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: o Use the term limited which means limited liability. There are many shareholders. o People buy stocks on the Australian Securities Exchange. Shareholders may dismiss the directors. o 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. o 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. o Under unincorporated corporations you can have a partnership, limited partnership, joint venture, syndicate, trust or unincorporated non profit association. o 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. o The co-operative is expressed to be a body corporate by the name under which it is registered under section 21. o The business is managed by a board of directors elected by members under section 204 and 205. o Members are only liable for the amount unpaid on shares under section 76. o Accounts must be audited annually under s. 243 and an annual report lodged with the Registrar under s.252. o 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. o 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.2225 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. o 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. o 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. o 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: o Limited liability. o Perpetual succession. o 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. o 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 Part 1.5 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.
[sections 119, 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.
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.
[sections 197, 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.
[sections 119, 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.
[sections 134141 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.
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