Topic 1: Introduction to Corporations Law. Unless otherwise indicated, all statute references in this paper refer to the Corporations Act 2001 (Cth)

Transcription

1 Topic 1: Introduction to Corporations Law Unless otherwise indicated, all statute references in this paper refer to the Corporations Act 2001 (Cth) Pty or Pty Ltd = private, proprietary company - The liability of members is unlimited (Pty) - The liability of members is limited (Pty Ltd) - Private, usually smaller companies, not listed on ASX Ltd = public company What is a company? - An artificial entity recognised by the law as a legal person with its own rights and liabilities, which is treated like a person (can sue and be sued) - A company is a type of corporation. It is primarily regulated by ASIC. What is a corporation? S 57A: A corporation includes: a) a company; b) any body corporate; and c) an unincorporated body that may sue or be sued or hold property in the name of an office holder appointed for that purpose S 9: Company means a company registered under this Act. Definitions - A structure that provides a mechanism to raise large amounts of investment capital, especially for capital intensive yet risky projects... (Wikipedia) - an artificial entity recognised by the law as a legal person with its own rights and liabilities : Lipton, Herzberg & Welsh (2013), [1.05] Negative impact of corporations - The corporation is today s dominant institution, creating great wealth but also great harm - Companies can wield real power and the corporate form can be abused by those in control of it - Harm caused by corporations: o Contributing to pollution o Bopal (explosion of a chemical factory in India, owned by American company, got no compensation) o Tobacco companies (producing & promoting tobacco when knew they were deadly) 1

2 Topic 2: Registration and Effects Registering a company All companies who wish to carry on business in Australia must be registered and hence incorporated under the Corporations Act. - Simple process just a form to fill out and money to pay - In the past it was a privilege, recognising the power of corporations and the value of LL that should not be given easily bcos of danger of fraud Why have the legislature made it easier? - When operating as a corporation, there is greater regulation and transparency because of the reporting regulations. ASIC/legislature is able to know what businesses are doing, they have access to your records Do you agree with this easy way to register? - Being a director is an onerous responsibility small businesses people may not realise the obligations they are accepting to fulfil - Businesses can affect a lot of people. Owners buying from hundreds of different suppliers, these suppliers don t get the money they are owed, whole chain reaction and people lose money - For a ASX big listed company, directors would be qualified people who are experienced at managing a business but here we have a small milk bar, unsophisticated people running it and if they mismanage the business then a lot of people will be affected Applying for registration 1. Apply for registration (s 117) following the prescribed form (s 117(4)) ASIC Form The form must contain information per s 117(2) It must include: - Name and address of each member - Type of company o Ltd (shares listed on ASX) or Pty Ltd (private companies, shares not for sale to public, small business usually) - Replaceable rules or constitution - Registered office and principal place of business of the company - Name, address & DOB of each director / company secretary - Details of any holding company - Share structure - Signature of the applicant There are no competence requirements. Company names - A co may use a name if it is available (National Business Names Register): s The CA requires the name to show whether co is LTD or PTY LTD or NL: s 148; s 150 (exception) o If a company is a company limited by guarantee (eg charity like the Red Cross), it may leave Ltd of its name if it says in its internal rules that it is registered for a charitable purpose company might not wish to be seen as a co that is profit making - Acceptable abbreviations: s Note prohibitions against misleading names Effect of registration - ASIC will issue the company with a certificate of registration and an CAN (s 118) 2

