Topic 1 Revision Notes

Transcription

1 Topic 1 Revision Notes What is Law: Need for Laws: -To promote social cohesion and therefore avoid chaos Non-Legal -Created by community or individuals -EG. School and sport rules Legal -Created by parliament, courts, local councils, subordinate authorities -Designed to protect individuals -Enforced by courts, cops, etc -More serious consequences Criminal Law -Prosecution vs. Defendant -Protecting community - Beyond reasonable doubt -Fines, prison, etc. Civil Law -Plaintiff vs. Defendant -Protecting individuals rights - On the balance of probabilities -Damages, injunctions, etc. Sources of Law: Statute Law -Parliament is representative of people -Acts, Legislation, Statute, Bills Common Law (case law/judge made law) -Precedent, Cases Introduction to Corporations Law: -Subject is concerned with the legal structure that enables corporations to operate and regulates their activities. That is CORPORATIONS ACT The Corporations Act: -Creates legal environment for companies that are established to function -Balances competing interests: Company, shareholders, max profits VS. Protection of investors, creditors and other stakeholders Stages of Corporations Life:

2 -Pre-incorporation -Incorporation -Management and regulation -Insolvency and liquidation Historical development of Corporations Law: -Australian corporations legislation historically is based on English Law -States used to be responsible for legislation in respect of the incorporation of companies and the regulation of their business. However this caused a lack of uniformity between the states, and made it difficult to enforce and administer companies who operated on an international basis. Company Snapshot in Australia: -More than 1.92 million Aus companies -99% of these are companies limited by shares Aus companies are listed on ASX (0.15%) -Most unlisted companies are very small and have few participants A Company s Management Structure: -Responsibility for making decisions is separated between members and officers. Such decisions include deciding on appropriate capital structure (borrowing, dividends, issuing more shares) and deciding on company activities (how to use capital, what enterprise to carry on). Members: Officers: -Are in a general sense, the company s proprietors (owners) -People who have invested money with the company in the expectation that they will receive a return on their money if the company is successful (Dividends paid or growth of investment) -Any legal person can be a member of a company (EG. A company). -A person who holds shares in a company is a member of a company -Are the people responsible for the management of the company -Can only be natural people -The officers of a company include its directors (collectively called Board of Directors ) -Must have at least 1 director in private company -Must have at least 3 directors in a public company -Directors make most decisions without needing approval of members, however certain fundamental decisions require the approval of members (EG. Regarding rights of members and changing internal governance rules). Executive directors: employed in company, devote substantial working time to managing company affairs Non-Executive directors: not employed, but provide outsiders contribution -All public companies must have a secretary. A secretary is responsible for certain admin and reporting functions set out in the law Concept of Incorporation:

3 What is a Corporation: -Body corporate = Artificial legal entity (created and recognized by law, rather than being real individuals) -Corporation = Artificial legal person, having rights and owing duties (Doctrine of separate legal personality) -Company = Company as registered under Corps Act Key features of a Corporation: -A company has, as a consequence of its creation as an artificial legal entity, the legal capacity of an individual (S124, CA) -It is also distinct and separate from its members, directors, managers, employees and third parties -Have additional powers that natural person s don t have: EG. Issue shares and debentures -A legal person (artificial) -Required by law to look after financial interests of shareholders (profits) primarily Consequences of Incorporation: Can sue and be sued: Perpetual succession: Common seal: Power to aquire, hold and dispose of property: Limited liability of members: -Sue in its name and be sued in its name -Means it is a continuing entity -Regardless of changes in membership or death of members -Continues until it is deregistered (struck of the register) -Company may have a common seal bearing its name and ACN (s123) -A company owns its own property in its own right, rather than having someone such as a director own the property on its behalf -Therefore members do not own a company s property -Depends on type of company: Company limited by shares: Limited to capital sum unpaid on shares (s516) Company limited by guarantee: Liability is limited to the amount a member guarantees under the company s constitution (s517) Unlimited liability company: Fully liable for company s debts on winding up -Note when a company is being wound up, members cant only expect a return on capital if the company has sufficient assets, once all their debts are discharged Salomon v Salomon & Co Ltd: (3-120) year old case that affirmed a company was a separate legal entity from its participants

4 -Facts of case: -S ran small boot manufacturing business as a sole trader -Decided to incorporate business -S and his family members were the only shareholders to his company -Company s assets had to be used to pay S in full before they could be applied to pay out company s other unsecured investors -Business failed -Assets were insufficient to pay out S and other creditors -Issue: -Was the company an agent or trustee for S or was it a separate legal entity? -Held: -Company was separate -Therefore S had to be paid before creditors Macaura v Northern Assurance Co Ltd: (3-140) -Facts: -Sold land and timber to company in return for shares -Took out insurance against fire in his own name -Fire destroyed timber -M claimed insurance -Issue: -Could M claim insurance? -Held: -Because timber was company asset, only company could have insurable interest -Therefore M could not make a recognizable claim on the insurer -NOTE, law has now changed in relation to insurable interests (s17 Insurable Contracts act) Lee v Lee s Air Farming Ltd: (3-140) -Facts: -Lee was major shareholder, governing director and employee of Lee s Air -Lee died -Widow (woman who has lost her husband by death) claimed compensation -Issue: -Was Lee able to enter into a contract with the company when they were really the same -Held: -Lee was able to enter a contract of employment with the company as it was a separate legal entity -Therefore Lee s Widow could claim compensation Lifting the Veil of Incorporation:

