Introduction to company law

Corporate Law: Law principles and practice

The origins of companies

Corporate entities have existed in many forms historically (e.g. the church, municipal bodies).

Companies could only be formed by an act of parliament or by the sovereign.

The British government passed a series of new statutes allowing for the formation of limited companies by right by a promoter who follows prescribed procedures and conditions.

The Australian colonies basically copied the existing English legislation.

Corporate Law: Law principles and practice

The development of corporate regulation

The states historically had control of company law, and consequently the law began to differ between individual states.

The Commonwealth began to assume power over corporations as per s 51(xx) of the Constitution ofAustralia, which gives the Commonwealth power to regulate foreign, trading and financial corporations.

See Huddart Parker and Co Pty Ltd v Moorehead (1909) 8 CLR 330.

Corporate Law: Law principles and practice

The development of corporate regulation cont …

In the late 19th century, the states and the Commonwealth agreed to introduce cooperative schemes in order to institute uniform legislation throughout Australia (e.g. the Companies Code).

The National Companies and Securities Commission (NCSC)later known as the Australian Securities Commission (ASC), and now ASIC was the overseeing body.

The Commonwealth has increasingly assumed control of companies.

Corporate Law: Law principles and practice

Introduction of the Corporations Act

The Commonwealth introduced the Corporations Act 1989 (Cth) to regulate corporations. In NSW v The Commonwealth [1990] 90 ALR 355, the states challenged the takeover of the legislation and the High Court decided the Commonwealth could pass company legislation, but could not regulate the creation of companies.

The Commonwealth later passed the Corporations Act 2001 (Cth), with the agreement of the states, and assumed the role of passing new amendments to corporate law.

Corporate Law: Law principles and practice

The Australian Securities and Investments Commission

The Australian Securities and Investments Commission (ASIC) replaced the NCSC.

ASIC answers to the Commonwealth Treasurer, institutes prosecutions through the DPP, conducts consumer education regarding the economic sector and works through various bodies to promote the application and improvement of company law.

Corporate Law: Law principles and practice

Administrative functions and powers of ASIC

ASIC controls the regulation and administration of the Corporations Act including registering companies; operating the ASIC Business Centres; maintaining a public ASIC database; and receiving company documents, annual returns and financial reports.

ASIC now regulates the financial sector, which includes banking, insurance and superannuation.

ASIC is responsible for regulating the futures and securities industries and has the power to licensesecurities dealers and investment advisers.

Corporate Law: Law principles and practice

Administrative functions and powers of ASIC cont …

ASIC also has significant powers in respect of capital raising by the issue of securities and ensuring compliance with the disclosure regime.

ASIC publishes the ASIC Digest, which contains information such as practice notes, policy statements and media releases and the like, indicating ASIC’s views and policies on various issues.

Corporate Law: Law principles and practice

Regulating financial services

ASIC is responsible for regulating corporations that supply financial products and licensing and monitoring financial services businesses.

ASIC has a role in protecting consumers against misleading and deceptive conduct in the provision of financial services. This covers financial service contracts in banking, sales of stocks and shares, for futures, for superannuation contracts and for savings accounts.

Regulating financial services cont …

ASIC’s website lists consumer warnings for consumers, including notices of current scams. ASIC’s specific roles in regulating financial services and markets include:

• In 2010 ASIC was given the power to supervise Australia’s financial markets, a power previously exercised by the ASX. ASIC is responsible for supervising the trading activities of brokers on the ASX.

• ASIC has been given supervisory powers over trustee companies that provide financial services such as controlling managed investments and acting as superannuation trustees, as well as the more traditional trustee role of estate administration.

Corporate Law: Law principles and practice

Corporate Law: Law principles and practice

Investigating and bringing legal proceedings

ASIC has investigatory and information-gathering powers. Under s 19 of the Act, ASIC has the powers to require persons to answer questions when conducting an investigation.

Under ss 28–29, ASIC can compel persons to produce books and records when conducting an investigation.

Other regulatory bodies under the ASIC Act 2001 The Takeovers Panel: the Takeovers Panel’s primary function is to resolve takeovers disputes where there is a claim of unacceptable behaviour.