3 o Registration is conclusive evidence that all requirements have been complied with and the co is validly registered (s 1274(7A)) - The company comes into existence as a body corporate at the beginning of the day on which it is registered (s 119) - S 124: A company has the legal capacity and powers of an individual AND all the powers of a body corporate. This has been held to include: o The power to issue or cancel shares o The power to sue and be sued o To buy, sell and own property in its own name o Enter into contracts and incur liabilities in its own name Benefits of registering a company - Limited liability of shareholders to the value of their shares o Shareholders are not personally liable for the debts or tortious acts of the company o The number one thing that is of most interest to your client o Liability is limited to the value of your shares, and once members have paid that, they have no more liability o Businesses incur a lot of debt Eg Slazenger sells tennis balls but they pay a supplier to make the balls and print the logo. They receive the tennis balls worth $100k but do not pay the supplier at the time. They have 30 days to pay. Incur a lot of debt so quarantining the people who run the business is very valuable. o Benefits/negatives of LL: Benefit: LL is said to encourage investment in business. Investors would be reluctant to invest if their personal wealth was exposed if the co fell into debt Benefit: If managers had to always be aware of the personal assets of their shareholders, they would be much less free to be entrepreneurial and would have shareholders always looking over their shoulder Negatives: With tort liability, where the co no longer exists or had no funds, you can t sue the company or the shareholders because they have LL - Perpetual succession o Company exists independent of changes to its ownership convenient for a group whose membership frequently changes (transferability of ownership) o Don't need to create a new entity every time the members change o How big an advantage this is will depend on whether the person who stands behind the business is integral If the person is integral then if you take that person out, the business has got no value and will die anyway (eg a barrister, people want to see that particular man/women. If he/she leaves than the whole practice would die so perpetual succession not such a big advantage) - Tax benefits o Corporate tax rate is fixed at 30%. Individuals at top end are taxed 49% o Example of the legislature making a conscious policy decision to promote people running business as corporation - Future expansion/transferability of ownership o If you need another $50k, you need to get another person on board. With a partnership you will have to dissolve the partnership and reform it. o With a company you can just issue some more shares o If someone wants to leave, just need to sign a form and put it in the register. With a partnership, have to change the partnership deeds and need to negotiate - Promotes enterprise/market efficiency o Endeavours with risk that one person alone could not bear o Shares are more readily traded to a wider group of people o Reduces transaction costs o Individual investors can diversify (spread) risk 3

4 o More people = more skill and expertise - No restriction on the number of members of a public company - May raise funds from public at large o Provided provisions of Ch 6D are observed (disclosure to investors) - May list on ASX Ltd (Australian Stock Exchange) o Listed companies are bound by ASX Listing Rules o No obligation to list on the stock exchange BUT it facilities the selling and trading of shares (raise capital) Disadvantages of registering a company - Costs and complexities of complying with regulations o Stressful and a pain if look at lower end of scale like small business, unsophisticated mums and dads running a business o Initial registration and annual costs to ASIC o Reporting requirements o Probably going to need to get an accountant o Cumbersome (meeting must be held etc) - Highly regulated a lot of exposure to legal liability o Greater regulation because investors need to know what is happening in a company that they are investing in Should [Person A] register a company or continue to operate as a sole trader? Factors to consider: - How big is the company o The profit, the turnover? The bigger a company, the more a company structure will be preferred - Depends what tax bracket you are in o Corporate tax rate is fixed at 30%. Individuals can be 49% or can be much lower so corporate tax rate won t be beneficial - Is [Person A] already paying an accountant and maintain good records or would forming a company and having to do these things be cumbersome/stressful? - Is perpetual succession an advantage or is the business reliant on [Person A]? - Does [Person A] run other businesses? o If so, want to quarantine the businesses. If one business isn t doing well, the one that is doing badly may affect your other companies because you can be personally liable Limited liability (corporate veil) Salomon v Salomon & Co Ltd [1897] Facts: S was a sole trader boot maker in London. He wanted the benefit of LL so formed a company with his wife, him and 5 kids becoming SHs. S valued the business at 40,000 pounds (over-value). Co had to pay him 40,000 for the business but had no money. Borrowed 20,000 from bank and gave it to S. S was still owed 20,000 which was a secured debt (the co would pay it back).the co went into liquidation. S claimed priority as a secured creditor. Other creditors were unsecured (eg those that sold him shoe laces, soles etc) Held: S had priority as a secured creditor. The company is a separate legal entity and not an agent of S (he isn t liable for the debts). The price was excessive but not fraudulent and the co approved it. No requirement that members be independent (ie fine that S ran the business on behalf of them all). Using the company just for LL is NOT an illegal purpose Issues re: Salomon - Transfer of risk from shareholders to creditors 4

