Eiffel Towers Ltd, a listed company, was a builder and property developer specialising in projects in Brisbane’s central business district. It has five directors. Giscard is the managing director and Henri is the chief financial officer. They are the only
Suyog Paudel
module_43.docxModule 4 – Introduction to Corporations law
Reading
Text, Chapters 1-2, Chapter 3 pp80-88, Chapter 5 165-174
Objectives
On successful completion of this module, you should be able to:
· describe the background to the Corporations Act and the role of the Australian Securities and Investments Commission
· identify the various types of company and the basic principles applying to each
· describe how a company is incorporated
· describe the nature of a company and the significance of incorporation
· explain and apply the principle of separate legal entity
4.1 Introduction
Modules 4-12 of this course cover the topic of corporations law. These modules concentrate on the legal principles relevant to Australian companies, although we sometimes compare companies registered in other jurisdictions. We focus on companies registered under the Corporations Act 2001 (Cth), so companies which are created by other pieces of legislation are outside the scope of this course, although you should be aware that they exist. Most non-lawyers could not distinguish the meaning of ‘company’ and ‘corportaion’. You don’t need to be able to distinguish these two terms for this course. Technically, a corporation is different from a company; however the meanings do broadly overlap and the two terms may be used interchangeably in this course. What you will learn in this course can be divided into three conceptual areas:
To understand how companies work, you need to understand a company’s relationships with people OUTSIDE the company. We call these people ‘outsiders’ or ‘third parties’. For example, is the company bound to a contract which is in the name of the company?[footnoteRef:1] Can an outsider successfully sue this company for negligence or breach of contract? What happens to creditor debts when a company enters into liquidation?[footnoteRef:2] [1: This means, can the company be sued for breach of contract, if the company does not perform the contract. Imagine two examples: Example (1) All of the directors signed the contract, on behalf of the company. Example (2) An ex-employee who lost his or her job a few weeks ago, signs a contract with a third party. The signature indicates that the contract was entered on behalf of the company and binds the company. The directors do not know about this contract. The employee signed it with the intention of obtaining revenge against the company. Is the company bound to this contract?] [2: For example, your client is owed money by a company which has entered into liquidation. Your client wants to know whether the money can be recovered. How can your client claim the money?]
It also involves examining the company’s relationships with people INSIDE the company (such as directors and shareholders). How much control over the affairs of the company do shareholders have? What duties are owed by directors of a company to the company?[footnoteRef:3] In which circumstances can directors be personally liable for the company’s debts? (Although technically, this last question relates to the relationship between a person outside the company and a director inside the company, conceptually this scenario belongs in this category because the liability arises out of the relationship between the director and the company – and specifically, out of the control the director can have over the company’s conduct). [3: For example, you have invested in a company and own shares in it. You think the directors are paying themselves excessive salaries – ten times the market rate. Is this against the law? What can you do? ]
We will also examine the more technical aspects of corporate regulation. This aspect of the course involves examining the legal principles which relate to the internal affairs and operations of companies. How and when can a company issue shares or debentures to investors in the company? How does a company call and hold a meeting of its shareholders? When and from which funds is a company entitled to pay dividends to its investors? How can a company amend the company constitution? You will learn all these principles, and many more, as you progress through this course.
A few key concepts will appear over and over in various Modules and so need to be explained before we proceed throughout this course. By doing so, you are not constantly cross- referencing back to later chapters for explanations of those terms.
· ‘Security’ : There are two completely distinct meanings of ‘security’ in company law. For the first one ‘security’ is defined in section 92 and includes shares and debentures. The other meaning of security is some kind of right which secures a debt. For example, a mortgage is a type of security; so is a company charge. This kind of security cannot be traded. When you encounter the word ‘security’ or ‘securities’, you will need to consider the context to determine which meaning is intended.
· A ‘shareholder’ is a type of ‘member’. A member is someone with an interest in the company. The interest can be as the holder of shares or as a debt investor (eg as the holder of debentures).
· ‘To issue shares’ means the original creation of shares by the company and issue to the first shareholder of those shares. In contrast, ‘to transfer shares’ is the transfer from one shareholder to another shareholder of existing shares.
· ‘To raise capital’ means to obtain money to fund the company’s operations, by issuing securities in the company to persons who want to invest in the company.
· ‘Internal rules’ are the contract between members of a company, the directors of the company, and the company itself. Sometimes this takes the form of an individualised company ‘constitution’, or may be the default ‘replaceable rules’ set out in the Corporations Act.
