Company Law Lecture Notes
Lecture 1: Introduction to Company Law
- Sources of Company Law o Case law
o Corporations Act 2011 (Cth) - Section 51 XX (Australian Constitution)
o Has power to make laws for the ‘peace, order and good government of the Commonwealth with respect to’:
- ‘Foreign corporations and trading or financial corporations formed (Cth parliament can only make laws after company is formed) within the limits of the Commonwealth…
- States have own rules regarding formation of company i.e. number of directors etc.
- Administration of the National Scheme
o ASIC (Australian Securities and Investment Commission) = enforces rules on Companies
- ASIC is subject to policy direction by Commonwealth minister (treasurer) - Functions:
Enforce the law (relates to outsider/shareholder lodging claim against company)
Ensure compliance (proper disclosure, keep information up-to- date, disclosure of accurate information)
Investigate (Australian Federal Police)
Law reform
Public access - Why Incorporate?
o Members (min number is 1 s114)
o If more than 20 and partnership = must incorporate s115 o Cannot form a partnership
- Partnership numbers increase with respect to certain professions e.g.
accountants (1000), lawyers (400), doctors (50)
Lecture 2: Intro Continued
- Liability
o Partnership – unlimited liability (no separation from business loss and personal assets)
o Company – limited liability (human beings may be protected from liability of debts of the business)
- Can have unlimited liability (rare) – companies that do not usually engage in business
- No liability company (mining company)
- Difference between limited and no liability, for a limited liability company amount at risk is the amount that the shareholders have promised to pay the company; no liability company = absolutely no liability for members - Types of Companies s112
1. Proprietary limited Company ss 9 (dictionary section), 45A (type of proprietary), 113 a. no more than 50 non-employee shareholders s113(1)
b. No public funding except for offer of shares to existing shareholders or employees s113(3)
o Types
- Limited by shares
- Unlimited with share capital o Pty or Proprietary in its name s148(2)
o S 45(a) explains small v large proprietary company a) Revenue less than $25 million b) Gross assets less than $12.5 million c) Less than 50 employees
o Satisfy 2 of 3 = small proprietary company o Large Proprietary Company must:
- Prepare annual financial report and directors report s292 - Financial reports must be audited s301 (costs money) o Small Proprietary Company must:
- Lodge these reports only if ASIC (s294) or holder(s) of 5% of shares request (s293)
2. Public company o Types:
a. Limited by shares b. Limited by guarantees c. Unlimited with share capital d. No liability company
o 3 or more directors and 1 company secretary (administration), financial report must be audited
o No liability company s112(2) - Share capital
- Mining purposes only – s112(3) s9
- No right (of company) to recover call (but shares forfeited s 254Q) - Incorporation Process s117, 118
1. Lodge application (ASIC) a. Type of company
b. Proposed name or ACN (Australian company number) c. Details of members who consent in writing
d. Details of DIR and Co Sec who consent in writing e. Registered office address
2. ASIC:
a. Gives company CAN b. Registers company
c. Issues certificate
o Company comes into existence on registration s119 o After company has been created = on-going requirements
- Keep financial records (contracts, receipts, payments…)
- Minute books (general meeting – members coming together to make decisions, board meetings – board of directors = more frequent)
- Registers of members, option holders (person has opportunity to buy more shares at a set amount) and debenture holders (record of debts of company)
- Changing Company Types ss162-167
o S162 = permitted changes e.g. Pty cannot change automatically to NL (No liability) – can go from Pty to Ltd, then Ltd to NL
o Method
- Agreement amongst members of company (special resolution -- 75%
majority (related to amount of shares one owns) s162(1)(a) s9)
- Lodge application with ASIC with copy of special resolution and other applicable documents : s163
- ASIC gives notice on ASIC database and in the Gazette: s164(3) - After one month, ASIC alters details to reflect change : s164(4) - Gives company new certificate : s164(6)
- NB Does not create a new company : s166
Lecture 3: Consequences of Registration
- Separate legal entity
o Enters into contracts under company’s own name o Powers of a natural person plus corporate powers (s124)
- Power to issue shares and grant floating charges (corporate powers) - Saloman v Saloman
o Establishes corporate veil – any debt is the company’s responsibility (company is a separate entity)
- Groups of Companies
o Holding company/subsidiary company ss 9, 46 o S46
- Company owns more than 50% of shares in another company = holding co/subsidiary co relationship
In order to appoint/remove directors = require 50% or more of votes
- Controls casting of more than 50% of votes (co may only own 20% but can persuade an extra 30% of votes) = cheaper than buying shares
- Controls composition of board – constitutional right (cheapest way) o S47
- Deals with the word Control ability to appoint/remove of all or majority of directors
o Industrial Equity v Blackburn
- Holding company could not declare dividends – only when subsidiary declares dividend (at the present time holding company has insufficient funds – profits are with the subsidiary)
- Related Body Corporate s50
o Holding company of another body corporate or;
o Subsidiary of another body corporate or;
o Subsidiary of a holding company of another body corporate - Lifting the Veil
