Corporations Law Summary for End of Semester
-ASIC primary body for administration of company law
-Acts as a registry for companies, auditors and liquidators
-Provides information about companies discloses documents lodged by companies
-Administrating corporations Act investigating and prosecuting breaches
Concession Theory
-Corporation is an artificial entity privileges granted by the state, argued this is more appropriate when state played greater role in incorporation
Aggregate Theory
-Another view of the corporation is that it is essentially a group of individuals. This is the predominant view of modern corporations. State is limited to assisting the efficient implementation of private dealings
Corporate Realism
-Sees the corporate as a real person significant role of the state in regulating. Argues that criminal liability and sanctions should be imposed on corporations but also rights
Types of Corporation
Limited Liability
-Almost all companies
-Liability of a member is limited by either amount owing on shares of the guarantee given by the member, once the company has received full payment for shares there is no other liability owing to shareholders
No Liability
-Unique to Australia, members are not even liable for amounts owing on shares, available only to mining companies
Unlimited Liability
-Shareholders do not have limited liability only applies if a company is unable to meet liabilities on winding up
-Proprietary company
-No more than 50 non-employee shareholders, cannot offer shares to the public s 113(3)
-Can make offers to exiting employees and shareholders and personal offer under s 708
-Breaching this may require conversion to a public company under s 165
-Can convert by passing a special resolution and lodging application with ASIC
-Less stringently regulated
-Can have sole member-director s 198E(1)
-No requirement to appoint secretary s 204A
-Large proprietary companies must produce an audited financial report and directors report on an annual basis
-Small PC 1) Consolidated revenue of less than $25M per year 2) Value of consolidated assets less than $12.5M 3) Company and entities it controls has fewer than 50 employees
-Must satisfy 2 out of 3 criteria
Small Proprietary Company
-Must meet requirements ins s 45A
-Not required to produce reports or appoint an auditor unless shareholders holding 5% require it or ASIC directs
-Do need to maintain written financial records that correctly record its position that could be audited maintained for 7 years s 286
-Aim of this distinction is to prevent public companies running business through a subsidiary and evading disclosure rules
-Proprietary companies do not need to hold an AGM
-Shareholders do not have a legally-entrenched right to removed directors (s203D does not apply). Directors can be entrenched provided replaceable rules are replaced
-Directors have a power to reuse to register a transfer of shares for any reason s 1072G (this rule is replaceable)
Limited liability
-s 516: If a company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member
-This is explained by as a default rule inserted into every contract which the other party to the contracts can displace by contrary provisions i.e. getting a personal guarantee from directors
Separate Entity
-The separate entity doctrine enables limited liability to operate
-Assists in partitioning the company’s assets (which it can own in its own right) from the assets of shareholders and vice versa
Salomon v Salomon
-Property owned by company does not belong to its members even where they have given it to the company in exchange for shares: Macaura v Northern Assurance Co Ltd
-Causes of action belong to the company and not to the members
-Company is party to contracts, not its directors or members
-Company can make contracts with shareholders, even controlling ones Lee v Lee’s Air Farming
-Company can be a debtor or creditor of member or director
-Company can be liable in tort, either directly or vicariously Williams v Natural Life Health Foods
-Company can act as trustee
-Company are persons under s6 of the Income Tax Act
Lifting the Veil
-s 588G imposes a duty on directors to stop a company incurring debts when it is insolvent or which render the company insolvent, failing which the liquidator can apply to the court for an order that the directors contribute to the assets available for the company’s creditors 588J(1)
-s 588V applies essentially the same test to corporate groups were parent can be liable for subsidiary
Common Law
Briggs v James Hardie& Co Pty Ltd: ‘There is no common, unifying principle, which underlies the occasional decision of courts to pierce to the corporate veil’
Fraud
Re Darby: Company set up and had asset transferred at over value. Company was then floated and controllers made large profit at the expense of shareholders. Veil was lifted to remedy fraud
Re H: Defendants had been using companies to defraud tax office. Tax office was allowed to treat entire group as one entity
Evade Existing Legal Obligations
-Acceptable in law to use a company to conduct an activity that may contract future liabilities i.e. subsidiary is used to protect assets of company, cannot establish a company to evade existing legal obligations
Adams v Cape Industries: Do not accept can lift the veil in a corporate group because a group has been structured so that one member of the group may attract liability, whether or not it is desirable it is inherent in corporate law
- We do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is a member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability in respect of a particular future activities of the group (and the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this matter is inherent in our corporate law
-Arguably this was not inherent in the corporate law because Adam v Cape industries was first case dealing with this issue, decided as if he was already bound
Gilford Motor Co Ltd v Horne: Mr Horne had agreed when selling business he would not solicit former customers if he carried on another business. He then incorporated a company with wife and one employee as directors and then solicited customers from former business. Court found that company was formed as a device or sham to hide the fact that Horne was running company. Injunction was granted against Horne and company
Jones v Lipman: Lipman sought land and the transferred land to a company he had incorporated in order to avoid specific performance being awarded. Court held that this was a device and an order was made against the company and the defendant
ANZ Executors: Argued these cases did not lift the veil because order was made against both companies as well as the individual. Arguably this is recognising the separate legal entity doctrine but acknowledging company is involved in the fraud. Essentially this is judges arguing we do not lift the veil
Company is Under Resourced
-If capital is so manifestly short could be argued that company is an agent
Re FG Films Ltd: Company held only 100 pounds of capital could not have made movie and order was given against the parent company
Smith Stone & Knight Ltd v Birmingham Corporation: Compulsory acquisition of land, compensation was paid to the parent for the land. A subsidiary company was running a business on the land and sought compensation for the interruption to its business, despite the fact it was a separate legal entity. Court rules that had to pay compensation to the parent on the basis the subsidiary was an agent of the parent. Wrong decision Aitkens test for lifting the veil
DHN v Borough of Tower Hamlets: Factually similar to SSK later described as turning on specific statutory interpretation
Spreag v Pasen: Followed decision in Smith Stone and Knight but applied to other way to make parent liable for statements of the subsidiary, Shepherd J was at least by analogy and agent of the parent. This is wrong
Adams v Cape Industries: If you want to say subsidiary is an agent for parent must how evidence, otherwise you can always find analogy to agency that will justify lifting the veil. Simply arguing analogy would destroy separate legal personality doctrine
Statutory Interpretation
Re Bugle Press: Two majority shareholders holding 90% of shares create a new company then sell shares to the new company to take advantage on the compulsory acquisition legislation. Court reject this and make it part of interpretation to look behind new company to see who the new shareholders are.
