CORPORATE LAW Lectures Week 2

PrePre-registration steps  

 

Complete a Form 201 contents in s117(2) see ASIC website asic.gov.au Lodge with ASIC Pay Fee of $412 for Pty Co Upon registration an ACN is given and a certificate of registration

The Separate Legal Personality of a Registered Company
Once registered, a company has the legal capacity and powers of an individual both within Australia and elsewhere: see CA s 124(1). Accordingly, a registered company is said be a legal entity or person. The word person as used in statutes usually includes bodies corporate such as companies.

Some of the Things That a Company Can Do
A company can, for example:  Contract as principal or agent;  Hold the legal or equitable title to property as principal or as a trustee;  Sue and be sued in its own name;  Employ persons.

The Relevance of the Separate Legal Entity Concept to Limited Liability Companies  

Where a limited liability company incurs a liability as principal, the creditor can only look to the company and its assets for recompense. 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   

Mr Salomon was a successful boot and shoe manufacturer who carried on his business as a sole trader. He decided to form a company which would purchase his business. 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:  Mr Salomon and two of his sons were appointed as the company s directors.  The directors caused the company to purchase the business of Mr Salomon for £39,000. According to Lord Macnaghten: 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:  Issuing Mr Salomon with 20,000 fully-paid fully£1 shares;  Issuing a £10,000 debenture to Mr Salomon;  Discharging about £8,000 worth of the liabilities that Mr Salomon had incurred as a sole trader; and  Paying the balance of about £1,000 in cash.    

For a variety of reasons, the Salomon company fell on hard times. In an attempt to keep the company going, Mr Salomon had the company cancel his £10,000 debenture and re-issue it to Mr reBroderip who paid Salomon £5,000 for it. Mr Salomon immediately lent the £5,000 to the company. However, the company eventually went into liquidation after it failed to pay the interest due to Mr Broderip on his £10,000 debenture.   

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. However, unsecured creditors of the company (including Mr Salomon) stood to receive nothing of the nearly £11,000 owed to them. The company s liquidator then sought to hold Mr Salomon responsible for all of the company s debts.

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

Broderip v Salomon [1895] Ch D 323
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. 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
The Court of Appeal unanimously dismissed the appeal of Mr Salomon. The Court considered that the legislature did not intend to allow a sole trader to gain the benefit of limited personal liability. The company was held to be the alias, agent or trustee of Mr Salomon. 

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: 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?
The House of Lords considered the sale by Mr Salomon of his business to the company was transparent and valid. 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  

   

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

Meaning of µcorporate group¶
There are several ways to define corporate group . 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 firstare 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 (i 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 onethe maximum number of votes that might be cast at a general meeting

CA s 46(a)(iii):
A body corporate is a subsidiary of another body corporate if it holds more than one-half of the issued share capital of onefirst 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).  This test focuses on the percentage of ordinary share capital held and not on the voting power attached to that holding. 

What is a µholding company¶?
Where a company ( New Moon ) is a subsidiary of another company ( Eclipse ), the other company ( Eclipse ) is called the holding company of ( New Moon ). 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 µultimate holding company¶? 

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

Lifting the Corporate Veil  

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. 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
The board of directors  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.

Company Organ Sources of Power 
Company

s constitution  Statutory replaceable rules  Corporations Act

Company¶s Constitution
Almost all companies have a constitution  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    

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). 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). The constitution of a proprietary company does not have to be lodged with ASIC unless ASIC asks for it under CA s 138.

Main Functions of Constitution    

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

Altering the Constitution  

A company may modify or repeal its constitution by special resolution: s 136(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. 

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. 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). 

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 held by the member: s 140(2).

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.

The Constitution 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.

Replaceable Rules
42 sections of the Corporations Act are labelled replaceable rule : see the table in s 141.  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). 

Section 140(1) Contracts director secretary

X Ltd

member

member

The Board of Directors   

Proprietary companies must have at least one director and public companies at least 3: s 201A. All directors must be individuals who are at least 18 years old: CA s 201B(1). 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? 

The power to manage and direct the company s business: see, for example, CA replaceable rule s 198A(1). 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). 

What is a µGeneral 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.

A company in general meeting usually has the power to:   

Change the company s constitution by special resolution: see CA s 136(2). Appoint a director by ordinary resolution: see, for example, CA replaceable rule s 201G. Remove a director by ordinary resolution: see, for example, CA replaceable rule s 203C (pty co); mandatory rule s 203D (pty (public co).

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.

Acknowledgement 

These slides and seminar questions have been adapted from original work developed and prepared by Associate Professor Jim Hambrook. Hambrook.

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