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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 3 CREATION OF A COMPANY: •  Types of Companies •  Promotion •  Formation •  Company Constitution

Key points:

•  Promoters and their duties •  Pre-registration contracts •  Internal Rules (purpose/ role; RR &/or Constitution/

statutory contract •  Altering the company’s constitution (statutory &

general law rules)

Topic 3 Pre-registration & registration AIM: At the end of this topic you should

be able to:

•  Identify a ‘company’ under the Corporations Act 2001 (Cth)

•  Differentiate companies based on member liability, and public status

•  Outline the steps required to register a company •  Define a promoter and their duties •  Describe the enforcement of pre-incorporation

contracts at common law and under statute •  Explain the relevance of a company constitution

Types of Companies

Royal Charter

Corporations sole

Bodies corporate formed by registration

under specific legislation

Corporations created by

special legislation

Companies registered under the

Corporations Act

Other incorporated bodies eg, trade

unions, co-operative societies

Public authorities,

instrumentalities or agencies

. Figure 2.1, Text 10th ed p 53

Types of Artificial Entities

Classification of companies under Corporations Act 2001 (Cth)

•  Liability of members •  Public/proprietary •  Relationship with other companies •  Related body corporate •  Where company incorporated •  Type of business eg trustee company, investment

company

Companies classified according to liability of members

Each member’s liability for company debts limited in some

way

Each member’s liability for company

debts is unlimited

Company limited by

shares (public or proprietary

Company limited

by guarantee (public only)

No liability company (mining -

public only)

Unlimited company (public or

proprietary)

Figure 2.2 Textbook 10th ed, p 65

Companies classified according to their public status

Public company

Proprietary company

Listed Unlisted

Small proprietary company

Large proprietary company

Figure 2.3, Text 10th ed p 69

Proprietary vs Public

PROPRIETARY PUBLIC

SHAREHOLDERS Minimum = 1 Maximum = 50

Minimum = 1 No maximum

DIRECTORS Minimum = 1 (1 resident)

Minimum = 3 (2 resident)

FINANCES Unable to get funds from public

Able to get funds from public (with disclosure document)

LISTING Unable to be listed May be listed or unlisted

Advantages & disadvantages of company business structure ADVANTAGES •  Separate legal entity •  Limited liability (usually) •  Proprietary companies (especially small) high degree

of financial privacy •  Company income tax rate •  Universally recognised DISADVANTAGES •  Members do not benefit from company’s tax losses •  Regulation > compliance costs •  Reduced individual control

Promoters and pre-incorporation activities

•  Definition and role of the promoter •  Duties of promoters •  Pre-registration contracts

Registration process

The role of the promoter •  No statutory definition •  Twycross v Grant (1877) 2 CPD 469 A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose

•  Aequitas Leasing Pty Ltd v AEFC [2001] NSWSC 14 [346] (Austin J); [347]

•  Tracy v Mandalay (1953) 88 CLR 215

Promoters • Suppose that some friends decide to form a company. One of them owns a building that she no longer needs. It is arranged that the company will buy the building to use as its head office.

• Should the law be concerned with this transaction?

• Why or why not?

Duties of promoters •  Fiduciary duties Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218 Gluckstein v Barnes [1900] AC 240

•  No profit at expense of company •  Disclosure of profits to potential investors or to board •  Honesty, reasonable skill, care and diligence

•  Remedies for breach of duties •  Rescission •  Recovery of secret profit •  Constructive trust order •  Forfeiture

•  Disclosure of personal interest •  Statutory liability eg ss 711(2), 711(3), 588FH, 728, 729 •  Duration of duties

Enforcing pre-registration contracts

•  Position at common law Kelner v Baxter (1886) LR 2 CP 174 Black v Smallwood (1966) 117 CLR 52 •  Shelf companies

•  Statutory modification Section 131

Pre-registration contracts TB Figure 8.2, p 226 Utilising shelf company DAY 1 DAY 7 DAY 10 ISSUE?

Date shelf company is registered

Date contract executed on shelf company’s behalf by promoter

Date shares in shelf company transferred to promoter and company name changed

No, contract binding on company on day 7 (see s 119) and ss 131-3 do not apply

Pre-registration contracts TB Figure 8.3, p 227 Statutory provisions

DAY 1 DAY 7 ISSUE?

Date contract executed purportedly on company’s behalf

Date company is registered

Contract not binding on day 1 as company not registered/ in existence. Consider statutory provisions (ss 131-3)

Statutory approach to liability for pre- registration contracts Digital Central Australia (Assets) Pty Ltd v Stefanovski (No 2) [2017] FCA 1000 Sections 131 – 133: •  Enable pre-registration contracts to be ratified by

company formed after contract entered into •  Impose statutory liability upon promoters to

compensate TP if contract not ratified •  To withhold rights and liabilities other than those

provided

•  Contracts to which sections 131-3 apply •  Agency/trust disclosure

Structure of sections 131-3 Section 131 131(1) Company becomes bound 131(2) Person entering the contract is liable 131(3) & (4) powers of the court Section 132 person released from liability by TP Section 133 covers the field Check out the provisions for yourself

Section 133 Corporations Act 2001

This Part replaces other rights and liabilities This Part replaces any rights or liabilities anyone would otherwise have on the pre--registration contract. ……………………………………………………… ‘note the term ‘this part’ as used in s 133 refers to Part 2B.3----Contracts Before Registration Part 2B.3 is found in Chapter 2B--Basic features of a company

Section 131 Corporations Act 2001

Contracts before registration S 131(1) (1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time--within a reasonable time after the contract is entered into.

