)!is!a!British!case!that!firmly!established!the!corporation!as! a!separate!legal!entity!and!the!corporate!veil!between!a!company!and!its!shareholders.! • Dispute!over!the!remaining!assets!after!the!failed!Salomon!&!Co!Ltd!had!been!liquidated.! • Court!ruled!that!the!company,!being!a!separate!legal!entity,!should!pay!Salomon!his! secured!credit!over!unsecured!creditors!despite!Salomon!being!the!managing!director! and!near!sole!shareholder!in!the!company.! !! Lee!v!Lee's!Air!Farming!

• Dispute!regarding!the!death!of!a!company!director,!Lee,!that!served!as!the!chief!

pilot!for!the!company! • Lee!had!taken!out!Workers! • Had!to!determine!whether!the!company!was!liable!for!workers!compensation!to!the!

widow!of!the!deceased!! • In!reference!to!the!Salomon!case!it!determined!the!company!is!a!separate!legal!

entity!and!its!sole!director/shareholder!can!also!be!an!employee!who!entered!into! a!contract!with!it! !! Macaura!v!Northern!Assurance!Co!Ltd! • A!company!owner!insured!a!supply!of!timber!in!his!own!name.!The!insurer!refused! the!claim.! • Court!established!that,+"the+corporator+even+if+he+holds+all+the+shares+is+not+the+ corporation…+neither+he+nor+any+creditor+of+the+company+has+any+property+legal+or+ equitable+in+the+assets+of+the+corporation."! !!

Salomon's!Principle!and!Corporate!Groups! !! Walker!v!Wimbourne! • High!Court!held!that!the!directors!of!a!company!had!breached!their!duties!in!authorising! a!loan!to!a!related!company.!The!loan!did!not!produce!any!benefit!or!advantage!to!the! lending!company,!and!in!fact!carried!the!risk!of!a!substantial!loss!as!the!borrower!was!in! financial!difficulties!and!was!unlikely!to!be!able!to!repay!the!loan.!! • The+directors+of+a+company+in+discharging+their+duty+to+the+company+must+take+account+ of+the+interests+of+its+shareholders+and+creditors.+Any+failure+by+the+directors+to+take+into+ account+the+interests+of+creditors+will+have+adverse+consequences+for+the+company+as+ well+as+for+them.! !! Pioneer!Concrete!Services!v!Yelnah! • “That+although+whenever+each+individual+company+is+formed+a+separate+legal+personality+ is+created,+courts+will+on+occasions,+look+behind+the+legal+personality+to+the+real+ controllers."! • According!to!Young!J,!the!corporate!veil!would!not!be!lifted!when!it!appears!that!"there+ was+a+good+commercial+purpose+for+having+separate+companies+in+the+group+performing+ different+functions+even+though+the+ultimate+controllers+would+very+naturally+lapse+into+ speaking+of+the+whole+group+as+`us'."!! !! Adams!v!Cape!Industries!plc! • Sought!to!ignore!the!separate!legal!personality!of!the!parent!company!in!a!dispute!over! asbestos!liability! • It!was!held!that!“the+court+is+not+free+to+disregard+the+principles+of+Salomon+v+A.+Salomon+ &+Co+Ltd+merely+because+the+justice+so+requires.”!

Piercing!the!Corporate!Veil! A+situation+in+which+courts+put+aside+limited+liability+and+hold+a+corporation's+shareholders+or+ directors+personally+liable+for+the+corporation's+actions+or+debts.! • The!principle!of!separate!legal!personality!can!be!disregarded!in!carefully!defined! circumstances.! !!...