Law Notes > Business Associations I Notes
This is an extract of our Introduction To The Corporation And Incorporating document, which we sell as part of our Business Associations I Notes collection written by the top tier of University Of New South Wales students.
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Class 1: Introduction to the Corporation and incorporating under Australian law
Look at remedies if things go wrong in companies. In the Queensland floods the question was should they take a generous look at the policies that they provide? What is corporate social responsibility? The things that are strictly legal and those which are voluntary. How should we treat companies as a political, social matter and whose perspective should we judge them from? Shareholders?
Co-operatives have the Co-operative Act. They are not companies but they are corporations.
Statutory corporations.
Public companies:
Use the term limited which means limited liability. There are many shareholders.
People buy stocks on the Australian Securities Exchange. Shareholders may dismiss the directors.
Perpetual succession captures the idea that the shareholders come and go. The company is a legal entity in its own right.
Not for Profit Company limited by guarantee is slightly different. Not as many shareholders.
Proprietary companies have limits on the members they can have.
Business associations include partnerships. Transfer of interests is harder in this circumstance. They become individually liable for the loan if the others don’t pay. The shareholders in a company have the limited liability. Sole traders do not enjoy limited liability.
Section 45A has different stipulations for small and large proprietary companies.
Section 112 tells you all the characteristics of the different public companies.
The stakeholders include creditors (lending, floating charge but section 1324 gives them rights to get injunctions but they have more effective remedies in their lending agreement), employees, governments, consumers, environment, community (media)
The partnership have special duties to one another. They have fiduciary duties. They come from Trust law.
History of corporations
15th/17th century- joint stock companies
1720- south sea bubble
18/19th centuries- deed of settlement companies
1844- joint stock companies act
1855- Limited Liability Act
1856- Joint Stock Companies Act (Consol)
Isn’t limited liability a device for fraud
1989-1999: ASC (now ASIC). Corporations law. Re Wakim (all the decisions of the Federal Court were found to be unconstitutional so states had to pass individual legislation to say that all the decisions in the federal court were state decisions and they had to refer their corporations law to the commonwealth government- state power is unconstitutional when vested in the national government).
ASIC Act 1989- referral of state power, treasure/ASIC/ASX, Federal/state and cross vesting, AAT/state criminal jurisdiction.
Corporations Act 2001
Page 26-40 History of how the regulation of corporate enterprise evolved
Corporations are legal persons.
The corporate group enjoys perpetual existence. It can more easily bring suit against strangers and even its own members. Its common seal can authenticate its acts and distinguish it from the acts of individual members. Transferability of shares. Distinction between group liability and personal liability of members.
Voting rights are based on the size of the shareholding. One vote, one share. Governors and associates of the companies were held to rigorous trustee standard of disinterested service- fiduciaries. The company is a personality distinct from its members.
There were strong economic factors in the 18th century making it imperative that a form of business association be available to facilitate the aggregation of investment capital. This was due to expansion of foreign trade, industrialisation and the growth of the factory system.
The Bubble Act was passed. It was repealed in 1825. It did not establish a distinct legal regime for the joint stock company.
The state adopts a limited interventionism by requiring disclosure as to specified matters perceived to be material to the judgment of potential investors. The state does not attempt any merits review of the efficacy or equity of the proposed venture or the interests in it which are being offered to investors.
The Joint Stock Companies Act 1844 UK established accountability mechanisms through obligations with respect to the holding of company meetings and the audit and publication of company accounts. There was the deed of settlement of a company. It vested management powers to directors and directed that shareholders would not act in the management concerns of the company.
The shareholders had limited liability in the Limitation of liability Act 1855 UK.
Page 40-52 Phases of corporate regulation in Australia
The first native company was the bank of NSW in 1817 formed as a partnership. It had shares. It had a deed of settlement in 1828.
There were chartered companies incorporated by royal prerogative and clothed with privilege for the benefit of English capital. This included the Australian Agricultural Company which was granted a million acres of land. Van Diemen’s Land Company but the land was poorly chosen.
The Uniform Companies Acts were adopted in 1962.
There was a stock market boom in 1969. The Poseidon boom.
Whitlam Labor government introduced the Corporations and Securities Industry Bill 1974. It proposed financial reporting obligations on companies which solicited public investment in their securities and sought to prevent market abuse through manipulation and insider trading.
The Corporations Act 1989 gives the commonwealth in section 51(xx) the power to legislate with respect to foreign corporations and trading or financial corporations formed with the limits of the Commonwealth.
The Corporations Agreement 2002 provided the framework for the national scheme. The Ministerial Council is at the centre of the scheme. It provides the machinery to alter the Corporations legislation. The parliament must consult the ministerial council before altering the Corporations legislation. The approval of the council is not required. They need approval from at least three state or territory ministers.
Page 53-58 Role of the Australian Securities and Investment Commission (ASIC) and the Australian Securities Exchange (ASX)
ASIC is an independent regulatory agency. It is charged with legislative implementation and the routine administration of the Corporations Act. It must maintain the performance of companies. It has extensive powers to investigate breaches of the national law, take civil enforcement action, initiate criminal prosecutions and exercise adjudicative powers. They can exempt persons and companies from compliance of sections in the Corporations Act. They may apply for a declaration by the Takeovers Panel that an acquisition of shares is unacceptable.
There are between 3-8 members of ASIC appointed by the Governor General on the nomination of the Commonwealth Minister under section 9(2) of the Australian Securities and Investment Commission Act 2001. The Minister must gazette a copy of the direction and lay it before each house in Parliament.
A Minister may also direct ASIC to investigate suspected contraventions of the legislation.
ASIC registers companies, maintains a public database for corporate information, regulates financial markets and enforces obligations. Their powers were expanded in 1998 with respect to consumer protection.
It deals with financial services including insurance, super and banking (excluding lending). It must promote market integrity and consumer protection within the financial system rather than separate product or industry specific regulation. This is expressed in the Trade Practices Act 1974.
Its consumer protection powers are disclosure requirements, licensing of market intermediaries, the prevention of market abuse and unfair conduct and the operation of complaints handling and resolution processes.
