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Corporate Law Notes
Corporate law (LLH305)
Queensland University of Technology
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Corporate Law
Notes
Topic 1: Intro and context of Australian Corporate Law
What is company?
o A device created by law to encourage economic activity o Companies are separate legal persons. This means they have a legal identity of their own. o Theories of the firm help to understand the purpose of forming a company o Companies provide a legal structure that allows for the pooling of ideas, capital and skill
What is a Company Law?
Company law regulates;
o the formation of companies o the attributes that companies have ( such as for e. separate legal personality and limited liability) o Internal management of companies ( e. between management and investors) o External relations ( e facilitating dealings with ‘outsiders’ such as customers and creditors) o How companies can raise capital o Reorganization, takeovers, liquidation, winding up and deregistration.
Company law aims to:
o encourage economic activity o Foster trust and confidence in financial markets o Companies must abide by the law, this includes company law as well as other laws such as environmental law, mining law, criminal law, consumer protection law, property laws etc. o It’s an essential feature of all companies that they are separate legal entities. One consequence of this is that they can suffer through penalties for breaching any laws
The Regulation of Companies
Australian Securities and Investments Commissions ( ASIC) o ASIC is the main regulator of companies. In this role its polices and enforced company law o ASIC has faced many criticisms, including from the Hayne Royal Commission into Misconduct in the banking and financial services sector 2019.
Other key regulators:
o Australian securities exchange (ASX). The ASX is required to cooperate with AIC in the performance of ASIC’s functions as regulator; s792D o Australian Taxation office (ATO) o Foreign Investment Review Board (FIRB)
Purpose of regulations?
o ASCI routinely states in regulatory mission in its Annual Reports. it’s regulatory mission in relation to administering company law is to - Act against misconduct to maintain trust. - promote strong and innovative development of the financial system - Help Australian to be in control of their financial lives. - ASIC has power to enforce both public and private rights.
Company Law in Australia; where it started, how it’s going
Origins of company Law
o Ancient Roman societas used by grain traders had many of the features of modern companies.
Middle Ages;
o Corporations sole o Corporations aggregate o Gilda mercatoria
Trading Companies and Joint Stock ‘Companies”
o Trading companies emerged in England in the early 1500s. These were the origins of Joint Stock Companies
Trading companies
o granted trading privileges by the crown via incorporation by royal charter or special statute. Such grants were rare. o Had separate legal personality as a company o E. Hudson’s bay company, east India Company
Joint Stock companies emerged to take advantage of commercial opportunities.
o quasi- partnerships with massive numbers of partners o Partners were adventures; investors holding ‘stock’ in the endeavour. o Not really companies – incorporation was only possible if the crown granted trading privileges
Nothing which can minister to pleasure or utility from the manufacture and sale office in Liverpool to the cultivation of coffee in India has escaped the vigilance of this organize competition.... they supply a want which has been widely felt.
- Carlton Hunt Bishop, The development of the Business corporation in England: 1800- 1867 ( Harvard University Press, 1936
Australian Company Law
o 1880 – 1960s, Each Australian colony/state had company law largely based on the 1862 Companies Act UK o States could see the merits of Uniform Legislation but this had to be enacted state by state, rather than by one law of the Commonwealth. This was because of the constitutional limitations on Commonwealth parliament to pass laws in relation to companies o Corporations Powers Section51 (xx) of the Commonwealth constitution conferred power ‘with respect to foreign corporation and trading and financial corporations formed within the limits of the Commonwealth.
Various attempts at uniform legislation
o Uniform Companies Act 1916 o Commonwealth state Co- operative Scheme 1978 – scheme legislation referred to as Companies code 1981 o Corporations Act 1989 (Cth) national scheme held to be unconstitutional by HC in so far as it provided for incorporation for trading and financial corporations. NSW v Commonwealth (1990) 169 CLR 482 o Corporations Law Scheme 1991 – scheme legislation referred to as Corporations law - constitutional limitations revealed in Re Wakim Corporations Law – constitutional limitations revealed in Re Wakim (1999) 198 511 Bond v R (2000) 201 CLR 213.