Note also: he Parliamentary Joint Committee on Corporations and Securities, which contributes to law reform and the development of law.

Corporate Law: Law principles and practice

Corporate Law: Law principles and practice

The Australian financial reporting system

The Australian financial reporting system was reformed by the CLERP 9 and operates through: • the Financial Reporting Council: s 225 of the Australian

Securities and Investments Commission Act 2001 (Cth) established the council, an advisory body that sets standards for the financial reporting of companies

• the Australian Accounting Standards Board (s 226)• the Auditing and Assurance Standards Board (s 227A)• the Company Auditors and Liquidators Disciplinary

Board: s 203 established the board with the power to cancel or suspend an auditor’s registration

• the Corporations and Markets Advisory Committee (s 148).

Corporate Law: Law principles and practice

Australian Securities Exchange The ASX is a public company traded on its own exchange, on which a public company can choose to be listed.

The ASX self-regulates but also cooperates with ASIC in setting standards of behaviour over companies and entities which are listed and operating on the ASX. Listed companies must comply with both ASX rules and general company legislation.

Listed companies are required to make continuous disclosure of their financial situation, unlike other companies which need only report once a year.

Corporate Law: Law principles and practice

Australian Securities Exchange cont …

The ASX also has a regulatory role to play in both company and securities regulation. This includes:

• supervising market participants (stockbrokers)• listing companies• monitoring and enforcing compliance by listed

companies to the ASX rules.

Corporate Law: Law principles and practice

Australian Securities Exchange cont …

The ASX Corporate Governance Council created the Principles of Good Corporate Governance and BestPractice Recommendations:

1. Lay solid foundations for management and oversight2. Structure the board to add value3. Promote ethical and responsible decision-making4. Safeguard integrity in financial reporting5. Make timely and balanced disclosure6. Respect the rights of shareholders7. Recognise and manage risk8. Remunerate fairly and responsibly.

Corporate Law: Law principles and practice

Corporate Law Economic Reform Program

The government embarked on a program to simplify company, and other regulatory, law to make it easier to do business in Australia.

The reform was the First Corporate Law Simplification Act 1995 (Cth) (which introduced single-person companies). It would later be known as the CLERP, which is now up to its ninth amendment.

Reforms have been introduced after reports from The Corporations and Markets Advisory Committee (CAMAC), the Parliamentary Joint Committee on Corporations and Financial Services and ASIC.

Corporate Law: Law principles and practice

Theories of the corporation  What is the entity of a corporation?

What are the components of a company?

Does a company always protect members and officers?

What is the responsibility of a company to the community, if any?

Corporate Law: Law principles and practice

Some theories of the corporation

The company as a fiction: a company is a convenient fiction that performs a social purpose. The company is not a legal person in the same way as a human.

Realist theory: a company is a real ‘person’ brought into existence by a group of individuals acting together for a common purpose. As a real rather than a fictitious person, its existence does not depend on state intervention but is deemed to be a real person with organs, allowing it to think and act. A company can therefore be liable for crimes and wrongs because it can think.

Corporate Law: Law principles and practice

Some theories of the corporation cont …

Contractual theory: the company is a nexus of contracts between various constituencies—shareholders, managers, creditors and employees—who have an interest in the firm. The law is designed to allow the different parties to make and enforce various legal relations (e.g. limited liability).

Aggregate theory: related to contractual theory and based on the idea that individuals form associations or aggregations to carry out some common purpose; in the case of a company it is usually a commercial purpose.

Political or stakeholder theory: a company is a distinct social entity, rather than the product of private contract, and has various stakeholders, including the community itself. The company is responsible to the whole community, not just to shareholders.

Corporate Law: Law principles and practice

Some theories of the corporation cont …

Communitarian theory: a company is a social institution and operates within a community. It has a responsibility to all members of the community, and is not just as a profit- making institution for the shareholders and officers of the company.

Concession theory: sometimes referred to as privilege theory, concession theory states that a company is created by the state and the status of separate legal entity is conceded, or alternatively granted, as a privilege to a body. The company, in turn, has responsibilities and duties to society when making decisions that affect the community.

