Exam Index Who is a Director?

- Whether someone is a director (9(b)(i)): 2009 Question 3 - Shadow officers and de factor directors: 2009 Question 3

Disqualification

- Automatic disqualification (206B(3)): 2009 Question 3 Declaration of Dividends

- Incurrence of a debt (254V(1)-(2)): 2012 Question 2Ab - Profits test (254T): 2012 Question 2Ab, 2011 Question 2b

Directors’ Duties

- Duty of Care, Skill and Diligence o Act with reasonable care and diligence, same as CL (180): 2012 Question C, 2011 Question 1a

§ BJR (180(2)) § Delegation (198D) § Reliance (189)

o Prevention of insolvent trading (588G): 2009 Question 3, § NOTE: Only applies to directors § Reasonable grounds to expect solvency (588H(2)): 2009 Question 3 § Reliance (588H(3)) § Absence from management (588H(4)) § Reasonable steps to prevent incurring of debt (588H(5))

- Duty of Loyalty and Good Faith o Duty to act in good faith and in the best interests of the company (181(1)(a)): 2009 Question 3, 2012 Question Ba,

2012 C, 2011 Question 1a § Duty owed to the company and not to the creditors (Kinsella) § Objective standard (Adler)

o Duty to act for a proper purpose (181(1)(b)): 2011 Question 1a o Avoid conflicts of interest

§ Duty to disclose material personal interest (191): 2011 Question 1a § Duty not to misuse information or position (182 and 183): 2012 C, 2011 Question 1a § Related party transactions (Ch 2E): 2012 Question C, 2011 Question 1a § Common law

• Duty not to misuse confidential information Reduction of Share Capital

- Common Law: General prohibition to reduce share capital (Trevor v Whitworth) unless… o Permitted share capital reductions (256B(1) and 256D)

§ Fair and reasonable (256(B(1)(a) • If it is not, apply for injunction (1324 and Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd)

§ Does not materially prejudice ability to pay creditors’ (256B(1)(b)) § Approved by shareholders under s 256C (256B(1)(c))

• Approval requirements • Notice requirements

o Permitted share buy backs (275A): 2011 2c o Permitted financial assistance (260A): *2011 1b*

§ ASIC v Adler § Was there shareholder approval (260A(1)(b) § Was there any exemptions (260(1)(c)) § Did the assistance materially prejuce interests (260(1)(a)(i)-(ii))

Issuance of Shares

- If the shares in question are preference shares, did they comply (254A): 2011 Question 2a o Note a court can validate a preference share issue (254E) o Are they a variation of class rights?: 2007 Question 1a

§ Common law (White v Bristol): 2007 Question 1a • Distinguished in 2012 Question 2Aa

§ Deemed variation (246C): 2007 Question 1a, 2011 Question 2a § Procedure to vary and cancel class rights (246B(1)-(2)): 2007 Question 1b, 2009 Question 2b, 2011

Question 2a § Challenging a variation of class rights (246(1) and 246D(5)): 2009 Question 2c

Consequences of Treating the Company as a Separate Legal Entity - Company’s obligations and liabilities are its own, and not those of its participants

o Shareholders have limited liability o Liability of shareholders is limited to the amount they have not paid on their shares

§ So, if a shareholder has fully paid for the shares – he has no liability § If only paid $1 on a share that was issued by a company at the price of $3 – the shareholder’s

liability would be limited to the amount unpaid on the share - $2 - A company will be a separate legal entity even though a single person manages and controls it:

Salomon v Salomon & Co Ltd [1897] AC 22 - A company is a separate legal entity and a person may concurrently have a variety of legal relationships

with that company: Lee v Lee’s Air Farming Ltd [1961] AC 12 - Shareholders do not have a proprietary interest in a company’s property: Macaura v Northern Assurance

Co Ltd [1925] AC 619 - Company can sue and be sued in its own name - Company has perpetual succession - Company’s property is not the property of its participants - Company can contract with its participants

Week 1

Separate Legal Entity On registration, a company becomes a separate legal person…

- Section 119: A company comes into existence as a body corporate at the beginning of the day on which it is registered

- Section 124: A company contains the legal capacity of… o Natural Persons o Body Corporates

Piercing the Corporate Veil The ‘corporate veil’ or ‘veil of incorporation’ can be explained as legal rules that grant the company ‘separate legal personality’, which consequently separates the company from its participants (e.g. shareholder, directors etc)

- This reasoning is derived from Salomon’s Case (above), which established that a company and its participants must be treated separately i.e. the corporate veil protects the company’s participants from liability

- There are a few exceptional circumstances that exist in which a court will pierce the corporate veil and disregard the separate legal personality of a company…

o COMMON LAW EXCEPTIONS § Where a company is used to avoid existing legal duties § Where a company is used for perpetuating a fraud § Agency

o STATUTORY EXCEPTIONS § Insolvent trading § Debts incurred as a trustee

Where a Company is Used to Avoid Existing Legal Duties The corporate veil may be pierced where the company was formed for the sole or dominant purpose of avoiding an existing legal duty…

