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LAWS1091(–(Business(Associations((
Contents'1.1."Intro"to"the"Corporation"and"Incorporating"under"Australian"Law"................................................."6"
1.2."Separate"legal"personality"............................................................................................................."15"
2.1."Implications"of"limited"liability"......................................................................................................"22"
2.2."The"Corporate"Constitution"and"Decision"Making"by"the"BoD"......................................................"34"
3.1."Decision"Making"by"the"General"Meeting"....................................................................................."55"
4.1."Contracts"with"outsiders"..............................................................................................................."70"
Class"10"and"11"J"Directors’"duty"of"care".............................................................................................."77"
Class"12:"Director’s"duty"to"act"in"good"faith"and"for"proper"purposes"..............................................."92"
Class"13"Director’s"duty"to"avoid"conflicts"........................................................................................."106"
Class"14"Director’s"duty"not"to"make"secret"profits"and"divert"corporate"opportunity"....................."132"
Class"15"Statutory"disclosure"obligations;"related"party"transactions"..............................................."133"
Class"16"Directors’"statutory"duty"to"prevent"insolvent"trading"........................................................"134"
Class"17,"18,"19"Shareholders’"remedies"and"winding"up".................................................................."136"
Week"12"Lect"1"..................................................................................................................................."136"
Note:"Next"Monday’s"ASIC"stuff"(pyramid"of"regulation"etc)"will"not"really"be"tested."Focus"is"on"directors’"duties,"but"stuff"tested"in"the"quiz"could"come"up"in"relation"to"it"etc"............................."136"
Shareholder’s"remedies"....................................................................................................................."136"
•" S/hrs"as"property"owners"–"various"rights"–"like"other"property"owners,"are"freely"able"to"dispose"of"rights"including"voting"rights"............................................................................................."136"
Class"20"Corporate"regulation:"the"role"of"ASIC"................................................................................."151"
Class"21"Review"by"an"examination"of"corporate"groups"..................................................................."152"
"
(
(
QUESTIONS(
• S202A(
o Whose(resolution(determines(directors’(pay?(• Unanimous(consent(principle(re(Salomon?(
• Partly"paid"shares"–"fully"liable"to"pay"calls?"Only"difference"to"fully"paid"shares"is"that"the"payment"is"staggered?"If"not,"difference"to"NL?"
• Can"only"private"companies"entrench"provisions?"
• Can"major"finance"providers"have"constitutional"right"to"elect"a"director,"or"does"that"need"
to"be"in"a"separate"contract"(Eley"case)?"
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Themes(
• Companies"–"registered"by"ASIC"• ASIC"responsibilities"–"various"• Looking"at"
o Starting,"running,"closing"companies"
o Compliance/regulation"of"directors"
"
"
GENERAL(NOTES(
(
V(IMPORTANT(CONCEPT:(THE(DIRECTORS(OWE(THEIR(DUTY(TO(THE(COMPANY(
(
• Replaceable"rule"–"i.e."presumptive"but"capable"of"displacement"by"constitution"–"often"done"so"in"prop"companies"
• How"replaceable"are"the"replaceable"rules?"
o E.g."vesting"of"management"power"in"the"board"(s"198A)"
• Except"for"those"RRs"that"a"public"co"cannot"replace"because"the"CA"says"so"(eg"dismissing"
dirs),"all"RRs"are"eminently"replaceable:"it"would"be"possible"for"a"pty"ltd"co"to"have"no"rights"
in"shrs"to"appoint"proxies"at"all,"and"to"have"a"quorum"of"1."
• Remb:"prop"company"diff"to"partnership!"(e.g."50"nonJemp"shareholders"vs"20"shareholders"
etc)"
• Difference"between"listed"company"and"public"company"
o Both"are"public,"but"it"is"at"their"discretion"to"list."