Current Regime
o Referral of powers – States and Territories agreed to refer their power to legislate with respect to companies to the Commonwealth under s51 (xxxvii) of Commonwealth constitution o Legislation Passed pursuant to the referral of powers – Corporations Act 2001 (Cth) & ASCI Act 2001 (Cth).
Corporations Act 2001 (Cth)
o As the Commonwealth law, the Corporations Act must be read in the context of other Commonwealth legislation including for e. - Acts Interpretation Act 1901 (Cth) and - Crimes Act 1914 (Cth) o There has been no broad – scale reform or program of simplification of company law since the Corporations Act was introduced. Significant piecemeal reforms include - overhaul of insolvency regime, particularly for small business - introduction of crowd sourced equity funding via fintech platforms
- Introduction of director registration and new duties targeting abuse of limited liability and other illegal schemes designed to defeat creditors ( aka illegal phoenix activity
Sources of Company Law
The Corporations Act 2001 (Cth) is not a code covering all aspects of company law. o it must be read in conjunction with the general law ( i common law and equity). There are other sources of company law that must be considered, including; - Corporations Regulations 2001 (Cth) - ASIC Act 2001 (Cth) - ASIC Regulatory Guides and Guidelines - ASX Listing Rules - ASX Corporate Governance Council, Corporate Governance Principles - Australian Accounting Standards Board, Accounting Standards
Key terminology
o Director’ a natural person appointed via the company’s internal governance rules to manage the business of the company. All of the directors of the company are collectively called the ‘board of directors’. o ‘Internal governance rules’ the rules agreed by the members of the company to govern all the matters connected with how the company will be administered. Internal governance rules include procedural matters (such as how to appoint and remove directors, arranging meetings of directors and meetings of the company’s members, and rules associated with transferring shares in the company), and detail certain rights (such as the rights attached to shares in the company). The Corporations Act includes a pre-determined set of internal governance rules. These are called ‘replaceable rules’. Companies can use these replaceable rules or replace some or all of them in a company constitution approved by members. o Share - ‘a claim against the company issued by the company to a person who contributes equity capital to the company. It is a form of personal property that represents an asset in the hands of the person who owns it. ... Shares have rights attaching to them that may give the holder the right to share in the company’s profits and to have some say in certain fundamental decisions affecting the company.’* o Shareholder - ‘A person who owns a share in a company is called a shareholder or a member. The members are the ultimate owners of the company.’* Contributing equity capital to the company is a form of investment. This is why shareholders are frequently described as investors. o * P Hanrahan, I Ramsay, G Stapledon, Commercial Applications of Company Law (Oxford University Press, 2021) 19
The Nature of Companies
Essential features of Companies o a. all companies are separate legal entities. Note s124 (1) Corporations Act o b. All companies accommodate the separation of ownership from management o c. All companies comes with well- established models for regulating their internal and external affairs
Capital includes;
o money in the bank and the value of the assets that the company owns. o Money that the company has borrowed. Companies can acknowledge and secure indebtedness in unique ways ( eg. debentures) These types of capital are broadly described as loan capital. o Money that the company has raised by issuing shares. When a company issues shares, the money paid for those shares forms the share capital of the company. Some but not all companies, have power to issue shares.
Perpetual succession
o Perpetual succession is a consequence of registration as a separate legal entity. o The company exists as a legal entity right up until it’s de-registered by the ASIC: s601AD (1). o This is so even if all the members die, or the company is abandoned. o The effect of perpetual succession is that companies outlive changes to members and directors.
Limited Liability
o Not all companies have limited liability, but most business that choose to register as a company, incorporate as a company with limited liability o Where a company offers limited liability to members, liability is limited either by grantee or by shares. Liability limited by shares is by far the most common. o Shareholders in a company limited by shares are not liable to contribute additional money to meet the company’s debts, beyond the amount initially agreed to be paid for the share. o Limited Liability – allows the company to agree in advance with its members the limit of the member’s liability to contribute funds to the company. Beyond that agreed limit, no further contribution to the company is required.