· A resolution is a decision of a company. It may be reached by directors’ resolution, or by members’ resolution. If neither the Corporations Act nor the internal rules requires a members’ resolution for a particular matter, then the matter may be decided by either members’ resolution or directors’ resolution. If a particular type of resolution is required by the Corporations Act or the internal rules, the decision will only be valid if that type of resolution was passed. The number of votes required for passage of a directors’ resolution will be specified in the internal rules. Members’ resolutions can be either ordinary resolutions or special resolutions (defined in section 9 of the Corporations Act). If a special resolution is required, it will only be passed if more than 75% of the votes that may be cast on that resolution, voted in favour of the resolution. If a members’ resolution is required, but a special resolution is not specifically required, an ‘ordinary resolution’ will be sufficient. An ordinary resolution (also known in the Corporations Act as simply a ‘resolution’) requires more than 50% of the votes that may be cast in favour of the resolution, to vote in favour of the resolution.
As an introduction, this module provides you a general idea about the nature of a company, the reasons why people choose to adopt the corporation as the entity through which to conduct their business, the regulator of company, and the development of company law in Australia. This module also covers the incorporation process of companies and how to distinguish different types of companies. More importantly, this module discusses the principle of separate legal entity , which is of fundamental importance for you to understand the rest of the course.
4.2 Sources of Corporations Law
Legislation – the Corporations Act 2001 (Cth)
Company law in Australia is heavily based on legislation – particularly the Corporations Act
2001 (Cth). In Modules 4 to 12, all references to legislation are references to the Corporations Act 2001 (Cth) unless otherwise stated. (From now on, ‘the Act’ means the Corporations Act).
The Corporations Act is divided into chapters; each chapter is divided into divisions and subdivisions; which in turn contain sections. Each part of a section is known as a subsection. The letter ‘s’ is an abbreviation for ‘section’; ‘ss’ is short for ‘sections’.
A quick word about notation: The title (or ‘name’) of a section may contain only numbers (eg s 180) or sometimes also contains a letter, eg s254D. If the name of the section contains a letter, the letter will always be a capital letter.
A subsection is noted by brackets after the main section name: eg, s 246B(2). Note that the part of the name that refers to the subsection uses only numbers and small letters (not capitals), eg s 180(1)(b).
Cases
A study of the company law cases is as important as the legislation. Many of the principles in the legislation enshrine or are reactions to (and perhaps override), earlier common law decisions (court decisions). Thus, to understand the legislation it is also important to understand the underlying common law from which these principles originated. Other cases interpret particular sections of the Corporations Act, and help us understand what the sections actually mean; how they apply to particular facts.
Relevant internet sites
There are a number of sites on the Internet that you will find very useful and interesting as you work through the corporations law component of this course. In addition to the Corporations Act itself mentioned above, other sites that will be of interest to you include of the Australian Securities and Investments Commission, the body which administers the Corporations Act throughout every state and territory (www.asic.gov.au) and the Australian Securities Exchange (www.asx.com.au).
4.3 Background to the Corporations Act
This topic provides a brief understanding of the course of events that have shaped the nature of companies in existence today and the legal principles that apply to them. You will not be examined on the historical development of Company Law, but as an accountant should have some general knowledge about how our company law has developed and the search for a single corporations law to be applied uniformly throughout the country.
Reading activity 4.1
Read Chapter 1 of your textbook and understand the historical development of corporations law in Australia.
4.4 Regulation of companies
The Australian Securities and Investment Commission (often abbreviated as ASIC) is the primary body regulating all Australian companies. Much useful information about ASIC can be found at its website at www.asic.gov.au.
ASIC’s functions include:
· registering companies
· monitoring company financial reporting, audits and annual returns
· registering company auditors and liquidators
· providing information to the public
· investigating and enforcing the Corporations Act.
ASIC has substantial powers, including an incidental power to do whatever is reasonably necessary to ensure company registration and financial reporting is in accordance with the Corporations Act: section 11(4) of the ASIC Act.
4.5 Types of company
The Corporations Act classifies companies in several different ways. A company can be classified, among other ways, according to:
· the nature of the liability of members
· whether it is public or private, and for proprietary companies, whether it is ‘small’ or
· ‘large’
· whether a company is ‘related’ to other companies.
4.5.1 Liability of members
As to the liability of members, there are four different types of companies according to s 112:
· a company limited by shares
· a company limited by guarantee
· an unlimited company
· a no-liability company.
Read your text book and find out the features of these company types.
4.5.2 Public and proprietary companies
A public company is defined as a company other than a proprietary company: s 9. A proprietary company is one incorporated in accordance with s 113 or one converted from a public company pursuant to s 162(1). Read s113. It is important because for a company to
claim to be proprietary it must meet those four characteristics or restrictions in s 113. Those four matters and some other differences are set out below:
Table 4.1:
|
Public company |
Proprietary company |
|
Minimum and maximum number of members: one and unlimited, respectively s 114. |
One and fifty: s 114 & s 113(1). |
|
Minimum number of directors: three - s 201A(2). |
May now have just one director: Section 201A(1). There is no retirement age for directors. |
|
May issue a written prospectus or offer information statement offering securities of the company for subscription or purchase, or inviting members of the public to deposit money with the company s 709. |
Not permitted –s 113(3). |
|
Each director must be appointed by a separate resolution unless the meeting has otherwise unanimously resolved: s 201E. |
No such requirement. |
|
Director not removable by resolution, request or notice of the other directors: s 203D. |
Could be removed if constitution so provides. |
|
Not usual. |
Restrictions may be imposed by constitution to restrict the transfer of its shares. |
|
No allotment of shares be made to public unless minimum subscription received: s 723(2). |
No such requirements. The process is not allowed anyway. |
|
‘Public’ not part of its name. Just the word ‘limited’ or ‘Ltd’– s 148(1). However note requirements in respect of No Liability companies – s 148(4). |
The word ‘Proprietary’ or ‘Pty’ must be part of its name – s 148(2). |
Note: Some of these differences might not mean too much to you at this stage of the course but you should become familiar with them as you work through the different topics.
