1650 law essay
COMPANY LAW assignment (1).docx
COMPANY LAW: ASSIGNMENT QUESTION [Semester 1, 2018]
Total Marks: 20 [Answer All Questions]
Due Date: Saturday 28 April 2018 by 5.00 pm [Hardcopy plus Turnitin by 5.00pm]
Word Limit: Minimum 1,600 words – Maximum 2,000 words [excludes footnotes and bibliography]
Bruce and Lee are the only shareholders and directors of Ninja Computers Pty Ltd, a two-dollar company that operates a computer stores in Sydney. Bruce and Lee share management of the company. Bruce is the managing director, which also involves responsibility for the company’s finances (because he worked for several years as an accountant with a large firm). Lee manages the company’s staff, business marketing and client relations. Lee knows very little about finance but is a good people person. Lee has complete trust and confidence in the ability of Bruce to manage the business, given the background and experience of Bruce.
On 1 July 2017, Lee received a telephone call from one of the company’s trade suppliers (SupplyCo) demanding that an overdue monthly supply account be paid. Lee thought this was very strange because Bruce was normally very efficient at paying the company’s bills. However, Lee was very busy that day and he left a message for Bruce on his desk.
Two weeks later when Lee asked Bruce about the bill, he replied that he paid it. On 1 August 2017, Lee again receives a telephone call from SupplyCo demanding payment. Lee emails Bruce about this, who replies that he has “sorted it out”. What Bruce has in fact done is pay off the creditor using the company’s credit card which is now over its limit.
Any doubts that Lee had about the company’s financial position is removed when Bruce sends an email to him advising that the company had been able to review its tax position and received a “huge” refund from the tax department, which he has used to buy new company cars for each of the directors costing $55,000 each. Although Lee is not happy about Bruce buying the cars without consulting him, Bruce insists that he only bought the cars to take advantage of a special tax advantage in buying luxury cars for business purposes.
Bruce, who has a reputation as a liar, had given false information to Lee. Bruce has been selling several company assets to pay off the luxury cars and his personal gambling debts. The money used to pay for the Christmas party was taken from another company credit card that Bruce signed up for. The company has been surviving on credit for all of 2017. Bruce has been able to conceal this from Lee by failing to keep proper financial records since 1 August 2016.
On 1 November 2017, Lee tries to use his company credit card, but it is rejected by the ATM due to insufficient funds. Lee tries to contact Bruce but his answering machine states that he is on holiday and will return to work on 8 November 2017.
On 9 November 2017 Lee becomes concerned because Bruce does not return from holidays and his mobile phone has been disconnected. On 10 November 2017, Lee receives a telephone call from the company’s bank manager who informs him that the company has now exceeded its $150,000 overdraft and that, for this reason, the bank will no longer honour any payments made by Ninja Computers Pty ltd.
On 14 December 2017, a liquidator is appointed by the court. The liquidator now seeks to repay the creditors of Ninja Computers Pty Ltd, but the company has insufficient funds and assets to make any repayment of debts totalling more than $285,000.
· (a) Advise the liquidator, with reference to the Corporations Act 2001 (Cth), as to what action she should take against Bruce and Lee and the chances of her success. [14 Marks]; and
· (b) Assume ASIC, instead of the liquidator, has taken legal action Bruce and Lee for breach of the Corporations Act identified in your answer in part (a). Explain, with reasons, what are the most likely potential legal consequences for Bruce and Lee? [6 Marks]
End of Question.
Hint: Your answer must address the relevant legal issues studied in this course. The question draws on selected material covered in topics 1-3. Therefore, no discussion is required on the law concerning directors’ fiduciary duties or statutory duties under ss 180-184 of the Corporations Act.
IMPORTANT:
1. Submission Procedure: TOP Office Level One [Marked Drop Box]
2. Assignment Cover Sheet must be submitted with student signature and with word count
3. Plus, copy of assignment to be lodged at turnitin
4. Late submission will attract penalty (mark deduction of 5 % for each day late)
Most Important: Plagiarism is a serious academic offence and can result in failure of this course. Students are expected to submit answers based on individual effort (this is not a group project).
Requirements for a pass/good mark:
1. A legal analysis of the question with reference to relevant principles of corporations law (case law) and, where appropriate, relevant statutory provisions of the Corporations Act 2001 (Cth).
2. Students are expected to reference the relevant chapters in the prescribed textbook and to draw supporting information from there (Hint: read the relevant parts of Chapter 18 of your prescribed textbook).
3. You are strongly advised not to use the internet for resource materials (as it is unnecessary and you run the real risk of drawing on irrelevant information and/or foreign law). The Current Edition of your Prescribed Textbook is more than adequate to answer the questions.
4. Students are expected to footnote references1 and to provide a bibliography.2
5. Marks will be deducted if the answer does not meet the minimum word count – a word count must be indicated on the cover sheet.
6. Use of margin of 1.5 and font of 12 (Times New Roman] – with answers on single side of each page.
7. A good answer to Question 1 and 2 will do the following (adopt the following structure) with respect to the question:
· (a) Identify the material (relevant) facts – and NOT simply repeat the question;
· (b) Identify the legal issue (or issues);
· (c) Identify the relevant case law;
· (d) Apply the legal principles and relevant case law and statute law to the given facts;
· (e) Offer legal reasons (with legal authority) as to whether various parties are liable (a simply Yes or No answer with personal views is totally inadequate).
8. Satisfactory answers will also
· (a) Be proof-read to eliminate spelling and grammatical errors;
· (b) Be referenced, with a bibliography;
· (c) Meet the minimum word length requirement and
· (d) Not simply copy/reproduce the textbook (answer must show own understanding)
· (e) Not be plagiarised.
