LAW5011 –
PRINCIPLES OF COMPANY LAW
SEMINAR NOTES STREAM 1
T3 2017
Introduction to Corporations Law ……… 3
Corporate regulators ……… 11
Incorporation and its Effects ……… 15
Application of Salomon to Corporate Groups ……… 26
Lifting the Corporate Veil ……… 31
Duty to Prevent Insolvent Trading ……… 37
Defences to Insolvent Trading ……… 41
Types of Companies ……… 43
Classification of Public/Proprietary……… 47
The Constitution and Replaceable Rules ……… 52
Alteration of Constitution: Statutory Limits ……… 56
Alteration of Constitution: Equitable Limits ……… 58
Share Capital, Dividends and Debt Capital ……… 60
Reducing Share (Equity) Capital ……… 66
Financial Assistance ……… 70
Dividends ……… 72
Directors, Members and Corporate Decision-Making ……… 74
Functions and Powers of the Board ……… 78
Disqualification from Managing ……… 81
Members (In General Meeting) ……… 84
Corporate Contracting ……… 90
Applying Agency Principles: Statutory Rules ……… 95
DD’s: Duty to Act in Good Faith and for Proper Purposes ……… 103
Duty of Good Faith ……… 104
Duty of Proper Purposes ……… 110
Equivalent Statutory Duties ……… 113
DD’s: Conflict Rules, Disclosure and Related Party Transactions ……… 114
No Profit Rule ……… 114
No Conflict Rule ……… 119
Duty not to Misuse Position/Information ……… 122
Duty to Disclosure Material Personal Interests ……… 125
Related Party Financial Benefit ……… 127
DD’s: Duties of Care, Skill and Diligence ……… 129
Statutory Business Judgment Rule ……… 135
Reliance/Delegation Defence ……… 136
Consequences of Breaches of DD’s and Relief from Liability ……… 137
Civil Penalties ……… 139
Criminal Penalties ……… 141
Relief by the Courts ……… 142
Members’ Remedies ……… 145
Action for Oppressive Conduct ……… 149
Statutory Injunction ……… 155
Winding Up Orders ……… 157
Personal Actions ……… 159
Corporate Distress and Mortality ……… 162
Receivership ……… 162
Voluntary Administration ……… 165
Liquidation and Winding Up ……… 170
Deregistration ……… 174
TOPIC 1: INTRODUCTION TO CORPORATIONS LAW
Regulatory Framework What is a Company?
• Separate legal entity
• An artificial or fictitious entity recognised by the law as a legal person with its own rights and liabilities
• S 9 Corporations Act: Definition of a co
o Includes a co registered under the Act or its predecessors o A co is one time of corporation: s 57A
• A corporation also includes any body corporate formed under other legislation and unincorporated bodies that may sue and be sued or hold property in the name of an office holder
• Widely used form of business organisations
o More than two million registered in Australia
• Co formation (registration/incorporation): Relatively simple process involving filing an application for registration with ASIC and paying the prescribed fee
o Once ASIC registered the co it comes into existence as a legal entity and can operate anywhere in Australia
• Corporations Act: Makes formal distinction between ownership and control of companies o Co’s are required to have shareholders who are regarded as the owners of the co
o Shareholders contribute capital by paying the issue rice on their shares and may receive dividends if the co’s assets exceed its liabilities and the excess is sufficient for payment of the dividend
• Incorporated v unincorporated
o When you're incorporated, you become a body corporate (separate legal entity)
Features of Companies
• Separate entity: Has its own corporate personality and is a separate entity distinct from its shareholders, directors, officers and employees
o Consequence: potentially unlimited lifespan (perpetual succession) o Can own property, enter into Ks
• Limited liability: Shareholders aren’t personally liable for their co’s debts
o Shareholders’ liability is limited to paying the issue price of the shares that they own which includes any unpaid amount on partly paid shares
o Eg. If co issues a share for $10 and shareholder pays the $10 (fully paid up share), then the shareholder has no further liability
§ If shareholder bought share on partly paid basis (only paid $5 upfront), then the shareholder’s liability is the other $5
• Transferability of shares: Distinguishes co from partnership
o Shareholders are able to transfer/sell their shares free of any restrictions
§ Free transferability of shares is a requirement for listing on a stock exchange
o Shareholders of listed public co’s who wish to sell their shares don’t need to obtain approval from other shareholders/company directors
TOPIC 6: DIRECTORS, MEMBERS AND CORPORATE DECISION-MAKING
Board of Directors Composition Who is a Director?