o Key"functional"difference,"other"than"requirements"of"listing"rules"etc:"public"
company"can"offer"shares"to"the"public."However,"difficult"when"unlisted"–"will"need"to"do"it"through"private"placements"etc,"and"there"will"not"be"a"liquid"market"
(transferability"or"ability"to"sell"shares"is"limited)"
• Limited"Liability"–"pg"26"of"Phillip"notes"o Arguments"in"favour"of"LL"
! Allows"industry"to"raise"capital"by"protecting"those"who"are"prepared"to"
advance"it"
! Provides"a"safe"avenue"for"investment"for"those"who"may"not"necessarily"
have"great"wealth"
o Arguments"against"LL"
! Can"serve"as"a"mechanism"for"sham"and"fraud"
! Will"remove"the"incentive"for"caution"and"vigilance"in"business"endeavours"
• Lift"the"corporate"veil"–"see"what’s"going"on"inside"a"company,"usually"involves"sweeping"
away"the"corporate"structure."E.g."subsidiaries"of"James"Hardie"issue"–"degree"of"control"of"holding"company"over"the"subsidiary"was"so"great"that"it"was"an"agent"and"so"holding"
company"should"provide"the"funds"for"compensation"
o Note"holding"company"is"the"proper"term"for"a"parent"company"
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• Note:"generally"treat"each"creditor"of"a"class"equally"in"liquidation,"so"that"they"are"paid"out"
pro"rata"(pari"passu"="on"equal"footing)"
• Quorum"for"one"person"company"="not"needed"="249B(
• Executive"mgmt."and"Board"
o Chairman"runs"the"board,"CEO"runs"the"company"
o CEO=MD"
! Appointed"by"the"board,"most"senior"executive"etc"
! An&MD&is&a&CEO&who&sits&on&the&board,&I&suppose&they&all&generally&do.&o Chairman"of"the"BoD"is"important"in"modern"corporations"
! Three"types:"“CEO"+"Chairman”,"Executive"chairman"(outranks"CEO),"NonJ
executive"chairman"(does"not"interfere"in"day"to"day"activities)"
! Roles:"evaluating"performance"of"CEO"and"board"members,"setting"agenda"
and"managing"proceedings"in"meetings"
! Considered"good"corporate"governance"to"separate"the"chair"and"the"CEO"
(i.e."have"a"non"executive"chair)"
• Capital"structure"priorities"
o Debentures/secured,"unsecured"bondholders"etc,"equity"(prefs"then"ordinary)"
o Types"of"equity"
! Voting"is"one"of"the"most"important"rights"
! Ordinary"stockholders"always"have"the"right"to"vote"
! Prefs"
• Dividends"on"prefs"often"expressed"as"a"%"of"par"value,"or"%"on"each"
dollar"of"pref"share"
o e.g."7%"prefs"="7%"share"on"$1"share"–"much"like"debt"
o Paid"when"there"are"profits"etc"
• No"rights"to"vote"unless"dividends"are"in"arrears/not"paid,"at"which"
point"they"often"get"voting"rights"
o But"note,"they"have"a"right"to"notice,"to"come"along"and"ask"
questions"etc,""
• Distinction"between"shadow"and"defacto"directors"
o Shadow"="exercises"control"on"the"board"from"the"outside"
o De"facto"="takes"on"job"as"director"without"lawful"appointment"
• Exec"and"Non"exec"directors"etc"
o A non-executive director is a director who does not have a contract of employment with the company " NED
o Contract of service = employee o Contract for services = agent
• Percentages"
o Appoint"directors"–"50%,"ordinary"resolution"o Change"constitution"–"75%,"special"resolution"
• Replaceable"rules"apply"to"any"registered"company,"public"or"proprietary,"other"than"to"a"
proprietary"company"with"a"sole"shareholder"and"director"(s"135)"
• Board"governs"the"company"(brains),"management"runs"the"company"(the"muscle)"
• No"obligation"for"prop"companies"to"hold"an"AGM?"S"250N"
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(
Quiz(recap(
• Legal"status"of"agency"principle"
o Generally"not"available"between"holding"company"and"sub,"and"it"is"obscure"as"to"
what"additional"factors"are"required"
! Obscure"when"it"applies"–"Spraeg"v"Paeson"is"an"outlier"• Difference"between"exchange"contract"and"contract"of"the"constitution"
o Statutory,"and"the"rights"can"be"unilaterally"altered"
o Note:"can’t"enforce"anything"that"you"enjoy"alone,"can’t"personally"enforce"something"that"is"collectively"enjoyed"(i.e."something"that"the"company"alone"can"
enforce"–"to"be"governed"in"accordance"with"constitution"etc)"• What"can"a"shareholder"do"in"response"to"a"poorly"run"company"
o Cannot"vote"in"a"new"business"plan"etc"–"but"can"dismiss"MD"
• Q:"Board"is"putting"forward"something"under"which"they"will"receive"a"benefit"(a"bonus"
share)"
o So"notice"needs"to"be"extra"special"J"a"F"standard"of"disclosure"re"the"bonus"shares"
• How"to"get"rid"of"a"MD"
o Board"can"revoke"status"of"a"MD"(but"not"dismiss"a"fellow"director,"in"a"public"
company"at"least)"
o GM"can"remove"as"a"director"
• Relationship"between"statute"and"general"law"agency"doctrine"etc"
o Statute"applies"first,"then"if"not,"GL"applies"
"
TERMS(
• Dictionary&of&the&CA&is&at&s9"• Company"secretary"
o "
• Liquidator"
o Sometimes"is"the"company,"or"an"agent"for"the"company"(?)"
• Shares"
o See"Phillip"notes,"pg"21"
o CONFIRM"DIFFERENCE"BETWEEN"PARTLY"PAID"AND"NL"–"SEE"PHILLIP"PG"22!!?!?"o Partly"paid:"The"issue"price"has"only"been"partially"paid,"with"further"payments"to"be"
made"when"required/called"by"the"company"(i.e."directors)."Thus,"liable"for"calls."
o NoJliability:"No"legal"requirement"to"meet"the"calls"made"by"the"company"on"
outstanding"amount,"with"failure"to"meet"call"resulting"in"forfeiture"of"share."Thus,"
payment"cannot"be"enforced,"shareholders"not"liable"for"calls."