5 o Although it may seem unfair that S was first in line even though he was the only person to have the ability to stop the co incurring debts, the HOLs puts the onus on creditors to know they are dealing with a LL company and should take steps to protect themselves - Why don t trade creditors have security? o Trade creditors (someone who has sent goods/provided a service to a business and are owed money) often don t have the bargaining power to procure security and will then be further down the queue o If they are lending a lot of money they may be in a better position. As it is just a contractual agreement between the creditors and the company it is just an agreement. Need bargaining power however, to get good terms Other complications of limited liability Lee v Lee s Air Farming [1961] AC 12 Rule: the company is a separate legal entity and in law is the employer, even if the worker in practical terms appears to be both the employer and employee Facts: - One-man company. L owed more than 99% of shares, was the MD and employee. - The co was in the business of crop dusting. Mr Lee flew the planes used for crop dusting and was killed in the course of employment. - L s widow claimed under the workers compensation insurance policy. Insurance co denied liability arguing that Mr L was not a worker and this was not a true employer-employee r/ship as in practice terms L was both the employee and employer Held: - Company was a separate legal entity from L and therefore the company could employ L - Mr L, as an individual, was a different legal person from Lee s Air Farming (the company) - Court said that it was important that the company kept proper records that indicated that Mr Lee was an employee o 1. That he paid the appropriate workers compensation premiums o 2. Sent the tax taken from his pay to the tax office (there were records of this) Macaura v Northern Insurance [1925] Rule: recognition of the company as a SLE can work against the person responsible for forming the company (eg property: in co s name but insurance is individual s name) - M owned a timber plantation in his own name, which was insured in his name - He then wanted to take advantage of having a corporate form of his business and so transferred the property to a company he had registered who became the legal owner of the plantation - He neglected to transfer the insurance policy into the company s name. Fire took place. Held: - M could not claim on his policy. The timber planation belonged to the co. - The company had NO insurance policy, only M did. SLE worked against Mr M NB: if contents are involved, the person trying to claim may be able to if the contents belong to him/her 5

6 SALOMON & LIFTING THE CORPORATE VEIL Issue: We are investigating whether we can lift the corporate veil and hold A (holding company) liable for because B (subsidiary) is in liquidation, but A has a lot of money. Per Soloman and Walker, each subsidiary company in a corporate group is a separate legal entity distinct from the other companies in the group & the holding company. However, there are exceptions. Parent/holding company cannot treat profits of a subsidiary as its own: Industrial Equity ESTABLISHING SUBSIDIARY/HOLDING R/SHIP (if Q doesn t tell you) To show that A is the holding company of B, need to satisfy one of the alternative tests of control S 46(a)(i): S will be a subsidiary of H if H controls the compositions of subsidiary s board - Need more than 50% of shares - s 47 refers to the power to appoint or remove all or the majority of the directors of a company - Control here refers to legal control, not practical or de-facto control that arises by reason of a significant shareholders (Mount Edon) o Facts: E was not a parent company of B because E had no legal power even though over a number of years E had effectively controlled board appointments. In legal terms, E only had 35% of votes. - Legal power is gained through an irrevocable deed with binding promise S 46(a)(ii): S will be a subsidiary of H if H is in a position to control the casting of more than 50% of the votes at S s GM - Bluebird Investment o Practical or de-facto control is sufficient o No requirement of legal control o If hold irrevocable proxy votes may be sufficient need a formal agreement - Not in a position to control if the proxy voter reserves the right to determine how the vote is case S 46(a)(ii): S will be a subsidiary of H if H owns more than 50% of the shares in S S 46(b): S will be a subsidiary of H if H is a subsidiary of a subsidiary of S EXCEPTIONS TO ABOVE RULE Australian courts are very reluctant to lift the corporate veil, believing that the protection of limited liability should not be put aside lightly. a) When the subsidiary is deemed to be an agent of the holding company (Smith Stone & Knight) X will argue that B (subsidiary) was simply a mere agent of A (holding company) and that B wasn t the one running the business, but rather A was. Such a finding will see A (parents company) to be held liable for the acts of it subsidiary if applicable: B was a wholly owned subsidiary of A however this in itself is not enough to establish agency (Industrial Equity) 6