Reading activity 4.2
Read your text book and consider to how to distinguish small and large proprietary companies?
4.5.3 Related companies
Reading activity 4.3
What are parent and subsidiary companies? How to distinguish them?
4.6 The incorporation of companies
For a company to be incorporated, all the requirements of the Corporations Act, including the lodgement of the necessary documents and payment of fees, must be met. On and from the date of registration, the company becomes a body corporate under the name, if any, set out in the Certificate of Registration: s 119.
S117 list out the contents that are required to be included in the registration form (ASIC Form 201). Read this section carefully and describe the entire process of registering a company. The questions below will help you to understand the process.
Reading activity 4.4
1. What must the application for registration contain?
2. Which form is the appropriate form for an application for registration of a company?
3. What is a registered office? Must every company have one? Must it be open to the public?
4. What is an ACN?
5. Why is the certificate of registration important?
6. How can you decide, from the company name, what type of company the company is?
7. Which names are unavailable under section 147? Which names are excluded by Schedule 6 of the Corporations Regulations?
8. Must the name be reserved before the company is registered?
9. What endings must be included on some company names? Can a company not have a name?
10. When does a company come into existence? What are the consequences of registration outlined in that section?
4.7 The effect of company incorporation
Nowadays, a company is clearly recognised as a legal person – that is, a person given its own legal status under the law – which means that it can sue and be sued in its own name. Acompany continues to exist despite changes to its shareholders. This means that the fact that one shareholder transfers shares to another company does not affect the company’s legal existence or operations, or its relationships with people outside the company. This is known as the doctrine of ‘perpetual succession’. These principles (known as the doctrine of legal personality) originated in the case of Salomon v Salomon, as discussed in your textbook.
Once registered, the following key principles apply to the company:
· It becomes recognised by the law as a separate legal entity, which facilitates limited liability
· It enjoys perpetual succession
· Can acquire, hold, and dispose of property in its own name.
The most important consequence of incorporation is that through registration, the company becomes ‘a separate legal entity’. ‘Legal entity’ simply means that it now has status at law; it can sue other persons in the courts; other persons can sue the company; it can hold property; it can enter into contracts. In short, it can do anything any other ‘person’ can do
(subject to a few limits). ‘Separate’ means that the company becomes a person separate from the people ‘behind’ the company: its directors (who manage the company) and its members (who together own the company).
Reading activity 4.5
1. Read the case of Salomon v Salomon and summarise the legal principles established by that case.
2. Read the summaries of Lee v Lee’s Air Farming Ltd and Macaura v Northern Assurance Co Ltd. Explain how the principle of ‘separate legal entity’ applied in each of these cases. In relation to Lee’s case:
a. Was Mr Lee performing his directors’ duties when he died?
b. Was the contract invalidated because he was sole governing director?
c. Could he sign a legally effective contract in two capacities, one personally and the other on behalf of the company?
3. Read the summaries of Walker v Wimborne and Industrial Equity v Blackburn. Explain how the principle of ‘separate legal entity’ applied in each of these cases in a corporate group situation.
Module 4 Tutorial Questions
1. Dave and Fred were managers of FCO Ltd. FCO closed their business, so Dave and Fred decided to set up a new business and try and employ all the former staff from FCO. There are at least 120 staff that are interested in working with Fred and Dave. Fred and Dave wish to invite investment from the public to fund their business and want to issue shares to all their staff. What sort of structure should they use?
2. Michael has discovered a low-cost way in which people can brew espresso coffee drinks on their stoves at home, without the need for expensive coffee-making machines. Michael wants to form a company as a vehicle to market his discovery. Advise what preparation Michael needs to do to form the company and how to incorporate his company under Corporations Act 2001 (Cth)?
3. A Pty Ltd has an issued capital of 100 $1.00 shares paid to 50 cents. B and C each hold 50 shares and are the directors of A Pty Ltd. B borrows $50,000 from his bank on behalf of the company. Sometime later, the business activities of A Pty Ltd. fail and it becomes apparent that the company cannot repay the loan to the bank. B is known to own substantial assets and the bank wishes to recover the amounts outstanding on the loan from B. Advise B as to his liability.
