CLAW1003 flashcards week 1-5

who has actual authority in partnerships and companies?

agents

what are the two types of associations, and what is there differences?

1. Unincorporated (>2 members) 

• Liability to outsiders uncertain 

2. Incorporated (>5 members) 

• Registered 

• Members liability limited 

• Association can be sued

what is the point of distinction between business structures?

Formation, Liability, Tranfer/Succession, Management, Fundraising and Tax Implications

what is a sole trader’s characteristics in terms of formation, liability, succession, management, fundraising and tax implications?

• Formation - limited formalities, low compliance, not separate legal entity.

• Liability - unlimited 

• Transfer/Succession - Difficult 

• Management - individual 

• Fundraising - Limited by personal assets, personal ability to borrow

• Tax Implications - Marginal income tax rates (“one person” company) s114, s201A

what is a partnership’s characteristics in terms of formation, liability, succession, management, fundraising and tax implications?

• Formation - limited formalities, low compliance, not separate legal entity 

• Liability - unlimited, personal 

• transfer/succession - complex, requires consent 

• Management - participation rights, managing partner 

• Fundraising - difficult, limited by partners’ personal assets, partners’ personal ability to borrow 

• Tax implications - partners pay tax at individual marginal rates

what section indicates the definition of a partnership?

Section 1 Partnership Act 1892 (NSW)

what section of the partnership act 1892 sets out the rules for determining the existence of a partnership? and what are the rules?

section 2, rules:

• Business activity

• In common

• Profit motive

which case indicates that a joint venture, even though its called it can be considered legally as a partnership?

UDC v Brian 1985

what is the section that defines a company?

• s9, ss57A Corporations Act 2001 (Cth) → Definition of a company 

1. Seperate legal entity 

2. Perpetual succession 

3. Limited liability

what section provides the legal capacity of a company?

• s124(1) Corporations Act 2001 (Cth) → company has the legal capacity and powers of a natural person unless restricted. can:

• Enter contracts 

• Own property 

• And be sued

what is a company’s characteristics in terms of formation, liability, succession, management, fundraising and tax implications?

• Formation - registration, ongoing compliance, separate legal entity

• Liability - limited 

• transfer/succession - generally simple, perpetual succession

• Management - directors 

• Fundraising - security interest, public company 

• Tax implications - company tax rate

what is the definition of a company and what section is it found

• s9, ss57A Corporations Act 2001 (Cth) → Definition of a company 

1. Seperate legal entity 

2. Perpetual succession 

3. Limited liability

what is the legal capacity of a company?

has the legal capacity and powers of a natural person (s124 corporations act 2001)

are shareholders liable or what circumstances are shareholders liable in a company?

• shareholders not personally liable for company debts (except unpaid share capital)

are directors liable or what circumstances are directors liable in a company?

 directors are not personally liable for company debts unless they engage in insolvent trading.

what is a trust’s characteristics in terms of formation, liability, succession, management, fundraising and tax implications?

• Formation - complex structure, not separate legal entity 

• Liability - Trustee has unlimited liability, Beneficiary has limited liability limited to share in trust. 

• Transfer/Succession - Complex, Subject to trust conditions 

• Management - Trustee 

• Fundraising - Difficult 

• Tax Implications - Beneficiaries at individual marginal rates, Trustee have penalty rates (top marginal rate)

what act regulates companies?

corporations act 2001 (cth)

where do you register a company and what do they give you upon registration? what section is this in the corporations act?

companies must register with ASIC. s118 of the corporations act 2001 stipulates that ASIC will provide them a certificate of registration and ACN.

what legal status does a company hold after registration?

a company adopts a legal status of its own entity where it has perpetual succession.

what is the corporate veil?