7 In Smith Stone & Knight, the court identified 6 overlapping questions as being relevant to deciding whether the Solomon principle can be displaced: Apply to facts..(if need more info, tell examiner as per below) 1. Were the profits of the subsidiary treated as the profits of the holding company? o Would need to see financial statements o If one company is public, would mean they would have to report to auditors and auditors would usually prepare the books separately 2. Were the persons conducting the subsidiary appointed by the holding company? o Appears so but to say conclusively would need minutes of meetings 3. Was the holding company the head and brain of the trading venture? o Could argue yes but to argue conclusively would need to see minutes 4. Did the holding company govern the venture, decide what should be done and what capital should be embarked on it? o Same as above o Common board control leads you to think S is an agent of H 5. Did the subsidiary make a profit through the holding company s skill and direction? 6. Was the holding company in effectual and constant control of the subsidiary? In Briggs v James Hardie, the court said to look at the overall relationship of the parties - Are they acting like separate people? (if so, S not going to be agent) - Were there contracts setting out the movement of products for $$ recognising each others SLE o Eg: one manufactures goods and one sells them (retail) Satisfied: In light of these factors, it appears that A (holding company) has exercised such a degree of control over B (subsidiary) that B may be held to be an agent of A and its acts deemed to be the acts of the parent company A. However, even if these 6 factors are satisfied, SSK is an old English case with unusual facts, limiting its precedent value. Further, we know that Australian courts are reluctant to lift the corporate veil, preferring to treat companies in corporate groups as individual companies (Walker). UNLIKELY. But if X can show the agency exception, the courts may lift the corporate veil and hold A responsible for B. Not satisfied: In light of these factors, it appears that A (holding company) has NOT exercised such a degree of control over B (subsidiary) such that B cannot be held to be an agent of A and its acts are not the acts of the parent company. Parent company NOT liable. b) Holding companies can be liable for the tortious acts of their subsidiaries (Briggs v James Hardie) As stated in Briggs v James Hardie, tort victims don t voluntarily choose to be tort victims and thus the courts are more willing to lift the corporate veil in such scenarios (Rogers J) to make the holding company liable for the acts of its subsidiary. 7

8 This is where the holding company owed a duty of care to the tort victim. - Holding company owed a duty of care to tort victim because: o The holding company provides all the management staff: CSR v Wren o The parent company is effectively conducting the activities and the subsidiary is a mere conduit or façade: CSR v Young - Holding company did NOT owe a duty of care to tort victim because: o James Hardie v Hall: subsidiary is independently managed so the holding company did not have control to determine the working conditions (subsidiary NZ, parent Aus) Conclusion X, a tort victim here is therefore likely/unlikely to succeed in piercing the corporate veil and holding A responsible for the tortious acts of B. c) Fraud or avoidance of an existing legal duty - The courts will lift the corporate veil to make an individual liable for conduct which they tried to get out of by forming a company and saying it was the company acting - The company cannot be a device to avoid the existing legal obligations of an individual (Gilford Motor Co) - The company cannot be a dummy co to commit fraud (Re Darby) Gilford Motor Co v Horne (1933) Facts: H signed a non-compete clause upon resigning, saying he wouldn t set up a competing business. He set up a competing company anyway. Tried to argue that HE did not set up a competing company but the COMPANY did. So HE had not breached the non-compete clause. Held (Lord Hansworth): Breach. Company was injuncted from competition against H s previous employer. the co was a mere cloak or sham to disguise or avoid the existing legal obligation that applied to Mr Horne 8

