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A Brief History of Corporations Law In General In AustraliaOriginally associated with churches who needed bodies to acquire rights/duties -The colony applied the English law with a mix of deed of settlement, the concept was initially divided into corporations aggregate (many united chartered companies and companies incorporated by statute (e.g. Bank of into one society kept up by perpetual succession) and corporations sole (one NSW, Agriculture Company. The joint stock was the most popular company person and their successors to give legal benefits - e.g. land in perpetuity) but not many companies were formed until the 1860s when the 1862 UK13-14th century - Boroughs and guilds were then recognized as merchants Act was adopted1950s - Different company legislation across states lead to difficulties and struggled to be free of feudalism - they were granted incorporation by royal charter. the Poseidon NL speculative bubble bursts. A national securities exchange to16th century - These guilds eventually broke down as egalitarian values were act against price manipulation (The ASX - 1974)1971 - The case of Strickland v Rocla Concrete overrules the earlier compromised by the oligarchic governing values but a rapidly burgeoning culture of investment was to take over leading to the chartered corporation and joint Huddart, Parker Co. which left open the prospect of the Corporations stock company which were regional (East India Company) power being construed broader17th - The many benefits of the corporate form are realized (perpetual1974 - Whitlam government introduces the Corporations and Securities existence, bringing suit, authentication by company seal, continuity of Bill to establish a national regulatory commission for securities markets to management, share transfer, distinction of group/personal liability. During this impose reporting obligations - it lapsesThe Fraser Government between then and 87 - establishes a three tier period the South Sea Bubble bursts and the Bubble Act is passed18th century - Lawyers progressively realize that it wasn't that much of a system for a Formal Agreement between states (see [2.85]/8]. By 1987 it is problem. But a new form of business association was needed - the deed of declared to have outlived its usefulness and it was suggested to give CTH settlement company provided this (with a formal/insubstantial restriction to complete responsibility for company law1989 - Hawke Labour government introduces a Corporations Bill that was circumvent the transferable stock requirement of the Bubble Act)19th century - Three corporate forms (partnerships, unincorporated stock assetnted to but in NSW v CTH it was held to be unconstitutional as the companies formed by deed of settlement and those incorporated by CTH did not have the power to enact laws to incorporate companies1991 - The new national scheme under the Corporations Act emerges Parliamentary Acts) are present. A series of steps are taken to extend corporate
[2.85/8] and endures for 10 years. It appears a 'national law' and federalized privileges to joint stock companies under the Trading Companies Act 1834 company through uniform: citation to CTH law, criminal and administrative (Crown can confer corporate privileges - was given as of right to any association law regimes, cross-vesting between FCs and SCs. It also established ASIC to with lawful purpose), the Joint Stock Companies Act (*established administer the corporations law accountability mechanisms like company meetings and audits), the LimitedLate 90s - Re Wakim; Ex parte McNally decides that CHIII states the Liability Act 1855 (to assist "humbler classes" to find avenues for savings). In manner of vesting jurisdiction is restricted to that chapter. The autocthonous 1856 a consolidated statute provided for incorporation on the application of 7 expedient only works one way persons2001 - The Corporations and ASIC Act effect a 'referral of powers' to theThroughout the 19th century the partnership was favoured. But by the end of Commonwealth; the Corporations Agreement marking out the boundaries the 19th century, law reform secured legitimacy by protective measures of the scheme ([2.95]/9) - amongst other things it requires the CTH not to introduced by the 1844 legislation. The seminal disclosure principle by the Davey introduce bills on certain subject matters or repeal bills without consulting Committee required prospectuses satisfy a "high standard of good faith" and the 'Ministerial Council' of representatives from each State - this scheme is idealized the counsel of perfection to "disclose everything which could only ensured up to this year but is likely to continue on. There are specific reasonably influence the mind of an investor of average prudence"Company law has since developed in the case law jurisdictional provisions ([2.100/10]
