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Corporate Law #2, 1/11

Separate Legal Personality and Limited Liability


Pre-registration steps
1. Complete a Form 201 – contents in s117(2) see ASIC website asic.gov.au
2. Lodge with ASIC
3. Pay Fee of $412 for Pty Co
4. Upon registration an ACN is given and a certificate of registration.
Note: Registration and incorporation meant the same process ie. in corporate law,
incorporation means registration.

The Separate Legal Personality of a Registered Company


1. Once registered, a company has the legal capacity and powers of an individual
both within Australia and elsewhere: see CA s 124(1).
2. Accordingly, a registered company is said to be a legal entity or person.
3. The word “person” as used in statutes usually includes bodies corporate such as
companies.
Section 22 of the Acts Interpretation Act 1901 (Cth) provides:
(1) In any Act, unless the contrary intention appears:
(a) expressions used to denote persons generally (such as "person", "party",
"someone", "anyone", "no-one", "one", "another" and "whoever"), include a body
politic or corporate as well as an individual.

Some of the Things That a Company Can Do


A company can, for example:
1. Contract as principal or agent,
2. Hold the legal or equitable title to property as principal or as a trustee
3. Sue and be sued in its own name
4. Employ persons.

The Relevance of the Separate Legal Entity Concept to Limited Liability


Companies
1. Where a limited liability company incurs a liability as principal, the creditor
can only look to the company and its assets for recompense.
2. Where all of the shares of the company are fully paid up, the company’s
shareholders are not liable to pay anything to the company to allow it to pay
its debts.

Salomon v Salomon [1897] AC 22, HL


1. Mr Salomon was a successful boot and shoe manufacturer who carried on his
business as a sole trader.
2. He decided to form a company which would purchase his business.
3. The only members of the company were Mr and Mrs Salomon and their five
children. Each of the seven family members held one fully paid £1 share.

Shortly after the company was incorporated:


1. Mr Salomon and two of his sons were appointed as the company’s directors.
2. The directors caused the company to purchase the business of Mr Salomon for
£39,000.
According to Lord Macnaghten: “the price on paper was extravagant. It …represented
the sanguine expectations of a fond owner rather than anything that can be called a
businesslike or reasonable estimate of value.”

The company paid the £39,000 purchase price by:


1. Issuing Mr Salomon with 20,000 fully-paid £1 shares;
2. Issuing a £10,000 debenture to Mr Salomon;
3. Discharging about £8,000 worth of the liabilities that Mr Salomon had incurred as
a sole trader; and
4. Paying the balance of about £1,000 in cash.

The term debenture is defined by s 9 of the Corporations Act:


‘A debenture of a body (ie company) is a chose in action that includes an
undertaking by the body to repay as a debt, money deposited with or lent to
the body. The chose in action may (but need not) include a charge over property of
the body to secure repayment of the money.’

In Salomon, the company granted the debenture-holder (initially Mr Salomon) a


charge over its assets as security for the £10,000 loan.
5. For a variety of reasons, the Salomon company fell on hard times.
6. In an attempt to keep the company going, Mr Salomon had the company cancel
his £10,000 debenture and re-issue it to Mr Broderip (a third party) who paid
Salomon £5,000 for it.
7. Mr Salomon immediately lent the £5,000 to the company.
8. However, the company eventually went into liquidation after it failed to pay the
interest due to Mr Broderip on his £10,000 debenture.
Interest at the rate of 10% per annum was payable to the holder of the £10,000
debenture.
9. The sale of the company’s assets in the liquidation realised enough to pay most
but not all of Mr Broderip’s claims in relation to the £10,000 debenture.
10.However, unsecured creditors of the company (including Mr Salomon) stood to
receive nothing of the nearly £11,000 owed to them.
11.The company’s liquidator then sought to hold Mr Salomon responsible for all of the
company’s debts.
The liquidator of a company is an independent person who is responsible for over-
seeing the winding up of a company. Among other duties, a liquidator sells the
company’s assets and uses the proceeds to pay the company’s creditors. The
Corporations Act indicates who make act as a liquidator and sets out the order in
which a company’s debts are to be discharged.

