Company Incorporation and Registration in Australia

• Incorporation: the creation or registration of new companies.
• Company: a legal person with rights and liabilities recognized by law as an artificial entity (Corporation definition s57A).
• ASX: Operates Australia's main financial markets for equities, or shares.

Creating a Company

• Section 119 Corporations Act: a company comes into existence at the beginning of the day on which it is registered and remains in existence until deregistered (s 601AD(1)).

Registration

• Application to register as an Australian company involves completing Form 201 and lodging it with ASIC.
• Section 114: A company can be formed with one or more members and requires a registered office in Australia (S 109X(1)).
• Registration Exception: Mining companies do not need to register for a specific purpose.

Naming

• Section 148: A company can have an available name (see s 147) or the expression "Australian Company Number" followed by the ACN.
• Section 147(1): A name is unavailable to a company if it is identical to a reserved name, identical to a name on the business names register, or unacceptable for registration under the regulations.
• Regulations determine if the name is identical or unacceptable.
• The name must also include status or type per 148(2)-(5) (i.e., limited public company or limited proprietary company).
• Acceptable abbreviations are included in Section 149 (i.e., Pty, Ltd).

Post Registration

• Keep contracts entered into by promoters before registration, approved at the directors formal board meeting.
• Store member, director, and company consent forms.
• Formally appoint directors and secretary under ss 201G, 201H, 204D.
• Keep Registers of (s 168): Debenture holders, option holders, members

Consequences of Registration

• Section 124: A separate legal person is created with individual capacity and powers, like owning property, being sued, and entering into contracts.
• This creates a body corporate which is capable of issuing and cancelling shares.

Classification According to Liability of Members

Companies Limited by Shares

• Shareholders are only required to pay any unpaid issue price of their shares (s 117(2)(a)).
• Section 515: In the event of liquidation, contributories must pay an amount to cover winding-up expenses, not exceeding any unpaid shares.
• Past members may be liable if they were members within one year and there is not enough money (ss 521-522).
• Liability of Members: Limited to the amount, if any, unpaid on the shares respectively held by them.

Companies Limited by Guarantee

• Members' liability is limited to the amounts they have undertaken to contribute (s 9) if the company is wound up.
• These companies do not have share capital, so members do not contribute capital during operation, making them public companies.
• Liability of Members: Benefit of separate legal entities, with liability limited to the amount of the guarantee is still retained.

Small Company Limited by Guarantee

• Generally has less obligations than public companies
• Section 45B: Its annual revenue is less than the threshold amount ($250,000).

Company Limited by Guarantee with Annual Revenue of Less Than $1 Million or More

• Has greater obligations, such as preparing financial and directors reports.
• See Sections 292, 298, 300B, 301, 316A.

Company Limited by Guarantee with Annual Revenue of Less Than $1 Million or Less

• See Sections 292,298,300B,301,316A
• Has greater obligations such as preparing financial and directors reports.

Companies Limited by Both Shares and Guarantee

• Not registered since 1998, very few existing
• Members only need to contribute unpaid sums on their shares and the amount they have undertaken to contribute to the company's property if it winds up.

Unlimited Liability Company

• Section 9: Members have no limit on their liability to the company, meaning they are responsible for the debts if it winds up without sufficient assets.
• This company can be proprietary or public.

No Liability Company

• Only operates for mining companies per section 112(2)
• Section 112(2): A no liability company must have share capital and its constitution must state that its sole objects are mining purposes, with no contractual right to recover calls made on shares from a member who fails to pay.
• Per s 148(4), it must have "No Liability" or "NL" at the end of its name.
• s112(3) Restrictions: engaging only in mining activities.
• This type of company incentivizes investment in mining as limited risk exists.

Classification According to Public v Proprietary

Public Company:

• Section 9: A company other than a proprietary company.
• Has more detailed obligations imposed as disclosure and investor protection are important concerns.
• Must have at least three directors, two of whom must live in Australia (s201A).
• Also requires at least one secretary: s 204A(2).
• There is no maximum number of shareholders
• Annual General Meeting: Required to hold one at least once a year per s 250N
• Public companies must prepare annual financial reports (s 295) and have them audited (s 301), also preparing directors' reports (s 298).
• An ASX listing allows share trading on the stock market but subjects the company to additional requirements.