Corporate Bodies in Australia ASIC ASXASICs sole responsibility is to administer the Corporations Act and hasASX was created in 1985 when each of the Colony exchanges decided to historically had a great breadth of powers and discretions. It has power to merge to form it. In 2006 the ASX (AU Stock Exchange) merged with the regulate both standards of management and regulating the market for securities Sydney Futures Exchange to form the Australian Securities Exchange (ASX)In 1998 it was demutualized and converted into a public company and selfand the conduct of its participantsIt is accountable only to the CTH Minister who can direct ASIC as to polices listed itself - thus strengthening its oversight and market integrity obligation which must be tabled before Parlaiment and made it subject to ASIC's supervision of its listening rulesIt once had a role in consumer protection - it's powers identical to the ACCC. ItAdvantages: Ease of fund raising, increased liquidity for securities, value runs in concert with APRA, the RBA and ACCC for shares otherwise locked up, promotes investor confidence through rules,Other Satellite bodies that complement ASIC are the Takeover Panel, valuable reputational signalDisadvantages: Public market facility exposes controllers to threat of loss Companies Auditors, and Liquidators Disciplinary Board and the Corporate
Markets Advisory Committee [2.120/11]
of control due to a takeover if people decide to dispose of shares, loss of privacy due to continuous disclosure, subject to considerable expense (listing fees, share registry, annual reports, greater regulation of conduct, higher governmental standards, trading restraints
Class 1 Summary Types of Companies S 45A -Proprietary Companies (1) Proprietary company is one that is registered or converts to it under the Act (2) Small if 2/3 of: Consol. Rev < $25m; gross assets < $12.5m; <50 employees (3) Large if 2/3 of: Consol. Rev > $25m; gross assets > $12.5m; 50+
employees (as at end of financial year) (4) When a company controls an entity (5) Part-time employees are taken into acct S 112 - Types of Companies (1) Can register as Proprietary (limited by shares, unlimited with share cap) and public companies (limited by shares, guarantee or NL) (2) NL must have SC; constitution with mining as sole objects; no right to recover calls from fail shareholder (3) NL cannot engage in activities outside mining (4) Directors of NL must not let/contract for a mine unless approved by SR (5) Act isn't invalid because of those S 113 - Proprietary Companies (1) No more than 50 non-employee shareholders if they are to be registered as a proprietary companies (2) Joint shareholders = 1 person S 114 - Company must have at least one member S 117 - Applying for registration (1) Must lodge with ASIC (2) Stating a number of things [160.8]
Choice of Business Association Can be incorporated to pursue profit and non-profit objectives (e.g. charitable/educational - but can differ e.g. mutual societies can give benefits to members - still not for profit) There is a special form for Abos
Sole Trader No business association; personally liable completely; must have an ABN and declare tax as an individual\
Co-operatives Limited liability - doesn't fit into the PO/NPO distinction and not a normal registered company for a number of reasons [3.20]/15. Commonly used by primary producers to market/distribute crop but also to pool buying power (co-op bookshop) Co-operatives Act makes it a body corporate and provides limited liability etc. [3.20]/15 Incorporated Associations
[3.25]/16 Different regimes in different statues - in NSW Associations Incorporations Act (5+
people, lawful object can incorporate if pecuniary gain/trading not an object).