The liquidator disputed the validity of the debentures on the ground of fraud. The
liquidator sought:
1. rescission of the agreement transferring the business from Mr Salomon to the
company,
2. cancellation of the debenture, and
3. repayment by Mr Salomon of the balance of the purchase money.

Broderip v Salomon [1895] Ch D 323


4. Vaughan Williams J held that the liquidator was entitled to a declaration that Mr
Salomon was liable to indemnify the company for all of its unsecured debts and
for all sums due on the debenture.
5. Vaughan Williams J considered that the company was carrying on the business as
the agent of Mr Salomon.
‘To allow a man who carries on business under another name to set up a
debenture in priority to the claims of the creditors of the company would have the
effect of defeating and delaying his creditors. There must be an implied
agreement by him to indemnify the company.’

Salomon v Salomon & Co Ltd [1895] 2 Ch 323, CA


1. The Court of Appeal unanimously dismissed the appeal of Mr Salomon.
2. The Court considered that the legislature did not intend to allow a sole trader
to gain the benefit of limited personal liability.
3. The company was held to be the alias, agent or trustee of Mr Salomon.
Corporate Law #2, 3/11

‘It never was intended that the company to be constituted should consist of one
substantial person and six mere dummies, the nominees of that person, without any
real interest in the company. The Act contemplated the incorporation of seven
independent bona fide members, who had a mind and will of their own, and were not
the mere puppets of an individual who, adopting the machinery of the Act, carried on
his old business in the same way as before, when he was a sole trader. To legalise
such a transaction would be a scandal’: Lopes LJ at 341.

The House of Lords Decision


The Court unanimously upheld Salomon’s appeal. The Court considered that the
company had been formed with at least 7 members, as required by the then
legislation; it was a separate legal entity capable of acquiring and operating a
business as principal. It could not be regarded as a mere alias or agent of its
controlling shareholder.
Lord Macnaghten:
‘The order of [Vaughan Williams J] appears to me to be founded on a misconception
of the scope and effect of the Companies Act 1862.
In order to form a company limited by shares, the Act requires that a memorandum
of association should be signed by seven persons, who are each to take one share at
least. If those conditions are complied with, what can it matter whether the
signatories are relations or strangers?

There is nothing in the Act requiring that the subscribers to the memorandum should
be independent or unconnected, or that they or any one of them should take a
substantial interest in the undertaking, or that they should have a mind and will of
their own, as one of the learned Lords Justices seem to think, or that there should be
anything like a balance of power in the constitution of the company. In almost every
company that is formed, the statutory number is eked out by clerks or friends, who
sign their names at the request of the promoter or promoters without intending to
take any further part or interest in the matter.’

Salomon v Salomon & Co Ltd finally resolved the lingering question of whether a sole
trader could gain limited personal liability by setting up a registered company to
carry on the business.

The current legislation requires a company to have at least 1 member. This is


true of both public and proprietary companies: see CA s 114.

Was the sale of Salomon’s business to the company fraudulent?


1. The House of Lords considered the sale by Mr Salomon of his business to the
company was transparent and valid.
2. The Court assumed that all members of the company were aware of the true state
of the business and its value. Thus no member of the company, or the company
itself, had been defrauded even if the company paid too much.

Lee v Lee’s Air Farming Ltd [1961] AC 12


1. L operates aerial topdressing business and forms a Co
2. L owns nearly all the shares and runs it
3. L crashes plane and dies
4. L’s widow claims against Co’s insurance
5. Insurance co denies claim
6. Privy Council accepts widow’s argument that L and Co were different legal

Meaning of ‘corporate group’


a. There are several ways to define ‘corporate group’.
b. However, for the purposes of this class, a corporate group consists of
companies that are ‘related’ to each other.

