COMPANY LAW TOPIC 1

An Introduction The Company

Lipton, Herzberg & Welsh,
Textbook Chp 1& 2 p 4 - 75
 History of Corporations as a legal
separate entity. Text Chp 1, p 5.
Roman law concept in Latin -corpus means body
corporation is a body of persons but with its own legal
identity and long term existence and ownership of
property separate from and beyond the life of any
individual.
In English law incorporation was originally possible by
grant of a Royal Charter, from the King for example
12th /13th cent Monasteries and Universities
12th/13th cent - Local Borough Councils/Shires
13th/14th cent- City Trade Unions and Exclusive Craft
Guilds
16th/17th cent -Incorporation by an Act of Parliament.
Then 19th cent- Statute Law Registration of a Co.
 Early examples of Business Co.
Trading Monopolies & Ventures
Dutch East India Co. (1600) when Holland was a world
shipping and trade superpower.
Citizens could purchase shares which could be traded.
It is an early example of the operation of market forces of
supply and demand on the price of shares.
The London Virginia Co. (1607) was given the right by
King James to appoint its own governors and include in
its charter individual small investors - persons called
adventurers thereby widening its financial base. It had
659 subscribers.
Getting Royal Assent to a Charter was a difficult
process so businessmen increasingly made use of
partnerships.
 The Use of Partnerships for
Investment/commercial enterprises
The beginnings of the industrial revolution and commerce saw the growth
in the use in the 17th & 18th cent of the existing legal concept in common
law of partnerships where many individuals could pool their resources and
carry on a business together with a view to making a profit without having to
get a Royal Charter of incorporation.
The legal features of partnerships: - Partners act as agents for each other
and can bind the firm.
Personal and joint liability of partners
Consent of all partners needed for transfer of interests
No need for formal registration
Subject to dissolution on the death or retirement of a partner.
Development in Equity Law of Trusts applied to partnerships to modify them
into a Joint Stock Co. , by using a deed of settlement which enabled
partnership capital to be divided into transferable stock (share) and the
appointment of a council of managers (directors) who could then manage
the business.
TEXT p. 5 -6
 Difficulties with the use of large
partnerships for speculation
Disadvantages of partnerships as joint stock companies no limits
on size and liability, problems with the transferability of shares and
issues with the separation of management from the stock owners..
Excessive speculative investment in the UK South Seas Company
(which controlled the slave trade in Sth America) caused a bubble (
dramatic rise in stock prices) which went bust and caused substantial
losses to many investors and created national economic uncertainty.
The Bubble Act UK (1720) was then passed to prohibit the formation
of unincorporated Joint Stock companies through partnerships.
Partnerships lacked some important features: free transferability of
shares, perpetual existence, ownership of property in its own name,
and limited liability.
The 1800s saw the need in modern commerce for ease of
registration of a corporation and new laws to limit the size of
partnerships and to distinguish corporations from partnerships.
TEXT p. 6
The first Companies legislation 19th
Cent. Text Chp 1, p 5.
UK Act of 1844 registration for formation of companies
UK Act of 1855 introduction of limited liability
UK Act of 1856 consolidated the 1844 and 1855 Acts and
introduced the use of a Memorandum of Association ( containing the
basic information about a company) and Articles of Association
( which contained a model set of rules regulations as guidance for
the internal workings and operation of the company) for registration.
It also placed a limit on the size of partnerships to 20 partners, and
required a minimum of seven members for incorporation.
Consolidation of all existing UK company laws into Companies Act
1862 dropping the Joint Stock title and indicating that a company
was a separate entity distinct from its members which became the
model law for the western world, including Australian colonies.
Australian colonies inherited English common law and equity law
system, with similar statutes and parliamentary system in 19 th cent.
TEXT p. 6
 Company compared to a
Partnership p 53 - 59
A Co. is a separate legal entity, a partnership is NOT.
A Co. is liable for its debts to creditors, and can sue and
be sued in its own name. In a partnership the partners
are jointly and individually personally liable.
A Co. can buy and sell and own property, and enter into
contracts in its own name. In a partnership it is the
partners who act in the name of and in account of the
firm, and who jointly own the property of the firm.
A Co. has a perpetual existence, a partnership only
exists for the life of the partnership agreement.
Members of a Public Co. are free to transfer their interest
on the stock exchange. In a partnership all partners must
agree to the introduction of a new partner.
 Co. distinguishing features -
continued
In a Co. management is by a board of directors separate
from the members, in a partnership all the partners are
the management.
A Public Co. raises capital from the issuing of shares for
sale with accompanying disclosure documents and
prospectus, a partnership is limited to the capital that is
provided by each partner.
A Co. pays a lower rate of tax usually 30%, in a
partnership all partners must pay the normal individual
tax rate of 45% on all profits that they earn from the firm.
A Co. has to meet with several formal requirements of
ASIC to be registered and come into existence, whereas
a partnership can come into existence by agreement.
For Registration Procedure see TEXT p.28, 59-78
The essential characteristic of a Co

