CHAPTER 1 AND 2

Company
A company has a separate legal entity from its shareholders. It has a lifespan
that is potentially unlimited.
People choose to form companies as it offers limited liability. This means that
shareholders are not personally liable for their companys debts.
A company allows the transferability of shares. This means shareholders are able
to transfer or sell their shares free of any restrictions.

What regulates companies?

1. Legislation (Corporations Act). CA established the Australian Securities and
Investments Commission (ASIC)
2. Case law
3. Constitution of each company (dos and donts of company)

Early days
Businesses were created by Act of Parliament or Royal Charter. The procedure to
obtain a charter of incorporation was expensive and suited to large enterprises
and require strong political influence.
Bubble act was passed in 1720 which means only corporations incorporated by
charter could be formed. However, it was a failure as the world was going
through industrail revolution.
In Australia, company law was state based. Different states have different laws.
This causes lack of uniformity. Commonwealth means Australian govt.
Corporations Act 2001 (CTH) means it covers the whole country. The
corporations Act is administered and enforced on a national basis by
Commonwealth bodies such as ASIC.

Regulation
Functions of ASIC
1. Role (Regulate and advise minister any changes to the legislation,
provide staff and support facilities)
2. Corporate regulator ( regulate financial products)
3. Power (investigate and info-gathering where it has reason to suspect a
contravention of a national scheme law)
Functions of ASX
1. Surveillance
2. Supervising listed entities.
3. Monitor and enforce rules

Behind all of these, criminal law exists.

Once a company is registered, a certificate of incorporation will be given.
(S119)
A company has the legal capacity and powers of an individual. (S124)
A company may sue and be sued in its own name.
Shareholders do not own the companys property.
A company will continue to exist until it is deregistered by ASIC.
Power of a company to make a contract may be exercised by an individual
(S129)
The liability of shareholders is limited to the amount unpaid on the issue
price of their shares.
Limited liability
1.
2.
3.
4.

Facilitates enterprise: people are more daring to go into business

Reduce monitoring
Promote market efficiency: shares can be tradely freely.
Encouraged equity diversity:investors can acquire shares in other companies.

Company as a separate legal entity

Saloman v Saloman & Co Ltd(1897)
Principle: a company is a separate legal entity even though a single
person manages and controls it.
Macaura v Northern assurance
principle: the shareholder of a one-person company does not have a legal
or equitable interest in the companys property.
Lee v Lees air farming
Principle: a one person company is a separate entity from its controller
who may also be its sole employee.
Corporate veil- a company is a separate legal entity from its shareholders.
It ensures shareholders are not personally liable to creditors for their
companys debts.
Lifting the corporate veil
Statutes
1. Insolvent trading- director is well aware that the company is going
bankrupt, yet insist that the company continues business. S588J,K,M
2. Uncommercial transactions- S588FB prevents an insolvent company
from disposing of assets before liquidation through uncommercial
transactions.
3. Security interests granted to officers- it regards officers who lend
money to their company secured by a security interest over its

proerty differently from arms length creditors who are granted

security interests by a company.
Common law
1. Re Darby- set up a company, get license for mining. Opened another
company, set the license at a high price to earn profit.
Principle- a veil may be lifted if a company is used as a vehicle for fraud.
2. Gilford motor- stealing customers after appointment was over.
Principle- a company cannot be created as a sham or to avoid legal
obligation.
3. Green v bestobell
Principle- an employee breaches of duty with own personal interests.

*Insolvent trading ( S588G) you know company is going bankrupt, yet insist the
company to continue business.
*A parent company may be liable for its subsidiaries if it owes a duty of care to
the victims of the subsidiarys negligence.

CHAPTER 3 session2
Types of company public or propriety(private)
Promotion- people who are involved in setting up the company.
4 types of members liability
Limited by shares
1. can be attached to both public and pty.
2. Company must issue shares
What does LTD s254M mean? it serves as a notice to creditors that liability of
shareholder is limited and debts of company can only be satisfied form assets of
the company.
eg ABC LTD offered to public vs ABC Pty Ltd not offered to public
Partially paid shares is a contracted obligation. When the company needs it,
shareholders must pay the remaining cost of share even if company is going
bankrupt. Calls are made by company, liquidator, judicial manager.
Limited by guarantee( public companies eg charitable, religious) S517
1. Only attached to public
2. Company must NOT issue shares
3. Members only. NO shareholder. Members gives guarantee to pay in event of

