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Week one Topic 1 Introduction and Framework Prescribed Textbook Hanrahan, Ramsay & Stapledon Commercial Applications of Company Law 19th ed (‘CACL’)

Defining the law •

•

Law is: •

the set of rules,

•

made by the state, and

•

enforceable by prosecution or litigation.

Business law is: •

The set of rules regulating businesses and business activities made by the state and enforceable by prosecution or litigation.

Types of Legal System 

Common law legal systems are based on the British legal system and follow the doctrine of precedent

Sources of law are: - legislation and - case law; 

Examples include the United Kingdom, Australia, Canada and New Zealand

What does Corporations Law cover? 

Creation of companies



Managing companies



Responsibility of officers eg directors



Rights of members eg shareholders



Insolvency of companies



Fund raising



Penalties for breach:

- Criminal penalties 1|Page

- Civil penalties - Liability to other persons under general law principles. Legal Research To use the law to solve legal problems, you need to know where it can be found. Relevant materials are: –

primary legal materials;

* case law; * legislation; and –

secondary legal materials

* journal articles, textbooks

Legal reasoning Deductive reasoning  All lions are mammals. X is a lion. Therefore X is a mammal. Inductive reasoning  99% of all creatures are insects. X is a creature. So X is probably an insect

What problem does the concept of a company solve? 

Legal ‘place holder’ – property owned by the company not the individual office holder



Aggregate body with legal personality



Corporations sole eg Archbishop of Canterbury



Created for orderly transfer of ecclesiastical (church) property



Transfers risk away from the people who run the business

What is a company? 

A company is an artificial legal person



Section (‘s’) 9 of the Corporations Act 2001 defines a company by registration



S 57  a company is one kind of corporation 2|Page





A company can: –

Hold property in its own name

–

Incur debts in its own name

–

Sue and be sued

> 2 million companies registered in Australia (mostly small business companies)

History of company law 

Corporation is an artificial person – ‘place holder in the legal space’



14th century  monarch conferred corporate personality upon monasteries & municipal boroughs



Mediaeval guilds - sole traders operating under guild rules & Royal Charter



Groups were given trade monopolies by the sovereign eg the East India Co & Hudson Bay Co



partnerships – agency, debts & joint trading - problems



17th century  joint stock companies – pooled funds from large numbers of investors

Landmark legislation 

Bubble Act 1720 – needed Royal Charter to form co Industrial Revolution



Joint Stock Companies Act 1844 – co by registration laissez faire capitalism



Limited Liability Act 1855 – of shareholders



Companies Act 1862 3|Page



Corporations Act 2001

Corporations Act 2001 (the CA) 

Corporations law is ‘legislation-heavy’ and ‘case law-light’



Company law involves commercial disputes, so because of costs parties often settle privately



Case law is reactive, courts must wait for parties to come before them so coverage can be piecemeal



Delay btw new legislation & when if ever courts interpret



Number of key provisions of CA where no case law

Australian Constitution & Company Law 

States federated in 1901 under Constitution but it did not give Commonwealth (‘Cth’) clear power to legislate for regulation of companies



S 51(xx)  ‘foreign corporations’



Uniform Companies Acts



Corporations Act 1989



New South Wales v Commonwealth (1990)



Corporations Act 2001

Australian Securities and Investment Commission (ASIC) 

Established by & gets powers from, ASIC Act



Administers the Corporations Act 2001



Offices in most large cities



Objectives of ASIC: –

financial system performance

–

Investor confidence

–

Legal compliance & enforcement

–

Information dissemination

Functions & powers of ASIC 

Registers companies



Registers business names



National company database



Regulation of financial services 4|Page



Takeovers



Investigative powers



Powers to bring legal proceedings



Education & consumer protection

The Australian Stock Exchange (ASX) 

Ensures integrity of financial markets



Regulates corporate governance



Continuous disclosure scheme



Supervises listed entities ie the sharemarket



Must comply with ASX Listing Rules

Registration and its Effects 

Most companies now formed by act of reg by ASIC under CA s 119



After reg, becomes separate legal person: s 124



CA permits different classes of company



Essential difference btw proprietary & public companies is that pty cos cannot solicit funds from the public



Public cos may solicit funds, MAY be listed on ASX

Registration and its Effects 

A person may either acquire an existing company by acquiring all the shares or incorporate a new company



Can incorporate with only 1 member (shareholder, ‘SH’): s 114



But public cos MUST have 3 directors, 2 of whom must live in Aus: s 201A



Co need not have constitution, then internal admin governed by replaceable rules

5|Page

Topic 2 Characteristics of the Company Topic overview 

Separate legal entity and the veil of incorporation



Corporate groups



Limited liability



Lifting/piercing the veil

What is a company? 

