Law

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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 2 TUTORIAL ACTIVITIES 2.1.5 & 2.2.1

Prescribed Texts

Thomson Reuters, Corporations Legislation 2018

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Activity 2.1.5 Study Guide p 33

5. Using the Index to the Australian Corporations Legislation, what are the statutory provisions in relation to: (a) the qualifications needed to be registered as an auditor; (b) the power of ASIC to examine records and books of a corporation; (c) the definition of a small proprietary company?

What are the statutory provisions in relation to: (a) the qualifications needed to be registered as an auditor?

Distinguish between the requirements and qualifications. •  > INDEX – ‘Auditor’[p 2720]/’registration of’ [p2721] •  Go to ss 1279, 1280* & 1280A, [p1505] •  Regs 9.2.01-9.2.03 [pp2191-2191] •  Note s.1280(2A) [p1492]. •  Note ss.1280(3) -(4). •  Note also s.1281 - AG-deemed registered. •  *Note the Editor’s notes after the section. Cross-

references to Corporations Regulations. [p1506]

(b) the power of ASIC to examine records and books of a corporation?

• INDEX –ASIC [p2718] • See Australian Securities and Investment Commission (p 2724)

• See Australian Securities and Investment Commission /’information gathering’/’Inspection of Books, [p2725] - see ‘Inspection of books’

• See ‘Inspection of books’ [p2767] / ‘ASIC, by’…’powers, exercise of’ …ASIC Act s 28

• See ASIC Act s 28 and note s 29 [p 2479]

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(c) the definition of a small proprietary company?

•  INDEX - 'Proprietary Company' [p2791] – note you are only directed to 'proprietary company' ss 9, 45A(1).

•  GO TO s.9 "Small Proprietary Company" [p 118] and note that it has the meaning given by subsection 45A(2).

•  Alternatively GO TO s45A and see that 45A(2) [p 133] refers to ‘small proprietary company.

•  In passing note s 45B Small companies limited by guarantee. (p 134).

Activity 2.2.1 Study Guide p 37

Case law

•  In a common law system, creates binding legal rules (Doctrine of precedent)

•  May apply: •  in interpreting rules contained in the Corporations Act •  in imposing additional rules

•  Consider - the significance of “the facts” of the case to the facts of a given scenario.

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Salomon’s Case SALOMON v SALOMON (1897) HOUSE OF LORDS

Issue: Could Salomon get priority for

(residual) £1,000 secured by his debentures?

©  Thomson Legal & Regulatory Ltd. ©  All Rights Reserved.

Facts: Salomon’s shoe

business

Pty Ltd

sold

debentures cash

Salomon 20,001 shares family 6 shares

(as Salomon’s nominee)

Salomon’s case – facts (cont.) •  Downturn/strikes in boot industry •  Salomon & Co went into liquidation •  Company’s assets insufficient to pay both

•  Debenture holder (secured creditor) •  Ordinary, unsecured creditors

•  Liquidator, on behalf of unsecured creditors •  Objected to payment of secured debt •  Argued company acting as either agent (or trustee) for

Salomon •  Argued that Salomon should indemnify the company for its

debts

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Salomon decisions Trial: found for liquidator (acting for unsecured creditors) •  Company conducted business as agent for Salomon. •  Business = Salomon’s business (high degree of control) •  Salomon as Principle, to indemnify his Agent (Salomon &

Co Ltd) against business liabilities Court of Appeal: found for liquidator •  Company = trustee, holding business on trust for Salomon •  Trustee entitled to indemnity from beneficiary for debts

incurred as trustee •  Salomon incurred liability to liquidator to pay trade

creditors

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Salomon in the House of Lords •  Reversed earlier decisions •  Salomon & Co Ltd neither agent nor trustee •  Debenture was valid •  Salomon succeeded in claim against Salomon & Co

Ltd as secured creditor •  Structure of company compliant with Companies

Act 1862 (UK)

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Prescribed Texts

Thomson Reuters, Corporations Legislation 2018 **Annotation: s 124 Corporations Act pp 185-187

Source: Thomson Reuters 2018, Corporations Legislation, Includes annotations pp 185-186

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Source: Thomson Reuters 2018, Corporations Legislation, Includes annotations p 186

Source: Thomson Reuters 2018, Corporations Legislation, Includes annotations p 187.

Separate Legal Entity

The common law has developed a concept of a company as a separate legal entity from: • the person/s who created it • the person/s who manage it: and/or • the person/s who comprise it. • The law recognises it as a distinct legal entity, having a separate existence and a corporate personality of its own.

• Company has capacity to contract, owns property and has perpetual succession (continued existence).

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Distinction between private and company assets

•  Company may own assets in its own right, section 124 •  Sole director and sole member companies •  Macaura v Northern Assurance Co Ltd [1925] AC 619

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A company may contract with its members

•  Company may contract with its members Lee v Lee’s Air Farming Ltd (1961) Ac 12 (Privy Council) •  Lee died in plane crash while “working for” Lee’s Air

Farming Ltd •  Insurance company argued that Mr Lee could not be

a worker and employer at the same time •  Privy Council held that Salomon allowed Mr Lee to act

in differing capacities as governing director, shareholder and employee

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Effect of registration

Registration section 117

separate legal entity sections 119 & 124

limited liability sections 516 & 517 Note also section 9 ‘limited company’

creates

facilitates

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Activity 2.2.1 Was Salomon a Travesty?

•  ‘ travesty’ = make ridiculous by grotesque/distorted representation…

•  No, the decision is not a travesty; if it had been decided differently legislation would ultimately have been needed to get this result.

•  Separate entity and limited liability are critical to risk taking and to a corporate capitalist economy.

Exceptions to SLE: Lifting the Corporate Veil

You should also examine the common law and statutory exceptions covered in the materials and the text in areas other than holding/subsidiary company relationships.

The corporate veil • COMPANY

Separate legal entity with own: •  Assets •  Liabilities •  Contracts

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•  INCORPORATORS •  DIRECTORS •  MEMBERS

•  own shares but not a proprietary interest in the company’s assets

•  may also be a creditor, debtor or director of the company

V E I L

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Lifting the Veil Existence of veil can be abused consider the position of: • unsecured creditors • tort claimants

Because of abuses, the veil is sometimes lifted to impose liability on: • controllers • directors (eg, Gilford Motors, Re Darby) • holding/parent company (eg, s 588V)

Lifting the veil (cont) Sometimes the lifting is to confer an advantage

(“reverse lifting”) eg, Smith Stone & Knight, Lee’s Air Farming)

Two methods of lifting (1) if statute has express provision (2) under general law principles

Statutory grounds Under Corporations Act 2001 (Cth)

•  insolvent trading (ss 588G, 588V, 596AC) •  uncommercial transactions (ss 588FB-588FF) •  financial assistance (s 260D(2))

• Under other legislation (eg, taxation, occupational health and safety, environmental protection and various regulatory regimes)

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General Law Examples

•  No relevant statutory provision, but, for some overriding policy reason, a court decides to lift the veil

•  Australian courts have been more reluctant to do this than the English and American courts

General Law Examples Difficult to reconcile cases but consider general descriptive categories

•  Fraud •  Company formed to evade an existing obligation

•  Company is agent of the controller •  Company knowingly participates in breach of director’s fiduciary duties

•  Part of a group of companies (but see s 588V)

•  Possibly, tort claims •  Possibly, if interests of fairness and justice require

Next Week’s Activities

Activities 3.2.1 & 3.4.1