Proprietary Company

• Must be limited by shares or have an unlimited company with share capital per Section 45A.
• It also cannot have more than 50 shareholders (excluding employee and CSF-connected shareholders) and requires no investor disclosure under Chapter 6D.
• It requires at least one director (but if has one or more CSF shareholders must have at least two directors s201A(1A).
• These company types usually restrict who may become a shareholder, maintain a small shareholder number, and are less heavily regulated.

Subsidiary

• Section 46: where one company controls another.
• A company is a subsidiary of another if:

  • The other company controls the composition of the first company's board (s 47), can cast or control more than 50% of the votes at the first company's general meeting or owns more than 50% of the shares of the first company.

          Or if the company is a subsidiary of another subsidiary.
    

• Section 47: The composition of the board of directors is controlled by another body corporate if the other body can appoint or remove all or a majority of the directors.
  • Holding company (s 9): a company of which another company is a subsidiary.

Conversion

• To convert from Public to Proprietary Company pass a special resolution and lodging an application with ASIC per ss 162 and 163.
• To convert from Proprietary to Public Company pass a special resolution and lodging an application with ASIC per ss 162 and 163. ASX Listed Companies
• Most large businesses are public companies having shares and other securities listed on ASX.
• Imposes heavier regulations, but offers a greater ability to raise capital.

Small vs Large

Section 45A (Small)

• Must meet at least two of the following criteria: - Consolidated revenue of under $25 million, consolidated gross assets under $12.5 million, or fewer than 50 employees.

Section 45A (Large)

• Must meet at least two of the following criteria: - Consolidated revenue of $25 million or more, consolidated gross assets of $12.5 million, or 50 or more employees. - These differences mean that most small companies are subject to fewer restrictions in preparing, lodging, and auditing financial reports, and they operate large businesses with substantial numbers of employees, offering greater public transparency.

Holding and Subsidiary Companies

• A Holding/Parent company exercises control over subsidiaries
• Subsidiary Section 46

Topic 2 - The Separate Legal Entity Doctrine

Separate Legal Entity

• When a corporation is created, it is considered a separate legal entity from its directors and shareholders.

Limited Liability

• For companies limited by shares, shareholders liability is limited to any unpaid portion of their shares

Separate legal entity doctrine and limited liability

• If shareholders shares are fully paid, you have no further liability to creditors
• Even though you may lose your investment you will not be liable to pay for debts
• Separate legal entity doctrine and limited liability are two related but different concepts

Limited Liability Benefits

• Facilitates enterprise making it more willing to invest because your liability is limited
• Reduces need for monitoring
• Promotes market efficiency because shares are freely traded and independent of the owner's wealth
• Encourages equity diversification because investors can purchase shares in a number of companies

Faciliates Enterprise

• There is more willingness to invest in a company because your liability is limited

Limited Liability Challenges

• Closely held companies roles may not always be separate, the corporate form could be used to avoid creditors
  • A corporate veil effectively shifts risk from shareholders to creditors
• Contract creditors may try to obtain security interest to overcome limited liability in attempt to attain security
• Trade creditors may charge additional to compensate for risk or take out insurance
• Tort creditors are vulnerable because and cannot get security in the same way

It is due to a corporation's status as a separate legal entity that the liability of its shareholders (and managers) may be limited, although not all shareholders of companies have limited liability.

The corporate veil exists because of the corporation’s separate legal entity status.

Does a Corporate Group Exist Test?

Salomon Case and Consequential Decisions

• Salomon v Salomon & Co Ltd [1897] AC 22: Seminal case stating separate legal identity doctrine.
• Separate legal identity applies to single director companies.
• Can own vast majority or all of the shares in a company and/or have majority control and still be seene as separate from the company.
• Lee v Lee's Air Farming Pty Ltd [1961] AC 12: Employees can be directors/shareholders as one person can function in dual capacities.
• Lord Morris: 'In their Lordships' view, it is a logical consequence of the decision in Salomon that one person may function in dual capacities.'
• Macaura v Northern Assurance Co Ltd [1925] AC 619 - states that shareholders have no legal or equitable interest in a company's property.
• Macleod v The Queen) [2003] says that shareholders may be found guilty of stealing company property.

