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Company Law > Week 1 > Flashcards

Week 1 Flashcards

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1
Q

Key issues to consider in comparing structures

A

Risk of loss of assets or the business

Asset protection/ limit liability

Minimise expenses

Succession planning passing on the business

Raising funds for future expansion

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2
Q

Advantages of a company structure

A

Limited Liability

Perpetual succession

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3
Q

Limited Liability

A

Debts of company are its own

Members have no personal liability except for capital to be contributed

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4
Q

Perpetual succession

A

Continues indefinitely even if owners and operators change

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5
Q

Disadvantages of a company structure

A

Compliance costs

Disclosure (publicity)

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6
Q

Compliance costs

A

Set up, running, audit and wind up

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7
Q

Disclosure (publicity)

A

Info to ASIC and ASX rules

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8
Q

If it is to be a company then what is a company?

A

See sections 9 and 57A Corporations Act for the definition

“company” means a company registered under this Act

A Corporation includes a company and any body corporate

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9
Q

What sort of company should I form?

A

Company Limited by Shares
Proprietary versus Public
Listed versus Unlisted

Company Limited by Guarantee

Unlimited Company

No Liability Company

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10
Q

Company Limited by Shares

A

Most common type
Raise funds by issuing shares
Shares can be fully paid or partly paid
Can be proprietary or public

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11
Q

Proprietary companies (e.g. private, family)

A

s 113:

no more than 50 members

no fund raising activity requiring a disclosure document under Chapter 6D

may be a company limited by shares or an unlimited company with share capital – s 112

(If it doesn’t meet all of above then it will be a public company)

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12
Q

Companies Limited by Shares (Proprietary companies)

A

Can be single director/single shareholder company (such as Racing Parts Pty Ltd). Classified as small or large (s 45A) Tests to determine.

Must meet two of three tests to be a small pty company

Tests are:
Revenue less than $25m,
Assets valued at less than $12.5m
Less than 50 employees

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13
Q

Companies limited by shares(Listed and unlisted public companies)

Benefits and disadvantages of listing

A

Cost of capital
Liquidity
Access to capital/funds

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14
Q

Companies limited by shares(Listed and unlisted public companies)

Eligibility to list on ASX

A

Size and shareholder spread

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15
Q

Companies limited by shares(Listed and unlisted public companies)

Process of listing on ASX

A

Application for admission to the list

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16
Q

Conversion from one type of company to another

A

Change in activities of company eg proprietary company can/ may want to go public or revert back to a private company to retain control. Process to change is in Part 2B.7 of the Corporations Act

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17
Q

Process to change is in Part 2B.7 of the Corporations Act

A

Pass a special resolution

Regulatory requirements

Provide information to ASIC

Does not create a new legal entity or affect the company’s relationship with outsiders

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18
Q

Companies limited by guarantee

A

The members of the company have their liability limited to the amounts that they have undertaken to contribute to the company in the event of a winding up. It has no share capital. Only contribute on winding up and not during the operations. Amount to be paid by the member is called the members guarantee. No capital raised initially. Capital comes from donations/subscriptions. Used for clubs, charities and other non-trading activities.

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19
Q

Unlimited Companies

A

It is a company whose members have no limit placed on their liability to the company. In a winding up members are liable for the debts of the company without limit. Therefore similar to a partnership.

20
Q

Why create unlimited companies?

A

Examples are professional practices (e.g. lawyers and accountants) which are prohibited under their professional rules from running a practice with limited liability

21
Q

A No Liability company must have:

A

Share capital

State that its objects are mining

No contractual rights in its constitution to recover calls made

NL company can only operate in the mining sector

Calls on share must be paid within 14 days otherwise shares are forfeited

However, note that not all mining companies are no liability companies (the major ones are public companies limited by shares – ASX: BHP, RIO, FMG etc.)

22
Q

How do you now create a company?

A

Create a new company (Form 201) or purchase a shelf company

23
Q

Shelf company

A

Company already exists and has been registered with ASIC. New owner just charges name and owners and rules.

Costs are about $600 - $1,500 plus GST (including the ASIC fee)

ASIC fee is about $460

24
Q

Corporate groups

A

Business can operate through more than one company. If running multiple businesses may wish to separate different businesses because of reporting, performance profitability and liability purposes.

Each company in a corporate group is a separate legal entity

Tests to determine what is a subsidiary are in section 46 (4 tests)

25
Q

Tests to determine what is a subsidiary are in section 46 (4 tests)

Only need to meet one of tests:

A

Holding company controls composition of board of directors i.e. appoint or remove directors of subs company

Holding company controls more than 50% of the votes of the subsidiary company

Holding company holds more than 50% of the issued shares of the subsidiary company

The company is a subsidiary of another subsidiary of the holding company

26
Q

Legal recognition of corporate groups

A

Limited recognition of corporate groups – law treats them as separate entities.

However some recognition of groups in the law covering insolvent trading e.g. holding company may be liable for debts of a subsidiary (see section 588V).

Related party transactions (section 208) transactions between public company and related entities.

Financial statements consolidation of accounts.

Directors duties director of wholly owned subsidiary to act interests of the parent company in some cases. E.g. normally director owes duty to company they are a director of, but section 187 allows a director of wholly owned subsidiary to act in the interests of the holding company.