Process of Incorporations (Some important provisions in first column - residual is here)
- S 152 - Company wants another name it can reserve it unless another company has it, it is on the register or it is of an unacceptable kind (e.g. Olympic or suggesting connection to royal family)
- A company has the capacity of an individual as well as distinctive body corporate powers (s 124)
- Limited companies must include Limited and Proprietary Limited Pty Ltd (s 148(2))
- A company certificate is conclusive evidence of compliance with incorporation (s 1274(7A) but cannot legalize otherwise illegal objects (Bowman v Secular Society)
- Company = those registered under a predecessor Acts or this Act; Corporation includes those under other statutes
- A practical alternative to the formalities of setting up a corporation is to use a shelf corporation (and change its objects appropriately)
? But one can still bind a company to its commitments; s 113 allows a company to ratify contracts prior to registration with an agreed/reasonable time (on agency principles - express or implied). But if the company doesn't get registered the person is personally liable (s 131). Such an agent cannot be indemnified by the company (s 132)
- Share Capital - only those limited by guarantee don't have this. It consists of members contributions and bonus issues and can never be returned to shareholders. It is a proportionate interest through a 'bundle of
Proprietary Companies The distinction between small and large proprietary companies are borne out of disclosure related issues Proprietary companies have some special privileges S 114(1), 221 - Prop company can register with 1 shareholder and trade with a single director S 250N - Requirement to hold an AGM only applies to public companies S 249A - Prop companies can pass shareholder resolutions without a meeting Ch 2E - Stand outside the prohibition on participation by directors in deliberations of the BOD in relation to which they have a material personal interest on related party transactionsSome privileges are confined to small proprietary companies - e.g. relating to preparation of audit and FS
S 286 - All companies have to keep written financial records to explain transactions and enable
(3) Lodge with constitution if to have one (4) Must be in prescribed form (5) Applicants must have agreements and consents of all those in (2) WRT the application (6) SL offence under (5) S 118 - (1) ASIC gives a company a CAN, registers it and issues a certificate (2) ASIC keeps a recordHave a number of obligations (appointing a public officer to liaise with the DFAT D-G and notify changes to its objects etc.) Committee members are exposed to personal liability to contract On winding up personal property isn't distributed to members without DG approval No national scheme - must either get two separate in states or register under 5B.2 Partnerships Restricted by CA 115 to 20 people (50 for med, 400 law; 1000 acct)
rights' (not a legal/equitable interest). Only true FS' to be prepared and directors can issue them for agreed audited consideration.
? All but small props have
- Issued Capital = Uncalled Capital + Paid up to prepare FS' every Capital financial year and have
- Rights attached to shares are those by the them audited and lodged CA, general law and constitution - (they are with ASIC (P&L, BS and transferable and liquid), include a right to SOFC - s 295) dividends, participation, rights on winding up,
**S 119 - A COMPANY COMES INTO right to notice/speak/elect and remove Small props are required to EXISTENCE AS A BODY CORPORATE AT THE directors prepare them and send them to
- Limited by Shares - Amount paid on shares BEGINNING OF THE DAY OF REGISTRATION members IFF (s 293 5% vote of and to call unpaid shares on the terms of SHs direct; s 292 company is issue S119A - (1) A company is incorporated in this controlled by a foreign company
- Limited by guarantee (generally NPOs) - jurisdiction; (2) Taken to be registered in the and it is not included in only liable to the extent of contribution and State/Territory in the application (3) The S/T consolidated accounts lodged by only includes members at the time of winding changes if a minister of the S/T in which it is ASIC; s 294 - ASIC directs it to. up. Don't have share capital. registered approves; a state ceases to be a
? Need not be lodged with
- No such thing as company limited by referring State (4) Company continues to be ASIC such as to make it shares and guarantee Factors affecting the decision to registered even if they so cease publicly available (s
- Unlimited Companies - shareholders not incorporate [3.30]/16 - limited S 120 - Members, directors and company 319(2)) directly liable to creditors. Class made on liability, perpetual succession, secretary
? ASIC can relieve a equal contribution, liability is several so one financing (can make floating charges), (1) You become this on reg with your company from these member can be subject to full liabilities. costs with formalities and continuing consent in the application obligations by reference Exempt from the 'unsanctioned capital (2) Shares taken up by the members as obligations, Taxation (franking credits to criteria (e.g. if it would reduction rule' - can reduce capital and specified in the application are taken largely reduced this) impose unreasonable attract funds to be issued burdens ? s 342)
- NL - Only mining but large ones still prefer not to
? Special provisions apply [3.125/19]
Part 2B.7 provides procedure to change types Concept Key Cases Issue/Result Principle Ratio Comments Salomon v Limited liabilityThe statute is the sole guideThere was no fraud (purchasing the Salomon Is linked to separate corporate personality in to the inquiry as to whether company at a low price) - this the sense that corporate personality is a the company was a wasn't proved and furthermore all precondition for limited liability as entity company the members new all the facts status is what partitions the pool of assets ofThe statute says nothingThe re-issuing of the debentures the company from that of the shareholders about the motive of and partial-securing to himself was Arguments in favour: Relieves shareholders shareholders - they could all what anyone would have done from monitoring each other, encourages(MacNaghten) though the even hold it on trust for one liquidity and provides accountability for debenture situation is unjust to the person management (takeover threat), marketThe statute makes it unsecured creditors - this is the pricing divorces it from the shareholder's essential to recognize present state of the law capacity, encourages entrepreneurial risk artificial existence of the taking company separate from Arguments against: Benefits to shareholders shareholders matched by detriment to Lee vThe fact that someone is a company director does not impede them from creditors who have a greater monitoring/riskLee's Air contracting with the company - a person can act in dual capacities bearing capacity (e.g. tort claimants as FarmingThe fact that he was sole director doesn't change anything. It was the creditors cannot bargain for protection - it company, however that made the appointment - that he was the agent presents a moral hazard). It favours does not affect its validity
externalization of social costs and will not be efficiently and completely regulated (time lag, gaps in coverage and barriers to private enforcement which create opportunities to disregard obligations. Corporations have a narrower moral compass which favours this externalization.