Text Chp. 2. p. 28-57

The limited liability Company is the greatest invention in
modern times because it allows for the pooling of large
sums of capital from investors who buy shares, for use by
entrepreneurs and managers to develop businesses that
are the main drivers of employment and wealth in our
society.
In Australia there are more than 2,000 Public Cos listed
on the stock exchange (ASX) and more than 1 million
Private ( Pty Ltd) companies.
A company is a separate legal entity that can own
property which is not owned by shareholders because
they only own the value of their shares. The following 3
case examples illustrate this most important principle:
 Co. legal powers & capacity of are
those of an artificial person -
From Foss v Harbottle 1843 ER, the rule was that members
(shareholders) could not sue on behalf of their company the proper
plaintiff is the company itself.

Also prior to 1998 a company could not enter into a contract without using
the Company Seal and this has also been modified by the Corporations
Act s 126 making the use of the seal optional and allowing contracts to be
made on behalf of the company by individuals (directors / agents) with or
without the seal and with express or implied authority, according to the
principles of agency and the Corporations Act statutory assumptions in s
129.

Ownership of property in the name of the company and not an individual

director/owner or shareholder is illustrated in the case of Macaura v
Northern Assurance Co. 1925 AC.
 The separate legal entity concept,
A Case study: Salomons case;
The leading case of Salomon v Salomon & Co. (1897) AC was a test case for the
way in which the courts would interpret and apply the rules in the Companies Act
(1862) UK. The key concept in the Act was the idea that a company could be an
artificial person with a separate legal identity of its own, even separate from its main
shareholders and managing director.

The House of Lords reversed the decision of the Court of Appeal and established the
principle that even a small one man company was a separate legal entity from its
main shareholder and business manager. Every company however small or
large was a separate legal entity of its own.

Text p 32 - 35
 The Salomon principle set a
precedent for all future companies
TEXT p. 35 -37 see cases that illustrate the application of the Salomon principle in a
variety of circumstances eg.
Salomons case has been applied and followed in many other modern cases involving
separation of the original business owner from their company:-
Macaura v Northern Assurance Co Ltd. 1925
Lee v Lees Air Farming 1961 (1.)

Application to Subsidiaries: Text 37-38

Other cases have also upheld the separate legal entity principle where a company is
a subsidiary of another company and is part of a group of companies. Each company
is a separate legal entity and the board of directors of each company owe their duties
separately to each company of which they are a board member:
Walker v Wimbourne 1976
Pioneer Concrete services v Yelnah Pty Ltd 1987

Footnote example of a case citation.(1.) Lee v Lees Air Farming [1961] AC 22

 Separate legal entity & limited
liability by shares - the veil p 41-5
99.9 % of all companies in Australia both Public and Private have liability limited by
shares, and when this is combined with the separate legal entity of a company it
creates a protective shield to encourage entrepreneurs to take risks and do
business.
Lord Denning described this protective shield as the corporate veil of secrecy. If
applied strictly it creates a problem of lack of transparency in company behaviour so
in modern times the courts through case law decisions and principles have created
precedents for lifting the corporate veil eg.