• Trust"
o Not"a"distinct"legal"entity"
! Separate"from"the"beneficiaries,"but"trustee"bears"personal"responsibility"for"
trust"obligations"
! Use"of"limited"company"as"trustee"allows"for"limited"liability"
o May"have"tax"advantages"
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1.1.(Intro(to(the(Corporation(and(Incorporating(under(Australian(
Law(
((
Introduction(
• A"corporation"is"an"organisational"structure"that"facilitates"the"raising"of"finance"for"business"
activity,"by"separating"management"and"control"
• In"the"20th"century,"the"company"emerged"as"the"dominant"form"of"business"association"in"
western"society"
"
Types(of(business(associations(
• List:&Sole&trader,&partnership,&company&o Note&that&there&are&also&(incorporated&and&unincorporated)&cooperatives&and&
associations&(Phillip¬es&pg&15&and&16)&• See&Phillip¬es&(pg&13&and&14)&for&general&comments&
o Wide&freedom&of&choice,&principal&restriction&re&partnerships&beyond&20&members&should&incorporate&(s&115,&CA),&4&different&functions,&Indigenous&form.&
&Sole(trader(
• Not"involved"in"business"association"""refers"to"an"individual"conducting"a"business"alone"
without"the"benefit"of"any"legal"structure"or"entity"status"distinct"from"that"of"the"individual"
who"conducts"it"
• A"sole"trader"is"personally"liable"without"any"limitation"
• No"formalities"accompanying"the"formation"or"conduct,"except"general"statutory"obligations"
such"as"workers"compensation,"taxation"etc"
• Someone"who"is"functionally"a"sole"trader"may"establish"a"oneJperson"company"(sole"
shareholder/director[/employee]),"due"to"advantages"of"the"corporate"form:"
o Limited"liability"
! Sole"traders"can"get"something"similar"through"LL"insurance,"though"not"a"
perfect"substitute"(carveJouts,"exceptions)"
o Taxation"considerations"
o Significant"difference"in"consequences"upon"death"
! Sole"trader:"No"entity"separate"to"the"deceased"individual,"with"it"more"
likely"that"the"sole"trading"business"will"not"continue."Business"assets,"having"
been"owned"by"the"sole"trader"in"name,"are"distributed"according"to"the"will"
! Company:"Separate"legal"entity"with"perpetual"succession,"with"the"assets"
remaining"under"the"ownership"of"the"company."Shares"are"distributed."
Reading: • Redmond [2.05]-[2.65] for a digested history of the how the regulation of corporate
enterprise evolved; [2.70]-[2-105] for a digest of the phases of corporate regulation in Australia; and [3.10]-[3-140] explains the reasons why business people would choose a
corporation as the legal form for operating a business, and how incorporation is effected.
• 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). ss45A, 112-114 Types of companies. ss117-121 Procedures for registration.
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• Potential"problem:"will"need"to"appoint"new"board"–"new"shareholders"may"not"be"amicable"
Partnership(
• Compare"to"an"incorporated"company"
o Limited"liability"
o Consequences"upon"death"
! Partnerships"are"dissolved"upon"death"unless"there"is"a"succession"clause"or"
similar"continuation"arrangement,"e.g."automatic"novation"by"the"surviving"
partners"
• Re"2"person"partnership:"Need"a"new"partner"or"continue"as"a"sole"
trader"
! More"generally,"it"is"difficult"to"transfer"interests"as"they"are"not"packaged"in"
the"form"of"shares"
(
Company((Phillip"notes,"pg"18J25)"
General&• 6"types"of"companies,"as"per"s"112"of"CA:"
Type: Proprietary companies (may not have more than 50 non-employee shareholders)
Type: Public companies
Classes: # Limited by shares # Unlimited with share capital
Classes: # Limited by shares # Limited by guarantee # Unlimited with share capital # No liability company (only available
to mining companies) "
"
• The&nature&of&share&capital&(share&capital&fund,&shares,&rights&attaching&to&shares)&–&pg&20,&21&of&Phillip¬es&
"
Proprietary&companies&• Generally"smaller"than"public"companies,"limits"on"number"of"nonJemployee"shareholders,"
fewer"regulatory"ad"disclosure"requirements,"name"ends"with"Pty"Ltd"
• Need"1"or"more"director"
• The"two"distinguishing"characteristics"from"public"companies"(Dimity)"
o A"proprietary"company"may"not"have"more"than"50"nonJemployee"shareholders"
! Reason:"subject"to"less"rigorous"regulation"than"public"companies"
o Cannot"offer"shares"to"the"public"
`& Limits&the&amount&of&capital&you&can&raise&• Guarantee"companies"and"no"liability"companies"may"not"be"registered"as"a"proprietary"
company"
• Section"45A"
o General"limitations,"small"prop"company,"large"prop"company"
"
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Corporations Act 2001 (Cth)
Section 45A: Proprietary companies
(1) A proprietary company must: • Be limited by shares or be an unlimited company with a
share capital • Have no more 50 non-employee shareholders • Not do anything that would require disclosure to investors
under Ch 6D (2) A proprietary company is a small proprietary company for a
financial year if it satisfies at least 2 of the following criteria a. The consolidated revenue for financial year of company