The idea that he both gave orders and served the company is mistaken - it was the company that gave the orders
Note: Gower suggests while large companies will be well aware of risks to investing in LLCs the "little man, whom the law should protect" rarely has an idea of the risk he runs in advancing credit to such a company. The case was affirmed in Hamilton v Whitehead HCA - an MD was liable as an agent to the company as he was knowingly concerned in the commission of offences by the company (even though he was the only person controlling it). There is no vicarious liability - he is an accessory. It is a logical conclusion of Salomon's Case that one can act in dual capacitiesThe name a 'group' ofHere the companies were not a companies is given to 'group', there was no interlocking companies with interlocking shareholders and the other shareholders and company did not stand to lose/gain allied/unified control anything from this one going into liquidationEach company is an independent legal entity consulting their own interests as to whether or not to make payments to each otherMust look at the individual directors and their failure to discharge their duties
Walker v Wimborne
Corporate Personality Is a legal person (some similarities - can engage in torts, be defamed (NSWALC v Jones), be in contempt of court (Bay v Clayton) cannot invoke selfincrimination in answer to production of documents (EPA v Caltex) is not a resident and is unlikely to be a subject of the Queen (Australasian Temperance and GLAS v Howe)
Article by Cheffins on the law's treatment of the relationship of shareholders to Managers Limited Liability does not 'shift risk' - the loss lies where it falls but there are still the concerns that shareholders have an incentive to gamble and that distribution of loss to creditors prejudices people who are least able to endure the consequences (trade creditors don't get guarantees - no bargaining power; also tort claimants) He notes the positive aspects (facilitates operation of equity markets, liquidity, investors don't become liable to a web of companies etc) ? But it shifts risk of business failure from poor risk bearers to people generally capable of bearing the consequences (large banks ? they are generally better positioned to bear debts; as they were well diversified) Paradox - People who value limited liability (small business owners) also often waive it through personal guarantees for corporate debts (but at least this is only to a single director) Administratively - the absence of limited liability will just encourage people to incorporate it into contracts of complex nature Areas of concern Regulation of limited liabilities in cases of misrepresentation Tortious liabilities - the problem of compensation (if tort damages > company assets; can't sue for shortfall) and deterrence (dangerous business is just a 'cost' and market forces are unlikely to bring accident costs to the company. Also shareholders wealth is only at risk if the accident costs threaten to make the company insolvent) Conclusion No changes required in the problem of tort creditors - the adverse impact of limited liability on them is limited (generally tort victims rarely seek redress and get settlement; also when they are likely to see it is mass tort cases where limited liability is unlikely to make a difference (large companies can usually bear the loss) and it will involve massive administrative issues (overseas investors, costly enforcement proceedings etc. Concep t Piercin g the Corpor
Re Darby - right to dig up slate; sold to other company
PrincipleRatio This was a case of common law fraud - the company was created solely to issue a prospectus to pay the first company to pay the fraudsters. The liquidators can sue the shareholders
Comments The primary categories of case for piercing the corporate veil have been: Fraud or improper conduct
Gilford Motor - company; competitio n; wife's name Jones v Lipman - at performan ce sold to company he had with his clerk Smith Stone and Knight v Birmingh am - holding company coulda stuck their name on it
Re FG needed to a 'maker' under the Act Spraeg v Paeson (into the corporate veil - not out - brickmaki ng)
Mere cloak or Sham?