Chapter 18 (1).pdf
TLAW 402 (Week 1) Regulatory Framework of Company Law (AH).pdf
TLAW 402 (Week 1)
Sources of company law Regulatory Framework of Australian Company Law
(Role of ASIC) Read: Ch 1 and 2 of Australian Corporate Law (6th ed,
2018, LexisNexis)
1 TLAW 402 (Week 1) Regulatory Framework
of Company Law
TLAW 402 (Week 1) Regulatory Framework of Company Law
2
On completion of this topic you should be able to: 1.1 know the sources of Australian company law;
1.2 Understand current structure of Australian company law;
1.3 Understand how company law is administered – role and powers of corporate regulator: ASIC
1.4 Explain the different types of companies and the purposes for which they are used (including the distinction between proprietary and public companies)
Topic 1
Sources of Company Law (1) General Law/case law (made up of both common law
and equity) and (2) Statute Law: Corporations Act 2001 (Cth) • sets out key rules that govern or facilitate the formation,
management, operation and termination of companies
• Passed by Federal Government in July 2001, but Act has been amended ever since;
• Continuous process of law reform (both statutory and through judicial development of case law)
• Content of company law never stands still! • Over 1,500 sections. • See: How to use the Corporations Act at Ch 1 of
Australian Corporate Law (6th ed, 2018)
3 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Sources of Company Law
(3) Other sources includes:
– Corporations Regulations
– ASIC Act 2001 (Cth) – sets out functions and powers of regulator (corporate watchdog), Australian Securities and Investment Commission (ASIC)
– ASX Listing Rules (is contractually binding on publicly listed companies)
– Accounting Standards
4 TLAW 402 (Week 1) Regulatory Framework
of Company Law
DEVELOPMENT OF AUSTRALIAN COMPANY LAW • History of company law statutes in Australia (key
legislative milestones) • Companies Act 1862 (UK) • Uniform Companies Acts (1961) • Co-operative Scheme (1981) • Corporations Law Scheme (1991) • Corporations Act 2001 (Cth) –single, national law governing
all aspects of companies from formation to termination;
• Constitutional problems • Until July 2001, Australia lacked a single, national law • Reason: Section 51(xx) of Constitution interpreted by the High
Court to give limited company law making powers to Federal Government
• Political solution in 2000 when States referred their corporate law making powers to the Federal Government
5 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Legislation ASIC administers • Corporations Act 2001 (Cth)
• ASIC Act 2001 (Cth)
• Other statutes: – [Insurance Contracts Act 1984
– Superannuation (Resolution of Complaints) Act 1993
– Life Insurance Act 1995
– Insurance Act 1973
– Retirement Savings Account Act 1997
– Superannuation Industry (Supervision) Act 1993
– National Consumer Credit Protection Act 2009]
7 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’S AIMS AND PRIORITIES ASIC’s aims (set out in s 1(2) of the ASIC Act 2001) are:
• Assist and protect retail investors and consumers in the financial economy
• Build confidence in the integrity of Australia's capital markets
• Facilitate international capital flows and international enforcement
8 TLAW 402 (Week 1) Regulatory Framework
of Company Law
What does ASIC do? • As the corporate regulator, ensures that company directors
and officers carry out their duties honestly, diligently and in the best interests of their company; ensure compliance with Corporations Act.
• As the markets regulator, assesses how effectively authorised financial markets are complying with their legal duties to operate fair, orderly and transparent markets.
As the financial services regulator, license and monitor financial services businesses to ensure that they operate efficiently, honestly and fairly. These businesses typically deal in superannuation, managed funds, shares and company securities, derivatives, and insurance.
9 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’s Company Law Functions • Functions
– Registering – eg companies (1.95 million co’s)
– Licensing – eg financial services
– Monitoring – eg financial markets trading
– Regulating – eg Regulatory Guides (explains how ASIC interprets the law): ASIC RG 217: ‘Duty to Prevent Insolvent Trading: Guide for Directors’ (July 2010) sets out key principles to help directors understand and comply with their duty to prevent insolvent trading.
– Deterrence and enforcement (use of civil penalties provisions under Corporations Act 2001)
– Educating – eg www.fido.gov.au
10 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’s Investigation Powers • power to commence an investigation – where
reason to suspect a contravention [s13 ASIC Act]
• power to require a person to give all reasonable
assistance in connection with an investigation
and/or to be examined on oath and answer
questions [s19 ASIC Act]
• power to inspect books [s29 ASIC Act]
• power to require production of books about
affairs of a company [ss30-33 ASIC Act]
11 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’s Enforcement Options • Seven broad strategies for law enforcement:
– Preservation
– Legal Action
• Civil Penalties
• Criminal Prosecution
– Administrative Action
• Enforceable Undertakings
• Infringement Notices
12 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’s Enforcement Options • Broad strategies for law enforcement:
Administrative Action – Enforceable Undertakings (discretionary/flexible remedy to help
enforce law; alternative to court action; not for offences involving fraud; deliberate misconduct or high level of recklessness): For ASIC’s policy on enforceable undertakings - see Regulatory Guide 100, Enforceable undertakings.
– Infringement Notices: Leighton Holdings Limited (Leighton) paid total of $300,000 after ASIC served 3 infringement notices alleging co had not complied with continuous disclosure provisions of Corporations Act 2001 and relevant provisions of the (ASX) Listing Rules. Also, ASIC accepted an enforceable undertaking (EU) which commits the co to reviewing its disclosure practices.
Legal Action – Civil Penalties [fines, banning orders, compensation]: – Criminal Prosecution [higher fines and/or imprisonment]
13 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’s response to allegations of misconduct/ non-compliance
ASIC may:
• carry out surveillance to check compliance
• assist parties in obtaining compliance
• conduct a formal investigation
• refer the matter to another agency/entity (eg CALDB)
14 TLAW 402 (Week 1) Regulatory Framework
of Company Law
TLAW 402 (Week 1) Regulatory Framework of Company Law
15
Civil penalties • ASIC can enforce the civil penalty provisions (s 1317E of CA)
for breach of directors’ duties;
• Court has discretion to order the director/officer to:
– pay a pecuniary penalty of up to $200,000 or/and;
– disqualify the person from management for a period or/and
– order the person to compensate the co for damage suffered by the co.
Civil penalty and criminal sanctions
• civil penalty – directors’ duties ss180-183, insolvent trading s588(G), continuous disclosure s674(2), insider trading s1043A, market manipulation s1041A.
• criminal sanctions – if director acted with dishonesty or recklessness, can be fined and/or jailed – director failing to act in good faith or for a proper purpose s184; – insolvent trading s588G; – misstatement in disclosure document s728(1); – continuous disclosure s674(2); – insider trading s1043A; – market manipulation s1041A; – false or misleading statements to induce persons to deal in
financial products s1041E
16 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC’s Role in Corporate Governance • Enforcement of directors duties and civil penalties
– HIH Insurance Ltd: ASIC v Adler [2002] NSWSC 171 [known as the ‘Rodney Adler case or the ‘HIH case’]
– James Hardie Ltd : ASIC v Hellicar [2012] HCA 17; Shafron v ASIC [2012] HCA 18 [known as the ‘James Hardie case’]
– Centro Ltd : ASIC v Healey [2011] FCA 717 [known as the ‘Centro case’]
– One Tel Ltd: ASIC v Rich [2003]; [2009] [known as the ‘One-Tel’ case]
Note: Cases will be discussed later in course under topic ‘Directors Duties and Liabilities’; Ch 16-17 of Australian Corporate Law (6th ed, 2018)
17 TLAW 402 (Week 1) Regulatory Framework
of Company Law
James Hardie Case: Directors and Officers civil penalties
Gillfillan v ASIC [2012] NSWCA 370 (Civil Penalty Decision for breach of s180(1) duty of care) impacting on 7 non-executive directors of James Hardie Ltd
(1) 5 Australian based non-executive directors banned for 2 years and 3 months and fined $25,000;
(2) 2 US based non-executive directors – banned for 1 year and 11 months and fined $20,000 ;
(3) Peter Shafron (Secretary and General Counsel): banned for 7 years and fined $75,000.