and entities it controls is less than $25m b. Value of consolidated gross assets at end of financial year
and entities it controls is less than $12.5m c. Company and entities it controls have fewer than 50
employees at end of financial year (3) A proprietary company is a large proprietary company for a
financial year if it satisfies at least 2 of the following criteria: a. The consolidated revenue for financial year of company
and entities it controls is $25m or more b. Value of consolidated gross assets at end of financial year
and entities it controls is $12.5m, or more c. Company and entities it controls have 50 employees at end
of financial year or more "
• Functional"difference"between"large"and"small"
o More"formal"requirements."Financial"records"audited"etc.,"less"requirements"
"
Public&companies&• Generally"larger"than"prop"company,"without"limits"on"the"number"of"shareholders,"usually"
greater"regulatory"and"disclosure"requirements,"name"ends"in"Ltd"
• A"public"company"need"not"be"listed"on"a"stock"exchange"
o Can"just"engage"in"private"placements"
o Listed"public"companies"have"shares"that"are"freely"traded"and"must"comply"with"
the"listing"rules"(i.e."ASX"listing"rules"and"corp"gov),"which"are"over"and"above"the"
legal"requirements"of"unlisted"public"companies"
• Need"3"or"more"directors"
(
Limited&by&shares,&limited&by&guarantee,&unlimited,&no&liability&• Phillip"notes,"pg"22"and"23"
• Key"points"
o Limited"by"shares"="regular,"large"companies"
o Limited"by"guarantee"
! Don’t"issue"shares,"don’t"have"equity"capital"in"the"same"way"
• Member,"vs"shareholder"
• Generally"for"something"similar"to"nonJprofit,"rather"than"large"
industrial"activities"
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! Company’s"capital"is"usually"from"retained"earnings"and"member"
subscriptions"
! When"company"becomes"insolvent,"i.e."unpaid"liabilities,"L>A,"then"
members"are"asked"by"the"liquidator"to"meet"their"promise"of"contributing"
up"to"the"limit"of"their"guarantee"until"L"are"paid"
! E.g."NRMA"is"limited"by"guarantee"–"can"become"a"member"
o No"liability"company"
! Mining"sector,"if"you"don’t"meet"calls"the"shares"are"forfeited"
(
Characteristics((Benefits/Disads)(of(the(corporate(form(
(
• For"large"enterprises"the"advantages"of"incorporation,"the"transferability"of"corporate"
securities"and"the"existence"of"organised"securities"markets"will"generally"compel"
registration"under"the"CA"
• The"prohibition"on"outsize"associations"in"s"115"will"usually"require"incorporation"of"such"
enterprises"in"any"event"
• For"small"business,"the"choice"will"not"be"as"clearJcut"and"will"turn"upon"a"complex"
combination"of"both"legal"and"personal"factors"
(
Advantages&• Limited"liability"
o Partners"a"normally"liable"for"firms"debts"""incorporation"insulates"members’"other"assets"from"claims"against"company"
o Note&LL&on&LL&• Perpetual"succession"
o Entity"is"distinct"from"its"shareholders"
o Unaffected"by"events"that"would"often"dissolve"a"partnership"(death,"ownership"
transfer,"bankruptcy)"
o Separate"entity"of"company"continues"to"hold"and"own"the"assets/property"as"
distinct"from"the"shareholders"
• Ability"to"marshal"large"amounts"of"capital"
o Shareholders"enjoy"LL"–"allows"for"a"wide"diffusion"of"shareholdings"and"significant"capital"raisings"even"in"relation"to"reasonably"risky"activities"
• Financing"
o Incorporated"business"has"the"corporate"advantage"of"the"power"to"create"a"floating"
charge"over"its"assets"or"to"make"a"public"issue"of"its"shares"and"debt"interests"
o These"debt"claims"issued"by"a"corporation"are"called"debentures:"s"9"CA"
o The"floating"charge"is"an"equitable"charge"which"floats"over"the"subject"property"
(often"the"whole"of"the"company’s"undertakings)"until"some"defined"act"of"default"
occurs"causing"it"to"crystallise"
o At"this"stage"the"charge"becomes"a"fixed"equitable"charge"
o Until"this"crystallisation,"the"company"may"deal"with,"and"dispose"of,"the"charged"
property"in"the"ordinary"course"of"business"
• Clear"governance"responsibility"
o S198A(1)"–"management"is"vested"in"the"BoD"
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o Shareholders"have"sole"responsibility"for"certain"activities"
! Changes"to"the"company"constitution"
! Electing"of"directors"
Disadvantages&• Cost,"formality,"continuing"obligations"
o Partnerships"can"be"created"with"no"formalities"and"its"internal"structure"is"not"
constrained"by"statute"or"reporting"obligations"
o They"may"also"freely"withdraw"their"capital"from"the"firm,"which"may"be"dissolved"
without"formality"
o In"contrast,"incorporation"is"an"act"of"the"state"attended"with"formality"and"expense"
""the"CA"imposed"continuing"obligations"of"disclosure,"account"maintenance,"
auditing"and"inspection"
o The"burden"of"formality"is"a"major"cost"of"incorporation"which"must"be"weighed"
against"the"corporate"advantages"
"
o Fees&payable&to&ASIC&to&both&establish&and&continue&as&a&company!o Large&public&and&private&companies&need&to&be&audited&and&produce&reports!o Requirement&to¬ify&ASIC&of&significant&changes!
