Company Law Week 1 Topics 1&2 (LAW 2452) Anton & Summer (SG) & Wesley & Mike

ke (HN) Semester 2, 2012 Reading assignment: text chapters 1 & 2; tutorial questions at end of chapter 2 and questions1-5 in course manual.

Do Not miss a class Do the readings before class. Prepare your own summaries of the concepts, legislation and cases Develop an awareness of relevant legal issues, and begin as soon as possible to develop an ability to apply these principles. Ask questions! Help each other: We are in this together!

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Assessments:
20% Midterm Exam (Week 5, Topics 1-6, open-book) 20% Comparative Law Paper (Week 10, submitted through Turnitin) 60% Final Exam (During the exam period, covering all topics, open-book)

Lecturers: Anton Kietaibl and Summer Nguyen-Aulmann

Room 1.12

Format: lecture (Monday) and tutorials (Thursday)

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Text: Understanding Company Law, 16th edition

Note: you are responsible for all the readings

Intended Learning Outcomes

Understand and Interpret Relevant Legal Principles of Company law Conduct Effective (Legal) Research Critically Analyse (Legal) problems Communicate in Writing in a Precise Manner Using Appropriate (Legal) Terminology

Overview: What is a corporation? Why were corporations invented? What are the pros and cons of having corporations? Have they done good or bad for the world, or both? How? Why study the law of Australian corporations (company is the most numerous type of Australian corporation)?

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What is a corporation? could be one of several types of artificial legal entities. A company is a type of corporation. Other types include trade unions, incorporated associations, etc. What is a company? A company is just one type of corporation, but most common, and the type we will generally be focusing on in this class. Caution: the terms company and corporation are used interchangeably, but under the Corporations Act and in the legal world generally, company has a specific meaning

A company is a separate legal entity from its shareholders, with separate rights and liabilities
(reference: text p. 32)

A company registered under the Corporations Act (our focus) are one type of corporation
(reference: text pp. 3-4, 77)

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A company has the powers of both: an individual person, such as to enter contracts, buy/sell property, sue/be sued; and a corporate entity, such as to exist forever, issue/transfer shares, issue bonds, grant options for unissued shares, distribute the companys property among its members, grant a floating charge, give security over uncalled capital, etc. (reference: Corporations Act, section 124, and text pp. 3-4, 27-28)

A company may own property distinct from the property of its shareholders (reference: text p. 3-4, 28) Shareholders only own shares in the company, they do not own the companys property, but they can transfer/sell shares (reference: text p. 3, 27) A company continues to exist forever-- unless deregistered by ASIC-- even though shareholders may come and go or die (reference: text p. 28) A company may be a holding company (reference: text p. 4, 37)

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Companies are governed by: Legislation, in particular the Corporations Act 2001 (or country-equivalent) Case law Constitutions (aka charters, articles) of each company

Limited liability means shareholders are not personally liable for the companys debts (reference: text pp. 3, 28) Extent of limits on shareholder liability varies with company type (more on this point next week) (reference: text p. 28) Limited liability transfers most risk of business failure from the companys shareholders to its creditors, to achieve the following goals:
facilitate enterprise reduce monitoring promote market efficiency encourage equity diversity (reference: text p. 29)

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Creditors may only collect from the company, not shareholders. This gives strong bargaining power to the creditor to be secured or obtain a personal guarantee. (reference: text p. 30) Limited liability adversely affects tort creditors, for example victims of negligence, who bear an uncompensated and involuntary risk in the event of the companys lack of sufficient assets or insolvency (reference: text p. 31) Are these things good, bad, or both?

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True or False. (1) Limited Liability means shareholders do not have any liability towards company debts.

(2) A corporation is an example of a company.

(3) The rules/laws any company must follow come from: (a.) Legislation (b.) Case law (c.) Company Constitution
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A company is a separate legal entity even when a single person owns all its shares. Therefore, a one-person company may borrow money from its controlling shareholder on a secured basis, who will then rank ahead of unsecured creditors upon the companys insolvency (reference: Salomon v. Salomon & Co. Ltd., text p. 33) The single shareholder of a one-person company may also be its only employee. So if there is an airplane accident, workers compensation can be claimed. (reference: Lee v Lees Air Farming Ltd., p. 35)
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Even a single shareholder of a one-shareholder company does not have a legal or equitable interest in the companys property. This is the same if it is one shareholder or millions. For example: Peter insured timber [trees] in his own name, then sold the timber to a company he formed. Later the timber burned. Peter made an insurance claim. The claim failed because only the company, not Peter, had an insurable interest in the timber. (reference: Macaura v Northern Assurance Co Ltd., text p.36)

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Each company in a corporate group is treated as a separate legal entity. This means: creditors can only enforce their rights against the debtor company not all the companies in the group (reference: text p. 37) Directors owe duties to their particular company and not to the group as a whole (reference: text p. 31) Directors cannot act in the best interests of the group and disregard the interests of their companys shareholders and creditors. (reference: Walker v Wimborne, text p. 38)

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A subsidiarys profits cannot be regarded as the profits of its holding company if the subsidiary did not pay dividends to the holding company. (reference: Industrial Equity Ltd v Blackburn, text p. 39) The holding company is not a party to contracts entered into by the subsidiary, this means the holding company can NOT be sued for the subsidiarys breach of contract. (reference: Pioneer Concrete Services Ltd. V. Yelnah Pty Ltd., text p. 39)

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Which of the following is not true?