Based on earlier litigation :
• CEO banned for 15 years; fined $350,000 by trial judge.
• CFO banned for 2 years; fined $20,000.
Why were these directors and officers banned and fined?
TLAW 402 (Week 1) Regulatory Framework of Company Law
18
James Hardie case • James Hardie Ltd manufactured products containing
asbestos (harmful to health; deadly) • It created a medical research and compensation foundation
(MRCF) to pay out employee compensation claims for asbestos injury
• MRCF had a shortfall of nearly $1 billion in funds • James Hardie Board approved defective draft ASX media
release which said that MRCF was fully funded and would meet all claims; provided assurance to marketplace
• ASX media release was misleading • ASIC successfully argued board of directors and co officers
were negligent; breached their duty of care and diligence owed to the co (both at general law and under s 180(1) of Corporations Act 2001)
TLAW 402 (Week 1) Regulatory Framework of Company Law
19
James Hardie case • Court held that actions of the directors were:
‘ a glaring failure to discharge their responsibilities on a matter of very great significance to the company and wider community’ and was ‘a serious departure from the required standard of care and diligence’
... ‘all that was required ..was a capacity to read English ...’
Board’s failure to raise any complaint about the documents content meant directors breached their duties to the co - they failed in their duty of oversight over management and in their monitoring function – resulting in reputational harm to the co
TLAW 402 (Week 1) Regulatory Framework of Company Law
20
Other types of remedies – civil action
• civil penalty action [s1317E Corporations Act 2001]; • civil remedial action e.g injunctions [s 1324
Corporations Act]; • public interest proceedings [s50 ASIC Act]; over 19 legal
actions by ASIC for benefit of investors in Westpoint (property development co collapsed in 2006). ASIC has thus far returned to investors about $160 million of the $388 million in losses caused to nearly 4,000 investors.
• appointment of a liquidator [ss459A, 459B and 461(k) Corporations Act]
21 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Types of remedies – Penalty Notices
• ASIC may serve a penalty notice where it has reason to believe a person has committed a prescribed offence s 1313 Corporations Act 2001 (eg failure to lodge notice of director or secretary)
• Summons issued if penalty not paid
22 TLAW 402 (Week 1) Regulatory Framework
of Company Law
ASIC information
• ASIC website www.asic.gov.au
– ASIC Digest (includes practice notes, policy statements and media releases)
• Fido website www.fido.asic.gov.au
• Infoline 1300 300 630
• ASIC Annual Report
• ASIC searches can be conducted directly through ASIC or approved information brokers.
• See: Ch 2 of Australian Corporate Law (6th ed, 2018)
23 TLAW 402 (Week 1) Regulatory Framework
of Company Law
OTHER BODIES • ASX – provides trading facility for listed
companies • Takeovers Panel (conducts hearings to find out
if unacceptable conduct has occurred) • Companies Auditor Disciplinary Board (CADB) –
deals with disciplinary matters relating to duties and functions of auditors and liquidators
• Australian Accounting Standards Board (AASB) – creates accounting standards for companies
• Parliamentary Joint Committee on Corporations & Financial Services (oversees operations of ASIC)
24 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Companies
• Companies in Australia are regulated by the Corporations Act 2001 (Cth).
• Under the Corporations Act a company:
– Is incorporated with limited liability;
– Has a perpetual existence;
– Has the right to sue and be sued;
– Has the right to hold property;
– Has all the legal capacity and powers of an individual person (and also company) : section 124
25 TLAW 402 (Week 1) Regulatory Framework
of Company Law
WHAT IS A COMPANY?
• An artificial entity recognised by the law as a legal person with rights and liabilities
• Shareholders – regarded as the owners of the company
• Directors – usually given the power to control the management of the company’s business
• Section 124 gives companies all the powers of an individual person.
26 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Nature of companies
27 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Companies
Separate legal entity
• Separate legal entity of a company is the main feature
that makes companies distinct from other trading entities
[such as sole trader, partnership, trust].
• Means the company has its own legal existence and
therefore rights and duties completely separate and
distinct from the people involved in it: Salomon v Salomon
& Co Ltd [1897]
• The concept of ‘separate legal entity’ is often referred to
as the ‘veil of incorporation’.
28 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Classification of companies
Classification of companies by liability
29 TLAW 402 (Week 1) Regulatory Framework
of Company Law
Week 2 Topic
• Overview of Business Structures (sole trader, partnership, trust, joint venture, companies)
• How are company created (ie. incorporated) and what are the formalities in setting up a company?
Read Chapter 3: Australian Corporate Law (6th
ed, 2018, LexisNexis)
TLAW 402 (Week 1) Regulatory Framework of Company Law
30
TLAW 402 (Class 2) Business Structures and Types of Companies (AH).pdf
TLAW 402
Week 2: Business Structures and Types of Companies
Read: Chapter 3 of Australian Corporate Law (6th ed, 2018, LexisNexis)
1 TLAW 402 (Week 2) Business Structures
and Types of Companies
Lecture Objectives On completion of this topic, you should be able to explain the essential features and advantages and disadvantages of the following business structures:
– sole trader – Partnership – Joint venture – trusts – companies
• Explain the different types of companies which may be incorporated and the purpose for which they are best suited].
• Explain the differences between public and proprietary companies; between “small” and “large” proprietary companies and its legal consequences.
• Explain how are companies created (ie. incorporated)? – What are the formalities in setting up a company?
See: Ch 3 Australian Corporate Law (6th ed, 2018)
2 TLAW 402 (Week 2) Business Structures
and Types of Companies
Business Structures
3 TLAW 402 (Week 2) Business Structures
and Types of Companies
Sole Traders
Features
• A sole trader owns and controls his/her own business.
• It is the simplest form of business organisation to create (minimal formalities).
– Register business name if trading under a different name from owner [Business Names Registration Act 2011 (Cth);
• Why? to ensure the public can identify the entity trading under a business name
– Register with tax office [get tax file number: TFN];
– Apply for Australian Business Number (ABN) via Australian Business Register (ABR)
• Why? [unique 11 digit number; confirms business identity to government and others].
• All business structures need ABN.