If evidence shows that the company is a mere cloak or sham and the business was really being carried on by him relief can be granted accordinglyCited Gilford - the company is a sham, a 'mask he holds before his face in an attempt to avoid the recognition of the eye of equity'It is a question of fact "whether the subsidiary was carrying on the business as the company's business or its own. To aid in this inquiry: I. Who was really carrying on the business? Were the profits treated as profits of the parent company?
II. Were the persons conducting the business appointed by the parent company?
III. Was the parent company the head and the brain of the trading venture?
IV. Did the parent company govern the adventure, decide what should be done, what capital should be embarked on the venture?
V. Did the parent company make the profits by its skill and direction?
VI. Was the parent in effectual and constant control???Here the company was a mere cloak or sham to allow Horne to continue to commit breaches of his service contract Injunction granted SP can be ordered to compel one who has it in their power to convey property The equitable remedy of SP can be rightly granted in this case
On the peculiar circumstances of the case all of these were satisfied. The waste company was just a legal entity. They were occupying the premise of for the sole purpose of the service it was rendering to the claimantsSkinner says in the odd circumstances there was an implication of an agency between the company. Not by the mere ownership of shares but their conduct constituting themselves as agents.
90% of FG's shares were owned by the American Director They had no registered office or employees in Britain The company's participation was so small as to be practically negligible - they acted as a mere nominee/agent of the American film who financed the projectThe applicant was incorporated for the sole purpose of qualifying as a British film. Used Atkin's 6 points I. Componere was carrying in the business despite Paeson's name on the loan. The Brickmaker was called 'Componere brickmaker' and it was the name on the business card II. The profits were treated as profits of the parent III. Paeson was conducted by people appointed by Componere IV. Paeson was the head and brain of the trading venture and decided what to do with the capital V. It was doubtful that there were profits - but if there were it was made by Componere's skill + directionAgency Limited recognition of the unity theory of enterprise
There are also statutory provisions that lead to veil piercing: S 588G - Debts incurred from insolvent trading S 588V-X - Where a company is a subsidiary, the holding company can be liable in relation to debts where it knew/ought to know of the state of affairs Personal liability of directors for debts incurred by the corporate trustee when not fully entitled to be indemnified by the beneficiaries X Bank Ltd v G - defendant creates an elaborate structure of corporations/trusts to put his assets beyond the plaintiff's reachOrders: The defendant's assets were frozen and the CA noted "the authorities revealed the court would use its power to pierce the corporate veil if it was necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration
? Skinner questions - is this a residual category?
Wallersteiner v Moir - Lord Denning was prepared to treat a group of companies under the control of a notorious financier as his "puppets" - "He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures" Re Bugle - Like Re FG - statute prohibited people from getting a 90% shareholding in companies; they formed companies to do so. DHN (group enterprise) - the holding company had two companies (B and C3). B owned land, C3 owned trucks, the holding company ran it. LBC compulsorily acquired B's land - the holding company claimed for disruption.