How is the limit of liability agreed?
o The process is different depending upon whether the company is one were liability is limited by shares or by guarantee.
Transferability of Interests
o Members are generally free to transfer their interests in the company. o Where the company is one with power to issue shares, this means that shares can be readily transferred. Note this is a general rules and it can be displaced by the company in its internal governance rules. o The effect of this transferability is that shares can be traded with other interested investors either privately or via a highly organised market such as a securities exchange (e ASX)
Companies in Australia
o Registered companies in Australia: 2019 – 2 million; 2020 – 2 million; June 2021 - 2 million; May 2022 – 3 million o Private: 99% are private companies with liability limited by shares. Most are very small. o Public listed: o Less than 0% of all companies (approximately 2000) are listed on a securities exchange (eg ASX). ASX listed companies have a market capitalisation of close to $2. Shares in ASX listed companies are held by foreign and domestic investors. Domestic investment is dominated by institutional investors (eg superfunds). o ASX companies are often ranked in terms of their market capitalisation. Shares in the ASX 200 are highly liquid investments o According to the ATO, the Australian corporate landscape is dominated by micro enterprises reporting a business income between $1->$2 million dollars.
Types of Companies
Section 112; Proprietary companies o Limited by shares o Unlimited with share capital
Public Companies o Limited by shares o Limited by guarantee o Unlimited with share capital o No liability company
Approach to this part
Proprietary companies
A. share capital
o Restrictions on proprietary companies o #1 number of shareholders (+ CSF shareholders) o #2 Fundraising o reporting and disclosure requirements
B. Public Companies
o Listed public companies o Unlisted public companies
C. Classification of Companies by type of liability
o Limited by shares o Limited by Guarantee o Unlimited by liability o No liability
Distinguishing Public and Proprietary
o
Restrictions on proprietary companies’ cont...
Restriction # o A proprietary company cannot engage in any fundraising activity that would require disclosure to investors under Chapter 6D Corporations Act: s113 (3)
There are 2 exception;
o offering shares to existing shareholders or to employees of the company or of its subsidiary: s113 (3) (a) o Making a CSF offer: s113 (3) (b) o Note: Chapter 6D regulates how companies can raise funds from the public. Generally, such fundraising activity requires the company to issue a prospectus.
Failure comply with the restrictions on proprietary companies
o If a proprietary company fails to comply with either of the restrictions, ASIC can require the company to convert to a public company: s
Reporting requirements of proprietary companies
o The reporting and disclosure requirements for proprietary companies vary, depending primarily upon whether it meets the definition of a small or large proprietary company in s45A. - note: Corporations Regulations r 1.0 o Small proprietary companies typically have no reporting requirements: s29 (2). There are exceptions, including if they have CSF shareholders. o 99% of proprietary companies in Australia meet the definition of a small proprietary company.
Public companies
o Defined s9: a company other than a proprietary company. o There is no limit on the members of a public company. Consequently, shareholdings in these companies tends to be widespread. o Public companies can offer their shares to the public ( but must comply with the fundraising provision in chapter 6D Corporations Act)
o Public companies can be limited by shares, limited by guarantee, unlimited with a share capital or no liability companies. o Public companies can be listed or unlisted.
Listed public companies
o A listed public company is listed on a prescribed financial market e ASX o Shares are ‘traded’ on the ASX allowing members of the public to buy and sell shares in the company. o In addition to the Corporations Act, listed public companies must also comply with the listing rules of the exchange where it is listed. o See definitions s9 ‘listed, prescribed financial market’, Corporations Regulations r1.0 o The ASX listing rules require compliance with - detailed disclosure and reporting requirements ( e. 300A) - governance requirement ( e. ASX listing Rule 4.10) - Enhanced shareholder protections ( e. ASX listing rule 7)
Unlisted public companies
o If a public company is not listed, it is called an unlisted public company. o Some unlisted companies will be trying to scale up with a goal of listing o Not all companies can meet the listing requirements
Classification by of companies by type of liability: s
o Limited Liability o By shares or o By guarantee o Unlimited Liability o No Liability
Limited by shares
o The issue price for a share is determined by agreement between the company and the investor. o Shares can be issued on the basis that the investor pays the entire issue price upfront, or pays only part of the issue price immediately. This is the difference between fully paid shares and partly paid shares. o The liability of the shareholder is limited to the amount left unpaid on the issue price of their shares: s516 Corporations Act. o Shareholders with fully paid shares have no further liability to make contributions to the company
Limited by guarantee
o Liability of members is limited to a nominal amount (eg $10) stated in the company’s constitution and in the company’s registration application: ss117 (2)(m), 517. o The company and the members agree that this is the limit of what the members will contribute if the company is wound up.
