CLAW 2201 Corporations Law Final Exam Notes

Transcription

1 CLAW 2201 Corporations Law Final Exam Notes Week 1 General Characteristics of Companies Separate legal entity o Legal capacity and powers of a natural person s124(1) Limited liability o Shareholders and directors not liable for company debts o Exceptions: Shareholders amount subscribed not paid s516 Directors liability for insolvent trading s588g Sue or be sued Perpetual succession Acquire, hold and dispose of property Transferability of shares o As a general rule, shareholders are able to transfer or sell their shares free of any rescrictions Owned by members/shareholders Managed by directors s198a Other business structures Sole traders o Formation limited formalities, low compliance, not a separate legal entity o Liability unlimited o Transfer/succession difficult o Management individual o Fundraising limited by personal assets and ability to borrow o Tax implications marginal income tax rates Trusts o Formation complex structure, not a separate legal entity o Liability trustee has unlimited liability, beneficiary has limited liability to share in trust o Transfer/succession complex, subject to trust conditions o Management trustee o Fundraising difficult o Tax implications beneficiaries has individual marginal rates, trustee has penalty rates (top marginal rate) Partnerships o Association of two or more legal persons carrying on business in common with a view of profit o Governed by the Partnership Act

2 o Formation limited formalities, low compliance, not a separate legal entity o Liability unlimited, joint and several liability o Transfer/succession complex, requires consent. Dissolution of partnership o Management participation rights, managing partner. Right to take part in management o Fundraising difficult, limited by partners person assets and ability to borrow o Tax implications partners pay tax at individual marginal rates Companies o Formation registration, ongoing compliance, separate legal entity o Liability limited o Transfer/succession generally simple o Management directors o Fundraising company charge, public company o Tax implications company tax rate o S113: Proprietary companies cannot have any more than 50 nonemployee shareholders Points of distinction Formation Liability Transfer/succession Management Fundraising Tax implications Week 2 Incorporation S117 register by lodging form with ASIC Form 201 $444 S118 ASIC registers the company, gives an ACN and issues a certificate of registration Corporate Veil Exceptions 1. Avoid existing legal obligations (GILFORD MOTORS v HORNE) 2. Commit a fraud (RE DARBY) 3. Involvement in directors breach of duty (GREEN V BESTOBELL INDUSTRIES) 4. Attribution directing mind + will (TESCO SUPERMARKETS v NATTRASS) 5. Directors liability for insolvent trading s588g 6. Parent company liability for subsidiary debts s588v 7. Uncommercial transactions s588fb 8. Security interests to officers s588fp

3 9. Directors liability for unremitted tax (Income tax Assessment Act) 10. Tax evasion (Income tax assessment act) Types of companies s112 Limited by shares (99.9% of companies) o Share capital o Members = shareholders o Liability limited to amount subscribed o Public of Pty Limited by guarantee o No share capital o Members give guarantee o Non-trading purposes o Public Unlimited by shares o Share capital o Members = shareholders o No limit on liability for members o Public or pty No liability o Share capital o Mining purposes only s9 o Cannot force shareholders to pay call o Members = shareholders o Public

4 12 Step Guide to Directors Duties 1. Are you asked to focus on a particular duty? - Yes: go straight to that duty - No: consider possible application of all relevant duties (step 2) 2. What is the nature of the potential breach? - Is there a problem with why something was done? Yes: consider the duties of loyalty and good faith (step 3) - Is there a problem with how something was done? Yes: consider the duties of care, skill and diligence (step 4) 3. PURCHASE NOTES TO SEE REST OF CONTENT