Section 131(2) Corporations Act 2001 (2) The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time--within a reasonable time after the contract is entered into. The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.

Section 131(3) Corporations Act 2001

(3) If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following: (a) pay all or part of the damages that the person is liable to pay; (b) transfer property that the company received because of the contract to a party to the contract; (c) pay an amount to a party to the contract.

Section 131(4) Corporations Act 2001

(4) If the company ratifies the pre--registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay.

Section 132 Corporations Act 2001 Person may be released from liability but is not entitled to indemnity (1) A party to the pre--registration contract may release the person from all or part of their liability under section 131 to the party by signing a release. (2) Despite any rule of law or equity, the person does not have any right of indemnity against the company in respect of the person's liability under this Part. This is so even if the person was acting, or purporting to act, as trustee for the company.

Pre-registration contracts

Company can ratify purported contract Purported contract > valid contract (s 131(1)) •  TP to that contract can sue if:

• Company is never registered • Company is subsequently registered but does not ratify

• Company is subsequently registered and ratifies contract but fails to perform

Pre-registration contracts (cont.)

•  Promoters and/or company may be liable (s 131(2)-(4))

•  Promoters can exclude liability from TP but not obtain indemnity from the company (s 132)

•  Sections 131-3 include ANY person who purported to execute the contract NOT only promoters

Post-registration options Once registered, the members of the company can either: •  Ratify pre-registration contract •  Not ratify contract, and, possibly, sue the person who purported to execute the contract on behalf of their company

•  eg, for breach of promoters’ duties •  Execute a new contract on the same or similar terms (a ‘novation’)

Timeline of promoters’ duties: TB Figure 8.1, p 226

Promoters’ duties Registration Directors’ & officers’ duties

General law General law

Statute (but not Part 2D.1 duties)

Statute including Part 2D.1 Sections 131-133 not applicable

Pre-registration contracts sections 131-133

Registration

• All companies must register with ASIC • Other bodies that must register

•  Foreign companies •  Registrable Australian Bodies eg, incorporated

associations

• On registration, ASIC will issue - ACN - Certificate of Registration Incorporation = separate legal entity

Steps for registration of proprietary company •  Decide on source of corporate governance rules: rely on

replaceable rules as listed in s 141 OR adopt constitution •  Single member/director companies rely on s 198E OR s 198E

and own constitution •  Members sign consent to becoming members; director

and secretary consent to act •  Applicant signs consent to registration •  Application for registration form lodged at ASIC •  ASIC issues Certificate of Registration

Figure 3.1: Steps for registration of a proprietary company: Text 10th ed, p 88

On-going requirements

Vary depending on type of company Some requirements apply to all companies

•  Registered office •  Notify certain events to ASIC •  Check Extract of Particulars in Annual Statement,

lodge details of any changes with ASIC and pay annual review fee

•  Maintain financial records, registers and minute books

•  Rights of members to inspect registers and books •  use and display of company number and name

Internal governance rules Govern relationships between: •  Company (as a corporate entity) and each member •  Company and each of its officers •  Members, one to another

Rules can be customised to suit company: •  Replaceable rules (RR) under s 141 •  Corporate Constitution •  Combination of RR and Corporate Constitution single member/director companies: RRs do not apply s 135(1); may have constitution but cannot exclude ss 198E and 201F

Replaceable Rules (RRs)

• Apply to those companies that do not have a constitution

• Certain RRs • apply only to proprietary companies • mandatory for public companies

Company Constitution •  Obligatory for

•  No Liability companies •  ‘Limited by guarantee’ companies that omit

“Ltd”

•  If constitution excludes all RRs: RRs don’t apply; exception: any mandatory RRs applicable to public companies

•  If constitution does not exclude all RRs: RRs apply to extent not modified by constitution

Companies registered before 01 July 1998

Prior to 01 July 1998, company’s internal governance rules = •  Memorandum of association •  Articles of association

Figure 5.1: Internal Rules – Post July 1998 companies Text 10th ed p 138 Note: RR = replaceable rules

Single Director / Shareholder Companies

•  RR do not apply to single director/ shareholder companies

•  All decision-making power rests with the sole director/shareholder; see section 198E

Statutory contract CORPORATE CONSTITUTION

1.  Written document 2.  Replaceable rules 3.  Combination of 1 & 2

Section 136

Operates as a CONTRACT between: •  Company and member •  Company and director •  Company and company secretary •  Members amongst themselves

Section 140

Statutory contract differs from other contracts

• Remedies are more limited (declaration or injunction)

• May be modified without consent of every party

• Written contract but not signed • No consideration given

Alteration of internal governance rules •  Section 135(2) RR can be displaced/modified by the

adoption of a constitution •  Section 136(2) company has power to alter its

constitution by a special resolution of its members reading the sections together, conclude that replaceable rules can also be displaced or modified by a special resolution

•  Limitations •  Statutory: see ss 140(2), 136(3)-136(4), Part 2F.2

(special rights) and Part 2F.1 (oppression) •  General law: eg additional tests of fairness

Gambotto’s Case

Enforcement of internal rules

•  Breach is not a “contravention” of the Corporations Act •  Breach is not an “offence” so

•  no criminal or civil liability under Corporations Act •  cannot be prevented by statutory injunction power

•  Statutory remedies - only relevant if breach constitutes oppression or breach of directors’ duties (offences) • Generally, under general law: • company may enforce the internal rules against members • members may enforce the internal rules against the company (using the statutory derivative action (Part 2F.1A) or suing to enforce a personal right)