The Australian Prudential Regulation Authority (APRA) has responsibility for prudential regulation of the financial sector. That is oversight of capacity to honour financial commitments.
The RBA is responsible for monetary policy and the stability of the financial system generally.
The ACCC has the competition laws as they affect financial services and products.
The ASX was formed in 1985. It merged with the Sydney Future Stock Exchange in 2006. It became a public company in 1998. Its shares are traded on the ASX. The Corporations Legislation was changed to strengthen the ASX’s obligations to ensure oversight of the conduct and integrity of market participants. It must operate a fair, orderly transparent market.
In 2008 there were 2,226 entities listed on the ASX. ASX also operates markets for debt securities, futures and options and warrants.
There are ASX listing rules. It is a market regulator and surveys market activity to identify unusual trades for investigation of possible insider trading or market manipulation. It enforces it’s listing rules. Listing enables companies to raise funds, makes the security more appealing, shows value of the company, promotes investor confidence because of monitoring. But there are listing fees, share registery, annual reports and investor relations and more regulation.
Page 92-116 The reasons why business people would choose a corporation as the legal form for operating a business and how incorporation is effected.
The types of business are sole trader, unincorporated associations and corporations.
Under unincorporated corporations you can have a partnership, limited partnership, joint venture, syndicate, trust or unincorporated non profit association.
Under corporations you can have an associations incorporated under the Associations Incorporation Acts, co-operatives, chartered corporations, corporations created by an Act of Parliament, Banks and insurance companies, credit unions, permanent building societies and friendly societies, companies under the corporations act (public companies limited by shares, public companies limited by guarantee, proprietary companies limited by shares, public unlimited companies, proprietary unlimited companies and no liability companies).
The present concern companies is the unincorporated companies.
There is a wide freedom of choice. Partnership above a certain size should incorporate to prevent mischief arising from large trading undertakings being carried on by large fluctuating bodies.
Section 20 of the CA prohibits the formation of more than 20 members of a partnership or association. However medical practitioners are allowed up to 50, legal practitioners up to 400 members and 1000 for accountants.
Non profit means charitable functions, educational or scientific activities like private schools, activities that are sporting or social or cultural like the RSL, activities to further professional or trade interests like law societies, activities for mutual benefit of members like credit unions. The charities don’t get taxed but sport groups make a lot of profit. The incorporated association has been established for non profit groups by legislation.
Incorporation can minimise tax imposts. That is why elaborate structures are created. It also helps aggregate funds on a large scale.
Aboriginals have special incorporation under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth). They can design corporate structures to best suit their needs.
A sole trader is not involved in business association. It is an individual conducting a business alone. They are personally liable for the debts and liabilities. There are no formalities for formation. They require an ABN.
Co-operatives offer limited liability for their members and provide an alternative incorporated form for the pursuit of business. They have open membership with no discrimination, democratic control like one vote per member regardless of amount of shares, returns on share capital is strictly limited and must distribute to members according to their proportion of patronage and commitment to the education of members and co-operation with other co-ops.
The co-operative is expressed to be a body corporate by the name under which it is registered under section 21.
The business is managed by a board of directors elected by members under section 204 and 205.
Members are only liable for the amount unpaid on shares under section 76.
Accounts must be audited annually under s. 243 and an annual report lodged with the Registrar under s.252.
The Registrar has discretion whether to register a co-operative. It must serve the interests of members under s. 19 and 20. They can direct them to cease borrowing and require repayment or refinancing of debts and the investment of proceeds under s. 264. They can direct them to transfer their engagements to another co-op under s. 314. They can be wound up with a certificate and the Registrar will appoint a liquidator under s.324 and inspectors can be appointed to look at documents under s. 372-384.
A member can retire from membership and have capital returned to them.
Incorporated associations are used for non profit associations. They permit association by 5 or more people formed for the object of trading or securing pecuniary gain for its members under s. 7(2)(a). They must appoint a public officer under s.22-25 to act as a liaison between the association and the Department of Fair Trading. They must notify the Department of changes to its objects and rules and identity of public officer under s, 20, 21, 23, 25. There must be a general meeting of members annually to receive a statement of the income and expenditure under s.26. A copy must be lodged to the Department by the public officer under s.27. $2 million must be insured under public liability insurance.
The unincorporated association does expose its committee members to personal liability for the contracts and torts of the association. But incorporated associations are not liable to the discharge of the associations liabilities under s. 16. But committee members will be liable if there is no maintained public liability insurance for the prescribed amount and the liability is incurred under s. 45 or the association incurs liability fraudulently or without reasonable expectation that the debt will be discharged when it falls due under s.38.
Incorporated associations are dedicated to non profit objects. A distribution of surplus property must be approved by the Director General and cannot be vested in another non profit association unless it has substantially similar objects under s.53.
But these companies deal with the state regulator and cannot be national so there is a preference to register as a guarantee company and deal with ASIC.
Factors affecting the decision to incorporate:
Limited liability.
Perpetual succession.
Financing. It allows a floating charge over property.
Partnerships are more flexible however and no formality is needed for their creation. There is no registration or internal structure or reporting obligations. They can be dissolved without formality. The CA requires incorporated companies to disclose information continuously. There are constraints.
Historically incorporations were taxed at the corporate level and then in the hands of its members. But dividend imputation was introduced to eliminate double taxation. There are imputation measures.
ASIC will incorporate a company under s. 117(2) according to the type of company, the proposed name, the names and addresses of persons who consent to be members, its proposed registered office and principal place of business and details of proposed share capital. A company may be named after its Australian Company Number or reserve the proposed name prior to incorporation under s. 152. Availability searches must be made for the name. It must not be a name already reserved or included on the national business names register or declared by regulation under s.147 to be unacceptable (i.e. names like made in Australia that have a connection with the Crown are not allowed). A company will get a certificate of incorporation to show they have complied with all requirements of incorporation.
It takes a while to become incorporated so shelf companies are used in the mean time and incorporated in advance of need. The company only comes into existence with registration
Corporations Act 2001 (Cth):
For an overview of the main provisions for incorporation and management of a small company, see the “Small Business Guide” in Part 1.5 (following s 111J).