As a separate legal entity, a company is distinct and separate, not only from other companies but from its own members and directors (Corporate Veil)

what does the corporate veil protect management from?

liability

what was the case of salomon v salomon?

independent legal entity - creditor, founder, vendor, director, shareholder (company and its controllers. → established that upon incorporation, a new and separate artificial entity comes into existence. → shareholders and directors may contract with the company and a person may both be the shareholder and secured creditor. → also saw the issue of the inflated price, as the liquidator indicated it was overestimated price and therefore a sham, yet it was ruled that even if inflated, was not fraudulent because it was approved by all shareholders at the time (himself and his family).

what was the case of lee v lee’s air farming?

 issue of if an individual is able to have a master/servant relationship to a company they control (Owner died whilst conducting work and wife wanted to gain workers compensation) → as the company is a real legal person, was separate to the owner, he couldve gone into an employment contract with him and can be a worker under the statute, therefore the wife was able to claim workers comp. → usually should be in the course of their employment (section 4 Workers Compensation Act 1987)

what was the case of macaura v northern asurance?

reaffirms separate legal entity in regards to insurance as Macaura’s ownership of the company did not give him an insurable interest in the company’s property. Therefore the insurance policies were void as they were taken out by Macaura in his own name, not the name of the company.

what are the exceptions for when the corporate veil can be lifted? what section of the law is this found?

used for fraud

avoid a contractual or legal obligation

insolvent trading

section 588G Corporations Act 2001 (Cth)

what sections are the other exceptions to the corporate veil?

• s588FP Corporations Act 2001 (Cth) → A security interest (right to take company property if debt not repaid) granted by a company to an officer or related insider is void if the insider enforces it within 6 months of its creation, unless the court grants leave.

• s588FL Corporations Act 2001 (Cth) → if you have taken a security and have not registered it, you cannot enforce the security if the business goes into liquidation within 6 months.

s588V Corporations Act 2001 (Cth) → Parent company will be held liable for debts for a subsidiary company they knew or should have suspected is insolvent. The parent is liable if: It had reasonable grounds to suspect insolvency, OR It should have known (a reasonable company would have known).

what occurs to a director and/or companies when the corporate veil is lifted?

Where the veil is lifted a director may become personally liable for a company debt; or 2 separate companies may be treated as one entity by the court for the purposes of allocating liability

case for aovidance of contractual obligations for lifting the corporate veil

Gilford Motor v Horne 1933 → corporate veil lifted if there is an avoidance of contractual obligations → broke a non-compete clause

what is the case for the avoidance of existing legal obligations

Creasey v Breachwood Motors Ltd 1993 → Corporate Veil lifted is there is an avoidance of existing legal obligations → fired an individual court order to reinstate them, then the company stopped operations and moved to a new company and then tried to get rid of them again as they said they were trading not under the old company anymore.

what are the practical responses to limited liability/corporate veil?

Security 

• Security interest over company assets 

• Personal guarantees from directors 

• Guarantee from parent company 

• Bargaining power?

what are the 4 types of companies, what section is this under, and how are they classified/distinguished from?

s112 of corporations act 2001 (cth)

1. limited by shares (public or proprietary)

2. limited by guarantee (public only)

3. no liability (public only)

4. unlimited liability (public or proprietary)

characteristics of limited by shares company

• Share capital 

• Members = shareholders 

• Liability limited to the amount subscribed 

• Public or Pty

characteristics of limited by guarantee companies

• No share capital

• Members give guarantee 

• Non-trading purposes 

• public

does a company limited by guarantee have share capital?

no - therefore members are not sahreholders.

characteristics of no liability companies

• Share capital 

• Members = shareholders 

• No limit on liability for members 

• Public or pty

characteristics of unlimited liability companies

• Share capital 

• Mining purposes only (s9 corporations act)

• Cannot force shareholders to pay call 

• Members = shareholders 

• Public 

what is the most common form of company?

Companies limited by shares are the most common form of company

what is the liability of companies limited by shares? what section is this?

In companies limited by shares shareholder liability is limited the unpaid value of their share (s516 corporations act)

characteristics of public companies

• Ltd (listed - ASX)

• Members - minimum 1, no maximum (s114) 

• Directors - minimum 3, 2 australian resident, no maximum (s201A(2))

• Company secretary, australian resident 

• Flexible fundraising options 

• Auditor 

• AGM

what is the membership rules for public companies?

• s114 Corporations Act 2001 (Cth) → Public companies must have a minimum of 1 member and there is no maximum of members.

what is the director rules for public companies?

•  Public companies minimum 3 directors, 2 must be australian residents and there is no maximum of directors.

member rules for proprietary companies

• s114 Corporations Act 2001 (Cth) → Public companies (proprietary included) must have a minimum of 1 member and there is no maximum of members.

characteristics of listed company

• Must be public 

• Listed on stock exchange 

• ASX listing rules

• Highly regulated 

what is the management make up of proprietary companies?