? Denning says they were "virtually the same as a partnership" and could be
VI. Componere was in effectual and constant control Furthermore, Paeson had no assets or bank account - thus it could potentially preclude its creditors from recovering anything but Componere could continue trading. Thus Paeson was an agent for its undisclosed principle. Spraeg could recover from both
Piercing the Corpora te Veil
Briggs Asbestos Case
Principle??Walkovs ky v Carlton
Ratio The authority of cases like DHN were doubted and in any event it was too late because such an avenue for corporate liability was closed by Industrial Equity v Blackburn The proposition that the veil may be pierced where a company exercise complete dominion over another is too simplistic (and would have been sufficient in Walker v Wimborne) There is no settled principle - and different considerations may be necessary in tort as opposed to contract (e.g. that the tort victim doesn't have a choice as to which corporation will do him harm - he can't choose to contract with a certain person) And furthermore corporate dominance of a subsidiary can be an indicator of propensity to commit a tort Also - different considerations would apply when the tort victim was an employee - he can choose who he works for (but he will not have any input in determining how the business is conduct or whether reasonable care will be taken for his safety)
Many cab companies made to minimize the maximum insurance claims. Fuld J rules that it wasn't fraudulent - the enterprise isn't illicit just because it consists of a number of corporations Keating J (in dissent) says it is subversive of legislative policy
treated as one (Skinner says its full of crap but use if you need it Industrial Equity - Again with Gilford Motors - mere shareholding is not enough. Cases must be decided on their facts Woolfson - Corporate veil was not pierced where one person owned land and all but one share in a business - doubted DHN Pioneer Concrete - read down DHN - only if the company is a group/actual partnership, will the veil be lifted
Summary of Statutes for Class 4 [Replaceable Rules, the Constitution and Powers]
Part 2B.4 - Replaceable Rules and the Constitution s 134 - Internal Management - can be governed by Act, constitution or both s 135 - Replaceable Rules (1) Sections that say RR - a. applies to companies registered post 98; companies registered before that repeal their constitution after that date b. RRs For Prop + Mandatory for pub - applies as an RR to any prop registered post 98; post 98 that changes to a prop; any prop that repeals/amends and to any public company (not asn ARR) (Doesn't apply to person sole D/SH - except 198E, 201F and 202C) (2) A provision applying to a company as an RR can be displaced/modified (3) Failure to comply with RR =/=
contravention S 136 - Constitution [$6]
(1) Adopted on registration (when all members agree before lodging app.); after registration of it is adopted by SR (2) Can be modified by SR (3) Can provide for further req. than SR (4) UCPO company can modify/repeal the (3) req. through compliance with it (5) Public company must lodge copy of SR with ASIC if it modifies/repeals within 14 days of passing; must also lodge (a constitution if it adopts, copy of it if it repeals)
[Can use constitution for expropriation for a proper purpose and not oppressively - must be procedurally and substantively fair ?
Special resolution (s9) - 75% of votes actually cast
s 137 - Date of effect of adoption/modification/repeal (1) If from an SR - when passed or later date specified (2) If from court order (s233) the date of order or later date specified S 138 - ASIC can direct company to lodge consolidated constitution s 139 - Company must send copy of const to member ($2) (1) If they ask + pay fee required
- within 7 days s 140 - Effect of constitution and RRs (1) Constitution has effect as a contract between a) each member; b) the company and each director/sec; c) a member and each other member [under which they agree to observe/perform it as far as it applies to them]
(2) Unless a member agrees in writing to be bound they aren't bound by modifications to const. insofar as it: a. Req. taking up more shares b. Increases liability to contribute to share capital or otherwise pay money (3) Imposes restrictions on right to transfer shares already held (unless the modification is made when changing from public ? private or to insert a proportional takeover approval provision)
The Corporate Organs Generally Powers of the GM They do not have residual powers (s 198A(2)) - the D do. Constitutional Structure Can alter the name (s 157); Adopt or repeal or modify a constitution (s 136); change the company's type (s 162(1)) Capital Structure - only directors can issues shares but the GM can: Convert shares into smaller/larger numbers (s 254H), reduce share capital or approve a buy back (s 256B-C; s 257A/C/D); Alter rights attached to shares (Pt 2F.2) Under Table A they could declare dividends and capitalize profits with director recommendation Board's Composition Appoint (s 201G); remove (s203CD) and determine remuneration (s 202A) GM's Power acquired for approval to Appoint/remove company auditors (ss 327A-B, s 329); SR to wind up voluntarily (s 491) or by court order (s 461(1)(a)); approve financial benefits to related parties of a public company (s 208(1)(a)); Approve termination of payment to company officers (s 200 B-C)
Powers of the Board Business of the company is managed by the directors (s 198A). Includes: Issuing shares Power to bring legal proceedings in the company's name Borrow money or grant security over company property Issue negotiable instruments Grant bonuses to employees and pensions But not to fix their own remuneration They can exercise all powers of the company except those the constitution require the GM to (s 198A(2))
? For Proprietary companies with a sole director + shareholder it is to be managed by his direction mandatorily (s 198E)
Note - Companies are also restricted by the ASX Listing Rules if public (277.7)
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