9 d) Insolvent trading - The corporate veil protects corporate shareholders (parent co) just as it does individual shareholders (Walker v Wimborne) - BUT corporate veil will be lifted to make holding company liable for the debts of S if S is trading while insolvent and holding co knew or reasonable to expect they knew S 588V(1): The corporate veil will be lifted to make a holding company liable for the debts the subsidiary if: (a) The corporation is a holding company of the subsidiary SEE PAGE 9 TO ESTABLISH when it incurs a debt (still a ) - Arises when a company so acts to expose itself contractually to an obligation to make a future payment of a aum of money as a debt (Hawkins) - Debts include: o Borrowings from a bank o Purchase of goods or services on credit terms o Leasing business premises o Contingent debts (eg: guarantees) o Involuntary obligations, such as obligation to pay taxes, assessed penalties for nonpayment, statutory levies for workers compensation insurance et o Debt is not defined in the Act - Not a debt it not legally enforceable promise or not certain - Time of incurring debt o Does not depend on strict legal analysis but substance and commercial reality (ASIC v Plymin) - Deemed debt: s 588G(1A) o Phrase includes paying a dividend, reductions of capital and entry into uncommercial transactions o Does not include unliquidated (ie undetermined) claims for damages in tort A liquidated debt is a sum of money that is identified or ascertainable by mere calculation Unliquidated is where there is a loss but the amount of the loss might not be able to be estimates S 588G(1A) table of when debts are incurred: 1. Paying a dividend: when paid (no consti provisions), when declaration is made (per consti) o Paying a dividend is deemed to be incurring a debt by the company when the dividend is paid, or if the consti provides for declarations of dividends, when the declaration is declared: s 588G(1A) 2. Reduction of share capital: when reduction takes effect 3. Buying back shares: when agreement entered into 4. Redeeming redeemable preference shares: when company exercises option 5. Issuing redeemable preference shares that can be redeemed by member: when shares are issued 6. Financially assisting someone to acquire shares: when agreement to provide assistance is entered, or it no agreement, when assistance is provided 7. Entering uncommercial transaction: when transaction entered into 9

10 (b) The subsidiary is insolvent at that time S 95A: cannot pay debts as and when they fall due. Should be clarified by a court because it is not a fulsome test. - Q of fact and commercial reality - Draw a distinction between a temporary lack of liquidity and an endemic shortage of working capital: Hall v Poolman - Cash flow test most common used to determine whether co is insolvent looking at income sources vs obligations (money co can realise through borrowing etc.) - Look at financial statements, but not only there (Brooks) - Test of insolvency from Plymin: o Non-payment of debts by a company does not necessarily indicate an inability to pay, but the size of the debt and the delay in payment or permanent non-payment is sufficient to justify the inference that they cannot pay its debts as they fall due: Plymin Deemed insolvency: insolvency presumed in 2 situations unless rebutted: - If the company was insolvent at some time in the 12 months prior to filing it to be wound up, it is presumed to have been insolvent from that point onwards: s 588E(3) - Where the co had failed to keep adequate records of financial transactions for 7 years, it is presumed to have been insolvent for that period: s 588E(4) (c) Reasonable grounds for suspecting that the subsidiary is insolvent - There were reasonable grounds for suspecting that the company was insolvent/would become insolvent because : s 588G(1), Plymin, ASIC information sheet 42 - Failure to pay, letters of demand, liabilities greater than assets, creditors unpaid, ongoing losses, problems selling stop, suppliers placing your company on cash on delivery, board disputes, complaints, expectation that next job will save company] (s 588G(1), Plymin, ASIC information sheet 42) (d) One or more of the directors of holding co is aware or its reasonable to expect that the directors would be aware [Director] failed to prevent [company] from incurring the debt when: (a) he/she was subjectively aware at that time of these reasonable grounds for suspecting solvency, given [the knowledge/circumstances]; or (b) an objectively reasonable person in [director s] position as director of [company] in its circumstances would be aware of these reasonable grounds for suspecting insolvency so has contravened s 588G (s 588G(2)(a)/(b)) i. Directors should know about the state of affairs of its company ii. Sufficient if circumstances for suspecting solvency iii. Sufficient if director aware of facts which would cause a reasonably competent person to suspect the co was solvent: Plymin (e) That time is at or after the commencement of the act 10