PDF Corporate Law Exam Notes

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Corporate Law Exam Notes

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Separate legal entity doctrine [lec 1]

1) Co can legally do most things that humans can do and some extras (e.g. issue shares)

2) Separate legal personality means:

• Co can incur obligations and holds rights and sue and be sued in its own name.

• Can contract with its controllers and others.

• Has perpetual succession.

• Separate taxpayer.

• Members have limited liability.

3) General principle

Salomen v salomen [lec 1]: sole shareholder in secured loan w/ co → co treated separately from controller → entitled to the repayment

4) Examples of application

• Co’s property is not the property of participants

Macaura v Northern Assurance [lec 1]: not transfer insurance to co + not the owner of timber (as co is the owner) → could not recover insurance on burnt timber

• Co can enter into employment contract with participants (e.g. shareholder) Lee v Lee’s Air Farming [lec 1]:

Two hats: controller + employee → entitled to benefits under both

Corporation [lec 2]

Features of companies

Advantages Disadvantages

• Can have >20 members (partnership has <20 member restriction S115)

• Limited liability for members

• Capital raising

• Different tax treatment

• Company law – reduce cost for participants, protect shareholders

• Flexibility (different ways to set up, internal governance rules)

• Establishment and admin costs

• Disclosure of information

• Pubic law obligations: civil spenalties, criminal sanctions

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Registering companies

• S117 procedure

1) Lodging application with ASIC 2) Contents of application

3) Copy of constitution (for public co) 4) Prescribed form

5) Consents and agreements

• S148: co names

• S121: registered office

Public v Proprietary

• [lec 2]

• To change co type:

1) Special resolution

2) Comply w/ various registration requirements

Public Proprietary

Types of companies S112

Limited (s9) by shares Limited (s9) by shares Unlimited with share capital Unlimited w/ share capital Limited by guarantee

• No aim for profit

• Own property and enjoy limited liability &

perpetual succession No liability S112 (2):

Mining co with no

statutory/contractual right to recover unpaid calls

General features [lec 2]

≥1 member ≤50 members (non- employee) S113 (1)

≥3 directors S201A (2) (≥2 ordinarily reside in AU)

≥1 directors S201A (1) Ordinarily reside in AU

≥1 secretary S204A (2) Secretary not required S204A (1)

Perpetual succession (till winding up) Can be traded (e.g. shares)

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6 LTD behind its name

S148 (2)

PTY LTD behind its name S148 (5)

Small Large (satisfy 2 of

the 3) S45A (2)

(satisfy 2 of the 3) S45A (3) Gross

operating revenue

<25M Gross asset

<12.5 M

<50

employees

Gross operating revenue

≥25M Gross asset

≥12.5 M

≥50 employees Replaceable rules Some are mandatory for ltd Don’t apply to single

director Pty S135 (1)

Constitution

Notice ASIC when

amending or repealing constitution S136 (5)

Apply to public co only

Entrenching clause S136 (3) [lec 2]

Applies Applies

Share issue

To the public

Can issue share to the public implied by S113 (3) Must prepare PDS unless excluded in S708

Cannot issue shares to the public S113 (3)

Cannot prepare PDS Pre-emption

Not apply RR 254D (1)

Dividend rights of different classes

S254W (1)

Each class of shares has same dividend rights unless provided in

(a) Constitution; or (b) Special resolution

RR S254W (2) Director may pay

dividends as they see fit (subject to terms of issue)

Lodge notice with ASIC regarding VCR

S246F (3) must lodge with ASIC

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General meeting

At least once every calendar year and within 5 months at end of financial year S250N Proxy Mandatory shareholder

right S249X

Replaceable shareholder right S249X

Voting rights

Listed Unlisted -Show of hands: one vote -On poll, one vote per share

RR250E Generally

‘one share one vote’

ASX listing rules

-Show of hands: one vote

-On poll, one vote per share RR250E

Calling member’s meeting

Single director can always call (despite anything in constitution) S249CA

Single

director may call

RR S249C

Single director may call RR 249C

Notice

28 days in advance (cannot be reduced) S249HA (1)

21 days in advance S249H (1) (can be reduced except for appointment or removal of director or auditor S249H (3))

21 days in advance S249H (1)

Resolution without GM

S249B: (single member) resolution passed by the member signing and recording it.

S249A (2): (> one member) if all SHs entitled to vote sign a document containing a statement that they are in favour of resolution set out

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8 Appointment of

directors by directors

Can appoint S201H (1) confirmation resolution by next AGM S201H (3)

Can appoint S201H (1) Confirmation resolution within 2 months

S201H (2)

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Director’s duty – Duty to not misuse position or information [lec 7]

1) Misuse of position

• S182 (1): a director, secretary, other officer or employee must not improperly use their position to:

a) Gain an advantage for themselves or someone else; or

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10 b) Cause detriment to the co

• ASIC v Adler [lec 5]: director & officer - $3.86m invest in co with financial difficulty, unsecured loan to other co è improperly used position to gain advantage for related party and themselves and caused detriment to co.