• Pty ltd 

• Members - minimum 1 (s114), maximum up to 50 non employee members (s113) 

• Directors - minimum 1 australian resident and no maximum 

• Company secretary not required

• Generally auditor not required 

• Generally AGM not required

what section shows qualifications for small proprietary companies and how to they qualify?

• Small proprietary companies - s45A(2) - have to fulfill 2 of the 3 at the end of the financial year: 

• Less than $50M consolidated operating revenue 

• Less than You $25M consolidated gross assets 

• Less than 100 employees

what section allows you for change of status of the company and how is this facilitated?

s162(1) —> can change status but requires special resolution, meaning at least 75% of votes cast by members entitled to vote must approve the change.

what is a shelf company

• companies that have already been formed but has not been traded 

• The purchase of a company involves a transfer of shares, a change of directors and a changed of registered office.

what is a corporate group?

A corporate group (or group of companies) is a collection of parent and subsidiary corporations that operate as a single economic entity under common control. The parent company holds controlling interest—often through direct ownership of 90% or more of voting shares—over subsidiaries, allowing them to function together while remaining separate legal entities.

advantages of corporate group structure

organisational advantages and capacity to isolate risky commercial undertakings by having the responsibility for these transferred to certain subsidiaries.

what happens if someone uses a corporate group strcutre to avoid liability?

• A deliberate use of group structures to avoid liability may justify a court lifting the corporate veil and treating the companies effectively as partners for purposes of liability. 

can a subsidary be a shareholder of its holding company?

no unless a resolution is passed at a general meeting

what is a wholly owned subsidary?

• Wholly owned subsidiary - company that is 100% owned by its holding company.

what section defines subsidaries and holding companies as a corporate group and how are they defined?

• Subsidiaries and holding companies definition s46(a) 

• i) controls composition of the board OR 

• ii) controls >50% of votes OR 

• iii) Holds more than >50% of shares

what section depicts the indicator of if a company controls another and how is this indicated?

S47 → A company controls another if it can appoint or remove most of its directors.

what section depicts a related bodies corporate and what things qualify as this?

S50 → defines a related bodies corporate → companies are legally connected within the same corporate group if they → a) holding company, b) subsidiary, c) subsidarty of the same holding company

public v proprietary company

Proprietary companies (Pty Ltd) are privately held, restricted to 50 or fewer non-employee shareholders, and cannot raise capital from the general public. Public companies (Ltd) have no share limit, can trade on exchanges (like the ASX), and face stricter, higher-compliance reporting.

when does a company assume a trust structure?

Some situations the court will infer a trsut arrangement even though not expressly set out → constructive trust → the court imposes the trust arrangement to achieve a just result as between the parties - the company being the beneficiary of the trust.

can a company exempt a person from liability to the company incurred in their capacity as an officer of the company?

no

what is a promoter?

• Undertakes to form company/takes necessary steps - TWYCROSS v GRANT

• Involved in formation/active/passive investor - tracy v mandalay

obligations of a promoter

• Fiduciary obligations to company

• Relationship in good faith 

• Act in company’s best interests 

• Avoid conflicts of interest 

• Disclose interest in contract/set up independent board - Erlanger v New Sombrero 

• Undisclosed profit - Gluckstein v Barnes - promoters set up company to buy land

what rule developed from twycross v grant 1877?

recognises that a promoter as someone who undertakes to form a company and sets it going → promoters must disclose all material contracts in a company prospectus under the Companies Act 1867

what rule developed from Tracy v Mandalay Pty Ltd?

establishing that promoters owe strict fiduciary duties to a company to disclose secret profits, even if they are "passive" promoters. The case involved promoters selling land to a new company at a massive profit without full disclosure to an independent board.

a person can be classified as a promoter if they merely profit from the venture without taking any active part in setting the company up

what is the duty of disclosure for promoters?

Disclosure: 

• To independent board of directors 

• Otherwise to shareholders 

• Prospectus disclosure - chapter 6D 

Remedies for breach 

• Rescission 

• Recovery for profit 

• Damages

what occured in Erlanger v New Sombrero?

