chapter 1 introduction to corporations law · concise income tax 5th edition ... review questions...

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Contents

Preface vAcknowledgments xxiiiTable of Cases xxivTable of Statutes xli

Chapter 1Introduction to Corporations Law 1Overview 1A Select History of Corporations Law 1

Historical development of the corporate entity 1Joint stock companies 2Development of corporations law in Britain 3Development of corporations law in Australia 4

Companies Act 1981 5Corporations Act 1989 5Corporations Law 5Corporations Act 2001 6

Commonwealth’s Legislative Power to Enact a Federal Corporations Regime 7

Corporations Act 1989 7Corporations Law 10Cross-vesting 12

Current Jurisdictional and Administrative Arrangements 15Review questions 16Further reading 17References Chapter 1 17

Chapter 2Choosing Between Business Organisations 18Overview 18Sole Proprietorship 19Definingasoleproprietorship 19Benefitsandshortcomingsofasoleproprietorship 19

Trading Trust 20Definingatrust 20Benefitsandshortcomingsofatrust 21Corporate trustee 23

Partnership 24Definingapartnership 24Limited partnerships 27Benefitsandshortcomingsofapartnership 28

Concise Income Tax 5th edition Julie Cassidy

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Joint Ventures 29Definingajointventure 29Benefitsandshortcomingsofajointventure 31

Company 32Definingacompany 32Liability of members 32Company limited by shares 32Company limited by guarantee 33Unlimited company 33No-liability company 34Public and proprietary companies 34

Public companies 34Proprietary companies 35Small and large proprietary companies 35

Benefitsofregistration 36Separate legal identity 36Limited liability 36Perpetual succession 36Flexibility 36Finance 37

Shortcomings of registration 37Formalities 37Costs 37Participation in management 37

Benefitsofproprietarycompanies 38Benefitsofpubliccompanies 39Review question 40Further reading 40References Chapter 2 40

Chapter 3Corporate Personality 41Overview 41Corporate Personality 41Definingcorporatepersonality 41Limited liability 42Multiple capacities 44Distinguishing company and shareholder property 46

Company Liability 46Difficultiesindeterminingcorporateliability 46Strict liability 47Vicarious liability 47Primary liability: The organic theory 48Privilege against self-incrimination 54

Piercing the Corporate Veil 54Piercing the corporate veil 54Sham 54

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Statutory directives to pierce the corporate veil 54Insolvent trading 55Debts incurred as trustee 56

Common law rules regarding piercing the corporate veil 57Avoiding a legal obligation 57Fraud 58Agency 58Corporate groups 61Trusts 64Public policy: the enemy 64

Review questions 65Further reading 65

Chapter 4Promoters and Pre-registration Contracts 67Overview 67Promoters 67Definingapromoter 67Promoter’s duties 71Consequences of a breach of duty 71

Pre-registration Contracts 72Pre-registration contracts at common law 72

Liability of the company 72Liability of the promoter 72Breach of warranty of authority 73

Reimbursement of promoter’s costs 74Pre-registration contracts under the Corporations Act 74

Introduction 74Personcontractingonbehalfoforforthebenefitofthecompany 75

Agency 75Types of contracts 77

Contract pre-registration 77Registrationofthecompanyorreasonablyidentifiablecompany 80

Registration 80Companyorreasonablyidentifiablecompany 80

Ratifiedorsubstitutedpre-registrationcontract 80Whatamountstoratification? 80Whatamountstoasubstitution? 82Ultra vires 82

Ratificationorsubstitutionwithintimelimits 82Effectofratification 82Effectofnoratificationorsubstitution 83Release from liability 84Trustee’s right of indemnity 84Review question 84Further reading 85References Chapter 4 85

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Chapter 5Registration of Corporations 86Overview 86Registration of ‘New’ Companies 86

‘Shelf’ companies 86Prerequisites to registration 87

Membership 87Reservation of company name 87Consent of director/secretary 88Constitution 89

Application for registration 89Documents to accompany application for registration 90Registration 90Certificateofregistration 90Effect of registration 91Post-registration requirements 91

Common seal 91Appointmentofofficersandauditors 91Registers 92Minute books 93Share issues 93Accounting records 93Annual general meeting 93

Registration of Existing Entities 93Companies registered under Corporations Law 93Transfer of registration of companies 94Transfer of registration by non-companies 94Registrable Australian Bodies 95Foreign corporations 95Review question 96Further reading 96

Chapter 6The Corporate Constitution 97Overview 97Identifying the Corporate Constitution 97

Memorandum and articles 97Mandatory and replaceable rules 98

Adopting /displacing replaceable rules 98Legal Consequences of Mandatory Rules

and Constitution 99Altering the Constitution 99

Special resolution 99Precondition in constitution 100Alterations affecting members 100Common law requirements 100

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Statutory Contract 106Binding nature of the constitution 106Alterable contract 106Separate contract 107

Independent contract 107Interdependent contract 108

Parties to the statutory contract 109Outsiders and the statutory contract 109Members enforcing outsider rights 110

