#7394 - Lifting The Corporate Veil - Corporations Law

Topic 2: Registration/Lifting the Corporate Veil

A company is an ‘artificial entity recognised by the law as a legal person with its own rights and liabilities’

1. Pre-incorporation

   1. A company can ratify a pre-incorporation contract made on its behalf 131-133

2. Registering a company:

   1. s 117(1): To register a company, a person must lodge an application with ASIC.

   2. s 117(2): It must state:

      1. (a) the type of company

      2. (b) the company’s proposed name

         • 147(1) Can’t be identical to another registered name or unacceptable for registration (Minister may consent in writing to the name even if it breaches these requirements (2))

         • 148(2) a limited company must have the words ‘limited’ at the end unless section 150 or 151 applies. A limited proprietary company must have the words ‘proprietary limited’ at the end of its name

           1. 150: doesn’t need limited if it is a charity (1), the company’s constitution prohibits the company paying fees to its directors (2)

         • 148(3) an unlimited proprietary company must have the word ‘proprietary’

         • 148(4) no liability company must have ‘no liability’

         • 149 Acceptable abbreviations: Pty, Ltd, NL

         • 152 Can lodge an application to reserve a name

         • 153 A company must have its name and CAN on all public documents and negotiable instruments except for a receipt (154)

         • 156 It is a strict liability offence to carry out business with an incorrect name

      3. (c/d/e/f) name and address of each member/director/secretary

      4. (g) address of company’s office

      5. (h) public company only: opening hours of office (if not standard opening hours)

      6. (j) address of company’s proposed principal place of business (if not office)

      7. (k) For a company limited by shares or an unlimited company:

         • Number and class of shares each member has

         • The amount they pay for it

         • Whether each share will be fully paid/partly paid

      8. (l) For a public company limited by shares or an unlimited company: if shares are issued for non-cash consideration, the particulars about the issue of the shares

      9. (m) for a company limited by guarantee: the amount of the guarantees

      10. (ma/mb) details about holding company

      11. (n) the state or territory where the company is registered.

3. Effect of registration (separate legal personality)

   1. S 118: company is issued with a certificate of registration which is conclusive evidence that all requirements have been complied with and the company is validly registered s 1274(7A)

   2. s 124(1) Companies have the same legal capacity as a human being. This includes the power to:

      1. (a) issue and cancel shares

      2. (b) issue debentures

      3. (c) grant options over unissued shares

      4. (d) distribute the company’s property among members

      5. (e) grant a security interest in uncalled capital

      6. (f) grant a circulating security interest over the company’s property

      7. (g) arrange for the company to be registered outside the jurisdiction

      8. (h) do anything authorised by any other law, including suing and being sued

      9. 124(2) a company’s legal capacity to do something is not affected by the fact the company’s interests are not served by doing it (doesn’t include prohibited acts (3))

   3. s 119: A company comes into existence as a body corporate at the beginning of the day on which it is registered (a company continues to exists until deregistered by ASIC 601AD(1))

   4. Implications of Limited Liability:

      1. A company becomes a separate legal entity from its investors (the people who own it) Salomon

      2. A company is entitled to contract with its employees and persons may act in a number of capacities. Even a one man company can contract with an employee e.g. Managing Director, owner and employee Lee’s Air Farming

      3. Shareholders are not personally liable for the debts or tortious acts of the company (the liability of a shareholder of a company limited by shares is limited to the unpaid amount on the issue price of their shares 516)

         • Shareholders do not have a proprietary interest in the property of the company Macaura v Northern Assurance Co Ltd

      4. Perpetual succession: company exists independent of changes to its ownership and remains in existence until deregistered by ASIC.