(a) The consequences of a company being a separate legal entity can work both for and against the company and its shareholder(s) (b) In a one-person company, the shareholder can be a priority creditor. (c) A holding company as a separate legal is responsible for all contracts executed by subsidiaries
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veil = a type of cloth worn to conceal a persons face (example: bridal veil)

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In corporations, veil means, for instance, the separation between a company and its shareholders, or a subsidiary and its parent Directors personally liable for companys debts if they fail to prevent the company from incurring those debts when there are reasonable grounds for suspecting that it is insolvent (reference: Corporations Act, section 588G(3), and text pp. 40-41) Possible criminal liability if dishonesty involved

Claw back of un-commercial transactions to make sure that corporate insiders do not obtain preferential treatment from the company at the expense of the companys creditors For example, disposing of or sales of assets prior to liquidation (reference: Corporations Act, section 588FB, text pp.40-41)

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Loan from company officer to the company secured by a charge/fee is treated different than secured loans by arms-length creditors. Officer may not enforce charge/fee within 6 months of creation of the loan. (reference: Corporations Act, section 267, text p. 41) Officer is liable where company provides financial assistance for the purchase of its own shares in violation of Corporations Act, section 260A (reference: text p. 41) Directors may be liable to pay companys unremitted corporate taxes under Income Tax Assessment Act (reference: text p. 41)

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For group companies such as holding companies: Holding company can be liable for subsidiarys insolvent trading where there were reasonable grounds to suspect the subsidiary was insolvent. (reference: Corporations Act, section 588V-588X text p. 44) Parent company must prepare consolidated financial statements for the group (reference: AASB section 127, text p. 45)

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1. Company used as a vehicle for fraud, such as when a dummy company is set up. (reference: In Re Darby, text p. 42)

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2. Company used as a sham to avoid a legal obligation under a contract or statute Examples: Davids company was bound by the non-compete contract which David had signed with Peter, even though Davids company was not a party to the contract (reference: Gilford Motor Co Ltd v Horne, text p. 42) Separate company held liable where, following wrongful dismissal of an employee, the employer stopped operations and transferred assets to the separate company (reference: Creasey v Breachwood Motors Ltd, text p.43)
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3. Company knowingly participated in a directors breach of fiduciary duties. Example: Peter, a manager of KFC, formed his own company, QFC. QFC then won a contract that KFC was also interested in. Peter breached his fiduciary duty to KFC. Because Peters company QFC knowingly and for its own benefit participated in Peters breach of duty, QFC must pay to KFC the profit QFC made (reference: Green v Bestobell Industries Ltd, text p. 43)

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4. Despite Walker v Wimborne, sometimes a transaction entered into for the benefit of one or more companies in the group may also have benefits for the group as a whole. In this situation, there is no breach of fiduciary duty by other group companies directors. (reference: Equiticorp Finance Ltd v Bank of New Zealand, text p. 45)

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5. Subsidiary can sometimes be an agent for its holding company (alter ego or other self theory). (reference: Smith, Stone & Knight v Birmingham Corporation, text p. 47) 6. Possible increased willingness to pierce the veil for tort (negligence) actions (reference: Briggs v James Hardie & Co Pty Ltd, text p. 48)

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Which of the following is not an example where piercing the corporate veil would apply: (a) company is created so that its controller can avoid a contractual obligation (b) directors of related companies have separate duties to each company they are a directors of. (c) uncommercial transactions (d) Company officer charge within six months of liquidation
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Number of members Company: one or more (reference: Corporations Act, section 114) Partnership: two or more Requirement as to purpose Company: none Partnership: profit (reference: text p. 51) Separate legal entity Company: yes Partnership/Trust: no

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Limited liability of members Company: yes, depending on type of company Partnership/Trust: usually no (reference: text p. 52) Can member sue to enforce organizations legal rights? Company: generally no Partnership: yes Existence after death of members Company: yes Partnership: no Trust: limited (reference: text p. 53)

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Members interest freely transferable? Company: generally yes Partnership: limited (reference: text p. 53) Formality/expense to start, maintain and end Company: significant Partnership/Trust: lesser Public companies and large proprietary companies must publicly disclose financial reports and appoint an independent auditor Partnership/Trust: no (reference: text p. 54)

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Management and ownership separated Company: yes (directors / shareholders) Partnership: no (reference: text p. 54) Maximum number of members Company: no limit for public companies; 50 nonemployee shareholders for proprietary companies Partnership: generally limited to 20 partners (reference: text p. 55) Separate tax filing for entity? Company: yes Partnership/Trust: no (reference: text p. 56)

Requirements: Availability of name (reference: text p. 58) Australian Company Number (ACN) Misuse of identical or similar name; tort of passing off i.e. using a similar name to create the impression that the business is that of another
Trade Practices Act section 52 prohibits corporation from engaging in misleading or deceptive conduct, including name (reference: text p. 59)

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Application for registration Registered office required (reference: Corporations Act section 142(1), text p. 61, diagram p. 62) Constitution and/or replaceable rules (in Corporations Act) regulate internal management of companies (reference: Corporations Act, section 134) New companies may choose to be governed by the replaceable rules, their own constitution, or a combination of both (reference: text p. 63)

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Subsequent appointments of directors made in accordance with replaceable rules or constitution (reference: text p. 65) Additional shares can be issued by directors (reference: Corporations Act, section 198A) 28-day notice of new directors and secretaries must be given to ASIC (ASIC, section 205B(1), text p. 67)

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Thursday Tutorials: From Chapter 2, Questions 2, 3 & 5 pp. 57-58 Course Manual Tutorial Questions 1-5
Next Lecture: Topic 3 - Types of companies Reading: UCL chapter 3.