4 TLAW 402 (Week 2) Business Structures
and Types of Companies
Sole Traders
Advantages
– Keeps all the profits
– Total control and ownership of the business
– Lack of formalities and inexpensive to form
– Nature of the business can be easily changed
– Keep financial affairs private
5 TLAW 402 (Week 2) Business Structures
and Types of Companies
Sole Traders Disadvantages
– Unlimited liability
– Business and sole trader are synonymous [treated as one and the same]
– Degree of personal involvement can make the business difficult to sell
– Lack of management skills or expertise
– Difficulty in raising large amounts of capital
– Lacks perpetual existence
6 TLAW 402 (Week 2) Business Structures
and Types of Companies
TLAW 402 (Week 2) Business Structures and Types of Companies
7
Partnership ADVANTAGES [overview] • Informal and inexpensive (oral, written, implied
agreement and conduct ‘partnership by estoppel’)
• Greater capital/management resources than sole trader –Corporations Act (s 115) limits size to max of
20 partners, unless: – formed for professional purposes
(accountants can have 1000 partners, lawyers 400 partners and actuaries/ doctors up to 50 partners)
• Financial Privacy (no registration of documents with ASIC)
Partnerships
DISADVANTAGES [overview] • Unlimited liability for debts and obligations of firm
But Note: Limited Partnership • Must be registered • Consists of limited partner (cannot manage business)
and at least one general partner (unlimited liability) • Taxed like companies
• Agency relationship [between partners] • Joint liability for contracts • Joint and several liability for tort [eg, negligence] • Limited life (no perpetual existence)
TLAW 402 (Week 2) Business Structures and Types of Companies
8
TLAW 402 (Week 2) Business Structures and Types of Companies
9
Partnership: Statutory Definition
Partnership
• Form of collective ownership
• Defined in section 1 of the Partnership Act 1892 (NSW) as the ‘relation which subsists between persons carrying on a business in common with a view of profit’.
• Need to analyse meaning of definition (4 essential criteria) with reference to case law (precedent): – ‘Business’
– ‘Carrying on’
– ‘Acting in common’
– ‘Profit’ motive
See Ch 3 Australian Corporate Law (6th ed, 2018) at 52-56
TLAW 402 (Week 2) Business Structures and Types of Companies
10
Liability (contract) • All partners are jointly liable for partnership
contracts (s 9)
• Joint liability means collective liability or shared liability (or ‘all liable together).
• Partners are sued together in only one legal action (brought against the firm, rather than naming each partner individually and running the risk of leaving out a partner’s name).
• Judgment in the firm’s name will bind all the partners.
TLAW 402 (Week 2) Business Structures and Types of Companies
11
Liability (tort) • Each partner is jointly and severally liable for
any tort committed by the firm (s 10).
• ‘Several’ means separate or individual.
• This means that an innocent partner faces potential unlimited personal liability for tort even if the partner is not to blame.
– See, for example, Lloyd v Grace, Smith & Co [1912] AC 716; Polkinghorne v Holland (1934) 51 CLR 143 at pp 121-123 of Australian Corporate Law (6th
ed, 2018, LexisNexis)
TLAW 402 (Week 2) Business Structures and Types of Companies
12
Fiduciary Relationship • Is a relationship of trust and confidence – arises
when one person (such as partner) is bound to act in good faith and best interests of the another person
• Duties of a fiduciary (partner) includes:
– The ‘no conflict’ rule
– The ‘no profit’ rule
– The ‘undivided loyalty’ rule
– The ‘duty of confidentiality’
Note: Such duties also owed by director/promoter to the company (class 6); by trustees to beneficiaries; by agents to principals
TLAW 402 (Week 2) Business Structures and Types of Companies
13
Joint ventures: purpose • type of business structure commonly used, particularly in high
risk capital, or high risk enterprise activities. The joint venturers are able to bring in different skills or assets, or a combination thereof, into the enterprise. Typical examples of use:
• mine explorations,
• property development,
• construction,
• manufacturing,
• publishing,
• entertaining,
• hospitality management and
• Share farming ventures.
See: Ch 3 Australian Corporate Law (6th ed, 2018) at pp 56-61
Joint Venture Daoud v Boutros [2013] NSWSC 687
• There is also recognised in law a distinction, which is sometimes difficult to draw, between a partnership and a joint venture.
Why the difficulty?
• It has been observed in a number of cases, including United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 that the term "joint venture" does not have a settled common law meaning.
TLAW 402 (Week 2) Business Structures and Types of Companies
14
TLAW 402 (Week 2) Business Structures and Types of Companies
15
Differences Joint Venture versus Partnership
• Activities of a JV are of specific duration or for a limited purpose (“one-off” project), whereas the activities of a partnership are often continuing and indefinite.
• Liability in JV is individual rather than joint and several as in a partnership.
• Joint venturers can, subject to agreement, freely dispose of their interest (property or share) in the joint venture, whereas partners need to assign their interest and do not enjoy this general freedom.
• Parties in a JV are not necessarily in a fiduciary relationship, whereas partners owe each other fiduciary duties.
• Joint venture is a separate venture for each party.
• The joint venturers receive a share of the product, whereas partners share profits [cash] —
TLAW 402 (Week 2) Business Structures and Types of Companies
16
Features of JV:
• Formalities: can be minimal or complex depending on commercial activity – there is no specific body of law on jv – governed by contract law and other laws that regulate the particular project (for eg compliance with mining law or construction law)
• Control/management (by joint committee)
• Liability (individual – not joint [unless it’s a partnership]
Features of JV:
• Fiduciary duties (parties can expressly contract out of such duties – ASIC v Citigroup Global Markets Australia [2007] FCA 963;
• Property (each party has its own share as tenants in common);
• Taxation (each party liable for own tax; unlike partnership, no joint tax return);
• Accounting and tax treatment (for income and expenses; each party adopts their own);
• Duration (depends on completion of project; expiry of time; default)
TLAW 402 (Week 2) Business Structures and Types of Companies
17
Trusts Features
• A trust arises where property is held by a trustee [individual or a co] for the benefit of the beneficiary.
• A trustee holds the legal title or exercises control over property for the purpose of applying it to the benefit of others.
See: Ch 3 Australian Corporate Law (6th ed, 2018) at pp 61-68
18 TLAW 402 (Week 2) Business Structures
and Types of Companies
Trusts
Two main forms of trust:
– Express Trusts are created by the intentional act of a person (a settlor) through a written instrument — for example, a will.
– Non-Express Trusts are those where intention is not expressed but it is possible for the courts to imply or infer that there was an intention to create a trust.
19 TLAW 402 (Week 2) Business Structures
and Types of Companies
Trusts
• Express Trusts include:
– Discretionary Trusts;
– Fixed Trusts;
– Unit Trusts;
– Trading Trusts [with corporate trustee].
• Non-Express Trusts include:
– Implied Trusts;
– Resulting Trusts; and
– Constructive Trusts.