A company is an artificial legal person, intangible, created by or under law with a discrete legal entity, perpetual succession and a common seal.



It is not affected by the death, insanity or insolvency of an individual member.



Comes into existence as a body corporate at the beginning of the day on which it is registered



Shareholders (‘members’) own shares



Directors control management of company

What problem does the company solve? 

Legal ‘place holder’ – property owned by the company not the office holder



Corporations sole eg Archbishop of Canterbury



Created for orderly transfer of ecclesiastical (church) property



Queen Elizabeth is occupier of several corporations sole, including Queen of Australia



Corporations aggregate comprised 2 or more members

Historical development 

Corporations aggregate  means for group to act collectively in Middle Ages



14th century  English monarch conferred corporate personality upon monasteries & municipal boroughs through Royal Charter



Mediaeval guilds - sole traders operating under guild rules eg Free Masons



Groups were given trade monopolies by the sovereign eg the East India Co & Hudson Bay Co



Partnerships – agency, debts & joint trading

Early Multinational Corporation: the East India Company 1600-1874 

Founded by Royal Charter in 1600 6|Page



EIC at its height accounted for half the world’s trade



The origins of the board 



EIC organised itself into a court of 24 directors, elected by and reporting to a “court of proprietors”, or shareholders.

Historical development – ‘joint stock’ 

17th century  Incorporation required Royal Charter (rare) & more ambitious commercial activities required more capital than individual could provide



Thus, development of unincorporated association called joint stock company



Investors could provide money in a venture, in turn for a share of the profits



Such ‘shares’ were transferable, can be sold without consent of other investors



Extension to small closely held companies by early 20th century

Landmark Company Legislation 

Bubble Act 1720 – joint stock companies became illegal, Bubble Act passed in response to speculation in shares of South Sea Company, ‘South Sea Bubble’



Industrial Revolution caused need for investment vehicle



Deed of settlement companies (complex)



Repeal of Bubble Act in 1825



Joint Stock Companies Act 1844

called

- co by registration,



-

regulation of deed of settlement companies

-

ancestor of modern company law

-

However, no limited liability

Limited Liability Act 1855 - introduced limited liability of shareholders



Companies Act 1862 - consolidation & reform, very similar to modern company law

Shareholders 

Historically single person shareholder both owned and managed the co



Role of co to generate profits



Affairs of the company were regarded as private 7|Page



1830 & 40s railway ‘mania’  demand for capital investment - shares traded publicly on stock exchanges



Growth of a new class of investors

Separation of ownership & control 

1837 Brent v Bligh – courts decided that ownership of a share only entitled to share of profits, not part of the co’s property



1932  Berle & Means, The Modern Corporation and Private Property: “The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital... the owners most emphatically will not be served by a profit seeking controlling group”



Position of shareholders (SHs) has steadily weakened since then compared to power of BoD (Board of Directors) to control the co.



1837  Brent v Bligh – courts decided that ownership of a share only entitled to share of profits, not part of the co’s property



1932  Berle & Means, The Modern Corporation and Private Property: “The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital... the owners most emphatically will not be served by a profit seeking controlling group”



Position of shareholders (SHs) has steadily weakened since then compared to power of BoD (Board of Directors) to control the co.

History of Company Law in Australia 

1998  Statutory recognition of one-person companies



State legislation dominated before 2001 (Constitutional issues)



Need for a uniform Australia-wide regime



NSW v Commonwealth 1989 

High Court of Australia: Commonwealth (Cth) did not have the constitutional power to pass laws relating to the incorporation of companies  Cth did not have constitutional power to completely take over corporate regulation in Australia. 

