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Regulatory framework - Summary Corporate Law
Corporate Law (MLL221)
Deakin University
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REGULATORY
FRAMEWORK
“The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company” – N M Butler, President of Columbia University, 1911.
A company is an artificial or fictitious entity recognised by the law as a legal person with its own rights a liabilities. They are essentially actors in the economy – they are the entity of choice for business and commerce in Australia and internationally.
Today, companies are regulated by Commonwealth legislation – the Corporations Act 2011 (Cth). s51(xx) of the Australian Constitution empowers the Commonwealth Parliament (not the states) to: “make laws.. respect to.. corporations, and trading or financial corporations formed within the limited of the Commonwealth”. - The word ‘formed’ is used in the past tense to refer to companies that have already been incorporated. This means the Commonwealth cannot rely on s51(xx) to make laws about bringing new companies into existence (i. the process of incorporating companies).
Regulators: Australian Securities & Investment Commission (ASIC): ASIC is a Commonwealth agency and is responsible for ensuring the Corporations Act is complied with. It is a body corporate between eight government-‐appointed commissioners headed by one chairperson: ASIC Act 2001 (Cth) ss 8-‐10. Its responsibilities include: - Regulation of financial services and markets; - Registering companies (any person who wants to register a company can lodge an application form with ASIC); - It is provides a national database on Australia’s companies; - Regulating company takeovers; - Investigates breaches of the Corporations Act ; - Investigate civil proceedings and criminal prosecutions (concurrent with DPP); - Advises ministers on necessary changes to the Corporations Act ; - Community education role.
Australian Stock Exchange (ASX): ASX Ltd, formerly the Australian Stock Exchange, operates as Australia’s main financial markets for equities, including shares, derivatives and fixed interest securities. Its primary role is to ensure the integrity of their financial markets so that they operate in a fair, orderly and transparent manner.
Takeovers Panel: The Takeovers Panel replaces the courts as the main form for resolving disputes about takeovers. It is a peer review body with members appointed by the government on the basis of their knowledge or experience in business, the financial markets, law, economics and accounting.
Characteristics of a Company: Companies are legal persons with rights and liabilities separate from their shareholders or members.
Separate Legal Entity: On registration, a company becomes a separate legal person: - s119 – a company comes into existence as a body corporate at the beginning of the day on which it is registered. - s124 – a company has the legal capacity of a natural person (can own property, contract, sue and be sued); and a body corporate (issue shares, grant security interest).
Consequences of Treating a Company as a Separate Legal Entity: 1. Company’s obligations and liabilities are its own – not those of its participants: - Shareholders have limited liability - Liability of shareholders is limited to the about they have not paid on their shares. - So if a shareholder has fully paid for the shares – he has no liability. 2. Company can sue and be sued in its own name; 3. Company has perpetual succession (the corporation continues to exist despite the death, bankruptcy, insanity, changes in membership or exit of any owner or member, or any transfer of shares); 4. Company’s property is not the property of its participants; 5. Company can contract with its participants.
Limited Liability: Limited liability means that shareholders are not personally liable for their company’s debts. The extent of a shareholder’s liability depends on the type of company, as provided by s 112. The liability of shareholders is limited to the amount unpaid of the issue price of their shares.
Salomon v Salomon & Co Ltd [1897] AC 22: Facts: - Mr Salomon was the sole trader of a shoe and leather business. The Corporations Act 1862 (UK) required 7 shareholders. - Salomon & Co Ltd was incorporated. Mr Salomon held 99% of the shares and was the managing director. - Mr Salomon sold the business to Co fro the share and secured debt. The business failed, and assets of Co were insufficient to repay secured (Mr Salomon) and unsecured creditors. Held: - A company is still a separate legal entity even though a single person manages and controls it; - A company can contract with it controlling participants. - A one-‐person company may borrow money from its controller on a secured basis who will rank ahead of its unsecured creditors on the company’s insolvency.
Piercing the Veil of Incorporation: The recognition that a company is a separate legal entity distinct from its shareholders is often referred to as the ‘veil of incorporation’ or ‘corporate veil’. This is because, once a company is formed, the courts usually do not look behind the ‘veil’ to inquire why the company was formed or who really controls it. Furthermore, when the separate entity concept is coupled with limited liability, the corporate veil ensures that shareholders are not personally liable to creditors for their company’s debts. Only in exceptional circumstances will a court pierce the corporate veil and disregard the separate legal personality of a company.
By Statute: Director’s Liability for Insolvent Trading: This liability arises where directors breach the duty contained in s 588G by failing to prevent the company incurring debts when there are reasonable grounds for suspecting that it is insolvent. This is known as ‘insolvent trading’.
Industrial Equity Ltd v Blackburn [1977] 137 CLR 567: Facts: - The consolidated accounts of a group of companies of which Industrial Equity was the holding company disclosed sufficient profits from which a dividend could be paid. - These profits were actually made by the subsidiaries. - Industrial Equity asserted that it could not pay dividends to its own shareholders from the profits made by its subsidiaries notwithstanding that its subsidiaries had not paid dividends to the holding company. Held: - The High Court asserted that merely because the group accounting requirements treated a group as a single entity to ensure that sufficient information of the group’s financial position is provided, this did not mean that the corporate veil could be lifted for other purposes.