! Change&of&directors,&constitution,&share&structure&etc!(
Other&• Tax"
o Historically,"the"double"taxation"consequence"of"incorporation"was"a"disincentive"
against"incorporation"
o As"a"distinct"legal"person,"the"company’s"profits"are"taxable"both"in"its"hands"and"in"the"hands"of"its"members"when"they"were"distributed"as"dividends"
o The"dividend"imputation"provisions"introduced"in"the"1980s"eliminate"the"double"
taxation"of"company"dividends"""companies"which"have"paid"tax"on"their"profits"at"
the"company"tax"rate"may"pay"dividends"to"shareholders"which"carry"tax"credits"at"
this"rate"
o These"measures"go"far"towards"restoring"tax"neutrality"to"the"choice"of"business"
form"
(
History((Derivation(of(the(modern(company)(
• See&Phillip¬es(• General"comments"
o JointJstock"companies,"composed"of"a"group"of"traders"and"formed"by"royal"charter"
""speculation"and"Bubble"Act"stifled"growth"of"corporate"form"""resort"to"
partnership/trust"law"re"deed"of"settlement"company"""general"incorporation"
statutes"(1844"onwards)"allowing"registered"companies"incorporated"as"of"right,"not"
of"privilege"""limited"liability"granted"(1862?)"
o A"lot"of"inheritance"of"statutory"interpretation"from"contract/equity/trust"law"
! E.g."directors’"duties"provisions"are"heavily"interpreted"through"equity"and"trust"law"
• “JointJstock”"companies"
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o Very"sophisticated,"often"large"partnerships"
o Prototype"for"modern"transferability"
! Transferability"was"created"by"the"use"of"cumbersome"indemnities"etc"in"
partnership"agreement,"as"well"as"some"attempts"to"create"a"market"
o Some"sort"of"board"
• South"Sea"Bubble"
o Strong"boom"period"in"the"market"at"the"end"of"the"17th"century"
o Dominated"by"the"South"Sea"Company"(joint"stock,"not"royal"charter)"
o Bubble"Act"banned"jointJstock"companies"
! Couldn’t"have"transferability"etc"• Over"18
th"and"19
th"centuries"–"deed"of"settlement"companies"arose"(much"like"joint"stock)"
o Used"trust"deed"
o Assets"held"on"trust"for"shareholders"(beneficiaries,"members),"the"trustees"were"
like"our"BoD"
o Effect"of"the"Bubble"Act"was"avoided,"through"having"(nominal)"restrictions"on"
transferability"of"shares"
! “shares"not"transferable"without"the"permission"of"X”"• Significant"lobbying"over"time"led"to"the"grant"of"limited"liability"as"of"right"for"various"
industries"(banking,"railway"construction"etc)"
o Also,"ability"to"get"LL"by"statute"application/registration"etc"
• Later,"LL"for"all"companies…"
(
Australian(corporate(regulation(history(
• See&Phillip¬es(• Generally"follows"British"Law"
• Until"the"1970s,"Companies"were"registered"and"regulated"under"State"Acts"
• The"Uniform"Companies"Acts"of"1961"(or"62)"was"the"first"attempt"to"harmonise"corporate"
regulation"across"the"states"
o Until"that"point,"companies"needed"to"separately"register"in"each"state"that"it"
wished"to"carry"out"business"
• Constitutional"problems"
o Based"on"Cth"ability"to"legislate"for"ACT"J"passed"corps"law"for"ACT"as"a"prototype,"
followed"by"the"states"
! Difficulties,"including"cross"vesting"
o S"51(xx)"–"power"over"trading"and"foreign"corporations"o Interpreted"narrowly"until"Rocla"Dams"etc"
• Cooperative"versus"national"systems"
o Legislative"duplication"
o Diminishing"uniformity"/"states"pull"out?"
o Enforcement"all"at"state"level"
o Massive"jurisdictional"complexity"
• 1989"–"1999"o ASC"(now"ASIC)"
o Corporations"Law"
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o Re"Wakim"
! Federal"courts"could"not"be"invested"with"state"power"(but"vice"versa"was"
possible)"
! Legislation"to"validate"all"past"decisions"
! Needed"to"find"a"true"legislative"solution"that"was"not"subject"to"legal"sniper"
fire"
• Eventually,"passed"the"Corporations"Act"2001"–"beginnings"of"a"true"national"scheme"
o Referral"of"state"power"
! 5"yr"reviews"(sunset"clause)"
! WA"agitates"but"does"not"pull"out"
! A"stable"system"for"all"practical"purposes,"in"that"it"is"unlikely"that"any"state"
will"withdraw"and"even"if"a"single"state"does"do"so,"…etc"
• Over"time,"Cth"power"and"institutions"grow"in"power,"so"unlikely""
o Treasury"(policy)/ASIC"(regulatory"resp,"has"recently"taken"more"of"ASX"reg"resp"
after"entry"of"ChiJX)/ASX"(operates"exchange"according"to"law"etc)"
! Note"the"different"roles"
! ASX"(securities,"not"stock,"following"merger"of""
• Regulates"listed"public"companies"
• Imp"re"corporate"governance"comes"from"Listing"Rules"and"
principles"of"good"corp"gov"
o Because"those"companies"offer"securities"to"the"public"
o Federal/state"and"crossJvesting"
o AAT/state"criminal"jurisdiction"
! Cth"and"Fed"Police,"and"ASIC,"do"most"of"the"investigation"
! Note:"criminal"enforcement"is"generally"done"in"state"courts"–"nod"to"uncertain"constitution""
• Summary:&National&enforcement&and®ulation,&on&the&basis&of&state&referred&powers&"
Other(notes(
• The"corporate"form"is"available"to"any"individual"or"association"which"meets"the"formalised"
requirements"found"in"the"Corporations"Act,"and"does"not"use"it"as"a"device"for"fraud"(?)"