Trusts ( Commercial) o Trusts allow for the separation of legal and beneficial ownership of assets. o How does this compare to a company? Companies allow for separation of ownership and management. Trusts allow for separation of legal and beneficial ownership of assets, which facilitates assets protection. Companies can arrange themselves to have classes of shares with different bundles of rights. Trusts allow for flexible income splitting.
Advantages? - Fundraising from public can be possible - Tax advantages are possible - Some internal and external relationships are governed by trusts law and default rules - no formal requirements for registration
Disadvantages
o not a separate legal entity o Trustee personally liable for debts of trust o Interests are not as freely transferrable ( must comply with law of trust and trust deed) o no perpetual succession
Partnerships o Partnerships allow for multiple owners of the business with a view to making a profit. The partners agree how they will share control of the business, their profits and losses. o How does this compare to a company? Companies must be registered. Partnerships arise as a matter of law based on the relationship between the parties. Partnerships are frequently set up in complex partnership agreements detailing the profit and loss sharing arrangements between the partners.
Advantages
- no special formalities for formation
- no special reporting or disclosure requirements
- Law as standard form contract – assumes all partners are equal, sharing in profit and losses.
Disadvantages
- Not a separate legal entity
- Do not automatically have limited liability (default is joint and several liability)
- Interests are not freely transferable
- No perpetual succession
- Risk exposure
- Maximum number of partners is 20; s
- Not taxed as separate entity
Unincorporated joint Ventures o Unincorporated joint ventures allow for the ventures to pool their resources in order to operate the business. The resources might be $, expert skill or legal rights (such as intellectual property or a right to conduct mining operations). o How does this compare to a company? Companies must be registered. There are no special formalities to create an unincorporated joint ventures, though they tend to involve complex commercial contracting so as to avoid being a partnership. Perpetual succession may not be valued for short term projects.
Advantages
- No special formalities for formation
- no special reporting or disclosure requirements
- No public law obligations
Disadvantages
- Not a separate legal entity
- Do not automatically have limited liability ( default is personal and unlimited)
- No perpetual succession
- Expense of complex commercial contracting – no body of law to serve as default rules.
Advantages of forming a company
o Comparing companies to other business forms, we can see that the advantages of forming a company align very closely to the essential features of companies looked at earlier in this topic: o All companies are separate legal entities o All companies accommodate the separation of ownership and management o All companies come with default rules for regulating their internal and external affairs o All companies have unique ways that they can raise capital (fundraising) o All companies have perpetual succession o Companies come pre-packaged with an array of different types of liability, including some with limited liability. o Shares in limited liability companies are generally freely transferrable.
Others?
o There are a variety of corporate forms available – choice among them makes it possible to run large and small commercial enterprises via a corporate form. Among these are corporate forms suitable for; o all sizes of businesses, including one person businesses o businesses seeking to keep control closely held (eg within a family) o businesses that want to keep their financial affairs reasonably confidential o Businesses that want to raise funds from an unlimited number of investors. o Companies are taxed at a flat rate. This is designed to be an attractive feature of incorporation, encouraging economic activity.* In practice:
o The most significant effect and primary benefit of incorporation is that, upon incorporation the company becomes a separate legal entity. It exists separately from its directors and its members o Tis separateness offers considerable protection to the directors and members, particularly in circumstances where the company is limited in liability and is unable to pay its debts. o A company can sue and be sued in its own name o It can own property in its own name o Its existence does not depend on the lives of its members or directors.