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) AC ACLC: Facts: - Pioneer Concrete Services alleged that Hi-‐Quality Concrete (Holdings) Pty Ltd, the holding company, had entered into a transaction with Yelnah Pty Ltd in breach of the agreement and sought an injunction to prevent its completion. Held: - The holding party was not a party to this clause of the agreement. - Rather, it was an undertaking given by its subsidiary, and the two were separate legal entitles. It was impossible to infer an agency relationship between the holding and the subsidiary companies in the circumstances.
Adams v Cape Industries plc [1990] 1 Ch 433: Facts: - This case involved an attempt by Cape Industries plc (Cape), a UK company, to avoid liability to US-‐ resident asbestos tort claimants who were awared damages by a US court against Cape and it’s wholly owned US subsidiary NAAC. Held: - The economic inter-‐relationship of the companies did not justify piercing the corporate veil and departing form the Salomon principle. The corporate veil could be lifted where the subsidiary was a ‘façade’, however, the court was not prepared to come to this conclusion in this case.
Uncommercial Transactions: There are provisions of the Corporations Act allowing for the piercing of the corporate veil for the purposes of treating corporate insiders, such as directors, and other related entities of the company differently from others who have dealings with the company. The aim of the provisions is to ensure that such persons do not obtain preferential treatment from the company at the expense of the company’s external creditors.
Security Interest Granted to Officers: Section 588FP disregards the corporate veil regarding officers who lend money to their company secured by a security interest over its property different from arm’s length creditors who are granted security interests by a company.
Financial Assistance: Where a company provides financial assistance for the acquisition of its own shares in contravention of s 260A, any person involved in the contravention breaches the section and may be liable under the civil penalty provisions.
Taxation Legislation: There are various taxation legislations which also allow for the lifting of the corporate veil.
At Common Law: Australian Courts are generally reluctant to pierce the corporate veil. However there are some exceptions: - Where a company used the corporate veil to avoid an existing legal duty – okay for company to limit personal liability for future obligations, but not to avoid an existing obligation – Gilford Motor Co Ltd v Horne; Jones v Lipman; - Where a company is used as a vehicle to perpetrate fraud – Re Darby;; - If the company knowingly participates in a director’s breach of fiduciary duties – Green v Bestobell Industries Pty Ltd. NOTE: in some circumstances, it is necessary to determine the purpose or intention of a company. Where this is the case, the courts will look behind the veil of incorporation and attribute the purpose or intention of individuals behind the company to the company itself.
Gilford Motor Co Ltd v Horne [1933] Ch 935: Facts: - Horne was appointed managing director of Gilford Motor Co Ltd for a term of six years. The service agreement provided that he was not to solicit or entice away from the company any of its customers during his appointment or after termination of his appointment. - Horne later resigned and started his own business in competition with the company. - He then sent circulars to customers of their company seeking their business. Gilford Motor Co bought an action seeking to restrain Horne from soliciting their customers. Held: - The action was successful and an injunction was granted against Horne and his company, even though the company was not a party to the contract with the plaintiff. - Lord Hansworth MR considered that the company was a ‘mere cloak or sham’ used as a device for enabling contractual obligations to be avoided.
- s 84(2) of the Competition and Consumer Act 2010.
Direct Liability: Direct liability applies to crimes and torts. A company may be primarily liable when the act/intent of a person are taken under the ‘organic theory’ to be the act/intent of the company itself. - Company is liable for the act/intent of employees “who represent the directing mind and will of the company, and control what it does” – HL Bolton (Engineering) v TJ Graham and Sons Ltd [1956]; - Whether person constitutes the mind and will of the company is determined on a case-‐by-‐case-‐basis. Seniority is a key factor.
Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1: Facts: - Radiant washing powder was advertised at a sale price. Sale items all sold and the shop assistant restocked the items, but at full price. The shop manager was not aware of this. - Offence under legislation to sell products at a higher price than advertised. Defence available if due to an act or omission of another person. Held: - The court applied the ‘organic theory’ to the shop manager and shop assistant and held that neither represented the directing mind and will of the company. - Accordingly, the acts of the shop manager and the shop assistant were not the acts of the company.
HL Bolton (Engineering) v TJ Graham and Sons Ltd [1956] 3 All ER 624: Facts: - The landlord asserted that a tenancy should not be renewed and claimed to have held the freehold for more than 5 years. Held: - “A company may in many ways be likened to a human body. It has a brain and a nerve centre, which controls what it, does. It also has hand, which holds the tools and act in accordance with directions form the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will” – Lord Denning - Intention of the company can be derived from the intention of its officers and agents. Whether their intention is the company’s intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case.
Regulatory framework - Summary Corporate Law
Course: Corporate Law (MLL221)
University: Deakin University
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