CORPORATIONS ACT 2001 - SECT 111J
Small business guide
(1) If, because of:
(a) regulations made under this Act; or
(b) instruments issued by ASIC under this Act;
the small business guide as set out in Part1.5 has become out of date, the regulations may set out modifications of the guide that would bring it up to date. The guide then is to be read as if it were so modified.
(2) The small business guide is divided into sections (numbered 1, 2, 3 ... ) and the sections are divided into paragraphs(numbered 1.1, 1.2, 1.3 ... ). For example, a reference in the guide to 3.1 is a reference to paragraph 3.1 of the guide.
This guide summarises the main rules in the Corporations Act (the Corporations Act 2001 ) that apply to proprietary companies limited by shares--the most common type of company used by small business. The guide gives a general overview of the Corporations Act as it applies to those companies and directs readers to the operative provisions in the Corporations Act.
The notes in square brackets at the end of paragraphs in the guide indicate the main provisions of the Corporations Act , the regulations made under the Corporations Act, and ASIC Practice Notes that are relevant to the information in the paragraphs.
Other Commonwealth, State and Territory laws also impose obligations on proprietary companies and their operators.
1 What registration means
1.1 Separate legal entity that has its own powers
As far as the law is concerned, a company has a separate legal existence that is distinct from that of its owners, managers, operators, employees and agents. A company has its own property, its own rights and its own obligations. A company's money and other assets belong to the company and must be used for the company's purposes.
A company has the powers of an individual, including the powers to:
• own and dispose of property and other assets
• enter into contracts
• sue and be sued.
Once a company is registered, its separate legal status, property, rights and liabilities continue until ASIC (Australian Securities and Investments Commission) deregisters the company.
[sections119, 124--125, 601AA--601AD]
1.2 Limited liability of shareholders
Shareholders of a company are not liable (in their capacity as shareholders) for the company's debts. As shareholders, their only obligation is to pay the company any amount unpaid on their shares if they are called upon to do so. However, particularly if a shareholder is also a director, this limitation may be affected by other laws and the commercial practices discussed in 1.3 and 1.4.
[section516]
1.3 Director's liability for company's debts
A director of a company may be liable for debts incurred by the company at a time when the company
itself is unable to pay those debts as they fall due.
A director of a company may be liable to compensate the company for any losses the company suffers from a breach of certain of the director's duties to the company (see 5.3).
In addition to having liability for the company's debts or to pay compensation to the company, a director may also be subject to a civil penalty.
If a company holds property on trust, a director of the company may be liable in some circumstances for liabilities incurred by the company as trustee.
[sections197, 344, 588G, 588J, 588M, 1317H]
1.4 Director's liability as guarantor/security over personal assets
As a matter of commercial practice, a bank, trade creditor or anyone else providing finance or credit to a company may ask a director of the company:
• for a personal guarantee of the company's liabilities; and
• for some form of security over their house or personal assets to secure the performance by the company of its obligations.
The director of a company may, for example, be asked by a bank to give a mortgage over their house to secure the company's repayment of a loan. If the company does not repay the loan as agreed with the bank, the director may lose the house.
1.5 Continuous existence
A company continues to exist even if 1 or more of its shareholders or directors sells their shares, dies or leaves the company. If a company has only 1 shareholder who is also the only director of the company and that person dies, their personal representative is able to ensure that the company continues to operate.
[sections119, 224A]
1.6 Rules for the internal management of a company
The Corporations Act contains a basic set of rules for the internal management of a company (appointments, meetings etc.).
Some of these rules are mandatory for all companies. There are a few special rules for single shareholder/single director companies.
Other internal management rules in the Corporations Act are replaceable rules. The replaceable rules do not apply to:
• a single shareholder/single director company; or
• a company that had a constitution before the introduction of the replaceable rules regime and has not repealed it.
A company does not need to have a separate constitution of its own; it can simply take advantage of the rules in the Corporations Act. The company will need a constitution only if it wants to displace, modify or add to the replaceable rules.
[sections134‑141 and 198E]
1.7 How a company acts
A company does not have a physical existence. It must act through other people.
Individual directors, the company secretary, company employees or agents may be authorised to enter into contracts that bind the company (see 7).
In some circumstances, a company will be bound by something done by another person (see 1.8).
1.8 Directors
The directors of a company are responsible for managing the company's business. It is a replaceable rule (see 1.6) that generally the directors may exercise all the powers of the company except a power that the Corporations Act, a replaceable rule or a provision of the company's constitution (if any) requires the company to exercise in general meeting.
The only director of a company who is also the only shareholder is responsible for managing the company's business and may exercise all of the company's powers.
The Corporations Act sets out rules dealing with the calling and conduct of directors' meetings. Directors must keep a written record (minutes) of their resolutions and meetings.
There are 2 ways that directors may pass resolutions:
• at a meeting; or
• by having all of the directors record and sign their decision.
If a company has only 1 director, the sole director may also pass a resolution by recording and signing their decision.
[sections198A, 198E, 202C, subsection 202F(1), sections248A‑ 248G, 251A]
1.9 Shareholders
The shareholders of a company own the company, but the company has a separate legal existence and the company's assets belong to the company.
Shareholders can make decisions about the company by passing a resolution, usually at a meeting. A "special resolution" usually involves more important questions affecting the company as a whole or the rights of some or all of its shareholders.
There are 2 ways that shareholders may pass a resolution:
• at a meeting; or
• by having all of the shareholders record and sign their decision.
If a meeting is held, an ordinary resolution must be passed by a majority of the votes cast by shareholders of the company entitled to vote on the resolution at the meeting in person or by proxy (if proxies are allowed). A special resolution must be passed by at least 75% of the votes cast by shareholders of the company entitled to vote on the resolution and who vote at the meeting in person or by proxy (if proxies are allowed).
The sole shareholder of a company may pass a resolution by recording and signing their decision.
A company must keep a written record (minutes) of the members' resolutions and meetings.