27
Q

Certificate of Incorporation per s 1274(7A)

A

A certificate issued by ASIC stating that a company has been registered under this Act is conclusive evidence that:

(a) all requirements of this Act for its registration have been complied with; and

(b) the company was duly registered as a company under this Act on the date specified in the certificate.

28
Q

First Legal Concept: Separate Legal Identity

A

A company once registered is a separate legal entity from its members and those that manage its operations. A company can incur debts in its own name, hold property take and defend legal action. The company continues unchanged even if members and operators change.

29
Q

Separate Legal Entity and the “Corporate Veil”

A

The company is a legal person separate from its participants

30
Q

The company is a legal person separate from its participants

This means that:

A

The company is separate from the people that run the company and own it

its obligations and property are its own and not those of its participants

The company can sue and be sued in its own name

its existence continues unchanged even if the identity of the participants changes

A company can contract with its participants

31
Q

Corporate Veil

A

Corporate veil” reflects and results from company’s separate legal personality. Expression that lawyers use to describe the legal rules that keep participants (members, officers) separate from the company in a legal sense.

32
Q

What is the effect of the corporate veil?

A

Stops the law from “seeing” the participants that make up the company (i.e. the owners and operators). Means that the law cannot look through the veil of incorporation and say that the company’s obligations, liabilities, rights or property are obligations, liabilities, rights or property of the participants

33
Q

Can I still be liable even though the company is a separate legal entity?

A

Yes, through the law “lifting the corporate veil”.

This happens through:
Statute Law (Corporations Act or other legislation); or
Common Law.

34
Q

Lifting the corporate veil under Corporations Act:

A

These are mainly dealings between the company and a director where the director attempts to get a benefit over third party creditors. The courts look through these transactions and treat the action of the company as actions of the director.

Examples:
Directors liable if it allows the company to trade whilst insolvent

Defeating employees’ rights to entitlements

35
Q

Examples of lifting the corporate veil under other legislation

A

OHS & Work Safety legislation

Directors required to exercise due diligence

36
Q

Lifting the veil under common law

A

Where the company is set up or used to perpetrate fraud – Re Darby

To evade or avoid an existing legal obligation – Gilford Motor Co Ltd v Horne

Where there is a torts claim - Briggs v James Hardie & Co Pty Ltd

37
Q

When will the corporate veil be lifted in a corporate group?

A

Holding company liable for debts of subsidiary if it was trading insolvent (sections 588V -588X)

AASB 1024 prepare consolidated accounts and not individual accounts

38
Q

Second Legal Principle: Limited Liability (Pty Ltd or Ltd)

A

Applies to members only. Liability is limited to the amount of any unpaid share capital or guarantees given. Members are legally responsible for the debts of a company only to the extent of the unpaid amount on the nominal value of their shares. Company must use Pty Ltd or Ltd after its name.

Section 516 Corporations Act:

39
Q

Section 516 Corporations Act:

A

Subject to sections518 and 519, if the company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member.

40
Q

Third Legal Principle: Pre-incorporation contracts

Practical question: What happens when someone wants to enter into a contract on behalf of a company that is not yet registered?

A

In modern times, these types of contracts are becoming less common as can set up a shelf company (already registered) and use that to sign the contract.

Promoters are in a fiduciary relationship with the yet-to-be-formed company, that prevent them abusing their power.

41
Q

Promoters are in a fiduciary relationship with the yet-to-be-formed company, that prevent them abusing their power.

A

Must act in principal’s best interest and put principal’s interest ahead of that of their own.

Must show loyalty and be faithful to person you established and must not make secret profits i.e. sell asset to company at inflated price

Liable for remedies in the case of breach of duties

42
Q

Third Legal Principle: Pre-incorporation contracts

Summary of sections 131-133:

A

If a person enters into contract on behalf of a company yet to be registered then the company is bound by the contract provided the company is registered and ratifies the contract within the agreed time or within a reasonable time.
If the company is not registered then the person signing the contract is personally liable or if the company is registered but does not ratify the contract
Once ratified then the company can enforce the contract and bound by the contract
If not ratified or company not registered then the person is personally liable for damages

43
Q

How can a company be liable for civil and criminal wrongs?

A

Because a company is a separate legal entity it can be liable for committing civil and criminal wrongs.
But a company is not real…it can only act through people…if the real people commit civil or criminal wrongs how is the company liable?

Direct Liability v Vicarious Liability

44
Q

Direct Liability

A

This is where the courts or legislation makes the company directly liable, and the acts of the individual who controls the company will be seen as acts of the company

Courts look to the controlling or directing mind and will of company (organic theory)

45
Q

Vicarious Liability

A

Employer is liable for acts or omissions of its employees as long as acting within their scope as employee

46
Q

Company Liability

For civil wrongs (common law and statute):

A

Vicarious liability: company has not done anything wrong but it is the action of another (employee) that makes the company liable

Contracts entered into on behalf of the company – dispute is with the company (Principle of Separate Legal Identity)

Statutes allow claims against the company directly

47
Q

For criminal wrongs (statute)

A

By statute: legislation will say that a company is a person

Not guilty of murder but can be guilty of manslaughter (lesser charge) and a fine

If individual of company commits a crime (e.g. see Australian Consumer Law legislation) then attributed to company

Company Law (9 decks)

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