5 CLAW 2201 Evidence Week 1 Introduction and Characteristics of Corporations Statute: Corporations Act 2001 (Cth): 114 A company needs at least one member 124 Company has powers of a natural person (including to issue and cancel shares) 198A Company is to be managed by the directors (1). They can exercise all powers except those reserved for members by the statute or their constitution (2) 201A Pty company must have at least 1 director (that resides in Australia) (1). Public company must have at least 3 directors (2 of which to reside in Australia) (2). 516 In companies limited by shares, members don t need to contribute any more than the amount unpaid on their shares. 588G Directors have a duty to prevent insolvent trading by company. Partnership Act 1892 (NSW): 1 A partnership is the relation which exists between persons carrying on a business in common with a view of profit 9 Every partner in a firm (other than an incorporated limited partnership) is liable jointly with the other partners for all debts and obligations of the firm incurred while they are partner. After a partner s death, their estate is also severally liable in due course of administration for such debts and obligations so far as they remain unsatisfied, subject to the prior payment of the partner s separate debts (1) 10 Any wrongful act or omission of any partner acting in the ordinary course of business of the firm, or with the authority of the partner s, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable, therefore to the same extent as the partner acting or omitting to act. 11 Where one partner acts within the scope of their apparent authority receives money or property of a third party and misapplies it, the firm is liable to make good the loss. 12 Every partner (other than an incorporated limited partnership) is liable jointly with the partner s co-partners and also severally for everything for which the firm becomes liable 24 Rules subject to any agreement expressed or implied between the partners. (1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses. (2) The firm must indemnify every partner. (5) Every partner may take part in the management of the business. (6) No partner is

6 Div 4 entitled to remuneration for acting in the partnership business. (7) No person may be introduced as partner without the consent of all existing partners. (8) Ordinary matters can be decided by a majority, but no change may be made in the nature of the partnership business without the consent of all existing partners. Dissolution of partnership Week 2 Incorporation and the Corporate Veil Statute: Corporations Act 2001 (Cth): 9 Dictionary 45A Pty company definition. Must: be limited by shares or be an unlimited company with a share capital, have no more than 50 non-employee shareholders, not do anything that would require disclosure to investors under Chapter 6D (exceptions s113) 46 Subsidiary definition. Other body must: control the composition of their board OR be in a position to cast, or control the casting of, more than half of the maximum number of votes at a general meeting, OR hold more than half of the issued share capital 47 Having control of the composition of the board of directors means being able to appoint or remove majority of the directors. 50 Related corporate bodies include: a holding company of another body corporate (a), a subsidiary or another body corporate (b), or a subsidiary of a holding company of another body (c) 112 Types of companies: Pty: limited by shares or unlimited with share capital Public: limited by shares, limited by guarantee, unlimited with share capital or no liability company. 113 A pty company must have no more than 50 non-employee shareholders 114 A company needs to have at least one member 117 To register a company, you must lodge an application with ASIC. Includes information application must contain. Form Once application is lodged under s117 ASIC will give the company an ACN, register the company, issue a certificate and keep a record of the registration. 162 A company may change its company type by passing a special resolution (75% majority) and complying with s 163 and A Pty companies must have at least 1 director (Australian resident) (1). Public companies must have at least 3 directors (2 Australian residents) (2) 588G Directors duty to prevent insolvent trading by the company.

7 588FB 588V Income Tax Assessment Act 1997 An uncommercial transaction is one that a reasonable person in the company s circumstances would not have entered into, having regard to: the benefits and detriment of the company entering into the transaction, the respective benefits to other parties to the transaction and any other relevant matters. Liability of holding company for insolvent trading of a subsidiary Directors are liable for unremitted tax. Tax evasion. Cases: SALOMON v SALOMON & CO* Facts: This was the very first case in which the principal of limited liability and the corporate veil separation was recognized in a case Mr Salomon ran his own boot maker and repairer business This business was being run essentially as a sole trader, but his children and wife helped him run the business Under the legislation in England at that time, to incorporate, you had to have a certain number of directors and shareholders in order to receive limited liability Many people then begun transferring their businesses into corporate structures, as Mr Salomon did into Salomon and Sons His business was not going well, so he borrowed money from a loan shark (extremely high interest rates) He gave security for the loan in the form of a debenture, which is a mortgage over shares He also took some security from his new business structure Mr Salomon and his sons were the shareholders and directors which were needed, there were also 2 secured creditors The company continued to struggle and ended up in liquidation The companies debts were much more than the value of the available assets The first ranking creditor was the loan shark, the liquidator knew he had to be paid first There was enough to pay him There was a little bit left over to pay the unsecured creditors of the business (the trade creditors) Mr Salomon then points out that he is also a secured creditor, he lent the purchase price