20 TLAW 402 (Week 2) Business Structures
and Types of Companies
Discretionary Trust • Exact details of beneficiary [“my children and
grandchildren”]and level of entitlement [how much money] is not specified (on purpose) in trust deed; left to discretion of trustee
• Why? Tax minimisation • Due to tax law, Trust income is fully distributed to
beneficiary and taxed according to beneficiary’s tax level • Trustee has discretion to chose beneficiary [which
child/grandchild] and the amount of money to distribute to them – latter is influenced by individual tax rates of each beneficiary
• beneficiary on lower tax rate typically receives large amount of trust income [taxed at the lower rate]
TLAW 402 (Week 2) Business Structures and Types of Companies
21
TLAW 402 (Week 2) Business Structures and Types of Companies
22
Trading trusts
• Created when Trustee conducts business, on behalf of beneficiaries
• instead of individual acting as trustee, co formed to act as trustee – why? Limited liability – Note liability of directors of trustee companies (s 197 of
CA)
• Often co is a two [or, since 1995] one dollar co (co with paid of capital of $2 [or since 1995 $1] – issue 2 shares each worth $1 each or, in a single member co, issue a single share worth $1
TLAW 402 (Week 2) Business Structures and Types of Companies
23
Features of Trusts:
• Formalities (settlor; trustee; the beneficiary; trust property)
• Control/management (by trustee)
• Liability (personal liability by trustee)
• Property (owned by trustee)
• Taxation (if trust income is fully distributed, beneficiaries pay tax)
• Duration (rule against perpetuities)
Companies
• Companies in Australia are regulated by the Corporations Act 2001 (Cth).
• Under the Corporations Act a company:
– Is incorporated with limited liability;
– Has a perpetual existence;
– Has the right to sue and be sued;
– Has the right to hold property.
24 TLAW 402 (Week 2) Business Structures
and Types of Companies
Companies
Separate legal entity
• Separate legal entity of a company is the main
feature that makes it distinct from other trading
entities.
• It means the company has its own legal existence
and therefore rights and obligations completely
separate and distinct from the people involved in
it:
Salomon v Salomon & Co Ltd [1897]
25 TLAW 402 (Week 2) Business Structures
and Types of Companies
Salomon v Salomon & Co Ltd [1897]
• Court held debts of a company are not the personal debts of the person who controls the company.
• At common law, a distinction is drawn between personal debt and company debt.
• This gives limited liability to the controller of the company, even if the company is a ‘one-person’ business with no other shareholders or directors.
• See: Ch 5 Australian Corporate Law (6th ed, 2018) at pp 156-159
26 TLAW 402 (Week 2) Business Structures
and Types of Companies
Companies
Corporate Veil
• The concept of ‘separate legal entity’ is often referred to as the ‘corporate veil’.
• The shareholders and the directors are completely separate and distinct from the company as though a veil (‘or shield’) hides and separates them.
27 TLAW 402 (Week 2) Business Structures
and Types of Companies
Companies
Lifting the corporate veil
• In exceptional cases, Courts and Statute will ‘lift’ the corporate veil impose liability on persons behind the corporate veil – for eg, when there is fraud or breach of legal duties:
Green v Bestobell Industries Pty Ltd [1982] and Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987)
See: Ch 5 Australian Corporate Law (6th ed, 2018) at pp 163-171
28 TLAW 402 (Week 2) Business Structures
and Types of Companies
Classification of companies
Classification of companies by liability
• See: Ch 3 Australian Corporate Law (6th ed, 2018) at pp 78-84
29 TLAW 402 (Week 2) Business Structures
and Types of Companies
Classification by liability
Liability of the members is limited to the extent determined by the type of company
(1) Companies limited by shares: • Has share capital • Liability of members limited to amount unpaid on
shares; • Popular for trading purposes • May be public or proprietary. • Must have the word limited or abbreviation ‘Ltd’ at
end of its name – why? Serves us warning to creditors to take care
30 TLAW 402 (Week 2) Business Structures
and Types of Companies
LIMITED LIABILITY • What is limited liability?
– Liability of members limited to amount unpaid on shares
– Personal assets are not at risk
• Why is it permitted? – encourages risk taking
– reduces need for shareholders to monitor management
– facilitates diversified share portfolios
31 TLAW 402 (Week 2) Business Structures
and Types of Companies
DISADVANTAGES OF LIMITED LIABILITY
• Transfers risk of company’s insolvency to creditors
• The impact depends on type of creditor
– secured/unsecured
– victims of company’s negligence
32 TLAW 402 (Week 2) Business Structures
and Types of Companies
Exceptions to limited liability • Limited liability is not absolute:
– Privilege that the law can take away when abused; – Prudent creditor can take steps to avoid limited
liability (see pp 77-78 : Australian Corporate Law (6th ed, 2018)
CIT Credit Pty Ltd v Keable [2006] NSWCA 130 – held:
• “The obtaining of guarantees from directors is a common transaction in Australian commercial practice. It is a product of the combined effect of limited liability and of tax incentives to incorporate small businesses or to operate through family trusts with corporate trustees.”
33 TLAW 402 (Week 2) Business Structures
and Types of Companies
Classification by liability Liability of the members is limited to the extent determined by the type of company
(2) Companies limited by guarantee: • Liability of members is limited to the amount which each
undertakes to pay to the company in the event of it being wound up.
• Has no share capital • Used by non-profit associations (modest capital needs)
(3) Unlimited liability companies: • Members have unlimited liability to the company in the
event of it being wound up. • Unpopular for trading purposes
34 TLAW 402 (Week 2) Business Structures
and Types of Companies
No Liability Companies
(4) No-liability companies: • Members do not incur liability on any unpaid portion of
their shares. • Used for mining companies only (cannot use this type of
company of any other type of business)
• Must have a constitution stating its purpose/objects: s 112 (2)
• Must have the words ‘No Liability’ or abbrev ‘NL’ as end of its name
35 TLAW 402 (Week 2) Business Structures
and Types of Companies
Public or proprietary?