[sections9 ( special resolution ), 249A, 249B, 249L, 251A]
1.10 What others can assume about the company
Anyone who does any business with the company is entitled to assume that the company has a legal right to conduct that business unless the person knows, or suspects, otherwise. For example, an outsider dealing with the company is entitled to assume:
• that a person who is shown in a notice lodged with ASIC as being the director or company secretary of a company has been properly appointed and is authorised to act for the company; and
• that a person who is held out by the company to be a director, company secretary or agent of the company has been properly appointed and is authorised to act for the company.
[sections128--130]
2 The company structure for small business
2.1 Proprietary company for small business
Generally, a proprietary company limited by shares is the most suitable company for use by small business. Such a proprietary company must have a least 1 shareholder but no more than 50 shareholders (not counting employee shareholders). It may have 1 or more directors.
[sections112--113]
3 Setting up a new company
The operators of small businesses can either buy "shelf" companies or set up new companies themselves.
3.1 "Shelf" companies
The operator of a small business may find it more convenient to buy a "shelf" company (a company that has already been registered but has not traded) from businesses which set up companies for this purpose or from some legal or accounting firms.
3.2 Setting up a company
To set up a new company themselves, the operator must apply to ASIC for registration of the company.
A proprietary company limited by shares must have at least 1 shareholder.
To obtain registration, a person must lodge a properly completed application form with ASIC. The form must set out certain information including details of every person who has consented to be a shareholder, director or company secretary of the company.
The company comes into existence when ASIC registers it.
[sections117--119, 135--136, 140]
3.3 ACN and name
When a company is registered, ASIC allocates to it a unique 9 digit number called the Australian Company Number (ACN). (For use of the ACN see 4.1).
In practice, a new company must have a name that is different from the name of a company that is already registered. A proprietary company limited by shares must have the words "Proprietary Limited" as part of its name. Those words can be abbreviated to "Pty Ltd".
A proprietary company may adopt its ACN as its name. If it does so, its name must also contain the words "Australian Company Number" (which can be abbreviated to "ACN"). For example, the company's name might be "ACN 123 456 789 Pty Ltd".
[sections119, 147--161]
3.4 Contracts entered into before the company is registered
A company can ratify a contract entered into by someone on its behalf or for its benefit before it was registered. If the company does not ratify the contract, the person who entered into the contract may be personally liable.
[sections131--133]
3.5 First shareholders, directors and company secretary
A person listed with their consent as a shareholder, director or company secretary in the application for registration of the company becomes a shareholder, director or company secretary of the company on its registration.
The same person may be both a director of the company and the company secretary.
See 5.1 and 5.2 for directors and 5.4 for company secretaries. See 6.1 for shareholders.
[section120]
3.6 Issuing shares
It is a replaceable rule (see 1.6) that, before issuing new shares, a company must first offer them to the existing shareholders in the proportions that the shareholders already hold. A company may issue shares at a price it determines.
[sections254B, 254D]
A company must have a registered office in Australia and must inform ASIC of the location of the office. A post office box cannot be the registered office of a company. The purpose of the registered office is to have a place where all communications and notices to the company may be sent.
If the company does not occupy the premises where its registered office is located, the occupier of the premises must agree in writing to having the company's registered office located there.
A proprietary company is not required to open its registered office to the public but this does not affect its obligation to make documents available for inspection.
The company must notify ASIC of any change of address of its registered office.
[sections100, 142, 143, 173, 1300]
3.8 Principal place of business
If a company has a principal place of business that is different from its registered office, it must notify ASIC of the address of its principal place of business and of any changes to that address.
[sections117, 146]
3.9 Registers kept by the company
A company must keep registers, including a register of shareholders and a register of charges. A company must keep its registers at:
• the company's registered office; or
• the company's principal place of business; or
• a place (whether on premises of the company or of someone else) where the work in maintaining the register is done; or
• another place approved by ASIC.
A register may be kept either in a bound or looseleaf book or on computer.
If a register is kept on computer, its contents must be capable of being printed out in hard copy.
[sections172, 1300--1302, 1306]
3.10 Register of shareholders
A company must keep in its register of shareholders such information as:
• the names and addresses of its shareholders; and
• details of shares held by individual shareholders.
[sections168--169]
3.11 Register of charges
A company must keep a register of charges if the company gives a bank, trade creditor or anybody else a charge over company assets.
[section271]
4 Continuing obligations after the company is set up
The Corporations Act and other laws impose obligations on companies themselves and on their directors and company secretaries. Some of the more important obligations imposed under the Corporations Act are discussed below.
4.1 Use of company name and ACN
The name of a company must be shown at all the company's business premises (including its registered office) that are open to the public. The company's name and its ACN or ABN (if the last 9 digits are the same, and in the same order, as the last 9 digits of its ACN) must appear:
• on some of its public documents; and
• on its cheques and negotiable instruments; and
• on all documents lodged with ASIC; and
• if it has one, on its common seal.
[sections123, 144, 147--156,
ASIC Practice Note 47]
Each year, ASIC issues each company with an extract of particulars within 2 weeks of the company's review date (which is generally the anniversary of the company's registration). The extract includes details recorded on ASIC's database such as:
• names and addresses of each director and company secretary;
• issued shares and options granted;
• details of its shareholders;
• address of its registered office;
• address of its principal place of business.
If any of the details are not correct as at the date the extract is received, the company must correct those details.
The correction may be lodged with ASIC on a printed form or, if an agreement is in place to lodge electronically, in accordance with the agreement.
[Sections346A and 346C, 352]
4.3 Review fee
A company must pay a review fee to ASIC each year.
[Corporations (Review Fees) Act 2003]
4.4 Notification to ASIC of changes
The company must notify ASIC if certain basic changes to the company occur. The following table sets out these notification requirements.
| Notification requirements | |||
|---|---|---|---|
| If... | the company must notify ASIC of the change... | see section... | |
| 1 | a company issues shares | within 28 days after the issue | 254X |
| 2 | a company changes the location of a register | within 7 days after the change | 172, 1302 |
| 3 | a company changes the address of its registered office or principal place of business | within 28 days after the change | 142, 146 |
| 4 | a company changes its directors or company secretary | within 28 days after the change (unless the director or company secretary has notified ASIC of the change) | 205B |
| 5 | there is a change in the name or address of the company's directors or secretary | within 28 days after the change | 205B |
| 6 | a company creates certain kinds of charges | within 45 days after the charge is created | 263 |
| 7 | a company has a new ultimate holding company, or details about the ultimate holding company change | within 28 days after the change happens | 349A |
| 8 | any of the changes in items1 to 7 means that: (a) the company must add or alter particulars in its member register kept under section169; or (b) the company must add or alter particulars in its member register kept under section169, and as a result, details about the number and class of shares on issue, or the amount paid and unpaid on the shares, alter. | within the time determined under the table in section178D | 178A 178C |
5 Company directors and company secretaries
5.1 Who can be a director
Only an individual who is at least 18 years old can be a director. If a company has only 1 director, they must ordinarily reside in Australia. If a company has more than 1 director, at least 1 of the directors must ordinarily reside in Australia.