Related Companies
Where a body corporate is:
(a) a holding company of another body corporate; or
(b) a subsidiary of another body corporate; or
(c) a subsidiary of a holding company of another body corporate;
the first-mentioned body and the other body are related to each other: CA s 50.

What is a subsidiary company? s46


A body corporate is a subsidiary of another body corporate if, and only if, (a) the
other body
(i) controls the composition of the first body’s board, or
(ii) is in a position to cast or control the casting of more that one-half of the
maximum number of votes that might be cast at a general meeting.

CA s 46(a)(iii):
o A body corporate is a subsidiary of another body corporate if it holds
more than one-half of the issued share capital of first body
(excluding any part of that capital that carries no right to participate
beyond a specified amount in a distribution of either profits or capital).
o This test focuses on the percentage of ordinary share capital held and
not on the voting power attached to that holding.
Note:
1. The operation of this provision is somewhat problematic given the demise of the
pre-July 1, 1998 rule that all issued shares must have had a ‘par’ or ‘nominal’
value.
2. Before, July 1 1998, the constitution of a company with share capital had to set
out its authorised share capital. That is, the amount of capital that the company
was authorised to raise by issuing shares. This could, for example, have been
$200m.
3. The legislation then required the stated authorised capital to be divided into one
or more classes of shares of a specified value known as their nominal or par value.
The $200m could, for example, have been divided into 150m ordinary $1 shares
and 500m non-participating $1 preference shares.
4. Assuming that all of these shares had been issued, if a company (Y) held more
than 75m of the $1 ordinary shares in another company (X), X would be a
subsidiary of Y.

What is a ‘holding company’?


a. Where a company (‘New Moon’) is a subsidiary of another company
(‘Eclipse’), the other company (‘Eclipse’) is called the ‘holding company’ of
(‘New Moon’).
b. ‘Holding company’, in relation to a body corporate, means a body corporate
of which the first body corporate is a subsidiary: CA s 9.

What is an ‘ultimate’ holding company’?


‘Ultimate holding company’, in relation to a body corporate, means a body corporate
that:
(a) is a holding company of the first-mentioned body; and
(b) is itself a subsidiary of no body corporate: CA s 9.

Lifting the Corporate Veil


1. The term ‘lifting the corporate veil’ involves a court holding that members of a
company are liable for a debt that the company alone would usually be
responsible for as principal.
Corporate Law #2, 5/11

2. Australian courts, and in particular the High Court, are very reluctant to imperil
the Salomon principle by lifting the corporate veil. See Redmond p173 Briggs v
James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

The Key Company Organs


1. The board of directors
2. The members in general meeting
These two organs, when acting within their respective powers, are considered to act
as the company and not as its agents.
Note:
1. A board of directors is comprised of those people who have been
appointed, with their written consent, to the position of director.
2. Appointments may be made pursuant to a company’s constitution or, in some
cases, pursuant to provisions of the Corporations Act. See, for example, ss
201E-K.
3. For the rule that a person must consent in writing to act as a director see CA s
201D(1).
4. A board of directors must usually act collectively at a board meeting when
exercising powers vested in the directors.
5. The board usually has the power to appoint one of their number to the position
of managing director: see replaceable rule s 201J.
6. The board can usually also delegate any of their powers to:
a) A committee of directors;
b) A director;
c) An employee of the company; or
d) Any other person: see s 198D(1).
7. Subject to s 190(2), directors are responsible for the exercise of the power by a
delegate as if the power had been exercised by the directors themselves: s 190(1).