Corportate Groups
-Companies can form wholly-owned subsidiaries or acquire them, this has the effect of insulating the parent from liability in relation to business activities
Qintex Australia Finanace Ltd v Schroeders Australia Ltd
-Subsidiary definition s 46: When the parent controles the composition of the board or has more than half the votes in general meeting, or holds more than half of the issued share capital carrying a right to share in profits (this applies for the purposed of s 588V)
-Related bodies corporate s 50: Encompasses holding and subsidiary and grandparent relationships. Where companies are related they must produce consolidated accounts
-Control s 50AA: capacity to determine the outcome of decisions about the second entity’s financial and operating policies
-Companies in a group remain separate legal entities directors are supposed to take account of the interests of that company rather than the group as a whole Walker v Wimborne
Tort Liability
Briggs v James Hardie & Co Pty Ltd: It is possible to argue that the proposed general tort considerations should not be applicable in cases where injured person is an employee. It could be argued that such a person has the ability to contract around this, however, generally an employee will have no real input in determining how the business will be conducted and whether reasonable care will be taken for his safety
-Torts are externalities which must be internalised for the assumption of efficiency to hold. If this does not happen, the parent will obtain the benefits of the activities but will not bear the costs of the activity. Morever, unlike many contract creditors tort creditors cannot bargain ex ante with the tortfeasor, cannot obtain guarantees from the parent and do not have the opportunity to check its solvency.
-General response to this is that companies will put in place adequate insurance arrangements to deal with the risk of extensive liability. If they do not put insurance in place then there might be a case for lifting the veil in the basis that the company is acting opportunistically in transferring risk of reasonably foreseeable losses to tort creditors (analogous to incurring debts when insolvent Millon Peircing the Corporate Veil. Financial Responsibility and the Limits of Limited Liability 2006
-Millon argues that limited liability should instead be limited to situations which shareholders have managed the business with due regard for bargained-for expectations and potential victims of reasonably foreseeable accidents
Civil and Criminal Liability
-Wrongs committed by companies will always be derivative in coming from an act or omission of a natural person, generally liability will be vicarious, base don the relationship between the company and the individual in question sometimes it can be held that the company acted as though it committed the wrong, which can be referred to as direct of primary liability
Civil Wrongs
-Vicarious liability of the company as an employer
-Primary Liability: Lennard’s Carrying Co Ltd v Asiatic Petroleum: A corporation is an abstraction. It has no mind of its own, its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation (organic theory)
Criminal Liability
-Rarely vicarious, can be primarily liable where the offence is committed by the directing mind and will prosecution must show that the person in question had the requisite mens rea for the offence
Tesco Supermarkets v Nattrass: Store manager incorrectly labelled goods which breached regulation. Company was not liable as could not argue store manager was directing mind and will, store manager controlled by the company not the other way around
Meridian Global Funds Management Asia Ltd v Securities Commission
-Primary rules of attribution: which will generally be found in its constitution i.e. the decisions of the board in managing the company’s business shall be the decisions of the company
-General rules of attribution: Like an agency and vicarious liability
-Special Rules of Attribution: Required when a rule of law expressly or impliedly provides that the primary and general rules do not apply. This turns on the court’s interpretation of the statute
-This creates uncertainty but makes it easier for large corporations to be convicted does not require those at board level to have knowledge of wrongdoing
Lecture 3 Structure and Operations
-Corporate governance rules consist of two kinds of rules replaceable rules which are adopted by default and a document called the Constitution which companies can use to modify or replace replaceable rules
-Public companies must have a constitution
-Constitutions form a statutory contract (s 140(1) CA)
-135(3) Breach of replaceable rules as they apply to a company is not a contravention of the act it is contractual rather than statutory
-This cannot be enforced by outsiders Eley v Positive Life
-Members are bound by the statutory contract in any disputes arising in relation to the affairs of the association: Hickman v Kent or Romney Sheep Breeders Association
-Members are bound or entitled only in their capacity as members
-Remedy for breach of the constitution by the company is injunction or declaration not damages: Webb Distributors v Victoria
-Sons of Gwalia v Margaretic: Held that a claim brought by a member against the company under s 1041H for false and misleading conduct did not fall within the scope of s 563A. Member had bought shares in the open market from a 3rd party not from the company (as was the case in Webb). Decision was influenced by the terminology of the consumer and investor protection statutes (which applied to whole investing public) rather than technicality of case law. This decision was overruled by legislation