A director must consent in writing to holding the position of director. The company must keep the consent and must notify ASIC of the appointment.
In some circumstances, the Corporations Act imposes the duties and obligations of a director on a person who, although not formally appointed as a director of a company, nevertheless acts as a director or gives instructions to the formally appointed directors as to how they should act.
The Court or ASIC may prohibit a person from being a director or from otherwise being involved in the management of a company if, for example, the person has breached the Corporations Act.
A person needs the Court's permission to be a director if the person has been convicted of certain offences or is, in some circumstances, unable to pay their debts as they fall due.
Generally, a director may resign by giving notice of the resignation to the company. A director who resigns may notify ASIC of the resignation. If the director does not do so, the company must notify ASIC of the director's resignation.
[sections9, 201A, 201B, 201D, 205A, 205B and 206A‑206G, 228‑230 and 242 and subsection 1317EA(3)]
5.2 Appointment of new directors
It is a replaceable rule (see 1.6) that shareholders may appoint directors by resolution at a general meeting.
[section 201G ]
5.3 Duties and liabilities of directors
In managing the business of a company (see 1.7), each of its directors is subject to a wide range of duties under the Corporations Act and other laws. Some of the more important duties are:
• to act in good faith
• to act in the best interests of the company
• to avoid conflicts between the interests of the company and the director's interests
• to act honestly
• to exercise care and diligence
• to prevent the company trading while it is unable to pay its debts
• if the company is being wound up--to report to the liquidator on the affairs of the company
• if the company is being wound up--to help the liquidator (by, for example, giving to the liquidator any records of the company that the director has).
A director who fails to perform their duties:
• may be guilty of a criminal offence with a penalty of $200,000 or imprisonment for up to 5 years, or both; and
• may contravene a civil penalty provision (and the Court may order the person to pay to the Commonwealth an amount of up to $200,000); and
• may be personally liable to compensate the company or others for any loss or damage they suffer; and
• may be prohibited from managing a company.
A director's obligations may continue even after the company has been deregistered.
[Sections180, 181, 182, 183, 184, 475, 530A, 588G, 596, 601AE, 601AH, 1317H]
5.4 Company secretaries
A company other than a proprietary company must have a company secretary. However, a proprietary company may choose to have a company secretary. The directors appoint the company secretary. A company secretary must be at least 18 years old. If a company has only 1 company secretary, they must ordinarily reside in Australia. If a company has more than 1 company secretary, at least 1 of them must ordinarily reside in Australia.
A company secretary must consent in writing to holding the position of company secretary. The company must keep the consent and must notify ASIC of the appointment.
The same person may be both a director of a company and the company secretary.
Generally, a company secretary may resign by giving written notice of the resignation to the company. A company secretary who resigns may notify ASIC of the resignation. If the company secretary does not do so, the company must notify ASIC of the company secretary's resignation.
The company secretary is an officer of the company and, in that capacity, may be subject to the requirements imposed by the Corporations Act on company officers.
The company secretary has specific responsibilities under the Corporations Act, including responsibility for ensuring that the company:
• notifies ASIC about changes to the identities, names and addresses of the company's directors and company secretaries; and
• notifies ASIC about changes to the register of members; and
• notifies ASIC about changes to any ultimate holding company; and
• responds, if necessary, to an extract of particulars that it receives and that it responds to any return of particulars that it receives.
A company secretary's obligations may continue even after the company has been deregistered.
[sections83, 142, 178A, 178C, 188, 204A‑204G, 205A, 205B, 346C, 348D, 349A, 601AD, 601AH]
6 Shares and shareholders
A proprietary company limited by shares must have a share capital and at least 1 shareholder. ASIC may apply to a Court to have a company wound up if it does not have any shareholders.
[sections461--462]
6.1 Becoming a shareholder and ceasing to be a shareholder
A person may become a shareholder of a company in several ways, including the following:
• the person being listed as a shareholder of the company in the application for registration of the company
• the company issuing shares to the person
• the person buying shares in the company from an existing shareholder and the company registering the transfer.
Some of the ways in which a person ceases to be a shareholder are:
• the person sells all of their shares in the company and the company registers the transfer of the shares
• the company buys back all the person's shares
• ASIC cancels the company's registration.
[sections117, 120, 601AA--601AD]
6.2 Classes of shares
A company may have different classes of shares. The rights and restrictions attached to the shares in a class distinguish it from other classes of shares.
[sections254A--254B]
6.3 Meetings of shareholders
Directors have the power to call meetings of all shareholders or meetings of only those shareholders who hold a particular class of shares.
Shareholders who hold at least 5% of the votes which may be cast at a general meeting of a company have the power to call and hold a meeting themselves or to require the directors to call and hold a meeting. Meetings may be held regularly or to resolve specific questions about the management or business of the company.
The Corporations Act sets out rules dealing with shareholders' meetings.
A shareholder of a company may ask the company for a copy of the record of a meeting or of a decision of shareholders taken without a meeting.
[sections249A--251B]
6.4 Voting rights
Different rights to vote at meetings of shareholders may attach to different classes of shares. It is a replaceable rule (see 1.6) that, subject to those different rights, each shareholder has 1 vote on a show of hands and, on a poll, 1 vote for each share held.
[sections250E, 254A--254B]
6.5 Buying and selling shares
A shareholder may sell their shares but only if the sale would not breach the company's constitution (if any). It is a replaceable rule (see 1.6) that the directors have a discretion to refuse to register a transfer of shares.