• LL(on(LL(
o Holding"company"structures"–"business"associations"are"organised"not"as"a"single"corporation,"but"as"a"holding"company"with"numerous"subsidiaries(
o E.g."James"Hardie(
! Most"asbestosJrelated"activities"(and"thus"liabilities)"related"to"2"subsidiaries(
! Moved"assets"out"of"the"subsidiaries/let"them"run"down,"as"asbestos"
activities"were"wound"down(
• Raised"questions"about"whether"sufficient"compensation"was"
available(
! The"holding"company"was"not"able"to"be"sued"directly"as"it"was"a"
shareholder"of"the"subsidiary"and"benefited"from"LL(
• I.e."not"regarded"as"the"same"entity,"but"as"a"shareholder"with"
liability"limited"to"the"size"of"the"equity"investment(
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• Also,"the"workers"cannot"sue"under"contract"(privity"of"contract)"or"
otherwise"sue"under"tort"(vicarious"liability"unable"to"be"established"
given"issues"such"as"control"and"proximity)"
! Questionable"human"impact"
• Dark"side"of"corporations"J"use"of"limited"liability,"giving"rise"to"externalities"
o Company"is"externalising"social"costs"of"the"enterprise,"so"that"the"shareholders"are"
earning"a"rate"of"profit"that"doesn’t"take"these"things"into"account:"! Damage"to"employees"
! Can"sever"the"chain"of"causation"in"tort,"making"tort"claims"more"difficult"
! Can"shift"the"risk"to"creditors"and"give"them"financial"costs"(no"exposure"to"
the"upside)"
! Environmental"costs"etc"
o In"an"ideal"world,"these"additional"costs"would"be"netted"off"profits"
• Problems(in(law(
o Questionable"human"impact"of"LL,"as"shown"by"LL"on"LL"–"how"to"allow"marshalling"
of"capital"whilst"holding"tortfeasors"responsible"
(
Read(the(following(pieces(of(legislation(
• Small"Business"Guide,"Part"1.5"(pg"147"of"CA"book)"
• S"45A"–"Proprietary"Companies"
• Types"of"companies"
o S"112"–"Types"of"companies"
o S"113"–"Prop"companies"
o S"114"–"Min"of"1"member"
! I.e."only"need"one"shareholder"for"a"company"
• Procedures"for"registration"
o 117"–"Registration"as"of"right"! Form"201"etc"
o 118"–"ACN,"certificate"of"incorporation"! All"companies"get"these"
o 119"–"Registration"is"creation"! The"dates"are"the"same"
o 119A"–"Aus"incorporation"vs"state"registration"! Nationally"regulated"since"2001"
o 120"–"Corporate"members"and"officers"
! Member"="shareholder"="contributory"(last"term"has"submeaning"re"
liquidation/winding"up)"
! Officers"="directors"and"senior"management"
• More"recently,"directors’"duties"have"been"generally"expanded"to"“officers”"(after"Enron"–"understood"sometimes"BoD"did/knew"little"
and"was"the"puppet"of"senior"management"–"SarbanesJOxley,"changes"made"in"Aus"after"HIH)"
o 121"–"registered"office"! Must"be"open"4"or"more"hrs"each"day,"for"people"to"obtain"information"and"
documents"about"the"company"
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1.2.(Separate(legal(personality("
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[4.10] Limited liability
The nexus between corporate personality and limited liability • Corporate"personality"and"limited"liability"are"doctrines"that"are"closely"linked"
• Corporate"personality"serves"the"function"of"marking"out"an"asset"pool"against"which"
creditors"of"the"enterprise"have"prior"claims"""entity"status"partitions"this"asset"pool"from"
the"personal"assets"of"stakeholders"
• The"recognition"of"the"corporation"as"an"entity"whose"rights"and"duties"are"distinct"from"
those"of"its"members"and"directors"is"a"precondition"to"the"limited"liability"that"members"of"
most"types"of"registered"company"enjoy"
The merits and costs of limited liability
• Primarily"apply"to"publically"held"companies,"vs"private/closelyJheld"companies"
• Some"would"argue"that"the"benefits"to"shareholders"are"matched"by"risks"to"creditors,"not"
all"of"whom"have"greater"monitoring"and"riskJbearing"capacity"
• Merits&of&LL&
o Encourages"investment"by"those"who"have"no"interest"in/capacity"for"management"
participation"
o Relieves"shareholders"from"the"burden"of"monitoring"fellow"shareholders’"capacity"to"contribute"proportionately"to"company"failure"under"a"regime"of"joint"and"several"
unlimited"liability"
o Encourages"free"liquidity"of"share"capital,"which"not"only"reduces"the"cost"of"capital"
to"the"company,"but"also"insinuates"an"accountability"mechanism"for"management"