Application of Salomon Principles to Corporate Groups

• Each company within a group is a separate legal person (Walker v Wimborne; Industrial Equity Ltd v Blackburn).
• Each individual corporate entity is treated as a separate legal entity, meaning creditors can only pursue the company itself, and shareholders are not liable for group defaults, only the subsidiary if they have unpaid shares.
• Walker v Wimborne: Directors are responsible to the specific companies within the group and must act for their best interests.
• Industrial Equity Ltd v Blackburn: a subsidiary's profits are not regarded as the holding company's profits available for the holding company's dividend payment.

Lifting/Piercing the Corporate Veil

• Exceptions (rarely used) to the corporate veil principle that law has created effectively shifts risk from shareholders to creditors
• Allows owners/operators to be held liable

A List of Exceptions (non-exhaustive)

• Company is a sham used to Avoid Existing Legal Obligation - Company used as vehicle for Fraud - Involvement in Directors' Breach of Duty - Entities in a Corporate Group where: Subsidiary is determined to be the Agent of the holding company (Corporate Group Context) Torts (liability of the holding company for the tortious acts of its subsidiary company)
• Statute - Insolvent Trading Provisions - Liability of directors for corporation debts [Considered as a Directors' Duty in Topic 7] - Liability of holding company for subsidiary debts

Common Law Exceptions

Avoid existing legal obligations - Gilford Motor Co Ltd v Horne, Jones v Lipman

• Directors will be held personally liable to the original company in the event that they incorporate a new company as a mere cloak or sham to avoid existing obligations
• Company as a vehicle for fraud - Re Darby If a director set up was a "dummy company" to enable him to perpetrate a fraud, the court looks behind the façade of the legal entity. Directors' breach of duty - Green v Bestobell Industries
• Corporate veil can be lifted where a director incorporates a new company used to breach his directors' duties to the original company

Subsidiary as an agent of - Walker v Wimbourne - Court may look behind veil of corporate group to see if subsidiary acting as agent or partner of parent company

Subsidiary as an agent of holding company - Briggs v James Hardie & Co Pty Ltd

• A parent company may be held directly liable for its subsidiary's torts if the parent itself owes a duty of care to the subsidiary's employees who were injured because of the subsidiary's negligence.
• different considerations for tort liability - more likely to lift the veil Subsidiary as an agent of holding company Smith, Stone & Knight Ltd v Birmingham Corporation Agency test Atkinson J :
• If the company was carrying on the shareholder's business instead of its own, an relationship of agency can be established. 6 requirements:
• The profits of the subsidiary must be treated as the profits of the holding company;
• The persons conducting the business must be appointed by the holding company;
• The holding company must be the head and brain of the trading venture;
• The holding company must govern the venture and decide what should be done and what capital should be embarked on it;
• The profits of the business made must be made the holding company's skill and direction; and
• The holding company must be in effectual and constant control. DSR Ltd v Wren
• Where a parent company directs or controls its subsidiary's operations and provides the subsidiary's management, the parent company owes a duty of care to the subsidiary's employees *high level of control Walker v Wimbourne Creditors can only look to company with which they have contracted

Statute Exceptions

• S 588FP - disregards the corporate veil in certain circumstances where officers lend money to their company secured by a security interest over its property
• Financial assistance can be pierced to render offices liable for civil penalties if they were involved in their company's contraventions of the Corporations Act, EG.if a company breaches section 260A, any person involved may be personally liable
• Uncommercial transactions- disposing of assets before liquidation see s 588FE(3)
• Pooling in liquidation where multiple companies in a corporate group are being wound up, ss 571-579Q allows the whole group to be treated as a single entity meaning each company in the group is taken to be jointly and severally liable for the debts of other companies in the group.