[sections1091D--1091E]
7 Signing company documents
A company's power to sign, discharge and otherwise deal with contracts can be exercised by an individual acting with the company's authority and on its behalf. A company can deal with contracts without using a common seal.
A company may execute a document by having it signed by:
• 2 directors of the company; or
• a director and the company secretary; or
• for a company with a sole director who is also the sole secretary--that director.
If the document is to have effect as a deed, it should be expressed to be a deed.
[sections126--127]
A company is not required to have a common seal. If it does, the seal must show the company's name and its ACN or ABN (if the last 9 digits are the same, and in the same order, as the last 9 digits of its ACN). The seal is equivalent to the company's signature and may be used on important company documents such as mortgages.
[sections123, 127(2)]
8 Funding the company's operations
The shareholders may fund the company's operations by lending money to the company or by taking up other shares in the company. Except if it is raising funds from its own employees or shareholders, a proprietary company must not engage in any fundraising activity that would require disclosure to investors under Chapter6D (for example, advertising in a newspaper inviting people to invest in the company).
The company may also borrow money from banks and other financial organisations.
Anyone who has lent money, or provided credit, to the company may ask for a mortgage or charge over the company's assets to secure the performance by the company of its obligations.
[sections113, 124]
9 Returns to shareholders
Shareholders can take money out of the company in a number of ways, but only if the company complies with its constitution (if any), the Corporations Act and all other relevant laws. If a company pays out money in a way that results in the company being unable to pay its debts as they fall due, its directors may be liable:
• to pay compensation; and
• for criminal and civil penalties.
[sections588G, 1317E, 1317G, 1317H, 1317P]
9.1 Dividends
Dividends are payments to shareholders. They can only be paid if:
• the company's assets are sufficiently in excess of its liabilities immediately before the dividend is declared; and
• the payment of the dividend is fair and reasonable to the company's shareholders as a whole and does not materially prejudice the company's ability to pay its creditors.
It is a replaceable rule (see 1.6) that the directors decide whether the company should pay a dividend.
[sections254T, 254U]
9.2 Buy‑back of shares
A company can buy back shares from shareholders.
[sections257A--257J]
9.4 Distribution of surplus assets on winding up
If a company is wound up and there are any assets left over after all the company's debts have been paid, the surplus is distributed to shareholders in accordance with the rights attaching to their shares.
10 Annual financial reports and audit
10.1 The small/large distinction
The accounting requirements imposed on a proprietary company under the Corporations Act depend on whether the company is classified as small or large. A company's classification can change from 1 financial year to another as its circumstances change.
A company is classified as small for a financial year if it satisfies at least 2 of the following tests:
• gross operating revenue of less than $10 million for the year
• gross assets of less than $5 million at the end of the year
• fewer than 50 employees at the end of the year.
A company that does not satisfy at least 2 of these tests is classified as large.
[section45A]
As the great majority of proprietary companies are small under these tests, the discussion below deals mainly with the accounting requirements for small proprietary companies.
[sections286--301]
10.2 Financial records
Under the Corporations Act, all proprietary companies must keep sufficient financial records to record and explain their transactions and financial position and to allow true and fair financial statements to be prepared and audited. Financial record here means some kind of systematic record of the company's financial transactions--not merely a collection of receipts, invoices, bank statements and cheque butts. Financial records may be kept on computer.
[sections286--289]
10.3 Preparing annual financial reports and directors' reports
The Corporations Act requires a small proprietary company to prepare an annual financial report (an annual profit and loss statement, a balance sheet and a statement of cash flows) and a directors' report (about the company's operations, dividends paid or recommended, options issued etc.) if:
• the shareholders with at least 5% of the votes in the company direct it to do so; or
• ASIC directs it to do so.
Unless the shareholders' direction specifies otherwise, the company must prepare the annual financial report in accordance with the applicable accounting standards.
Although the Corporations Act itself may not require a small proprietary company to prepare a financial report except in the circumstances mentioned, the company may need to prepare the annual financial reports for the purposes of other laws (for example, income tax laws). Moreover, good business practice may also make it advisable for the company to prepare the financial reports so that it can monitor and better manage its financial position.
Large proprietary companies must prepare annual financial reports and a directors' report, have the financial report audited and send both reports to shareholders. They must also lodge the annual financial reports with ASIC unless exempted.
[sections286--301, 319--320]
11 Disagreements within the company
11.1 Special problems faced by minority shareholders
There are remedies available to a shareholder of a company if:
• the affairs of the company are being conducted in a way that is unfair to that shareholder or to other shareholders of the company; or
• the affairs of the company are being conducted in a way that is against the interests of the company as a whole.
A Court may, for example, order the winding up of a company or the appointment of a receiver.
[sections232‑235, 461]
11.2 Buy--back of shares
A company may buy back the shares of a shareholder who wants to sever their relationship with the company.
[sections257A--257J]
11.3 Selling shares
A shareholder in a company who wants to sever their relationship with the company may decide to sell their shares. However, the shareholder may not be able to sell their shares readily--particularly if they want to sell their shares to someone who is not an existing shareholder. Some of the difficulties they may face in that case are:
• under the replaceable rules the directors have a discretion to refuse to transfer the shares; and
• restrictions in the company's constitution (if any) on transferring shares.
[sections995, 707, 1091D--1091E]
12 Companies in financial trouble
12.1 Voluntary administration
If a company experiences financial problems, the directors may appoint an administrator to take over the operations of the company to see if the company's creditors and the company can work out a solution to the company's problems.
If the company's creditors and the company cannot agree, the company may be wound up (see 12.3).
[Part5.3A]
12.2 Receivers
A receiver, or receiver and manager, may be appointed by order of a Court or under an agreement with a secured creditor to take over some or all of the assets of a company. Generally this would occur if the company is in financial difficulty. A receiver may be appointed, for example, because an amount owed to a secured creditor is overdue.
[Part5.2]
12.3 Winding up and distribution
A company may be wound up by order of a Court, or voluntarily if the shareholders of the company pass a special resolution to do so.