Ultra Vires Doctrine 113Ultra vires doctrine at common law 113Ultra vires in the narrow sense: Corporate capacity 113Ultra vires in the wide sense: Members’ and directors’ powers 113Review questions 116Further reading 116

Chapter 7Shares and Dividends 117Overview 117Shares 118

Nature of a share 118Evidence of shareholding 118

Classes of Shares 119Power to issue different classes of shares 119Definingaclassofshares 119

Deferred shares 120Ordinary shares 120Preference shares 121Governor’s shares 123Employee shares 124

Variation of class rights 124Definingavariationofclassrights 124Procedure to vary class rights 125Challenging a variation of class rights 126

Share Capital 127Description of share capital 127Altering share capital 128Maintenance of share capital 128

Prerequisites for a reduction of share capital 128Procedure for reduction of share capital 129Challenging a reduction 130

Company purchasing its own shares 135Prohibition on company purchasing its own shares 135Buy-backs under Div 2 of Part 2J.1 136

Company lending money on security of its own shares 136Prohibition on company lending money on security of its own

shares 136Exemptions 138

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Companyfinanciallyassistingpurchaseofitsownshares 138Prerequisitesforfinancialassistance 138Procedure for shareholder approval 142Exemptions 142Consequences 143

Dividends 144Procedure for declaring/announcing dividends 144Effect of declaring a dividend 144Dividendsmustbepaidoutofprofits 145Definitionofprofits 145

Past years’ losses 145Eventsafterthecurrentfinancialyear 145Futureprofits 146Netprofits 147Capital losses and gains 147Netprofitsofthecompanydeclaringthedividend 153

Interim dividends 153Consequences 154Review questions 155Further reading 156

Chapter 8Corporate Fundraising 157Overview 157Debt Capital 158

Pros and cons of debt capital 158Form of debt capital 159

Debentures 159Security for debt capital 160

Charges 160Fixedandfloatingcharges 160Negative pledges 161Registration of charges 161

Definitionofsecurities 162Offers requiring disclosure 163Exceptions to disclosure requirements 164

Small scale offerings 165Sophisticated and professional investors 166Rights issues 167

Disclosure document 168Definitionofdisclosuredocument 168Prospectus 168Continuously quoted securities 169Short form prospectus 171Profilestatement 171Offer information statement 172

Clear, concise and effective disclosure 173

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Supplementary and replacement disclosure document 173Obligation to correct information 173Supplementary document 174Replacement document 174Stop orders 174

Requirements for offering securities 175Preparation of disclosure document 175Lodgement with ASIC 175Exposure period 176

Defective disclosure 176Prohibition 176Criminal liability 176Civil liability 177Part 2 Division 2 179

Restrictions on advertising and publicity 179Prohibition 179Exemptions 180Hawking securities 181Unsolicited offers to purchase securities 181

Financial Services Reform Act 181Review question 182Further reading 183

Chapter 9Appointment and Removal of Directors 184Overview 184Board of Directors 184

Role of board of directors 184Division of power between board and general meeting 185

DirectorsandOfficers 187Definitionofdirector 187Definitionofofficer 191Validation of appointment 191

Section 129 assumptions 191Indoor management rule 192Validation of acts under ss 201m and 204e 193Court’s power to validate acts under s 1322(4)(a) 194

CompanyOfficers 194Executive and non-executive directors 194Managing director 194Chiefexecutiveofficer 195Governing director 195Associate director 195Chairperson 196Alternate director 196Secretary 196

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Qualifications 197Natural persons 197Number 197Residence 197Age 197Sharequalification 198Consent 198

Disqualification 198Managing a corporation 198Automaticdisqualificationforconvictionofcertainoffences 199Automaticdisqualificationofanundischargedbankrupt 200Court’s power to disqualify for breaching civil penalty provisions 201Court’s power to disqualify for managing insolvent companies 206Court’s power to disqualify for repeated breaches of the

Corporations Act 206ASIC’s power to disqualify persons subject to liquidator’s report 209Court’s power to grant leave to manage a corporation 211

Appointment of Directors 214First directors 214Subsequent directors 215

Directors’ Remuneration 216Right to remuneration at common law 216Right to remuneration under the replaceable rules 216Single director/shareholder companies 216Listed entities 216Managing director 217Disclosure requirements 217

Listed entities 217Resignation and Removal of Directors 218

Resignation 218Vacationofoffice 219

Retirement by rotation 219Automatic vacation under the Corporations Act 219Automatic vacation under constitution 219

Removal of directors 220Proprietary companies 220Public companies 220

Paymentsforlossofoffice 222Review questions 224Further reading 224

Chapter 10Directors’ Duties 226Overview 226Duty to Act Honestly/in Good Faith and in the

Best Interests of the Company 227Fiduciary duty 227

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Whatconstitutesthecompany’sinterests? 227Company’s interests 227Shareholders 227Nominee directors 232Group companies 234Creditors 235Employees and other third parties 241Equitable relief 241

Statutory duty 242Relationship with other duties 244Consequences of a breach 244

Injunction 244Civil penalty 244Disqualification 250Compensation 257Criminal offence 257

