Corporations Law: Incorporation and Its Effects Study Notes

Corporations Law: Topic 2A - Incorporation and its Effects

Learning Objectives

  • By the end of this topic, you should understand:
    • How to register a company.
    • Legal requirements for company names.
    • The separate legal entity doctrine and the concept of limited liability, including its justifications and disadvantages.
    • The circumstances in which the courts and statutes will lift ‘the corporate veil’.
    • Key distinctions between common law and statutory regulations.

Terminology

  • Corporation, body corporate, and company: used interchangeably.
    • Common Law: At common law, ‘body corporate’ and ‘corporation’ are interchangeable terms referring to any artificial legal person created and recognized by law.
    • Historical Context:
    • Company: referred to business enterprises that adopted partnership features but were not formally incorporated.
    • Corporation: referred to public entities formally incorporated under statute or royal charter.
    • Corporations Act (2001):
    • Section 9 defines company as entities registered under the Corporations Act (Cth).
    • Section 57A(1)(a)-(b) includes 'companies' as well as other 'body corporates' in the term corporation.

Creating a Separate Legal Entity

  • Process of Incorporation:
    • Register with ASIC by lodging an application (s 117(1)).
  • Key Terms:
    • Incorporation: refers to the creation of new companies.
    • Registration: process for foreign companies to be recognized under Australian law.
    • Existence of a Company:
    • Section 119 indicates a company comes into existence at the beginning of the day it is registered and will remain in existence until deregistered (s 601AD(1)).

Registration Process

  • Requirements:
    • Complete Form 201 and lodge it with ASIC, including a payment of a small fee.
  • Mandatory Information (as per Section 117(2)):
    • Type of company.
    • Company's proposed name (unless using an ACN).
    • Details of individuals consenting to become members or directors.
    • Address of the proposed principal place of business, among others.
  • Post-Registration:
    • Keep member, director, and company consent forms.
    • Establish registers required under the Act.
    • Formally appoint directors and proceed with board meetings.
    • Expenses incurred before registration can be settled from company assets (s 122).

Company Names

  • Section 148: Company may have:
    • An available name.
    • The expression “Australian Company Number” followed by ACN.
  • Name Availability (s 147): A name is available unless:
    • Identical to a reserved name or a business name.
    • Unacceptable under regulations (e.g., offensive).

Legal Requirements for Names

  • Limited Companies (s 148(2)):
    • A limited public company must have “Limited” at the end.
    • A limited proprietary company must include “Proprietary Limited” or “Pty Ltd”.
    • No liability companies must state “No Liability,” while unlimited proprietary companies must state “Proprietary.”
    • Public companies must not include “Proprietary” in their names unless previously so registered before 1st July 1998.

Consequences of Registration

  • Upon registration, a separate legal entity is created:
    • Per Section 124, a company possesses the capacity and powers of an individual, including the ability to:
    • Own property.
    • Be sued.
    • Enter contracts.
    • Section 124 also provides that a company has all powers of a body corporate, including issuing and cancelling shares.

Types of Corporations

  • Different types of companies can be registered under the Corporations Act, classified based on:
    • Liability of Members (Classification 1).
    • Public or Private/Proprietary (Classification 2).

Limited Liability of Members (Classification 1)

  • Concerned with members/shareholders' liability for company debts:
    • Members' liability may be limited to the value of shares (s 516).
    • A company's liability is unlimited.
    • Types include:
    • No Liability Companies.
    • Companies with Unlimited Liability (rarely employed).

Limited by Shares (Classification 1A)

  • Members contribute money against shares as a contract:
    • Limited liability is crucial in bankruptcy situations for creditors or liquidators.
    • A shareholder will only be liable for any remaining unpaid amount on their shares (s 516).

Limited by Guarantee (Classification 1B)

  • Approximately 11,000 entities in Australia:
    • Small company limited by guarantee defined (s 45B) regarding annual revenue.
    • No power to issue shares and cannot pay dividends.
    • Function suited for non-profit activities. Members have a single vote.

No Liability Companies (Classification 1C)

  • Roughly 1,000 in Australia:
    • Members are not liable for unpaid amounts on their shares designed to enhance investment.
    • Can only be registered if:
    • Has share capital.
    • Constitution restricts to mining purposes, and members cannot recover unpaid calls.

Unlimited Liability (Classification 1D)

  • Members do not have limited liability rights:
    • Company assets used to satisfy debts upon winding up; members must cover any insufficient asset shortfall (s 515).
    • Approximately 600 in Australia, primarily in professional firms.

Public or Proprietary Companies (Classification 2)

Proprietary Companies (Classification 2A)

  • Defined by Section 45A as companies registered as Pty:
    • Must be limited by shares or be an unlimited company with share capital.
    • Limited to a maximum of 50 non-employee shareholders.
    • Reduced regulatory requirements and improved commercial privacy with lower costs.

Private Companies Characteristics (Classification 2B)

  • Need at least one director residing in Australia.
  • Circulating resolutions are permissible (s 249A) without formal meetings.
  • No requirement to have annual general meetings.

Size Classifications (Classification 2C)

  • Proprietary companies classified as small or large:
    • Small Company Criteria (s 45A(2)):
    • Less than $50 million in revenue.
    • Assets valued under $25 million.
    • Fewer than 100 employees.
  • Large Companies exceed these provided thresholds (s 45A(3)).

Public vs. Proprietary Companies (Classification 2D)

  • Public Companies: Shareholders can trade shares on the stock market, must follow ASX Listing Rules, and enjoy benefits like access to growth capital and improved company valuation.
  • Key Obligations Differences:
    1. Material Personal Interests: Public company directors face stricter regulations on conflicts of interest compared to proprietary directors.
    2. Director Removal: Public company directors must be removed through a member ordinary resolution, while proprietary directors can be dismissed under certain circumstances by other directors.
    3. Related Party Transactions: Governed by complex rules for public companies, while not applicable to proprietary companies.
    4. Annual General Meetings: Mandatory for public companies, non-mandatory for proprietary.

Changing Company Type

  • Companies can change types with certain conditions:
    • Some conversions must satisfy existing criteria (s 162).
    • A proprietary company might automatically convert to a public company if it fails to meet certain conditions (s 113).
    • Typically requires a special resolution (75%) from members to effect any change and subsequent lodging of forms with ASIC.