o Veil may be lifted under statute and common law
o Imposes liability on directors, controllers (members), holding company - Statutory exceptions
1. Insolvent trading s95a (definition)
- S588G (director liable) s588V (Holding company liable) 2. Voidable transaction
- Liquidator may avoid an insolvent and uncommercial transaction – related to market value (longer claw-back period for related entity)
- S588FE(3) within 2 years of application for winding up
- S588FE(4) related entity period = goes back 4 years before application for winding up
- Related entity – promoter, director, member or spouse of these persons 3. Company officer (senior managers of company) security interest s588FP
- Void if security interest is enforced by officer within 6 months of creation of interest – (may seek court approval – genuine attempt to protect interests) 4. Financial Assistance s260a
- Company helps somebody to buy shares in company
- Help refers to company giving money to somebody so this person can buy shares
- Company is not guilty of this offence, the person involved in contravention is guilty of offence 260D
Common law
- Avoidance of obligations/fraud o Gilford Motor v Horne - Fraud
o Re Darby
o Breach of promoters duties, Darby and Glyde considered promoters = corporate veil lifted = liable
- Agency/partnership
o Smith Stone and Knight v Birmingham Corp
o SSK owned Birmingham Waste Co, BWC carried out business in SSK’s factory
o Birmingham Corp (council) acquired land and factory – govt. pay disruption costs (movement of factory)
o SSK claimed for disruption, Birmingham Corp argued that BWC is separate from SSK o SSK may sue on BWC’s behalf as BWC was SSK’s agent
- Benefit of group as a whole
o Equiticorp Finance Ltd (in liq) v Bank of New Zealand
o Company A was helping Company C not only for C but for A as well
o If transfer never took place the companies (group A-D) would have lost bank support for their own funding arrangement
o Is no breach of duty – transfer of money from A to C was for the benefit of the group as whole
- Company knowingly participates in breach of director’s fiduciary duties o Green v Bestobell Industries
o Cannot cheat own company
o Remedy for Bestobell = account for profits
Lecture 4: Promoters Duties
- Promoter’s Duties
o Relationship between promoter and company o Promoter is:
actively instrumental in formation of company (Lawyers/accountants who set up company are not promoters)
a passive shareholder with expectations to receive profits Tracy v Mandalay - Duties are owed to company (promoter is a fiduciary)
1. No conflict of interest 2. No secret profit 3. Duty of disclosure
Erlanger v New Sombrero Phosphate Co
Syndicate did not disclose that they were going to sell an island that was not so valuable
Must have disclosure to an independent board and full disclosure of promoter’s interest
Remedy: contract rescinded (as if there never was a contract)
Gluckstein v Barnes
Discounting the mortgage (mortgage bought from bank at less than face value)
Did not tell owner that Gluckstein will pay off mortgage
Undisclosed profit when company formed (Company Olympia)
Disclosure must always be to either an independent board or to shareholders
- Common law Remedies
o Rescission (discretionary)
If company delays in applying rescission
No affirmation of contract
Innocent TP rights involved
Inability to restore parties to their original position o Account for profits
o Constructive trust
o Liable in tort of deceit or for negligent misstatement
- Statutory Remedies
1. Recovery by liquidator as voidable transactions (company must have gone bust) s588FH, s588FE
2. Recovery for false statements in disclosure document. (Applies to public companies)
Promoter must disclose any property acquired by company and any offer of securities to company: s711 (2)
Promoter must disclose any fees or benefits received: s711(3)
Promoter must not offer securities if there are misleading statements in offer document: s728
Person who suffers loss may seek compensation: S729 - Pre-Registration Contracts
o X signs contract with outsider (TP) before there is a company
o If contract is not fulfilled by company or X then outsider will want to sue company/X o Part 2B.3 covers contracts before registration
S133 says that common law is replaced by this above section
S131 and s132 are the only provisions that need discussion o S131(1) must be compared with s131(2)
o Person enters intro contract:
a) On behalf of or;
b) For benefit of;
Proposed company, company becomes liable after it is registered and ratifies (company takes over contract) contract
o S131(2): where company is not registered or fails to ratify then the outsider can still sue the person (Mr X)
- Ratification: Positive act that company has adopted or confirmed the contract o E.g. internally – director’s pass a resolution
o E.g. company signs a new document (showing we want to be bound to outsider) o E.g. company uses item (there is action)
o Part-payment of purchase price (company is showing it wants to make some payment = ratification)
- One case I need to know for pre-registration contracts o Bay v Illawarra Stationery Supplies
Outsider can only sue the person who signs
- Court has discretion to make any order including making the company pay all or part of damages s131(3)
o Used to challenged liability under s131(1)(2)
- If company ratifies but does not perform person who signed may be liable for damages s131(4)
o Performance is different to ratification (it involves action) - Outsider may release person who signed from liability: s132(1) - Company may not indemnify person who signed: s132(2)
o If a human being is made liable that human being must have the funds to pay the outsider – cannot get money from the company