A liquidator is appointed:
• when a Court orders a company to be wound up; or
• the shareholders of a company pass a resolution to wind up the company.
[Parts5.4, 5.4B, 5.5].
12.4 Liquidators
A liquidator is appointed to administer the winding up of a company. The liquidator's main functions are:
• to take possession of the company's assets; and
• to determine debts owed by the company and pay the company's creditors; and
• to distribute to shareholders any assets of the company left over after paying creditors (any distribution to shareholders is made according to the rights attaching to their shares); and
• finally, to have the company deregistered.
[Parts5.4B, 5.6]
12.5 Order of payment of debts
Generally, creditors who hold security over company assets are paid first.
[Division6 of Part5.6]
12.6 Cancellation of registration
If a company has ceased trading or has been wound up, it remains on the register until ASIC cancels the company's registration. Once a company is deregistered, it ceases to exist.
[sections601AA--601AB, 601AH]
45A, 112-114 Types of companies.
CORPORATIONS ACT 2001 - SECT 45A
Proprietary companies
(1) A proprietary company is a company that is registered as, or converts to, a proprietary company under this Act.
Note 1: A proprietary company can be registered under section118 or 601BD. A company can convert to a proprietary company under Part2B.7.
Note 2: A proprietary company must:
* be limited by shares or be an unlimited company with a share capital
* have no more than 50 non‑employee shareholders
* not do anything that would require disclosure to investors under Chapter6D (except in limited circumstances).
(see section113).
Small proprietary company
(2) A proprietary company is a small proprietary company for a financial year if it satisfies at least 2 of the following paragraphs:
(a) the consolidated revenue for the financial year of the company and the entities it controls (if any) is less than $25 million, or any other amount prescribed by the regulations for the purposes of this paragraph;
(b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million, or any other amount prescribed by the regulations for the purposes of this paragraph;
(c) the company and the entities it controls (if any) have fewer than 50, or any other number prescribed by the regulations for the purposes of this paragraph, employees at the end of the financial year.
Note: A small proprietary company generally has reduced financial reporting requirements (see subsection 292(2)).
(3) A proprietary company is a large proprietary company for a financial year if it satisfies at least 2 of the following paragraphs:
(a) the consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million, or any other amount prescribed by the regulations for the purposes of paragraph(2)(a), or more;
(b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million, or any other amount prescribed by the regulations for the purposes of paragraph(2)(b), or more;
(c) the company and the entities it controls (if any) have 50, or any other number prescribed by the regulations for the purposes of paragraph(2)(c), or more employees at the end of the financial year.
When a company controls an entity
(4) For the purposes of this section, the question whether a proprietary company controls an entity is to be decided in accordance with the accounting standards made for the purposes of paragraph 295(2)(b) (even if the standards do not otherwise apply to the company).
Counting employees
(5) In counting employees for the purposes of subsections(2) and (3), take part‑time employees into account as an appropriate fraction of a full‑time equivalent.
Accounting standards
(6) Consolidated revenue and the value of consolidated gross assets are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).
CORPORATIONS ACT 2001 - SECT 112
Types of companies
Types of companies
(1) The following types of companies can be registered under this Act:
| Proprietary companies | Limited by shares |
|---|---|
| Unlimited with share capital | |
| Public companies | Limited by shares |
| Limited by guarantee | |
| Unlimited with share capital | |
| No liability company |
Note: Other types of companies that were previously allowed continue to exist under the Part10.1 transitionals.
No liability companies
(2) A company may be registered as a no liability company only if:
(a) the company has a share capital; and
(b) the company's constitution states that its sole objects are mining purposes; and
(c) the company has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them.
Note 1: Section9 defines mining purposes and minerals .
Note 2: Special provisions on no liability companies are found in the provisions referred to in the following table:
| No liability company provisions | ||
|---|---|---|
| item | topic | provisions |
| 1 | names | 148, 156, 162 |
| 2 | terms of issue of shares | 254B |
| 3 | liability on partly‑paid shares | 254M |
| 4 | calls | 254P‑254R |
| 5 | winding up | 477‑478, 483, 514 |
| 6 | registering a body as a company | 610BA |
| 7 | transitional | the Part10.1 transitionals |
(3) A no liability company must not engage in activities that are outside its mining purposes objects.
(4) The directors of a no liability company must not:
(a) let the whole or proportion of a mine or claim on tribute; or
(b) make any contract for working any land on tribute;
unless:
(c) the letting or contract is approved by a special resolution; or
(d) no such letting or contract has been made within the period of 2 years immediately preceding the proposed letting or contract.
(5) An act or transaction is not invalid merely because of a contravention of subsection(3) or (4).
CORPORATIONS ACT 2001 - SECT 113
Proprietary companies
(1) A company must have no more than 50 non--employee shareholders if it is to:
(a) be registered as a proprietary company; or
(b) change to a proprietary company; or
(c) remain registered as a proprietary company.
Note: Proprietary companies have different financial reporting obligations depending on whether they are small proprietary companies or large proprietary companies (see section45A and Part2M.3).
(2) In applying subsection(1):
(a) count joint holders of a particular parcel of shares as 1 person; and
(b) an employee shareholder is:
(i) a shareholder who is an employee of the company or of a subsidiary of the company; or
(ii) a shareholder who was an employee of the company, or of a subsidiary of the company, when they became a shareholder.
(3) A proprietary company must not engage in any activity that would require disclosure to investors under Chapter6D, except for an offer of its shares to:
(a) existing shareholders of the company; or
(b) employees of the company or of a subsidiary of the company.
(3A) An offence based on subsection(3) is an offence of strict liability.
Note: For strict liability , see section6.1 of the Criminal Code .
(4) An act or transaction is not invalid merely because of a contravention of subsection(3).
Note: If a proprietary company contravenes this section, ASIC may require it to change to a public company (see section165).
CORPORATIONS ACT 2001 - SECT 114
Minimum of 1 member
A company needs to have at least 1 member.
117-121 Procedures for registration.
CORPORATIONS ACT 2001 - SECT 117
Applying for registration
Lodging application
(1) To register a company, a person must lodge an application with ASIC.
Note: For the types of companies that can be registered, see section112.