Disclosure of profits is legally invalid if it is made to a board of directors that is controlled by the promoters themselves. Disclosure must be made to an independent board capable of making informed decisions for the company. Because the syndicate only disclosed the profit to a puppet board they controlled, the court granted the remedy of rescission (canceling the contract entirely and returning the island to the promoters in exchange for the company's money back).

what occured within Gluckstein v Barnes ?

syndicate formed to buy property from a liquidator received a £20,000 mortgage discount, purchasing the property for £140,000. A company was formed with the directors purchasing it for £180,000. While the public was informed of a £40,000 profit, the promoters secretly took an additional £20,000 → The court held that the company was entitled to account for the profit.

what is a pre-incorporation contract?

Contract entered before incorporation

what occured in regards to pre incorporation contracts for kelner v baxter?

established that persons (promoters) signing a contract on behalf of a non-existent, unformed company are personally liable, as the company cannot have an agent or ratify the contract. Since the principal did not exist, the contract is only valid if deemed a personal contract of the signatories

statutes for pre-incorporation contracts

• S133 Corporations Act 2001 (Cth) - If a dispute arises over a contract signed before a company was registered, lawyers cannot rely on old common law or other statutes. They must use Part 2B.3 of the Corporations Act.

• s131(1) Corporations Act 2001 (Cth) - company bound if contract ratified by company (or company reasonably identifiable with it) within time agreed/reasonable time 

• s131(2) Corporations Act 2001 (Cth) - person entering the contract liable if no ratification

• s131(3) and (4) Corporations Act 2001 (Cth) - court discretion to make appropriate orders ‘

s131(1) Corporations Act 2001 (Cth) - other party may give release

what is the statute that shows the definition of a director?

s9ac

define a director

• a) A person who:

• (1) Is appointed to the position of a director; or

• (2) Is appointed to the position of an alternate director and

• is acting in that capacity

• b) Unless the contrary intention appears, a person who is not

• validly appointed is a director if

• (1) They act in the position of a director (‘de facto director’)

• or

• (2) The directors of the company or body are accustomed to

• act in accordance with the person’s instructions or wishes.

• (‘shadow director’)

what is a defacto director and what statute is this within?

De facto directors (s9ac) 

• Need not be officially appointed: the test is whether they were acting in the position of a director 

• May have resigned - the test is whether the tasks they performed were those normally undertaken by director 

• S9ac - alternate directors - a person appointed to act as a fill in for a director who for some reason at the time is unable to act as a director. The alternate director only at the time they are called upon to act in the place of the absent director.

what is a governing director?

Governing director - a pty company’s constitution can be amended to give a director tenure and control of the board for life. This is not the case for public companies.

what are officer/s and what statute is the deifnition/s found?

S9AD - officer: 

• Company secretary

• Senior managers:

• Person who makes/participates in making decisions affecting the whole or substantial part of company’s business

• Person who has capacity to significantly affect the company’s financial standing

• Insolvency controllers (eg receivers, administrators, liquidators)

what are functions of directors in regards to the board and what section is this found?

s198A - management power: business of company managed by/under direction, exercise all powers of company, except those reserved to general meeting.

what are the powers reserved for members and what is the sections?

• Powers reserved to members 

• Appoint/remove s201G, s203C, s203D 

• s136(2) - amend constitution 

• S162 - change company type 

• S157 - change company name 

• S491 - voluntary winding up

• S254 A - issue of preference shares

what is the rule within automatic self-cleansing filter v cunninghame?

Members cannot override management decisions

what is the section for number and qualification of directors and what do they include?

s201

• S201 A - pty: at least 1, Aust Resident → Public: at least 3, 2 Aust residents 

• s201B - must be atleast 18 years old (s201B(1)), must be a natural person (individual) (s201B(1)), must not be disqualified from management (s201b(2))

• s201D - must consent to the appointment

• no upward age limit

what are the types of directors?

managing directors, chair of directors, nominee directors, executive directors, non-executive directors

what is the managing director?

Managing director - appointed pursuant to s201J and may take all the board’s powers under s198C

what is the chair of directors?

Chair of directors - exercise procedural control at meetings (s248E) and signs the minutes (s249U)

what are nominee directors?

• Nominee directors:

• Are often appointed to represent the interests of a particular class or classes of shareholders 

• Example: employees may be entitled, pursuant to the company constitution, to elect a director. 

• A subsidiary’s directors may be nominees of the holding company

what are executive directors?

Executive directors - full time employee of teh company and as such owe contractual, common law and statutory obligations to the company.

what are non-executive directors?