Holding Companies Trading While Insolvent: - 588V disregards the corporate veil

S588V(1)

• A corporation contravenes this section if:
• The corporation is the holding company of a company at the time when the company incurs a debt; and
• The company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
• At that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and One or both of the following subparagraphs applies:
• The corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting; [subjective test] Having regard to the nature and extent of the corporation's control over the company's affairs and to any other relevant circumstances, it is reasonable to expect that: A holding company in the corporation's circumstances would be so aware; or B-one or more of such a holding company's directors would be so aware... [objective test]

Meaning of holdings companies

• Is in topic 1

Meaning of Incurring a Debt

• Incurring a debt means incurring an obligation to pay someone a sum of money (Hawkins v Bank of China). But, debt also includes:
• Borrowing money from a bank
• Leasing premises
• Statutory obligation to pay taxes or other statutory levies

Insolvency

-When will a company be insolvent? Section 95A: A person is solvent if the person is able to pay all of that persons debts as and when they become due and payable.

• Insolvent if can not pay solvency debts as and when due and payable -Cash flow test

Powel V Fryer

Commercial Reality test beyond looking at cash resources and consider all assets

Statutory Presumptions of Insolvency:

Section 588E(3):

• Presumption of continuing insolvency:
• The presumption arising from absence of financial records
• The presumption from proof of insolvency from previous recovery proceedings

Reasonable Grounds Test for Insolvency

• ASIC v Plymin: "Reasonable Grounds" are objective. (compare someone who is reasonably competent and diligent.)

ASIC v Plymin [2003] VSC 123

• Incurring of substantial trading losses
• Threatening legal proceedings in relation to non-payment of debts
• Inability to obtain further loan finance;

Defences s 588X

• suspucion: Suggesting likely to require more than mere idle wondering whether it exists or not , positive feeling amounting to slight opinion but without sufficient evidence.
• Reasonable for Grounds to expect solvency when debt incurred both company and directors

Delegation and reliance on others - if it is proved that a corporation hired someone responsible to be liable

Consequences of Breach - Section 588W(1)

1. The company is being wound up

Topic 3 - The Constitution and Replaceable Rules

• Internal rules can be governed by replaceable rules contained in the corporations act or by a constitution or by a combination of both

Replaceable rules

• Serve as default rules that would apply unless unless the company chooses to adopt their own alternative rules. They do not apply if the companies have retained their own rules.

Failure to comply

• The replacement rules are also subject to any provision under the companies shareholder's agreement
• Section 135- the replaceable rules also some apply only to proprietary companies while some are mandatory for public companies due to corporations act

1 person proprietary companies

Those companies also do not need a constitution, insted, the corps act has a umber of rules that apply specifically to these types of companies

statutory reqs for adoptin constitutions

section136

• section 139 if someone makes a rrquest, they must send one cop within 7 days

Contents for these regulations

• section 150 - limitations of this include. The rules dont apply to dividend or the transfer transmission of shares are not applicable to a company limited by guarantee

Company Constitution

Some companies must adopt on inlcuding

• The requirements to list them on the ASX for no liability companies

Companies Constitution - public charitable purposes

• • Section 136(5) - if this includes a public comapny they ahve to lodge with ASIC wiht 14 days of the company adoting or modifying the constitution To Adopt a Constitution follow, A new company to adopt a constitution may reister if the person named in the application has agreed or the comapny can adopt it by reisoltuons

S140

• Contracts between contracts can be created that are signed to the company The company and director contracts are made out

Interpretation Of Constitution

What court has to say

• courts are reluctant

Section 124 requirements

• A company has power issue and cancelled shares if can be a limited guaranteed or a debenture

• Ultra vives doctrine

• If a companies cannot do something this could be made void

Remedies for the breach

Section 140 provides that a contracts constitution or any replay rule and contracts must enforce them, unless members may enforce only provisions that confer rights on

Statutory Requirements to adopt constitutions

Section 140 requires a shareholder approval is required to later constitution if it needs a 75 per cent of the votes

Limitations on Alter Ability

contracts cannot be allered and change

• 140 contracts can be alltered by some may not want to bind there member if that can allter everything , howver for the long run that can cause an issure later on for alteration

Section 246 b

variation for Class Rights