Case Law
o Leading case: Salomon v Salomon & Co Ltd [1897] AC 22. o Salomon’s case has been accepted as authority repeated in the High Court of Australia. See: o Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424, 444–5; o Hamilton v Whitehead (1988) 166 CLR 121; o Peate v Federal Commissioner of Taxation (1964) 111 CLR 443, 480; o Industrial Equity Ltd v Blackburn (1977) 137 CLR 567, 577; o Nicol v Allyacht Spars Pty Ltd (1987) 163 CLR 611, 616–7. o Salomon’s case remains a leading authority and the seminal articulation of the doctrine of the separate legal entity in the UK: Prest v Petrodel Resources Ltd [2013] UKSC 34
Salomon v Salomon & Co Ltd [1897]
o FACTS: A company limited by shares was formed under the Companies Act 1862 (UK). There were 7 subscribers (i. members upon registration), one of which was Mr Salomon. Prior to incorporation Mr Salomon had operated his business very successfully as a sole trader. Upon incorporation, Mr Salomon sold his business to the company. Some of the purchase price was unpaid, treated as a loan by Mr Salomon to the company. The loan was secured by a debenture. Mr Salomon was a secured creditor of the company. The company entered liquidation after some business difficulties. It did not have sufficient assets to pay its creditors. The liquidator, on behalf of the unsecured creditors argued that Mr Salomon should not be entitled to take priority over the unsecured creditors because he was in control of the company and was essentially running the business. The members and the company were not independent of one another. o Aaron Saloman carried on a successful leather and bootmaking business as a sole trader for over thirty years. In order to provide for his sons who ‘troubled him all the while’ for a share in the business, he incorporated it as a company limited by shares under the Companies Act 1862 (UK). The statute required 7 subscribers. These seven people were Saloman, his wife and 5 children, some of whom worked in the business. o After the company was registered, Mr Saloman sold his business to the company for an exorbitant 38,782 pounds. In exchange, the company allotted 20,000 shares to Mr Saloman as part payment for the transfer of his existing business to the company. The
larger part of the purchase price remained unpaid. This unpaid portion of the purchase price was treated as a loan by Mr Saloman to the company. The loan was secured by a debenture.
o The end result was that Saloman was a secured creditor of the company and held all bar 6 shares in the company.
o The business had been very prosperous but shortly after it was sold to the company strikes in the leather industry led the business into financial difficulties and subsequently liquidation. The company’s assets were insufficient to pay both Mr Saloman and the unsecured creditors. The liquidator (acting on behalf of the unsecured creditors) argued that Mr Saloman was effectively in complete control of the company, the company was acting either as agent or trustee for him in running the business. It was central to the liquidator’s case that the subscribers to the company were not independent of one another and that this was essentially a one person company. If the liquidator succeeded in his argument, then Saloman would have been required to indemnify the company for the debts it incurred on his behalf and he would not be entitled to priority over unsecured creditors.
Held;
o The company was a separate legal entity. A company is distinct from both its shareholders and its directors. A company therefore can become a secured creditor of a member. Mr Salomon as a secured creditor, ranked ahead of the unsecured creditors. o The House of Lords held that despite Saloman’s control over the company, the company was nevertheless a separate legal entity. The company, not Saloman, ran the business. As a separate legal entity, the company was distinct from both its shareholders and directors. There was no barrier to a company becoming the secured debtor of its shareholders. Consequently, a shareholder could become a secured creditor ranking ahead of the unsecured creditors of the company.
How does the doctrine of the separate legal entity work in practice?
o Companies can enter contract with members: Lee v Lee’s Air Farming Ltd [1961] AC 12 o Members only have an interest in the company by virtue of their membership. They do not have a proprietary interest in property owned by the company: Macaura v Northern Assurance Co Ltd [1925] AC 619 o Companies are responsible for their own actions, even where the company commits a criminal offence: Hamilton v Whitehead (1988) 166 CLR 121
Lee v Lee’s Air Farming Ltd [1961] AC 12
FACTS:
o Lee ran a business and later formed a company to conduct the business. Lee became the governing director of this company. All the issued shares in the company were
company is a separate legal entity and also because a managing director is considered to be the ‘controlling mind’ of the company, it was appropriate to prosecute both the managing director and the company.