Classification of companies by membership
• See: Ch 3 Australian Corporate Law (6th ed, 2018) at pp 82-84
36 TLAW 402 (Week 2) Business Structures
and Types of Companies
TLAW 402 (Week 2) Business Structures and Types of Companies
37
Proprietary and Public Companies
• 4 types of co’s can also be classified as
– Proprietary (private) co; recognised by its name – for eg, ABC Pty Ltd
– Public co (which may or may not be listed on the ASX); recognised by its name, for eg, ABC Ltd
PROPRIETARY COMPANIES
• Proprietary company
– ss 112 and 113 definition under CA
• Share capital
• Maximum 50 non-employee shareholders
• Must not engage in activity that requires disclosure to investors under Ch 6D of CA (for eg, via a prospectus)
38 TLAW 402 (Week 2) Business Structures
and Types of Companies
PUBLIC COMPANIES
• All companies other than proprietary companies
• What are the advantages and disadvantages of this classification (proprietary v public companies? See next slide)
39 TLAW 402 (Week 2) Business Structures
and Types of Companies
40
Significance of Distinction
• Name [pty ltd v ltd]: s 148-149;
• Fundraising: s 113(3);
• Minimum number of directors [1 for pty co v 3 for public co]: s 201A;
Proprietary co’s are free of many of the obligations and limitations of public co’s:
• Secretary: s 204A(2) [only public co];
• AGM: s 250N [only public co] vs ‘circulating resolution’ for pty co: s 249A;
• Registered office [only public co] must be kept open to public during hours specified in s 145;
• Financial secrecy (note exception for financial reports: large pty co: s 45A)
TLAW 402 (Week 2) Business Structures and Types of Companies
LARGE & SMALL PROPRIETARY CO
• Purpose of distinction
• Section 45A: Small pty company if satisfy any 2 out of 3 criteria in any financial year –
less than:
–$25m consolidated operating revenue
–$12.5m consolidated gross assets
–50 employees
See: Ch 3 of Australian Corporate Law (6th ed, 2018) p 83-84
41 TLAW 402 (Week 2) Business Structures
and Types of Companies
42
Significance of Distinction • Small pty co subject to fewer requirements in relation to
preparation, lodgment and audit of financial reports
• Small pty co does not have to:
– Prepare profit & loss a/c, balance sheet: s 292(1);
– Appoint an auditor; and
– Lodge financial statements with ASIC
• Note exceptions
• Upon request by ASIC (s 294) or shareholder holding 5 % or more of voting shares (s 293)
– See further: Small Business Guide in Pt 1.5 of CA
TLAW 402 (Week 2) Business Structures and Types of Companies
OTHER COMPANY CLASSIFICATIONS
• ASX listed companies
• Disclosing entities defined in s 111AC
• Must prepare and lodge half-year financial reports as well as annual financial reports
• Subject to continuous disclosure requirements
43 TLAW 402 (Week 2) Business Structures
and Types of Companies
OTHER COMPANY CLASSIFICATIONS (CONT)
• Holding and subsidiary companies
– Section 46 definition under CA
• Control the composition of the board or
• Position to cast or control the casting of majority of votes at shareholders meeting or
• Holds more than half issued capital
44 TLAW 402 (Week 2) Business Structures
and Types of Companies
COMPANY REGISTRATION • How do you form a company?
• Registration procedure
– See further: Ch 3 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) for incorporation checklist; at pp 71-75.
– www.asic.gov.au
45 TLAW 402 (Week 2) Business Structures
and Types of Companies
APPLICATION FOR REGISTRATION • Overview – Apply to ASIC: • ASIC Form 201 • Select type of company (for eg, limited by shares) • Select co name (or ASIC can supply 9 digit ACN) • Obtain written consents of director [minimum age 18 and must be a
natural person], secretary, auditor etc • A proprietary company must have at least one director, but does not
need to have a secretary or, for small Pty co, an auditor .
• Decide on how to operate the company. • Prepare company constitution? Or adopt ready made rules (on
internal governance) found in the Corporations Act - known as Replaceable Rules [see Topic 4 on Internal Management] or adopt combination of the two options
• Lodge application form and pay registration fee (approx $412.00) • Certificate of registration issued by ASIC – co lives until
deregistered.
46 TLAW 402 (Week 2) Business Structures
and Types of Companies
Register your company
• Application for registration as an Australian company (Form 201) can be completed; Fee with the application must be included; OR
• Company can be registered through a number of business service providers who use software that deals directly with ASIC.
• Search business directories or the internet for ‘shelf company services’ or ‘Australian company registration’. These providers can also offer full company secretarial services covering registers, consents and share certificates.
TLAW 402 (Week 2) Business Structures and Types of Companies
47
POST-REGISTRATION REQUIREMENTS Formalities depends on whether proprietary or public co: • Select registered office (must be open to public if public
co); note - can’t use PO Box • Appointment of director; public officer (secretary and
auditor if public co) • Minute book (record resolutions of meetings) • Registers (of members, option holders, debenture holders) • Common seal (optional) is a rubber stamp which acts as co
signature • Review Annual Statement (contains co details – names of
directors) and pay annual review fee ($230 for proprietary and $1086 for public co’s)
• See further: Ch 3 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 73-75
48 TLAW 402 (Week 2) Business Structures
and Types of Companies
Review Question [Week 2] • Meiling, a sole trader, has a successful restaurant business in Hurstville,
Sydney. She used the profits from her business to buy herself an expensive home in Hurstville, a Volvo car and an investment property in Chatsworth. Meiling wishes to expand her business. Her income and her income tax is rising. Meiling comes to you for advice. She wants to know whether she should reconsider the type of business structure she has.
• Meiling has $250,000 dollars for the new business and will need a further $300,000 to open the new yum-cha restaurant in Ashfield. Meiling is currently single, but wishes to marry soon and would love to have children and grand-children.
Advise Meiling, with reference to the facts above, what type of business structure would best suit her needs. Your answer must:
– give full reasons for the advice. – give full details on the formalities required to implement the advice given.
TLAW 402 (Week 2) Business Structures and Types of Companies
49
Class 3 Topic
• Study the legal nature of a company
– the legal effects of incorporation (concept of corporate veil - and
– lifting the corporate veil under common law and statute law; with case studies – see Ch 5 of Australian Corporate Law (6th ed, 2018, LexisNexis)
TLAW 402 (Week 2) Business Structures and Types of Companies
50
TLAW 402 (Week 3) Legal Nature of Company and Corporate Veil (AH).pdf
TLAW 402 (Week 3)
Legal Nature of a Company Corporate Veil
Lifting the corporate veil [under common law and statute law]
Read Ch 5 of Australian Corporate Law (6th ed, 2018, LexisNexis)
1 TLAW 402 (Week 3) legal Nature of
Company/Corporate Veil
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
2
Class 3 On completion of this topic in you should be able to:
1 Discuss legal significance of Salomon decision and its practical application.
2 Explain when court will be prepared to lift the corporate veil.
3 Explain when Corporations Act lifts corporate veil (and makes director personally liable).
See further: Ch 5 of Australian Corporate Law and Ch 18 pp 552-569 (Harris, Hargovan & Adams 6th
ed, 2018)
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
3
Why is Salomon’s case important? COMPANY AS A SEPARATE LEGAL ENTITY
• Main case of Salomon v Salomon & Co Ltd [1897] AC 22 (Salomon) is authority for the legal principle that an incorporated company is a separate legal entity from its founder, shareholders and directors.