through"the"threat"that"poor"performance"reflected"in"stock"price"decline"will"
stimulate"the"acquisition"of"control"by"a"party"which"believes"it"can"achieve"superior"
returns"through"management"replacement"
o Encourages"entrepreneurial"risk"taking"by"companies"since"they"may"safely"invest"in"
projects"with"prospects"of"positive"returns"but"also"those"with"significant"risk"
exposure."If"projects"with"higher"risk"profiles"are"conducted"through"a"separate"
entity,"that"further"insulates"members"from"losses"
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• Risks&of&limited&liability&o May"create"a"moral"hazard"in"the"area"of"tort"law"with"the"opportunity"it"offers"to"
externalise"the"risks"of"enterprise"
! Cheffins:"Loss"lies"where"it"falls"""heads"I"win,"tails"you"lose"i.e."moral"
hazard"
o Favours"the"externalisation"of"social"costs"of"corporate"behaviour,"shifting"the"risk"of"
enterprise"operations"away"from"shareholders"and"onto"stakeholders"or"wider"
society"
o Mainly"moral"dilemmas"""individual"moral"restraint"is"often"blurred"by"the"
demands"of"the"corporate"role"and"lost"in"the"anonymity"of"group"decisions"and"
action"
[4.20] Corporate personality The special character of corporate personality
• Recognition"of"the"corporate"personality"is"a"preJcondition"to"a"legal"structure"for"the"limited"
liability"of"members"
• A"company"registered"under"the"Act"is"invested"with"the"legal"capacity"and"powers"of"an"
individual"(s"124)"though"its"incorporeal"nature"ensures"that"it"enjoys"perpetual"succession"in"
the"sense"that"there"is"no"temporal/change"of"membership"limit"upon"its"existence"
• It"can"commit"both"crime"and"tort"
• Injury"to"its"reputation"can"be"sued"for"by"a"defamation"claim,"although"it"may"recover"only"
injury"to"its"pocket"and"not"its"feelings:"Lewis"v"Daily"Telegraph"[1964],"Mirror"Newspapers"
Ltd"v"Harrison"(1983)"
• Can"be"held"in"contempt"of"court:"R"v"J"G"Hammond"&"Co"[1914]""but"it"is"incapable"of"
personal"appearance"and"must"appear"through"a"representative:"Tritonia"Ltd"v"Equity"and"
Law"Life"Assurances"Soc"[1943]"
• Not"entitled"to"invoke"the"common"law"privilege"against"selfJincrimination"in"answer"to"a"
demand"for"the"production"of"documents"under"statutory"power:"Environmental"Protection"
Authority"v"Caltex"Refining"Co"Pty"Ltd"(1993)"
• Reference"to"“person”"in"state"and"commonwealth"legislation"refers"also"to"a"body"
corporate"unless"contrary"intention"expressed:"Acts"Interpretation"Act"1901"(Cth)"s"22"and"
Interpretation"Act"1897"(NSW)"s"21(c)"
• “Residents”"in"s"75(iv)"of"the"Constitution"does"not"embrace"corporations:"Australasian"
Temperance"and"General"Life"Assurance"Society"Ltd"v"Howe"(1922)"
• Protective"provisions"in"a"money"lending"statute"have"been"interpreted"as"confined"to"the"
“protection"of"borrowers"who"are"natural"persons"and"subject"to"the"possibility"of"being"overreached"in"their"indigence”:"Motel"Marine"Pty"Ltd"v"IAC"(Finance)"Pty"Ltd"(1964)"
• It"is"well"established"that"a"company"may"be"an"enemy"alien,"its"status"being"determined"by"
the"nationality"of"those"persons"in"control"of"its"affairs:"Daimler"Co"Ltd"v"Continental"Tyre"
and"Rubber"Co"Ltd"[1916]"
The separate personality of the corporation
• The"separate"personality"doctrine"and"its"consequences"rest"fundamentally"upon"judicial"
decision"
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• Salomon’s"case"is"significant"as"it"established"the"principle"of"separate"corporate"personality"(separate"legal"entity"with"LL"for"shareholders)"J"genesis/confirmation"of"LL"for"shareholders"
o As"long"as"the"necessary"formalities"of"incorporation"are"satisfied,"a"new"entity"
comes"into"existence"which"is"separate"and"distinct"from"its"directors"and"
shareholders"
! I.e."In"general,"the"purpose"of"incorporation"(e.g."escaping"personal"liability,"
etc)"is"irrelevant"if"the"technical"requirements"for"incorporation"are"met"
(Salomon)"
• Not"without"its"limits"–"fraud"etc"! This"is"so"whether"the"company"has"a"large"number"of"shareholders"or"is,"as"
in"Salomon’s"case,"a"company"managed"and"controlled"by"one"person"
o Test"for"separate"legal"entities:"whether"you"can"sue"against"/"be"sued"by"the"
company"
! Shareholder/director"etc"could"sue"their"own"company,"as"Salomon"did"
o Genesis"of"both"LL"for"shareholders"and"the"unanimous"consent"principle"