Company Organ Sources of Power


1. Company’s constitution
2. Statutory ‘replaceable rules’
3. Corporations Act

Company’s Constitution
1. Almost all companies have a constitution
2. The only companies that must have a constitution are:
a) No liability companies: see CA s 112(2)
b) Charitable companies limited by guarantee that do not want to have ‘Limited’
as the last word of their name: CA s 150
c) Public companies that want to be listed on the ASX: see ASX Listing Rule 1.1
Condition 1A
3. The registration application for a public company must be accompanied by a copy
of its proposed constitution if the company is to have a constitution on
registration: CA s 117(3).
4. A public company must lodge with ASIC a copy of a special resolution adopting or
amending a constitution within 14 days of the resolution being passed: see CA s
136(5).
5. The constitution of a proprietary company does not have to be lodged with ASIC
unless ASIC asks for it under CA s 138.
Note:
1. The registration application for a public company, but not a proprietary company,
must be accompanied by the proposed company’s constitution if it is to have a
constitution on registration: CA s 117(3).
2. Under CA s 150, ASIC has the power to register a company limited by guarantee
without ‘Limited’ in its name, or alter the registration of such a company by
omitting ‘Limited’ from its name, if its constitution:
a) requires the company to pursue charitable purposes only and to apply its income
in promoting those purposes;
b) Prohibits the company making distributions to its members; and
c) Requires the directors to approve all other payments the company makes to
directors.
3. A company must send a copy of its constitution to a member within 7 days if
the member asks the company in writing for one and pays any fee (not exceeding
$10) required by the company: see CA s 139 and Corp Regulations Sch 4 Item
2.

Main Functions of Constitution


1. Divide company’s powers between the board of directors and general meeting
2. State the number of directors that the company is to have
3. State how directors can be appointed and removed
4. Provide for the convening and holding of company meetings

Altering the Constitution


1. A company may modify or repeal its constitution by special resolution: s 136(2)
2. A ‘special resolution’ is defined by CA s 9 as a resolution:
(i) of which notice has been given as required by s 249L(1)(c); and
(ii) that has been passed by at least 75% of the votes cast by members entitled to
vote on it.

Note:
1. To pass, a ‘special resolution’ requires the support of at least 75% of the votes
cast on it by eligible voters: see CA s 9 definition.
2. ASIC may direct a company to lodge a consolidated copy of its constitution with
ASIC: CA s 138.
3. Where it is proposed to put a special resolution to a meeting of a company’s
members, s 249L(1)(c) requires the notice of the meeting to set out that
intention and to state the proposed resolution.

3. A company cannot contract out of its statutory right to alter its constitution: see,
for example, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at
479; Russell v Northern Bank Development Corp Ltd [1992] 3 All ER 161;
[1992] 1 WLR 588, HL.
4. A constitution may provide that the special resolution to alter it does not have
effect unless a further requirement in the constitution is complied with: s 136(3).
Note:
1. However, a company’s members may contract with each other not to exercise the
power of alteration in particular circumstances. Such an agreement is an example
of a ‘shareholders’ agreement’. The company is not a party to a shareholders’
agreement: see, for example, P D Finn, "Shareholder Agreements" (1978) 6 ABLR
97 at 101-2.
2. The further requirement could, for example, involve a majority vote of more than
75%, or the consent of a particular member or class of members. Unless the
constitution provides otherwise, the company may modify or repeal such a further
requirement only by complying with it: s 136(4).

5. Existing members are not bound by the following changes to a constitution unless
they consent to them in writing:
a) One which requires a member to take up additional shares;
b) One which increases a member’s liability to contribute share capital, or otherwise
to pay money, to the company;
c) One which imposes or increases restrictions on the right to transfer shares already
Corporate Law #2, 7/11

held by the member: s 140(2).


6. However, such changes may bind persons who become members of the company
after the changes have been made.
7. At general law, members can challenge the validity of an alteration to a
constitution on the following grounds:
a) A reasonable person could not consider the alteration to be in the best interests of
the company.
b) The alteration is unfairly prejudicial to, or unfairly discriminatory against, one or
more of the members.
Courts are generally reluctant to interfere with decisions taken by majority vote.
Note:
1. A shareholder is entitled to vote at a general meeting in any way that the
shareholder chooses. Votes are proprietary rights which can be exercised for
selfish or personal reasons: see, for example, Peters’ American Delicacy Co
Ltd v Heath (1939) 61 CLR 457.
2. However, the exercise of any power (including the statutory power to alter a
constitution) is subject to equitable limitations.
3. The concept of ‘fraud on a power’ is well established. ‘Fraud’ in this context
does not denote dishonest behaviour. Rather it means the exercise of the
power to achieve an improper purpose or oppressive or manifestly
unreasonable outcome.
4. In the special context of company law, when a majority vote is set aside on the
basis that it constitutes a fraud on a power, it is often said that there has been a
‘fraud on the minority’.