      5. Free transferability of shares: this doesn’t occur with a partnership

      6. From Salomon:

         • Look at whether the company was properly formed, don’t look at the motives

         • A “one-man” company is ok

         • Members of the company need not be independent of each other

         • Using a company to limited liability is not an illegal purpose, creditors must be wary themselves by:

           1. Becoming a secured creditor

           2. Obtain guarantees

           3. Charge higher interest rates to reflect higher risk

         • A company can be a debtor or creditor of a member

      7. Insurance:

         • Under common law, because a company is a separate legal identity, an insurance policy must be in its name to receive the benefit Macaura v Northern Assurance Co Ltd

         • However section 17 Insurance Contracts Act dispenses with the common law requirement. Where an insured suffers and economic loss, the insurer is not relieved of liability just because the insured did not have legal or equitable interest in the property

4. Corporate Groups

   1. A corporate group is number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control Walker

   2. Key terms and definitions:

      1. Related Bodies corporate. Where a body corporate is 50

         • a holding company of another body corporate; or

         • a subsidiary of another body corporate; or

         • a subsidiary of a holding company of another body corporate;

The two bodies are related to each other

2. Holding company: a company of which another company is a subsidiary 9

3. Subsidiary (formal ‘related party’ test) a company is a subsidiary of another company if 46

   • The other body:

     1. Controls the composition of the first body’s board; or

        1. Power to appoint or remove all or the majority of the directors of a company 47

        2. Control refers to legal control, not practical or defacto control Mount Edon Gold Mines Ltd v Burmine

        3. If they own more than 50% of the shares, this will be satisfied. If less, look at the other shareholders to see if control exists

     2. Is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or

        1. Second half is the “Control test”. This is satisfied if a company has a legally enforceable power to control the casting.

           1. Actual control is required: it is not enough to have only an informal agreement with the other shareholders

        2. Certain arrangements falling short of control will satisfy the first test Bluebird Investments v Graf Holdings

     3. Holds more than one-half of the issued share capital of the first body

        1. A company holds shares if it’s a registered shareholder

        2. Does not include preference shares (non-voting shares)

4. Flexible ‘Control’ test 50AA

   • Used in related party transactions (259E), indirect self-acquisitions (259E), and Ch 2M financial statements

   • 50AA(1) An entity control a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

   • Catches ‘entities’ not just companies

     1. This includes body corporates, natural persons 64A(a) connected to a corporation 64B(2), partnership and trust 64A(a)

   • 64A First entity control second entity where they have the entire capacity to determine the outcome of decisions about C’s financial/operating policies 50AA(1)

   • Capacity Factors:

     1. Practice influence first entity can exert (rather than the legal rights it can enforce) 50AA(2)(a)

     2. Any practice or pattern of behaviour affecting the second entity’s financial or operating policies 50AA(2)(b)

     3. There will be no control where the first entity is under a legal obligation to exercise its capacities for the benefit of someone other than the first entity’s members 50AA(4)

3. Lifting the corporate veil: The application of the principle in Salomon to corporate groups means that each company is regarded as a separate legal entity distinct from other companies in the group. As a result, creditors can only enforce their rights against the debtor company. However in some cases the corporate veil may be lifted so the parent company is liable for the debts of a subsidiary

   1. Within company groups

      • Agency: When the subsidiary is deemed to be the agent of the holding company. This occurs when (Courts value limited liability so will probably want all six things to be satisfied – will apply narrowly) Smith Stone and Knight v Birmingham Corporation:

        1. The profits of the subsidiary must be treated as the profits of the holding company

        2. The persons conducting the business must be appointed by the holding company

        3. The holding company must be the head and brain of the trading venture

        4. The holding company must govern the venture and decide what should be done and what capital should be embarked on it

        5. The businesses profits must be made by the holding company’s skill and direction

        6. The holding company must be in effectual and constant control

        1. Note: Unusual facts of the case limit its precedent value: here the subsidiary was not treated by the HC as a separate entity, it did not have its own accounts. Court painted the picture of a puppet

        2. The fact that a HC exercised ‘control and dominance’ over a subsidiary is insufficient to pierce the corporate veil Briggs v James Hardie

        3. 100% ownership is not enough to establish agency Smith Stone and Knight

        4. Showing an agreement to act would be helpful

      • Benefiting the group

        1. Directors owe duties only to the company on whose Board they serve. They cannot transfer funds to save a related company unless they can demonstrate it is in the best interests...