• Main feature that makes companies distinct/unique from other trading entities [such as sole trader, partnership, trust].
• Salomon’s case is as relevant today, and in many other parts of the common law world, as it was in 1897.
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
4
Salomon v Salomon & Co Ltd
• Facts: Mr Salomon (sole trader)
• Incorporated a co (Salomon & Co Ltd) in which he and 6 members of his family were the only shareholders
• He sold the business to the co
• Co paid him part of the purchase price (in the form of shares) and agreed to pay the rest over time
• To secure its obligation to pay, the co give Mr Salomon security over its assets in the form of a co charge (debenture)
• Thus, Mr Salomon was a major shareholder, director and secured creditor of the co.
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
5
Salomon v Salomon & Co Ltd
Legal Issue: Co’s business failed; value of assets insufficient to pay both Mr Salomon and co’s other creditors.
• Liquidator (on behalf of unsecured creditors) argued:
- Mr Salomon should not receive priority payment because of the degree of control he exercised over the co;
- That the co should be treated as being his agent or trustee (and therefore he should indemnify [pay] the co for the debts it incurred)
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
6
Final Decision • Salomon v Salomon & Co Ltd [1897] AC 22 –
House of Lords in England held:
• Upon incorporation of a company, it becomes a separate legal entity from its founders, directors, members and controllers.
• Thus, Mr Salomon can be a secured creditor with priority payment for co’s debt owed to him
• See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 156-159
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
7
High Court of Australia In emphasising the result in Salomon’s case, High Court in Andar Transport Pty Ltd v Brambles Ltd (2004) 206 ALR 387 held:
“the [fact] that a company may ultimately be owned or controlled by one person will not affect its status as a legal entity that is distinct from its members or controllers.”
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
8
Practical Impact of separate legal entity principle:
• Distinction between personal and company debts (Salomon’s case);
• Distinction between personal and company assets (Macaura’s case);
• It is possible for a person to act in dual capacities, as director and employee (Lee’s case);
See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 159-161
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
9
Macaura’s case • Mr Macaura transferred his interest in a timber
plantation to a co controlled by him. He insured timber in his own name but failed to transfer the insurance policy to the co. When timber was destroyed by fire, insurance co refused to pay because he was not the owner of the timber (the co was the owner).
• Held: co’s property is not the property of its participants (ie. they have no legal ownership of the co’s property)
• See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 160
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
10
Lee’s case • Lee, director and employee, worked as pilot and
killed in plane crash during employment; Mrs Lee (widow) claimed under co’s workers compensation policy
• Insurance co refused claim – argued Lee was not a worker
• Legal principle: a co can contract with its controlling participants because they are separate legal entities – they can contract with each other (for eg, as corporate employer and employee).
• See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 161
Companies
• Under s124 of the Corporations Act a company:
– Is incorporated with limited liability;
– Has a perpetual existence;
– Has the right to sue and be sued;
– Has the right to hold property.
11 TLAW 402 (Week 3) legal Nature of
Company/Corporate Veil
Companies
Veil of incorporation
• The concept of ‘separate legal entity’ is often referred to as the ‘corporate veil’.
• As a general rule: The shareholders and the directors are completely separate and distinct from the company as though a veil (‘or shield’) hides and separates them.
12 TLAW 402 (Week 3) legal Nature of
Company/Corporate Veil
LIFTING THE CORPORATE VEIL
• What does this mean?
• Disregarding (ignoring) the concept of the company as a separate entity and imposing liability (usually on the person behind the company) is called lifting the corporate veil – this can be done: – at common law (by the courts) or
– under statute (by parliament)
13 TLAW 402 (Week 3) legal Nature of
Company/Corporate Veil
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
14
When will the court lift the corporate veil?
• On what legal grounds can courts lift the corporate veil at common law?
– No fixed categories at common law
– See case law for judicial guidance – identified in next slide and discussed fully in prescribed text.
– See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 163-171
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
15
At common law, courts have lifted veil when company used:
• to evade a legal duty/obligation (Gilford Motors case)
• to assist in a director’s breach of fiduciary duties (Bestobell case)
• As a sham (Gilford Motors case)
• for fraud (Darby case)
• As alter ego/ agency grounds (Smith, Stone Knight case; Bird Cameron case)
• to trade with the enemy (grounds of public interest)
• to evade tax
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
16
Court lifted corporate veil when company has been used:
• to evade a legal duty/obligation: Gilford Motor Co Ltd v Horne [1933] 1 Ch 935
•Facts: Horne was the MD of GMC Ltd. Signed a non-compete clause in employment contract. Resigned, set up a co with wife and friend as directors and Horne managed the new Co which targeted the customers of GMC Ltd.
•GMC sought court injunction[stop order] to restrain both Horne and newly formed Co from breaching contractual agreement
Gilford Motor Co Ltd v Horne
Court held:
“I am quite satisfied that this company was formed as a device, a strata[gy], in order to mask the effective carrying on of a business of Mr Horne.
The purpose of it was to try to enable him, under what is a cloak or a sham, to engage in business which …he had a fear that the plaintiffs (GMC Ltd) might intervene and object.”
See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 168
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
17
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
18
Legal Treatment of Corporate Groups • Fact that a co is a separate legal entity from its controllers is
also emphasised in the context of corporate groups by the High Court in its decisions in:
– Walker v Wimborne; and
– Industrial Equity Ltd v Blackburn
These decisions allows for corporate groups to become an entrenched feature of the modern commercial world
See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 171-175
Industrial Equity v Blackburn (1977)
Issue: could the holding co consider the profits of its subsidiary as part of the holding co’s profits before the subsidiary co had declared a dividend?
High Court held: Subsidiary co is a separate legal entity from its Holding co, therefore potential dividends payable by a subsidiary cannot be used by a Holding co until the subsidiary has at least declared a dividend.
See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 173
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
19
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
20
Statutory Examples of Lifting Corporate Veil under CA includes sections:
• 588G (director’s personal liability for insolvent trading)
• 588V(insolvent trading in corporate group)
• 260D (breach of financial assistance law)
• 197 (directors of corporate trustee can be personally liable)
• See further: Ch 5 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 185-187
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
21
• Personal Liability: Insolvent Trading
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
22
Insolvent Trading: s 588G/H In Tourprint International Pty Ltd v Bott [1999] NSWSC
581, Court held: • ‘This case is a cautionary tale for co directors,
especially in the small business sector.
• The defendant, Mr Bott, joined the board of directors of the co less than a year before it went into voluntary administration.
• He received no remuneration as a director.
• For at least a major part of that period, the co was hopelessly insolvent … the result … is that he [Mr Bott] is [personally] liable … under the insolvent trading [law] in s 588G… in a sum in excess of $500,000 plus interest.’