8 LEE v LEE S AIR FARMING* MACAURA v NORTHERN ASSURANCE CO* The liquidator says it is ridiculous to say that the original owner could be a sucured creditor Mr Salomon appeals House of Lords agrees with the liquidator, of course it is not a separate legal entity, he IS the company Then appeals to the Privy Council, who agree with Mr Salomon, that he is a secured creditor of the business The fact that he is the major director and shareholder is irrelevant, as long as he complied with the relevant legislation, then he is as entitled as anyone else to the benefit of the corporate veil Principle: Creditor, founder, vendor, director and shareholder are all separate roles, they don t influence each other. There is a corporate veil, you can be both the major director and shareholder as well as a secured creditor. They are independent of each other. Facts: Mr Lee had an air farming business, he took his plane and sprayed crops with insecticide This business was originally a sole trader structure, but he transferred his business into a corporate structure Mr Lee was the owner, but also the person who went up and did the spraying, therefore there was an employment contract between Mr Lee and the company, he was paid a salary as an employee Mr Lee died in a plane crash while working, his widow wanted to claim under his workers compensation policy The insurance company refused because Mr Lee was the major director and shareholder, therefore he could not be considered an employee, as he is the company. Privy Council agreed that he was an employee, she therefore could claim workers compensation Principle: Directors/shareholders can be employees if they are doing the work, it is a separate capacity and role to all of the others. Facts: The corporate veil backfired There was a business running a timber plantation, which then became incorporated After the business was incorporated, a very suspicious fire burnt down all the trees He went to claim with his insurance policy However he took out the insurance when he was the only owner (sole trader). When he incorporated, he transferred the business to a company, but did not

9 GILFORD MOTORS v HORNE* RE DARBY GREEN v BESTOBELL TESCO SUPERMARKETS v NATTRASS transfer the insurance. The insurance was under his name personally, and not the company s. At that time, only someone who had an insurable interest in the property could insure it He was told that he doesn t own the property, only the company does Therefore the company didn t have insurance and couldn t claim after the fire Therefore the corporate veil was a weapon rather than a shield Principle: The corporate veil goes both ways. Exception to the corporate veil. If the business has been created to avoid existing legal obligations, they can lift the corporate veil to attribute liability Facts: Mr Horne was the original managing director of a Gilford Motors, there was a clause in his contract that if he left he wasn t allowed to make contact with their customers or to entice them away Mr Horne left Gilford Motors and set up his own company with his wife and a business partner as the shareholders and directors Mr Horne arranged for the new company to make contact with Gilford Motors customers to entice them away to join his new company Gilford Motors then sued Mr Horne and the company and tried to get an injunction Mr Horne s defense was that, as it is a company, they are not bound by that clause, the company did not sign the contract However it was found the only reason the company was set up was to avoid his existing legal obligations Principle: If a company has been created to help someone avoid their existing legal obligations, the corporate veil can be lifted. Exception to the corporate veil. If a company has been set up for the purpose to commit fraud, then the corporate veil can be lifted. Exception to the corporate veil. Involvement in directors breach of duty. If a company is set up and passes on information to arrange for it to do conduct which breached directors duty, the corporate veil can be lifted. Exception to the corporate veil. Companies can have criminal liability, if they have the mental state and intention. Technically a company can be guilty of

10 murder, if you can attribute the intention of someone behind the company. Directing mind and will of a company can be attributed to the managing director behind the corporate veil and it will be lifted.