5 -Corporation as a separate legal entity has certain advantages: Protects investors from risk of personal liability for business debts Encourages investment, enterprise and capital raising -However as a result the company s debts are its own and not those of its participants (Disadvantage): Managers may be less careful than they otherwise would have been -In some circumstances, the court will lift the corporate veil to expose those behind the company to liability (exception to general rule that each company must be treated as a separate legal person) Lifting the Veil at Common law: -There is no overarching principle re when corporate veil will be lifted -English courts are more inclined to lift than Australian courts -EG. Where there is a fraud Company was formed to avoid an existing obligation (Gilford Motor Co Ltd v Horne) The company was seen to be really acting as agent of the controllers (Smith Stone & Knight Ltd v Birmingham Corporation) Lifting the Veil under Statute: -Corporations act provides for lifting of Corporate veil in particular circumstances where the company trades while insolvent (ss.588g-u, 588Y, (defenses s588h)) -The insolvent trading provisions in some circumstances render holding companies to be liable for corporate debts of their subsidiaries. That is the holding company failed to prevent the subsidiary from incurring the debt (ss.588v-588x). -Companies are required to prepare balance sheets and profit and loss statements (s295) -Other statutes such as the Income Tax Assessment Act 1936 provide for the Corporate Veil to be lifted ASIC (Australian Securities and Investment Commission):

6 -ASIC is the main regulator of companies and the body responsible for carrying out the administrative functions set out in the Corporations Act. -ASIC is an independent Commonwealth Government body -Established by Australian securities & investment commissions act 2001 ASIC Functions: -Consumer protection -Regulation of financial markets -Regulation of companies (FOCUS): -Registering companies (leads to incorporation of the company) -Gathering and disseminating info about companies -Educating companies and individuals about the law (help people comply with the Corp Act) -Modifying operation of the Corps Act in certain circumstances -Registering company auditors and liquidators -Investigating breaches of the law (investigations often occur because of someone complaining to ASIC) -Enforcing the law In undertaking functions, ASIC must strive to achieve specified objectives (s1(2) ASIC): -Promote the confident and informed participation of investors and consumers in the financial system -Administer the laws that confer functions and powers on it efficiently and with a minimum of procedural requirements Comparison of Corporation & other forms of Business Organisations: Not for Profit activities: -Conducted through UNINCORPORATED or INCORPORATED associations -EG. Sporting or community service groups Unincorporated: Incorporated: -May still make a profit as a result of activities, but this profit must be used for the purposes of the association (not redistributed to members) -Not a separate legal entity -Therefore cannot enter into contracts, sue or be sued, or own property in its own name -Members of an unincorporated association do not have the benefit of unlimited liability -Is incorporated under the Associations Incorporation Act 1981 (Vic). -Benefits of limited liability, and can hold property in its own name -Cannot redistribute profits to members (otherwise it would be a Corporation) For profit activities:

7 Sole Proprietor (Sole Trader): Partnership: Unincorporated Joint Venture: Trust: -Individual person that operates business in their own name -More simple and informal -Death of sole trader results in the end of the business -No separation between the business and personal assets or obligations of the person running the business (Personally liable). -A partnership is the relationship that exists between persons carrying on business in common with a view to profit (s5 of the Partnership Act 1985 Vic). -Partnership can be created by writing, deed, orally, or conduct -Cheap and easy to form, easy to alter, and easy to dissolve -A partnership is not a separate legal entity -Partners have fiduciary obligations to other partners -Sharing of profits -Each partner can act as an agent for other partners. Meaning they can incur obligations for which all other partners are also responsible. -Partners do not have limited liability unless they are part of a limited partnership. These are rare in Aus, because they are taxed the same as companies. -Partners are jointly and severally (ie, individually) liable for each other s contracts and torts where incurred in the course of the partnership business. -Membership is limited to 20, except for certain professional relationships: such as accountants, architects, and doctors (s115 CA). More than 20 members is prohibited unless it becomes incorporated. -Contractual arrangement between two or more people that they will cooperate to conduct a particular venture of related ventures -Not a separate legal entity. Therefore assets & obligations are those of venturers personally. -However Joint venturers are not agents of each other. -A trust arises where one person is required to hold or invest property for the benefit of another person. The person who holds the property is the trustee, and the people who are entitled to enjoy the property and receive the income or other proceeds from it are the beneficiaries. -Trustees have fiduciary obligations -A trust is not a separate legal entity -Trusts do not have to pay on trust income so long as it is distributed to the beneficiaries (however, they still must lodge trust returns)

8 Summary of Different Types of Organisations: Company Advantages: -Limited liability: meaning debts are its own and not those of its participants. Assuming the company s controllers have not acted unlawfully, on insolvency the company s members would lose their initial investment but would not be required to contribute any more money (other than any amount unpaid on partly paid shares) to meet the company s debts. -Perpetual succession: meaning a company s existence continues indefinitely until it is brought to an end through winding up and de-registration, despite changes in the identity of its participants. This reduces the cost and complexity involved in transferring those assets and obligations if the identity of the enterprise changes. -Free transferability of interests: meaning companies can unitize investor s interests in the business in the form of shares that are capable of being traded through organized stock exchanges. --Companies as large commercial enterprises: unlike partnerships, companies can have more than 20 members (s115 CA). -Corporate law as a standard form contract between participants: for enterprises that have a separation of ownership and control, company law can provide a useful set of rules to govern the relationship between the participants. -Taxation: Companies may a lower marginal tax rate than individuals. Also the breakeven point is $ , meaning that if a company earns more than $130 00, they may pay lower income tax. Company Disadvantages: -Establishment and administration costs: More expensive to establish. As well as maintain records, make public filings, disclosing information to members. -Publicity: All companies other than small proprietary companies are required to disclose to ASIC (and therefore to the public) their key financial information on a periodic basis. This information is available to anyone that seeks it. -Public law obligations: Companies and their participants are required to submit themselves to regulation under the public law. This is enforced through criminal sanctions and civil penalties.