Corporate Law: Law principles and practice

The company as a legal person

Company as separate legal entityA company is a separate legal entity that comes into existence at the beginning of the day of its registration: s 119.

A company takes the legal capacity and powers of an individual in and outside the jurisdiction. It can issue shares and other securities, including rights to put charges on company property: s 124.

A company, once created, is a separate legal entity from its owners (members), its operators (directors, officers and employees) and any other agent who is contracted bythe company.

Corporate Law: Law principles and practice

The consequences of being a separate legal entity

Members have limited liability (i.e. limited to their paid-up shares).

Organic theory: the directors and officers form the will and mind of the company and the various agents (employees), as organs, carry out the functions of the company as a body.Tesco Supermarkets v Nattrass [1972] AC 153

Corporate Law: Law principles and practice

The veil of incorporation

The creation of a company (an artificial entity) creates a barrier between the members and operators of the company and its creditors. Salomon v Salomon & Co [1897] AC 22Lee v Lee’s Air Farming Ltd [1961] AC 12

The separate entity is created through ‘the veil of incorporation’.

If a company entity is misused for improper purposes (e.g. fraud, tax evasion, evasion of contractual obligations) then a court may ‘lift the veil of incorporation’ and disallow the separate entity of the company from its owners and operators.

Corporate Law: Law principles and practice

Lifting or piercing the corporate veil at common law

The first assumption is that a company is a separate legal entity from its owners and operators.Industrial Equity Ltd v Blackburn (1977) 137 CLR 567

Courts may pierce the corporate entity, or look behind it, if they believe the company entity has been used improperly to cover a wrongdoing, or the company entity has resulted in some unfairness to members separated from the company. Green v Bestobell Industries Pty Ltd [1982] WAR 1

Courts are reluctant to pierce the veil.McLeod v The Queen (2003) 214 CLR 230

Sometimes a member may request that a court pierce the veil (i.e. reverse piercing). Macaura v Northern Assurance Co Ltd [1925] AC 619

Corporate Law: Law principles and practice

Reasons for piercing the veil

• to determine the residence of a company for tax purposes

• in the case of fraud or the breach of an agreement being the basis for incorporation—when an individual is attempting to avoid a personal agreement (Gilford Motor Co v Horne [1933] Ch 935)

• in the case of inequitable or unforeseen circumstances (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360; [1972] 2 All ER 492)

Corporate Law: Law principles and practice

Statutory lifting of the corporate veil

Provisions in various statutes may determine that an individual is liable for various offences and cannot have the protection of the separate entity of the company.

Employees, agents and officers may be liable along with the company for offences committed personally or on behalf of the company

Corporate Law: Law principles and practice

Piercing under the Corporations Act

• paying dividends out of capital—company directors will be personally liable if they authorise the payment of a dividend when there are insufficient profits and the company becomes insolvent (s 254T)

• trading while insolvent (s 588G)—this places liability specifically on directors

• employee entitlements—directors will be personally liable when a company enters transactions that put in jeopardy employee entitlements such as superannuation (pt 5.8A)

• uncommercial transactions—when directors, employees or some related person enter into any agreement at the expense of creditors (ss 588FB–588FF).

Corporate Law: Law principles and practice

Piercing under other statutes

Statutory piercing occurs under tax law, occupational health and safety legislation and environmental legislation, to name but a few statutes.

Corporate Law: Law principles and practice

Criminal liability of corporations

A company can be convicted of a crime, even manslaughter.R v Denbo Pty Ltd (1994) 6 VIR 157

A company can be convicted of personal crimes requiring a mental element (mens rea), where the wrongful intention (will and mind) can be inferred to be that of management.Tesco Supermarkets Ltd v Nattrass [1972] AC 153

Corporate Law: Law principles and practice

Statutory criminal liability

Legislation may make a company liable for wrongful acts even where the company did not authorise an act. This is a form of strict liability.Competition and Consumer Act 2010 (Cth).

The Criminal Code Act 1995 introduces the principle that a company may have a corporate culture that promotes wrongdoing.

Corporate Law: Law principles and practice

A company’s liability for torts

A tort is a wrongful action that allows the person suffering an injury to sue for damages. A company is liable for torts committed by its management, employees and agents on behalf of the company.