! LL:"Salomon"did"not"need"to"put"in"more"funds"to"the"business"to"pay"the"
unsecured"creditors,"as"per"the"complex"trust/agency"arguments"
! Unanimous"consent:"No"actions"against"directors"if"all"shareholders"have"full"
knowledge"and"consent"
• Gower’s&Principles&of&Modern&Company&Law&o Since"Salomon"the"complete"separation"of"company"and"its"members"has"never"
been"doubted"(though"veil"can"be"lifted"in"some"cases)"
Salomon v Salomon & Co Ltd [1897] AC 22 Facts:
• Salomon"initially"carried"out"his"business"as"a"sole"trader"(leather"merchant),"but"decided"to"
incorporate"as"part"of"his"retirement"planning"in"order"to"take"advantage"of"perpetual"
succession"under"the"corporate"form"
o In"addition"""4"sons"worked"in"the"business,"were"only"employees"under"the"sole"
trader"form,"wanted"to"give"his"sons"some"control"and"was"able"to"make"them"
directors"in"the"company"
o A"legal"change."In"commercial"terms,"nothing"had"changed"–"S"operated"his"business"through"the"legal"structure"of"a"company"
• Process"of"converting"sole"trader"to"company:"
o The"Companies"Act"1862"(UK)"required"seven"subscribers"so"his"children"(4"sons,"1"
daughter)"and"wife"each"subscribed"to"one"share"to"satisfy"this"requirement"""Mr"
Salomon"took"20,001"of"the"company's"20,007"shares"
! Now,&only&one&shareholder&is&required&o The"company"bought"the"assets"held"by"Salomon"as"a"sole"trader"for"39000"pounds"
! I.e."paid"for"the"materials,"stock"in"trade,"and"for"the"right"of"assignment"of"
the"lease"and"all"the"contracts"etc"
! The"company"paid"Salomon"as"follows:"
• 20001"shares"issued"to"Salomon"and"6"shares"to"family"(1"pound"
each)"[book"just"says"20000"fully"paid"1"pound"shares"here]"
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• Debentures"with"a"FV"of"10000"pounds"of"debentures"to"Salomon,"
secured"by"floating"charge"over"the"assets"of"the"company"(now"
known"as"(circulating)"security"interest)"
• Unsecured"debt"of"9000"[to"Salomon?]"
• Company"fell"on"hard"times"(economic"depression)"
o Assignment"(transfer)"of"debenture"to"Broderip"for"5000"pounds."2"important"things"
to"keep"in"mind"
! Even"in"hard"times,"Salomon"was"keen"to"support"the"company"
! Inability"of"the"company"to"pay"on"the"debenture"enabled"B"to"install"a"
receiver."
o The"company"was"put"into"liquidation"and"Broderip"was"repaid,"with"the"residual"
interest"in"the"debenture"reassigned"to"Salomon,"who"retained"the"floating"charge"
over"the"company"(once"more"became"a"secured"creditor)."[S"claimed"his"
reversionary"entitlement"to"the"secured"indebtedness"which"would"have"exhausted"
the"funds"in"the"liquidator’s"hands"to"the"total"exclusion"of"the"claims"of"the"
unsecured"creditors.]"However,"the"liquidator"sought"to"repay"unsecured"creditors"
before"S,"initially"by"disclaiming"the"validity"of"the"debentures"on"the"ground"of"
fraud."
More detailed: • Process:"First,"receiver"is"installed"by"secured"creditor,"who"takes"what"the"creditor"is"owed"
from"the"sale"of"assets."
o B"was"repaid"his"£5000,"debenture"had"further"value"so"as"per"the"terms"of"the"
debenture"it"was"reassigned"to"Salomon,"who"now"regained"the"floating"charge"over"
the"company"
• "If"the"company"is"a"hopeless"case,"the"receiver"stands"aside"(after"the"secured"creditor"is"
paid)"and"all"the"creditors"together"appoint"a"liquidator"for"a"fair"and"orderly"and"pari"passu"
winding"up,"usually"ends"in"deregistration"of"company."The"liquidator"has"all"the"powers"of"
the"BoD"invested"in"it"and"the"BoD"stands"aside"
• Liquidator"now"in"possession,"has"sold"off"all"the"assets"and"is"considering"how"to"allocate"
the"proceeds"
o Salomon"was"entitled"to"receive"5000J7000"from"that"debenture"as"the"residual"
interest"in"the"debenture"
! I.e."Salomon"is"back"as"a"secured"creditor"with"a"reduced"value"debenture"
• Liquidator"seeks"to"pay"the"unsecured"creditors"(trade"creditors"etc)"before"paying"Salomon"
the"remaining"interest"on"his"debenture"
• As"such,"Salomon"sues"his"own"company"(i.e."the"liquidator)"
o Liquidator’s"action"driven"by"belief"that"LL"structure"was"a"mechanism"for"fraud"
(disclaimed"the"validity"of"the"debentures"on"the"ground"of"fraud)"
"
Held:
• General"context"of"failure"at"first"instance"and"on"first"appeal:"
o 19th"century"commercial"morality."Idea"that"company"was"a"sham"and"essentially"a"
sole"tradership"
! Impropriety"of"using"LL"for"family"company"