Lifting/Piercing the Corporate Veil
o Where shareholders or directors exploit the separateness of the company to hide behind the corporate veil in an abuse of the corporate form, the corporate veil might be lifted (or pierced) to attach personal liability to the directors or shareholders. o These circumstances arise at common law and pursuant to statute
Common Law Lifting/ Piercing the Corporate veil
o Various courts have attempted to articulate precisely when the court will be willing to lift/pierce the corporate veil: Smith Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116. o While there is no definitive statement of when the veil will be lifted or pierced at common law, some key circumstances can be identified from the case law: o courts are reluctant to pierce the corporate veil (Briggs v James Hardie) and will generally only do so as a last resort: Prest v Petrodel Resources Ltd [2013] UKSC 34
The corporate veil was lifted in Green v Bestobell Industries Ltd [1982] WAR 1 to reveal the full extent of a breach of duty by a manager
Fraud – Re Darby [1911] 1 KB 95
o Sham – ie the company is being used as a sham as a ‘front’ to ‘mask’ the real operation: Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 at 740 – 741 (cited with approval Hobart Bridge Company Ltd v Federal Commissioner of Taxation (1951) 82 CLR 372, 385 (Kitto J)). Ian M Ramsay and David B Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company and Securities Law Journal 250, 261.
At common law there is a general reluctance on the part of the courts to lift the corporate veil: Smith Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116.
o Where the corporate veil is lifted, it is generally for policy reasons. Generally, you will find there is greater willingness where fraud is involved.
Briggs v James Hardie
FACTS:
o Briggs sought to bring an action in negligence against both the company that employed him and its holding company, James Hardie. He sought damages in relation to asbestosis a condition obtained in the course of his employment due to the alleged negligence of his employer. Briggs’ action was time barred. He came before the court seeking an extension of time, which should have been granted so long as he could establish that there was evidence to support his action.
HELD:
o The Court of Appeal decided that although the law was not certain, it was arguable that the corporate veil could be lifted in such circumstances and the matter should be remitted below and be decided after a full trial of the issue. The court showed willingness to lift the veil where there was negligence and a restructure of the company in a factual matrix where the restructure was derided as repugnant to public policy despite its legality. o Prest v Petrodel Resources Ltd [2013] UKSC 34 managed to find away around lifting the corporate veil making it very clear that it would be an absolute last resort. Green v Bestobell Industries Ltd [1982] WAR 1 – breach of duty by a manager.
Fraud - The veil was lifted in Re Darby where there was fraud involved.
FACTS: o A director was ordered to repay profits made in a transaction where a person involved in forming the company organised for one company to purchase a mining licence and then form another company for the specific purpose of purchasing that license for a grossly inflated price from the first company. The new company had issued a prospectus and money was raised from the public through share issues. The profits from the transaction were divided between the directors of the first company. Darby was one of these directors. The directors claimed that the profit was not made by the director, it was made by the company itself. Clearly the person involved in forming the companies and making the initial arrangements had set up a dummy company to perpetrate a fraud. The new company slid into liquidation and the liquidator sought to the recover the profit from the directors.
HELD:
o The directors could not hide their fraud behind the corporate veil. It was ordered that the profits be delivered up.
Sham - “A ‘sham’ is.. that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.”: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530, 537 (Lockhardt J). The quoted words here ‘front’ and ‘mask’ are from an excellent article by Ian M Ramsay and David B Noakes that explains shams in considerable detail and analyses all the relevant case law: ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company and Securities Law Journal 250, 261. Note you are not required to read this paper.
Statutory provisions
o Income Tax Assessment Act 1997 (Cth)
Corporate Law Notes
Course: Corporate law (LLH305)
University: Queensland University of Technology
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