The Constitution and Replaceable Rules and Replaceable Rules


Section 140(1) provides that a company’s constitution (if any), and any replaceable
rules that apply to the company, have effect as a contract:
(a) between the company and each member;
(b) between the company and each director and company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and perform the constitution and rules so
far as they apply to that person.
Note:
1. Section 140(1) is said to create a ‘statutory contract’ between the various parties
referred to.
2. Members can only enforce those provisions of the constitution or replaceable rules
which apply to them as members and not in any other capacity. See, for
example, Eley v Positive Government Security Life Assurance Co Ltd
(1875) 1 Ex D 20; (1876) 1 Ex D 88 where Eley was unable to enforce a provision
which related to him in his capacity as company solicitor.
3. Note that there is no contract between a member and a director or secretary.
4. Only public companies are required to lodge a constitution with ASIC as part of the
registration process: see CA s 117(3).
5. ASIC can request any company to lodge an up-to-date version of its constitution:
see CA s 138.
6. A company must send a copy of its constitution to a member within 7 days if the
member makes a written request for one and pays any fee of not more than the
prescribed amount required by the company: CA s 139(1). The current
prescribed amount is $10: see Corporations Regulations Schedule 4 Item 2.

Replaceable Rules
1. 42 sections of the Corporations Act are labelled ‘replaceable rule’: see the table
in s 141. [see end of document]
2. The ‘replaceable rules’ can only apply to:
a) A company that was first registered after July 1, 1998; and
b) A company registered before July 1, 1998 which has repealed its constitution
since that date: see s 135(1).
In both cases, a company’s constitution can displace or modify a rule: s 135(2).

Note:
1. The rule in s 249X is a replaceable rule for proprietary companies but a
mandatory rule for public companies.
2. Most companies were registered before July 1, 1998 and most of them have not
subsequently repealed their constitution. The replaceable rules do not apply to
these companies. However, the ‘articles’ in Table A [companies limited by
shares] or Table B [no liability companies] of the Schedule to earlier state or
territory companies legislation might apply to them to the extent that they have
not been displaced by the relevant company’s own constitution.
3. Note that s 135(1) does not seem to deal with the position of companies that
were registered on July 1, 1998 (a weekday).

Section 140(1) Contracts


Director Secretary
↘↖Company X ↗↙
↙↗ ↘↖
Member ↔ Member

1. Note the absence of contracts between members and directors and members
and secretaries.
2. There is not usually a fiduciary relationship between members and directors or
between members and the company.
3. There is a fiduciary relationship between each director and the company.
4. Members and directors (and secretaries) can only enforce those provisions of
the statutory contract which relate to them as members, directors or secretaries.

The Board of Directors


1. Proprietary companies must have at least one director and public companies at
least 3: s 201A.
2. All directors must be individuals who are at least 18 years old: CA s 201B(1).
3. Directors derive their powers from the company’s constitution, the Corporations
Act and the terms of their respective employment contracts.

What Are the Usual Powers of the Directors?


a. The power to manage and direct the company’s business: see, for
example, CA replaceable rule s 198A(1).
b. The power to exercise all of the powers of the company other than the
powers that the Act, or the company’s constitution, require the company
to exercise in general meeting: see CA replaceable rule s 198A(2).
Note: Most modern constitutions vest full control over decisions relating to the
payment of dividends to members in the board of directors: see, for example, CA
replaceable rule s 254U(1).

What is a ‘General Meeting’? The term ‘general meeting’ in company law means a
meeting of the company’s members.