• Grove v Flavel: director improper use of position to have co with financial difficulty to repay loan owed to himèpossible detriment of other creditors

• R v Byrnes: director makes improper use of position if they do an act that they know or ought to know they have no authority to do.

• Chew v R: director can breach s182 or s183 even if they believe their actions are in the interest of co.

• R v Heilbronn: director improper use of position to strip co of its assets and transfer them to another co.

• Diakyne Pty Ltd v Ralph: managing director authorized and directed the payment of a substantial sum from co funds to a co the director controlled.

• ASIC v Maxwell: officer raised funds from public for the purchase and development of real estate made improper use of position.

• Digital Pulse Pty Ltd v Harris: employee made improper use of position because employee established a competing business and diverted work to it while being an employee.

• Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd: 3 managers improperly used their position when they acquired a competitor business.

• Re Cummings Engineering Holdings Pty Ltd: 2 directors improper use of position to approve a payment to managing director when co had been not profitable and closed.

2) Misuse of information

• S183 (1): a director, other officer or employee must not improperly use the information obtained in their position to:

a) Gain an advantage for themselves or someone else; or b) Cause detriment to the co.

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ASIC v Vizard [lec 7]:

• Chew v R: director can breach s182 or s183 even if they believe their actions are in the interest of co.

• director improper use of information: use confidential information obtained as a director of Telstra to buy and sell shares è benefit himself.

• ASIC v Adler [lec 5]: officer - $3.86m invest in co with financial difficulty, unsecured loan to other co è improper use of info to gain advantage for related party and themselves and caused detriment to co.

Director’s duty – Insolvent trading [lec 5]

1) S588G: Duty to prevent insolvent trading

• Duty is owed only by director (including de facto & shadow directors s9)

• Standard chartered Bank of Australia Ltd v Antico [lec 5]:

Where a co is a shadow director of another co, then the first co, because it is a shadow director, is subject to the duty in s588G, not to have the second co trade while it is insolvent.

2) S588V (1): [liability of holding co for insolvent trading by sub]

A co contravenes this section if:

a) Co is the holding co (s46: owning ≥ 50% of shares in sub) of a co at the time when co incurs debt; and

b) Co is insolvent or becomes insolvent; and c) Reasonable grounds for suspecting; and d) One or both of the followings applies:

i. Co or director are aware there are such grounds;

ii. It’s reasonable to expect holding co or director would be so aware.

NOTE: for holding co, no need to go through shadow director rule.

3) Process:

STEP 1: what is insolvency?

• S95A (1): a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

S95A (2): a person who is not solvent is insolvent.

• Insolvency worked out using cash flow not BS.

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• A co is insolvent if it is unable to pay all its debts as and when they become due for payment. A temporary lack of liquidity does not mean insolvency.

• Presumptions s588E:

▪ S588E (3): where a co is being wound up and is proved that the co was insolvent at a particular time during the 12 months ending on the date of the application for winding up è presumption that the co continued to be insolvent through that period

▪ S588E (4): where co has failed to keep or retain financial records for a specified period (as required by s286) è presumed to have been insolvent for the entire period that it was in contravention of s286.

STEP 2: when does s588G apply? [lec 5]

• S588G (1): this section applies if:

a) A person is a director of a co when co incurs a debt; and

b) Co is insolvent or becomes insolvent by incurring that debt; and

c) At that time, there are reasonable grounds for suspecting that the co is insolvent or would become insolvent.

Queensland Bacon Pty Ltd v Rees: reasonable grounds for suspecting insolvency is a ‘positive feeling of actual apprehension’

STEP 3: when is debt incurred for the purpose of s588G (1)? [lec 5]

v S588G (1A): deemed debts

Action of company When debt is incurred

1. Paying a dividend When dividend is paid, or when

dividend is declared

2. Reduction of share capital When the reduction takes effect

3. Share buy-back When agreement is entered into

4. Redeeming redeemable preference shares When co exercise the option 5. Issuing redeemable preference shares When the shares are issued 6. Financial assistance to acquire shares in itself

or a holding co

When agreement is entered or when assistance is provided if there is no agreement

7. Uncommercial transaction (defined in s588FB) When transaction is entered into Note:

▪ 2,3,4 link to maintenance of capital

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▪ S588FB (1): a transaction is an uncommercial transaction if and only if, a reasonable person in the co’s circumstances would not enter into, having regard to:

a) Benefits to co; and b) Detriment to co; and

c) Respective benefits to other parties; and d) Any other relevant matter.

e.g. selling something for less than its value

▪ Dividend test s254T (1) [lec 5]:

A co must not pay a dividend unless:

a) Assets exceeds Liabilities immediately before dividend is declared and the excess is sufficient for the payment of the dividend; and

b) Payment of dividend is fair and reasonable to shareholders as a whole;

and

c) Payment of dividend does not materially prejudice the co’s ability to pay its creditors.