winding up.
It does not need to have the word LTD as there is no shares to raise.
4. Constitution prohibits the company from paying fees to its directors and
requires the directors to approve all other payments the company makes to
directors.
Unlimited ( no limit placed on their liability to the company)
1. Can be attached to both public and pty.
2. Company must issue shares
3. Members are shareholders
Members are liable in a winding up for debts of company without limit if
company has insufficient funds.
No liability (a no liability company is prohibited from engaging in activities that
are outside its mining purposes objective) s254m
1. Only attached to public
2. Company MUST engage in mining.
3. Must have a objects clause/ constitution.
4. Company must issue shares that is partly paid. However, when call is made,
do not need to pay!
Difference b/w public and Pty
Public- more onerous obligations because disclosure and investors protection are
important concerns of the legislation( transparency).
Pty- usually lesser number of shareholders(less than 50), thus less heavily
regulated by legislation. Cheaper to maintain compared to public.
Membership: Pty-less than 50. Public- unlimited
Directors: Pty at least 1. Public at least 3( one reside in australia)
Secretary: Pty do not need. Public - at least 1 secretary
AGM: Pty- no need. Public - at least once a year
Advantage of small pty
1. need not prepare financial reports
2. Need not have to have an independent auditor.
3. Cheaper to maintain over public companies.
Chapter 6 session 2
Promotion- setting up of company
Promoters( people who set up the company)
1. Active actively set up, raising capital, registering company.
2. Passive provide money
Why must we consider passive promoters?- because 1. Money is involved 2.
Obligations and duties
Fiduciary - trust and confidence
Erlanger Must fully disclose their interests in contracts with the company they
are promoting.

Ratification- means that a company adopts or confirms the pre-registration

contract.
S131: The person who enters into a pre-registration contract is liable to pay
damages to the other contracting party if the company is not registered within
either an agreed time.

Chapter 4 (session 3)
A one-person propritary companies- does not need a constitution or RR. Instead
Corporation act has a few basic rules such as:
1. Director of the company may exercise all powers of the company such as the
power to issue shares, borrow money and issue debentures
2. Director may execute negotiable instrument
3. Director may appoint another director by recording the appointment and
signing the record
4. Director is to be paid any remuneration for being a director that the company
determines by resolution.
Companies limited by guarantee cannot be governed solely by RR, it should have
a constitution. However, its internal rules may be governed by both the
constitution and RR.
A no liability company cannot be governed solely by RR, it MUST have a
constitution. S112(2). However, its internal rules may be governed by both the
constitution and RR.
Objects clause- activities of the business/ mission statement
Ultra vires- any transaction that was not within the scope of the company/
beyond the power of the company.
Constructive notice- people are aware of a companys objectives just because it
it registered with ASIC that is available for inspection by the public. However, it
has been abolished by S130.

S45A: Propreitary companies

S1330: ASICs power to intervene in any legal proceedings
S112: Types of company according to members liability
S112(2): Requirements of a No liabilities company
S119: Company comes into existence on the day it is registered.
S124: Legal capacity and Powers of a company

S125: Limitations in constitution and companys objectives

S126: An individual can act on behalf of company to make/vary/ratify a contract.
S130: Information available to the public from ASIC does not constitute
constructive notice.
S131: Contracts before registration
S134: A company may be governed by RR, constitution or by both.
S135(2): Companys constitution can displace or modify replaceable rules.
S135(3): Failure to comply with replaceable rules
S136: Constitution of a company
S140: Effect of constitution and replaceable rules
S141: Table of replaceable rules
S148: A companys name
S162: Changing type of company
S166: Effect of change of type of company
S194: Voting and completion of transactions-Directors of proprietary companies
eg director personal interest.
S198A: Powers of directors
S249X: Who can appoint a proxy (Replaceable Rules for proprietary companies
and mandatory rule for public companies).
S254M: Liability on partly paid shares
S296: companys financial report to comply with accounting standards
S516: company limited by shares.
S588G: Insolvent trading
S588FB: Uncommercial transactions(receiving gift that could not be explained by
normal practice prior to liquidation).
S727: prohibits a person from making an offer of securities or distributing an
application form for an offer of securities that needs disclosure to investors.

Case law
Macaura : shareholders do not own the companys property
saloman : a company is a separate legal entity even though a single person
manages and controls it.
Re darby: corporate veil lifted if company is used as a fraud.
Gilford motor: corporate veil lifted if company is used as a sham/ avoid legal
obligations
Green v bestobell: coprate veil lifted if a persons duty if conflicted with his own
interest.
Twycross v grant: active promoters
Tracy v mandalay: passive promoters
Erlanger: promoters must fully disclose their interests in contracts with the
company they are promoting.
Gluckstein v barnes: promoters have a duty to disclose personal profits they may
arise from their position