What Can Be Done at a General Meeting? The members of a company can do


anything which is within their powers under the Corporations Act and the company’s
constitution.
Corporate Law #2, 9/11

A company in general meeting usually has the power to:


a. Change the company’s constitution by special resolution: see CA s
136(2).
b. Appoint a director by ordinary resolution: see, for example, CA
replaceable rule s 201G.
c. Remove a director by ordinary resolution: see, for example, CA
replaceable rule s 203C (pty co); mandatory rule s 203D (public
co).
Note:
1. To pass a special resolution at least 75% of the votes cast on the resolution must
be affirmative: CA s 9 definition.
2. At common law, to pass an ordinary resolution more than 50% of the votes cast
on it must be affirmative.
3. As to replaceable rules see CA s 135.
4. Section 203D applies to a public company notwithstanding anything in the
company’s constitution or in any agreement between the company or its
members with the relevant director: s 203D(1).
5. Most authorities suggest that a public company does not have to comply with s
203D if it has an alternative removal process in its constitution and adheres to
that process: see, for example, Browne v Panga Pty Ltd (1995) 17 ACSR 75; 13
ACLC 853, SC(WA); Holmes v Life Funds of Australia Ltd [1971] 1 NSWLR 860;
Link Agricultural Pty Ltd v Shanahan (1998) 28 ACSR 498; 16 ACLC 1,462,
SC(Vic); Bisan Ltd v Cellante [2002] VSC 504, Dodds-Stretton J. However a
different view was taken by Bryson JA in Scottish & Colonial Ltd v Australian
Power & Gas Co Ltd [2007] NSWSC 1266.

Shareholder Meetings
See Redmond Chapter 6 for aspects such as who can convene a meeting, the notice
requirements, resolutions, voting and proxies, quorums and disclosure obligations.

Table of Replaceable Rules s 141


Provisions that apply as replaceable rules
Officers and Employees
1 Voting and completion of transactions-- 194
directors of proprietary companies
2 Powers of directors 198A
3 Negotiable instruments 198B
4 Managing director 198C
5 Company may appoint a director 201G
6 Directors may appoint other directors 201H
7 Appointment of managing directors 201J
8 Alternate directors 201K
9 Remuneration of directors 202A
10 Director may resign by giving written notice 203A
to company
11 Removal by members--proprietary company 203C
12 Termination of appointment of managing 203F
director
Provisions that apply as replaceable rules
13 Terms and conditions of office for secretaries 204F
Inspection of books
14 Company or directors may allow member to 247D
inspect books
Director's Meetings
15 Circulating resolutions of companies with 248A
more than 1 director
16 Calling directors' meetings 248C
17 Chairing directors' meetings 248E
18 Quorum at directors' meetings 248F
19 Passing of directors' resolutions 248G
Meetings of members
20 Calling of meetings of members by a director 249C
21 Notice to joint members 249J(2)
22 When notice by post or fax is given 249J(4)
22A When notice under paragraph 249J(3)(cb) is 249J(5)
given
23 Notice of adjourned meetings 249M
24 Quorum 249T
25 Chairing meetings of members 249U
26 Business at adjourned meetings 249W(2
)
27 Who can appoint a proxy 249X
[replaceable rule for proprietary companies
only]
28 Proxy vote valid even if member dies, 250C(2)
revokes appointment etc.
29 How many votes a member has 250E
30 Jointly held shares 250F
31 Objections to right to vote 250G
32 How voting is carried out 250J
33 When and how polls must be taken 250M
Shares
33A Pre-emption for existing shareholders on 254D
issue of shares
in proprietary company
33B Other provisions about paying dividends 254U
34 Dividend rights for shares in proprietary 254W(2
companies )
Corporate Law #2, 11/11

Provisions that apply as replaceable rules


Transfer of shares
35 Transmission of shares on death 1072A
36 Transmission of shares on bankruptcy 1072B
37 Transmission of shares on mental incapacity 1072D
38 Registration of transfers 1072F
39 Additional general discretion for directors of 1072G
proprietary companies to refuse to register
transfers