• All companies must have directors (collectively the ‘board of directors’) o S 201A(1): Proprietary companies need only have one director o S 201A(2): Public companies must have at least two directors
• S 120(1): The initial directors are those persons named with their consent in the application for registration of the co
o Subsequent appointments of directors may be made in accordance with the co’s constitution (if any) or replaceable rules contained in ss 201G, 201H
• S 201A – 201K o
• S 9: Definition of director (a) A person who:
(i) is appointed to the position of director; or
(ii) is appointed to the position of alternate director and is acting in that capacity regardless of the name that is given to their position; and
(b) Unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director (de facto director); or
(ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes (shadow director)
Subpara (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body.
De facto Directors
• Person who acts in the position of a director even though they have not been appointed to that position o Often involves a question of degree requiring a consideration of the duties performed in the
context of the operations and circumstances of the co
• Necessary condition: Person exercised top level management functions
• May be regarded as de facto if they are the driving force behind the co business o ‘Consultant’ may be regarded a de facto director (Grimaldi)
Shadow Directors
• Person whose instructions or wishes are customarily followed by the directors of the co o Can be a body corporate, can be a creditor
TOPIC 10: MEMBERS’ REMEDIES
Overview of Member Remedies
• Broad range of management powers conferred on directors under s 198A o Members in GM will have no power to intervene in management
• A controlling majority may employ a variety of ‘squeeze out’ techniques, (at both board level and in GM):
o Withholding info about affairs of co o Reconfiguring board
o Using majority voting power to amend the Constitution in a manner that is unfair to minority members
o Issuing new shares for an improper purpose
o Entering into self-interested transactions and then forgiving such conduct (Cook v Deeks) o Refusing to take legal action in co’s name
• This course considers:
o S 236: The statutory derivative action;
o S 232: The oppressive conduct remedy;
o S 461: Winding up orders;
o S 1324: Statutory injunctions;
o Members’ personal actions, (focusing on those arising in equity)
§ Ie. Circumstances in which a member can sue to enforce a personal right
Statutory Derivative Action
• Enable members and officers to bring proceedings on behalf of a co where the co fails to do so o Right is derived from the right of the co (not personal right)
• An exception to the rule in Foss v Harbottle which states that the proper P to a wrong done against the co is the co itself
o At CL, exceptions developed to the rule – however, it was not entirely clear when the exceptions would operate
o The effect of ratification on derivative action was also unclear
o This made taking action very expensive and risky for members who had not certainty that they would be able to recover their costs
• Not available if the co is in liquidation (Chahwan v Euphoric)
• S 236(3): Abolishes the right of a person at CL to bring or intervene in proceedings on behalf of the co
• S 237A: Makes access to co docs easier
Standing
• S 236(1): Grants standing to members, former members (or persons entitled to be registered as a member) and also officers and former officers of the co
o Under CL, only members had standing to bring derivative action
• S 239: Makes it clear that ratification by shareholders does not prevent an order being made o But it may be taken into account by the court
Leave
• Applicant required to obtain the leave of the court for action to proceed:
o Leave will only be granted by the Court if the criteria in s 237(2) are met o The applicant bears the onus of proof
• Leave sought under s 237(2) is final and not interlocutory in character
• S 236(2): Once leave is granted, proceedings brought under Pt 2F.1 must be brought in the co’s name o S 236: Bringing such proceedings does not prevent a member from pursuing a personal
remedy, (i.e. an oppression remedy)
• S 236: Gives standing to à o A member
o A former member
o Any person entitled to be registered as a member of the co o An officer; and
o A former officer
• Leave requirements à Court must be satisfied that:
1. S 237(2)(a): It is probable that the co itself will not bring the proceedings or properly take responsibility for them
• The co’s response to notice of intention to apply for leave, (see s 237(2)(e)) will often be sufficient to satisfy this criterion
• Court inferred from the contents of an administrator’s report that it was unlikely the co itself would take action (Charlton)
• Otherwise, the applicant may show that the wrongdoer has such a dominant influence on the board that the board will not commence proceedings
2. S 237(2)(b): The applicant is acting in good faith
• Designed to prevent the SDA being used for the private purposes of the applicant
• Good faith has two interrelated factors:
o The applicant must honestly AND reasonably believe that a good cause of action exists and has a reasonable prospect of success
o The applicant must not bringing the DA for a collateral purpose which would constitute an abuse of process
• It does appear that when a former member or former officer applies for leave to bring a SDA, their application will be particularly scrutinised with respect of the good faith requirement
3. S 237(2)(c): It is in the best interest of the co that the applicant be granted leave
• Recognises that directors may have sound business reasons for not pursuing claims open to the co
• Courts will consider (Swansson):
o Evidence as to the character of the co and the nature of its business for the purposes of determining the effect of the proposed litigation
o Whether there are more appropriate means of redress
o Evidence of the ability of the D to meet at least a substantial part of any judgment awarded in favour of the co