Duty Not to Fetter Discretion 258Proper Purpose Doctrine 258

Fiduciary duty 258Directors’ honesty 259Importance of improper purpose 259Share issues 259

Registration of share transfers 262Consequences of breach 265

Generally 265Share issue 266Registration of share transfer 266

Statutory duty 266DutytoAvoidaConflictofInterests 266

Fiduciary duty 266Contracting with the company at common law 267Contracting with the company under the constitution 268Contracting with the company under the Corporations Act 269Useofpositionforpersonalprofitinequity 274UseofpositionforpersonalprofitunderCorporationsAct 280

Duty to Act with Due Care and Diligence 286Common law 286Statutory duty of care and diligence 290

Business judgment rule 292Reliance and delegation 292Consequences of breach 293

Insolvent Trading 294Duty to prevent insolvent trading 294Insolvency 294Debt 295‘Incurring’ a debt 295Objective test 296

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Defences 297Consequences of breaching s 588g 301

Compensation 301Civil penalty 301Criminal offence 302

Review question 302Further reading 302

Chapter 11Meetings 305Overview 305WhatConstitutesaMeeting? 305

More than one person 305Meeting in person 306Resolutions and declarations without meetings 306

Board Meetings 307Convening board meetings 307Notice 309Attendance at board meetings 310Quorum 310Voting 311Minutes 311

Annual General Meeting 312Obligation to convene annual general meeting 312Convening an annual general meeting 312Agenda 312

General Meetings 313Directors’ power to convene a general meeting 313Members requisitioning a general meeting under s 249d 313

Who may requisition a general meeting under s 249d? 313Basis for requisitioning general meeting 313Notice 314Members’ right to convene general meeting 314

Members convening a general meeting under s 249f 314Court’s power to order the convening of a general meeting under

s 249g 314Basis for an order convening a general meeting 314Whatis‘impracticable’? 315

Directors’ power to postpone meetings 317Notice of general meetings 317

Length of notice 317Service of notice 318Content of notice 319Directors’dutytoprovidesufficientinformation 319

Circulation of members’ resolution and statement 321Quorum 322Resolutions 323

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Proxies 323Appointment of proxies 323Revocation of proxy’s appointment 324Rights and powers of a proxy 324

Representatives 325Appointment of representative 325Rights and powers of representative 325

Voting 325Show of hands 325Poll 326Chairperson’s casting vote 326

Minutes of general meeting 326Validating procedural irregularities 327Review questions 329Further reading 329

Chapter 12Members’ Remedies 331Overview 331Rule in Foss v Harbottle 331

Proper plaintiff rule 331Common law exceptions to Foss v Harbottle 333

Personal rights 334Statutory Derivative Action 338

Standing to seek leave to bring a derivative action 338Grounds for an application 341

Company will not bring proceedings 341Notice 341Good faith 342Best interests of the company 344Serious question to be tried 346Substitution of litigant 346Ratification 346

Court’s powers 347Independent investigator 347Costs 347

Leave to settle proceedings 347Oppression 347

Oppressive or unfairly prejudicial or discriminatory conduct 347Standing under s 234 348Whomaybetheoppressor? 351Scope of s 232 352

Objective test 352Act or omission 352Isolated past conduct or continuous course of conduct 352Ultra vires, illegal or want of probity 353Discriminatory 353

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Oppressive conduct 353Unfairly prejudicial or discriminatory conduct 355Contrary to interests of members as a whole 362Nature of relief under s 233 362

Injunctions 362Introduction 362Standing to apply for injunction 363Nature of relief under s 1324 369

Right to Inspect Books 369Members’ right to inspect books 369Directors’ right to inspect books 370Review questions 371Further reading 372

Chapter 13External Administration 374Overview 374Receivership 375

Appointment of receiver 375Appointment by creditor 375Appointment by a court 375Impact of appointment on directors’ powers 380

Termination of appointment 381Receiver’s powers 381Receiver’s duties 382Receiver’s liability 383

Schemes of Arrangement 384Definingcompromiseorarrangement 384Agreement to scheme 384

Convening meeting to consider proposal 384Explanatory statement 385

Court’s discretion to approve compromise or arrangement 385Administration of Company 389

Appointment of administrator 389Impact of appointment on directors’ powers 391

Termination of appointment 391Committee of creditors 391Administrator’s powers 392Administrator’s duties 392Administrator’s liability 393Moratorium 398Creditors’ meeting 398Termination of scheme of arrangement 400Termination of administration 402

Winding Up 403Types of winding up 403Appointment of liquidator 403

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Impact of appointment on directors’ powers 405Termination of liquidator’s appointment 406Liquidator’s powers 407Liquidator’s duties 408Liquidator’s liability 409Winding up by the court 410

Court’s power to wind up a company 410Winding up in insolvency 410Winding up on other grounds 411

Voluntary winding up 420Application by members 420Application by creditors 420Court’s powers 421

Deregistration 421Types of deregistration 421Voluntary deregistration 421Deregistration initiated by ASIC 422Reinstatement 422Review questions 425Further reading 426

Index 428

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