- NOTE: It is OK to form a company to LIMIT personal liability for future obligations, but not to AVOID existing obligations…

o Gilford Motor Co Ltd v Horne: A company was formed for the sole or dominant purpose of avoiding a non-compete clause

o Jones v Lipman: A company was formed for the sole or dominant purpose of avoiding a contract for the sale and purchase of land

Where a Company is Used for Perpetuating a Fraud The corporate veil will be pierce where it is used to perpetuate a fraud: Re Darby [1911] 1 KB 95 Agency Insolvent Trading

- Insolvency occurs where a company cannot pay its debts as they fall due for payment - Section 588G: This section will operate to lift the corporate veil when a company trades while

insolvent and imposes personal liability on the directors for the company’s debts o A director will become personally liable if they fail to prevent the company incurring a

debt when there are reasonable grounds to suspect that the company is insolvent or the debt will render the company insolvent

o DEFENCES: These are contained in section 588H Debts Incurred as a Trustee

Lifting the Corporate Veil of Group Companies The ‘corporate veil’ is what separates the company from its members/directors. To pierce this veil is when the law goes behind this barrier and attributes liability to individuals, as opposed to the company

- “...the court is not free to disregard the principle of Salomon v Salomon merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entitled with all the rights and liabilities that would normally attach to separate legal entities”: Adams v Cape Industries PLC

Here is a diagram of some situations that will lift the corporate veil for group companies…

Corporate Liability for Crimes and Torts A company is a legal fiction, so the idea of imputing an ‘action’ or ‘state of mind’ to a company is impossible; however, there are two ways in which such liability can be imputed…

- Vicarious Liability - Direct Liability

Vicarious Liability

- Legislation may provide that a company may be convicted for the actions of its agents without the need to impute a guilty intent to the company

o Under common law, an employer (i.e. a company) is vicariously liable for the acts of its employees in the course of employment

o The actor will be personally liable, and the company will be vicariously liable Direct Liability: Organic Theory A company can be primarily liable when the act/intent of a person are taken under the ‘organic theory’ to be the act/intent of the company itself

- A company liable for the act/intent of employees “who represent the directing mind and will of the company, and control what it does”: HL Bolton (Engineering) v TJ Graham and Sons Ltd [1956]

o “Some of the people in the company are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by law as such” HL Bolton (Engineering) v TJ Graham and Sons Ltd [1956] per Lord Denning

o Seniority is key factor!

Types of Business Structures

Tesco Supermarkets Ltd v Nattras [1972] AC 153 FACTS HELD

- The court applied the ‘organic theory’ to the shop manager and shop assistant and held that neither represented the directing mind and will of the company

- Accordingly, the acts of the shop manger and shop assistant were not the acts of the company

The Process of Registration (Incorporation)

1. An appilication must be lodged with ASIC under section 201 2. Section 117: The application must contain the following contents…

o Whether the company is proprietary or public o Members, number of shares and share classes o Directors

§ Pty – One ordinarily residing in Australia § Public – Minimum of 3, 2 ordinarily residing in Australia

o Secretary § Public – Must have

o Consents of members, directors and secretary o Address of registered office o Constitution or replaceable rules o Company name

3. When ASIC registers the company, an ACN and issue of registration will be issued 4. Section 119: A company will come into existence when registered

Separate Legal Entity Pros

- The company’s obligations and liabilities are its own, and not those of its participants - The company can sue and be sued in its own name - The company has perpetual succession - The company’s property is not the property of its participants - The company can contract with its participants - A person may concurrently have a variety of legal relationships with a company (e.g. director,

shareholder and employee)

Week 2 Company Limited by Shares

- Section 516: Each member’s liability to the company is limited to the amount unpaid on their shares; so if shares are fully paid, there is no liability risk

- Section 148(2): ‘Limited’ or ‘Ltd’ must be in a company limited by shares’ name; this serves as a warning to potential creditors

- Can be public or proprietary company Company Limited by Guarantee

- Section 517: Each member’s liability to the company is limited to amount the member had undertaken to contribute in the event that the company winds up

- Unlike a company limited by shares, there is NO share capital - Often used for non profit activities - Can only be a public company

Unlimited Company

- Section 9: This is a company whose members have no limit placed on their liability; in other words, members are jointly and severally liable for company’s debts without limitation upon winding up

- This type of company is NOT suitable for trading ventures; instead, it is primarily used by professional associations where members required to have unlimited liability

- Can be public or proprietary company No Liability Company

- Section 148(4): ‘No Liability’ or ‘NL’ must be used in a no liability company’s name; this serves as a warning to potential creditors

- Section 112(2): The company MUST be a ‘mining company’ o Section 112(2)(b): A ‘mining company’ is a company whose constitution states that its

sole objects are mining purposes o ASC v SIB Resources NL: If the company’s constitution permits activities that are not

necessary for, or incidental to, its mining purposes, the company will not meet the definition of mining company

- Can only be a public company