Non-executive directors - not involved in full-time management of the company and not an employee. Often these are experts who can provide specific expertise in relation to certain areas of the company’s business.

what are the two types of non-executive director?

• Types of non-executive directors - affiliated NED (had a material connection to the company e.g. a shareholder) and an independent NED who has no business or other connection that may interfere with the independent exercise of their judgement.

how are directors appointed on registration and after incorporation and what are the sections for them?

On registration; 

• s120(1) - named in application to ASIC 

After incorporation

• 201G - appointed by general meeting - ordinary resolution 

• s201H - if vacancy, board can appoint director → pty - shareholder confirmation within 2 months → public - shareholder confirmation at next AGM

how are directors removed and what section are these?

• s203C - pty - general meeting, ordinary resolution 

• s203D - public - general meeting, ordinary resolution and 2 months notice 

• s203E - board cannot remove director

what is the rules in regard to shareholders removing directors within the general meeting?

• Directors can be removed by shareholders in general meeting. However: 

• Note that in PTY companies - the replaceable rules or constitution govern removal of directors (s203C) and accordingly ‘entrenchment’ of directors is possible (governing director) 

• In public companies - the directors can be removed by shareholder resolution regardless of any provisions in the constitution (s203D)

what are the three ways that directors are disqualified?

automatic disqualification, disqualification by court, disqualification by ASIC

what section and how does automatic disqualification occur?

1. Automatic disqualification:

• S206 B:

Disqualified:

• 5 years if convicted of:

• Offence concerning company management

• Corporations Act offence, punishable >12 months’ jail

• Offence of dishonesty, punishable at least 3 months’ jail

• Offence against the law of foreign country, punishable by >12 months’ jail

Or whilst

• Undischarged bankrupt

• Bound by personal insolvency agreement, not yet complied with

• Disqualified from managing company by foreign court

how does disqulaification by court occur and what sections are these?

1. Disqualification by court 

On ASIC’s application, Court can disqualify if:

s 206C – breached civil penalty provision (s 1317E)

• period Court considers appropriate

s 206D: in last 7 years

• Officer of 2 or more failed companies AND

• management partly responsible for failure

• up to 20 years

s 206E: 2 or more Corporations Act breaches

• by officer or

• by company whilst officer + failed to take reasonable steps

• period Court considers appropriate

how does disqualification by ASIC take place and what is the relevant sections?

• S206F - ASIC can disqualify if: 

• Officer of 2 or more companies wound up 

• Unsecured creditors will not receive more than 50c in the dollar (liquidators report s533)

• Disqualification for up to 5 years 

• Notice requirements 

what is the effects of disqualification?

Effect of disqualification 

• Cannot be officer or director for relevant period 

• Offence while disqualified s206A(1)

• Schedule 3 - up to 5 years imprisonment 

• Can be personally liable for debts within 4 years of winding up s588Z 

• Can apply for leave 

• By application to ASIC 

• By application to Court s206G(1)

how does the governing of director rumeration work and what is the two strikes role?

• s202A - shareholders by a way of resolution determine a directors remuneration that s211 indicates must be reasonable.

• The two strikes rule lets shareholders push back if they think directors are being paid too much. If 25% or more vote against the remuneration report at two consecutive AGMs, shareholders can then vote to “spill” the board. This means the directors may have to stand for re-election within 90 days.

what occured in whitlam v asic in regards to proxy votes?

In Whitlam v ASIC, the court found that the chair (Whitlam) did not breach the law even though he failed to sign proxy votes (someone voting on his behalf), meaning those votes weren’t counted. The court said there wasn’t enough evidence that he deliberately did this or that he was acting as a director when the mistake occurred. Now, under s 250BB of the Corporations Act, if the chair is appointed as a proxy, they must vote exactly as instructed.

can directors pass a resolution without a actual meeting taking place?

yes - s248A corps act

what part of the corporations act providea a regulatory framework for equity-based crowd-sourced funding and what are the means for companies to offer ordinary shares to retail investors through a liscenced CSF intermediary’s platofrm?

Part 6D.3A of the Corporations Act provides a regulatory framework for

equity-based crowd-sourced funding.

– Unlisted public companies limited by shares and proprietary companies with

less than $25 million in consolidated assets and annual revenue can make

offers of ordinary shares to retail investors through a licensed CSF

intermediary’s platform, using a CSF offer document.

how much can be raised through CSF?

5M in 12 months