(Payment would materially prejudice co’s ability to pay its creditors if the co would become insolvent as a result of the payment) link to s588G(1A)

v Other debts:

▪ Must be for a specific amount;

▪ Must be incurred voluntarily by co (i.e. if co does sth negligently, then incurred debt is not insolvent trading [p248]);

▪ Debt can be a contingent one STEP 4: when is liability imposed? [lec 5]

• S588G (2): by failing to prevent the co from incurring the debt, the person contravenes this section if:

a) The person is aware at that time that there are reasonable grounds for suspecting that the co was insolvent; or

b) A reasonable person in a like position in a co in the co’s circumstances would be so aware.

• Non-executive directors will get in trouble for insolvent trading even if they didn’t incur debt personally. This is director’s duty to prevent co from incurring the debt.

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14 STEP 5: Do any of defences in s588H apply? [lec 5]

S588H:

1) This section is in relation to contraventions of s588G (2).

2) It is a defence if when debt was incurred, the person had reasonable grounds to expect and did expect, that the co was solvent at that time and would remain solvent even if the debt is incurred.

• Metropolitan Fire Systems Pty Ltd v Miller [lec 5]:

To ‘suspect’ sth requires a lower threshold of knowledge or awareness than to ‘expect’ it. No excuse – ignorance of co’s finances.

• Hall v Poolman:

Non-executive director argues to have reasonable grounds to expect solvency è rejected as continuing incurred substantial debts è no way of refinancing

3) Delegation and reliance on competent and reliable person, onus on directors to show that they had:

a) Reasonable grounds to believe and did believe:

i. A competent and reliable person was responsible for providing the D adequate info about whether the co was solvent; and ii. The other person was fulfilling that responsibility; and

b) Expected (on the basis of info provided) that co was and would remain solvent.

4) It is a defence if absence from management is due to illness or other good reasons.

• Deputy Commissioner of Taxation v Clark [lec 5]:

Total failure to participate in management, as the wife just signed whatever her husband gave to her è not a good reason as EVERY director is expected to participate in the management of co.

• Can appoint alternate director [RR s201K] instead

5) Took all reasonable steps to prevent the co from incurring debt.

6) What are reasonable steps in relation to s588H (5), matters to consider:

a) Any action to appoint an administrator of the co; and b) When that action was taken; and

c) The result of that action.

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STEP 6: consequences of insolvent trading [lec 5]

• Civil penalty provision s588G (2)

▪ Enforced by ASIC:

Pecuniary penalty up to $200,000 s1317G (1), disqualification s206C (1), compensation s1317H

▪ Liquidator can seek compensation under s588M

▪ An unsecured creditor can seek compensation:

o Only when co is being wound up; AND

o Must obtain written consent of the co’s liquidator: s588R or the permission of the court: s588T.

o S588U: creditor cannot sue if the liquidator has already sued the director

• Criminal liability s588G (3) – insolvent trading offence a) A co incurs a debt at a particular time; and

aa) at that time, a person is director of co; and

b) The co is insolvent or becomes insolvent by incurring that debt; and c) Person suspected that co is or would become insolvent; and

d) Failure to prevent incurring of debt was dishonest.

[Fine of up to $360,000 or imprisonment for up to five years.]

Director’s duty – Duty to avoid conflict of interest (duty to disclose) [lec 7]

1) Differences between general law and statutory duty General Law Statutory provisions Contents Duty to avoid conflict

of interest

Provides additional regulation:

• Chapter 2E: related party transaction

• S191: Directors must disclose conflict of interest at board meeting (criminal)

• S195: stop public co Ds attending board meeting (i.e. voting restriction) if they have conflict of interest (criminal)

• S182 & 183: misuse of position and information

Apply to Fiduciaries:

• Directors

• Senior executive officers, who, like directors,

• Some only apply to directors e.g. S191

• Some apply to directors, senior executive officers and employees

e.g. S182 & 183

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16 can be regarded

as fiduciaries.

• Related party transaction: only to public co

Who enforce Company ASIC

PDF Corporate Law Exam Notes

Corporate Law Exam Notes

Table of Contents

Separate legal entity doctrine [lec 1]

Corporation [lec 2]

Public v Proprietary