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
23
Directors Duty to prevent insolvent trading Issues: • Policy issues – why personal liability?
• Analysis of s 588G/H
• Who owes the duty?
• When is a debt incurred?
• When is a company insolvent?
• What are the directors defences under s 588H - what does it mean?
• What are the consequences of breach?
• See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 552-569
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
24
Policy Issues: s 588H/G
• Lifts the corporate veil – why?
• Limited liability
• Director accountability; emphasis on financial management
• Protect from excessive risk-taking
• Protection of creditor interests
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
25
Legal Requirements for breach of s 588G
• Person is a director [see s 9 definition; includes de facto and shadow directors]
• At the time when co incurs a debt [includes trade debt and ‘statutory debts’ under s 588G(1A)]
• Co is insolvent or becomes insolvent – [s 95A says a co is insolvent when it is unable to pay its
debts as and when they become due and payable; courts use a cash flow test] and
• A person would have reasonable grounds to suspect insolvency at the time (of incurring the debt)
See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 552-556
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
26
Test for insolvency • Cash flow test – Powell v Fryer (2001):
‘conclusion of insolvency must be [got] from a proper consideration of the co’s financial position, in its entirety, based on commercial reality.
Generally speaking, it ought not be drawn simply from evidence of a temporary lack of liquidity.
Regard should be had not only to the co’s cash resources .. but also to moneys which it can [get]:
• by realisation by sale, or
• borrowed against the security of its assets ..
it is the inability, utilising such resources as are available …. which indicates insolvency.
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
27
Statutory presumptions of insolvency : s 588E
• For example, arises when the co has breached CA by failing to keep or retain adequate financial records during period of contravention
• Useful; overcomes difficulties of proof in the absence of proper accounting records
• Can be rebutted by evidence to contrary
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
28
• Statutory defences: s 588 H
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
29
S 588H Defences (overview):
Director can avoid personal liability if they can prove any 1 of these defences
• 588H(2): Expectation of solvency on reasonable grounds;
• 588H(3): Reasonable reliance;
• 588(H)4: Absence due to illness or for ‘some other good reason’;
• 588H(5): All reasonable steps to prevent debt
See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 560-569
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
30
S 588H(2) Statewide Tobacco Services Ltd v Morley
Mrs Morley (‘paper’ director of family co) did not actively participate in management; saw no co books; did not ask for figures; did not apply her mind to co documents signed; did not attend meetings; sought to rely on [equivalent] to s 588H(2) defence
Held: A director cannot rely on a complete ignorance of or neglect of duty; the days of the sleeping or passive director are over;
directors must take “a diligent and intelligent interest in the information either available to him or which he might with fairness demand from the executives or other employees and agents of the company
See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 565-566
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
31
Commonwealth Bank v Friedrich (1991): s 588G/H
• Chairman (director) of the failed National Safety Council (NSC) held to be personally liable for debts of $97m.
• Failed to exercise diligence and care in his oversight of NSC
• Failed to pay attention to the financial affairs of the NSC
• Failed to show that he had reasonable grounds to expect solvency (due to ignorance and being a passive director).
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
32
S 588H(3): ‘reasonable reliance’ At the time debt was incurred, she/he had
reasonable grounds to believe:
(1) A competent and reliable person was responsible for providing information on solvency; and
(2) The person was fulfilling that responsibility; and
(3) The director expected, by relying on that info, that the co was solvent
See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at p 562- 564 for case law example and discussion
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
33
588H(4): illness or some other good reason
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
34
S 588H(4): DCT v Clark [2003] • Mrs Clark (housewife and mother)
• Made director in family co in mistaken belief that law needs 2 directors
• Felt obliged to accept director position as a wife
• No business experience
• No understanding of duties/responsibilities of a co director
• Would sign unexplained co doc ‘with frying pan’ in one hand and pen in the other
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
35
• Mrs Clarke’s defence
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
36
Spousal love and affection?
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
37
S 588H(4): DCT v Clark [2003] held: The phrase ‘some good reason’ must [not] conflict with
the directors duty to generally participate in management
“… it is a basic feature of corporations [law] in Australia that directors are expected to participate in management of the co …
there is no justification for a [rule] which would hold sleeping directors to be … relieved of their liabilities.”
See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 564-565
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
38
• Intolerant of sleeping directors (case law: Morley; Daniel; Clarke)
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
39
• 588H: All reasonable steps to prevent the debt
588H (5): All reasonable steps
• Defence if director can show that they took all reasonable steps to prevent co from incurring debts – for example, by placing the co into external administration
• such as Voluntary Administration [VA] where the administrator is placed in charged of the co by the directors for a limited time to see if a corporate rescue plan can be worked out and approved by the creditors
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
40
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
41
Consequences of breach: • S 588G(2) is a civil penalty provision – means
director can face: – (1) disqualification order (banned from management);
– (2) compensation order;
– (3) pecuniary penalty (fine)
Note: If director acted with dishonesty, can be fined up to $340,000 and/or 5 years jail.
Recovery action by liquidator, or by creditor (but with consent)
Consequences of breach • Relief from liability
• Director may apply to court for relief from liability under s 1317S (based on judicial discretion)
• Director must show: – acted ‘honestly’ and;
– that in all of the circumstances they ‘ought reasonably’ be granted judicial relief.
• No relief if director acted dishonestly or neglected their duties
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
42
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
43
Judicial relief from liability • Court in Stake Man case (2009) excused a director
from liability for insolvent trading for payment of $356,952.02 arising from a liquidator’s claim .
• Significantly: first case where a director has been fully excused from personal liability through the exercise of judicial discretion under ss 1317S.
• See further: Ch 18 of Australian Corporate Law (Harris, Hargovan & Adams 6th ed, 2018) at pp 568-569
Review Question [Week 3] • Harry is the managing director of Techno Pty ltd. Harry accepted a very large
order, to the value of $150,000 for the supply of computers to Dodgy Retailer Pty Ltd. The purchase order was placed by Dodger, the director of Dodgy Retailer Pty Ltd. The computers were delivered, on credit, to Dodgy Pty Ltd which later failed. It appears that Harry, and everyone in the technology business, knew that Dodger was a bad credit risk.
• Two weeks after accepting the order of computers, Dodgy Retailer Pty Ltd went into liquidation without ever paying Techno Pty Ltd for the computers.
Advise fully, with reference to legal authority whether: (1) Can Dodger be held liable for the unpaid debt of Dodgy Retailer Pty Ltd?
Discuss fully with reference to common law legal principles only; and
(2) Will your answer be different with reference to liability, if any, under the Corporations Act? Explain
TLAW 402 (Week 3) legal Nature of Company/Corporate Veil
44