States agreed to give up (‘refer’) their legislative power re companies to the Cth

Corporations Act 2001 

Registration



Related parties transactions



Officers & employees



Meetings



Transactions affecting share capital 8|Page



Debentures



Financial reports



Shares



Member rights & remedies



External Administration



Takeovers



Continuous disclosure



Fundraising

Case Law – ‘precedent’ 

Another source of law that governs companies (in addition to legislation)



Australia has ‘common law’ system where decisions of courts are binding statements of the way statutory provisions (legislation) is interpreted



Case law is reactive – cannot bring issue to court only dispute & often commercial parties will mediate rather than go to court



Delay between legislation & interpretation in court – many issues thus do not have case law clarifying them



Another source of law that governs companies (in addition to legislation)



Australia has ‘common law’ system where decisions of courts are binding statements of the way statutory provisions (legislation) is interpreted



Case law is reactive – cannot bring issue to court only dispute & often commercial parties will mediate rather than go to court



Delay between legislation & interpretation in court – many issues thus do not have case law clarifying them

Salomon v Salomon & Co Ltd (1897) Facts: 

Mr Salomon was sole trader in boot business in London in 1890s



Mr Salomon decided to set up a company so he sold the boot business to Salomon & Co Ltd for £39k



The company paid by: –

issuing £20k worth of shares (20 000 shares at £1),

–

Issuing a debenture (secured note of debt) for £10k to Mr S

–

Balance in cash to Mr S



Salomon & Co Ltd went insolvent leaving unpaid debts



Mr S paid himself out ahead of the unsecured creditors

Issue: 9|Page

Was the company a separate entity independent at law, or was the arrangement a sham to defeat creditors? Held: The company is a separate legal person to its managers and owners



Consequences of the separate legal identity of the company 

1. Company’s property is company’s property; 2.

Company’s debt is company’s debt;

3.

Companies can contract with their members, directors and outsiders (and vice versa); and

4.

Companies can commit torts and crimes.

What is the corporate veil? 

Expression that lawyers use to describe the legal rules that keep participants (members, officers) separate from the company in a legal sense



“Corporate veil” reflects and results from company’s separate legal personality



Stops the law from “seeing” the participants that make up the company i.e. the owners and the operators



Means that the law cannot look through the veil of incorporation and say that the company’s obligations, liabilities, rights or property are obligations, liabilities, rights or property of the participants

Lee v Lee’s Air Farming Pty Ltd (1961) Facts: Mr L was a pilot. He formed a company and held 2999/3000 shares & was the only director. Workers compensation insurance was taken out by the company over Mr L. Mr L was killed in a plane accident . His widow made a claim for Workers compensation. The insurance company said Lee was not a worker. The Workers Compensation Act said that “a worker is a person who has entered into a contract of service with an employer” Held: The company was the employer as it was a separate legal entity distinct from its founder Mr Lee, who also worked as its employee.

Macaura v Northern Assurance [1925] Facts: Mr Macaura owned land on which there was timber. He sold the land and timber to a company he set up and in exchange received shares. A fire destroyed all the timber. Mr Macaura had insured the timber but in his own name, and had not transferred the insurance policy to the company. When Mr M made his claim the insurance company refused to pay. Issue: The insurance was not held in the name of the company which owned it. 10 | P a g e

Held: The company was a separate legal entity and only the company could make the claim so the insurers were not liable (did not have to pay).

Lifting/piercing the veil 

What does this mean? –

disregarding separate entity 

– 

company & shareholders regarded as one

imposing liability on shareholders

Salomon principle is the general rule. Veil lifting the exception & rarely occurs in practice

When will the veil be lifted? -statute (legislation) -common law;

Lifting the veil 1. where the company is set up or used to perpetrate fraud – Re Darby; 2. to evade or avoid an existing legal obligation – Gilford Motor Co Ltd v Horne; 3. where there is a torts claim- Briggs v James Hardie & Co Pty Ltd 4. company is agent of the controller – Smith, Stone & Knight Ltd v Birmingham Corporation; 5. company is part of a group of companies - Adams v Cape Industries plc and Another (1991) ; 6. Directors’ liability for insolvent trading s 588

Re Darby [1911] : Fraud 

Facts:



Darby & Gyde formed a company of which they were sole dirs & SHs. Co purchased a license to quarry & then floated another company to buy the license at overvalue. New co issued shares to public. New co paid $$ thus raised to D & G and then new co failed.



Issue: Could liquidator claim $$ back from D & G?



Held: Yes, D & G set up co for purpose of fraud so liquidator could look behind façade of legal entity.

11 | P a g e

Gilford Motor Co Ltd v Horne: Avoidance of legal obligations Facts: H was the MD of Gilford Motor Co (GMC) for a term of 6 years. He wa...