Contents of the application
(2) The application must state the following:
(a) the type of company that is proposed to be registered under this Act;
(b) the company's proposed name (unless the ACN is to be used in its name);
(c) the name and address of each person who consents to become a member;
(d) the present given and family name, all former given and family names and the date and place of birth of each person who consents in writing to become a director;
(e) the present given and family name, all former given and family names and the date and place of birth of each person who consents in writing to become a company secretary;
(f) the address of each person who consents in writing to become a director or company secretary;
(g) the address of the company's proposed registered office;
(h) for a public company--the proposed opening hours of its registered office (if they are not the standard opening hours);
(j) the address of the company's proposed principal place of business (if it is not the address of the proposed registered office);
(k) for a company limited by shares or an unlimited company--the following:
(i) the number and class of shares each member agrees in writing to take up;
(ii) the amount (if any) each member agrees in writing to pay for each share;
(iia) whether the shares each member agrees in writing to take up will be fully paid on registration;
(iii) if that amount is not to be paid in full on registration--the amount (if any) each member agrees in writing to be unpaid on each share;
(iv) whether or not the shares each member agrees in writing to take up will be beneficially owned by the member on registration;
(l) for a public company that is limited by shares or is an unlimited company, if shares will be issued for non‑cash consideration--the prescribed particulars about the issue of the shares, unless the shares will be issued under a written contract and a copy of the contract is lodged with the application;
(m) for a company limited by guarantee--the proposed amount of the guarantee that each member agrees to in writing;
(ma) whether or not, on registration, the company will have an ultimate holding company;
(mb) if, on registration, the company will have an ultimate holding company--the following:
(i) the name of the ultimate holding company;
(ii) if the ultimate holding company is registered in Australia--its ABN, ACN or ARBN;
(iii) if the ultimate holding company is not registered in Australia--the place at which it was incorporated or formed;
(n) the State or Territory in this jurisdiction in which the company is to be taken to be registered.
Note 1: Paragraph(b)--sections147 and 152 deal with the availability and reservation of names.
Note 2: Paragraph(f)--the address that must be stated is usually the residential address, although an alternative address can sometimes be stated instead (see section205D).
Note 3: Paragraph(g)--if the company is not to be the occupier of premises at the address of its registered office, the application must state that the occupier has consented to the address being specified in the application and has not withdrawn that consent (see section100).
Note 4: Paragraph(h)--for standard opening hours , see section9.
(3) If the company is to be a public company and is to have a constitution on registration, a copy of the constitution must be lodged with the application.
(4) The application must be in the prescribed form.
(5) An applicant must have the consents and agreements referred to in subsection(2) when the application is lodged. After the company is registered, the applicant must give the consents and agreements to the company. The company must keep the consents and agreements.
(6) An offence based on subsection(5) is an offence of strict liability.
Note: For strict liability , see section6.1 of the Criminal Code .
CORPORATIONS ACT 2001 - SECT 118
ASIC gives company ACN, registers company and issues certificate
Registration
(1) If an application is lodged under section117, ASIC may:
(a) give the company an ACN; and
(b) register the company; and
(c) issue a certificate that states:
(i) the company's name; and
(ii) the company's ACN; and
(iii) the company's type; and
(iv) that the company is registered as a company under this Act; and
(v) the State or Territory in this jurisdiction in which the company is taken to be registered; and
(vi) the date of registration.
Note: For the evidentiary value of a certificate of registration, see subsection 1274(7A).
ASIC must keep record of registration
(2) ASIC must keep a record of the registration. Subsections 1274(2) and (5) apply to the record as if it were a document lodged with ASIC.
CORPORATIONS ACT 2001 - SECT 119
Company comes into existence on registration
A company comes into existence as a body corporate at the beginning of the day on which it is registered. The company's name is the name specified in the certificate of registration.
Note: The company remains in existence until it is deregistered (see Chapter5A).
CORPORATIONS ACT 2001 - SECT 119A
Jurisdiction of incorporation and jurisdiction of registration
Jurisdiction in which company incorporated
(1) A company is incorporated in this jurisdiction.
Jurisdiction of registration
(2) A company is taken to be registered in:
(a) the State or Territory specified:
(i) in the application for the company's registration under paragraph 117(2)(n) (registration of company under this Part); or
(ii) in the application for the company's registration under paragraph 601BC(2)(o) (registration of registrable body as company under Part5B.1); or
(b) the State or Territory in which the company is taken to be registered under paragraph 5H(4)(b) (registration of body as company on basis of State or Territory law).
This subsection has effect subject to subsection(3).
Note 1: ASIC must specify the State or Territory in which the company is taken to be registered in the company's certificate of registration (see paragraph 118(1)(c)(v) and 601BD(1)(c)(v)).
Note 2: The company's legal capacity and powers do not depend in any way on the particular State or Territory it is taken to be registered in (see section124).
Note 3: A law of a State or Territory may impose obligations, or confer rights or powers, on a person by reference to the State or Territory in which a company is taken to be registered for the purposes of this Act. For example, a State or Territory law dealing with stamp duty on share transfers might impose duty on transfers of shares in companies that are taken to be registered in that State or Territory for the purposes of this Act.
(3) The State or Territory in which a company is taken to be registered changes to the State or Territory in this jurisdiction nominated by the company if:
(a) either:
(i) the relevant Minister of the State or Territory in which the company is taken to be registered before the change approves the change; or
(ii) the State in which the company is taken to be registered ceases to be a referring State; and
(b) the procedural requirements specified in the regulations are satisfied.
(4) A company continues to be registered under this Act even if the State in which the company is taken to be registered ceases to be a referring State.
CORPORATIONS ACT 2001 - SECT 120
Members, directors and company secretary of a company
(1) A person becomes a member, director or company secretary of a company on registration if the person is specified in the application with their consent as a proposed member, director or company secretary of the company.
(2) The shares to be taken up by the members as specified in the application are taken to be issued to the members on registration of the company.
Note: A member's name must be entered in the register of members (see section169).
CORPORATIONS ACT 2001 - SECT 121
Registered office
The address specified in the application for registration for the company's proposed registered office becomes the address of the company's registered office on registration.
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