In cases of using a company to commit fraud re Darby 1911,

In cases of using a company as a front to avoid other legal obligations Gilford
Motor Co v Horne 1933
In cases where a company knowingly participates or aids a director to breach their
duties Green v Bestobell Industries Ltd. 1982
In cases where funds are moved around in a group of companies Equiticorp
Finance Ltd v Bank of New Zealand 1993
In cases where a parent company may be made liable for the wrongful acts of its
subsidiaries where there is a duty of care Briggs v James Hardie & Co Ltd. 1989
 Some Statutory provisions that lift
the veil Text p 41 - 53
Sec 588G directors may become personally
liable for the debts incurred by their company
where there were reasonable grounds for
suspecting that the company was insolvent.
Sec 588FB,FE,- directors and related parties
may be liable for uncommercial transactions
entered into to defeat creditors.
Sec 260 directors may be liable where money
(financial assistance) was provided by the
company to an individual to buy shares in the
company.
 History of development of
corporations law in Australia.
The six British colonies that existed in Australia in the late
19th Cent. each had their own parliament and law making
powers and copied the Companies Act 1862 ( UK) as
their model law for corporations.
In 1901 the colonies agreed to unite into a federation of
states to form the nation of Australia, and a Constitution was
written to set out the powers of the new Australian (federal
parliament) leaving the remaining powers with the states.
Sec 51(xx) in the Constitution says that the federal
parliament has concurrent power with the states to make
laws for foreign corporations, and trading and financial
corporations formed within the limits of the
commonwealth( of Australia).
TEXT p.7-10
 Interpretation by the High Court of
A Case Study: Sec 51 (xx).
In Huddart Parker & Co. Pty Ltd. v Moorehead 1909 formed was interpreted as
meaning literally already formed, therefore deciding that the federal parliament did not
have any power over the formation and registration of new companies.

The interpretation in this case was the start of a struggle for the next 90 years
between those who favoured states rights and independence and those who
wanted a uniform system of law with centralised federal control and powers. There
were several attempts at creating a uniform system for corporations and other high
court challenges to these various schemes which also became a focus for political
hostility. The Liberal Party
( Conservatives ) aligned itself with state rights always obstructing the Labour Party
( ALP) on the premise that its schemes for uniform laws and federal control were anti-
free enterprise and based on communist/socialist ideals of centralised control (2.)
particularly with the election of the Whitlam led ALP government in 1972.
The result was that for many years the states controlled corporations law and
companies had to register separately in each state and that each state had its own
stock exchange.

Footnote example of a legal journal article : (2) Mees, B and Ramsay, I Corporate
Regulators in Australia (1961- 2000) (2008) 22 Aust Jnl of Corp Law 212.
Cases that upheld Huddarts states
rights approach in corporations law
Strictland v Rocla Concrete Pipes Ltd 1971
A growth in the size of business activities and foreign investment, a maturing of the
financial markets in Australia and the largest stock market collapse in 1987 since the
Great Depression of the 1930s put pressure on the state and federal governments in
1988 to negotiate a co-operative scheme called the Co-operative Scheme but this
was challenged successfully in
NSW v Commonwealth 1989.
As a result the scheme was amended in 1989 and based on ACT Corporations
Law, with centralised federal supervision through the ASC, the federal police
and the federal DPP. A series of economic, financial and legal reforms were
carried out by the federal government under an ongoing policy reform program
called CLERP ( Corporate Law Economic Reform Program).
But even this amended version was successfully challenged on technicalities in a
series of cases eg.
Re Wakim 1999, Bond v R 2000, and R v Hughes 2000.
Consequently it was agreed by all parties that the only way to solve the Constitutional
block was for the states to transfer their corporations law powers to the federal
government which resulted in the enactment of the Corporations Act 2001 (Cth),
and the ASIC Act 2001(Cth) which also make provision for the Takeovers Panel,
Australian Accounting Standards Board, Auditing and Assurance Standards
Board.
 Federal legislation now applies to
the regulation of companies
Sec 9.6A Corporations Act 2001 (Cth) (3) re-instates
the jurisdiction of the Federal Court in corporations law
matters, and this together with cross vesting powers
with state courts overcomes the problem of conflicts
between the jurisdiction of state courts and federal
powers eg. as in Re Wakim.
The Crimes Act 1914 (Cth), the Criminal Code Act
1995 (Cth), the Director of Public Prosecutions (DPP)
Act 1983 (Cth) and the Acts Interpretation Act 1901
(Cth) apply in prosecutions under the Corporations Act to
the exclusion of equivalent state legislation.

Footnote example of the citation of an Act: (3) Corporations

Act 2001 (Cth) s 9.
 Australian Securities and
Investments Commission
ASIC Act 2001 (2001) established ASIC as the federal government
agency responsible for the registration of corporations and their
compliance with corporations law. The enforcement regime in
corporations law utilises a pyramid of compliance penalties, both civil
and criminal, based on the regulatory compliance theories of
Braithwaite (4.). Responsive Regulation (1992)
ASIC is a body corporate with a board of 8 federal government
appointed members and a Chairperson. It has offices in each state and
territory and a large number of administrative staff. The Federal
Government Treasurer is the responsible Minister for ASIC.
ASIC is also responsible for the collection and dissemination of relevant
corporate information, law reform and education matters.
Applications for the registration of companies must be made to ASIC
TEXT p. 10 -14

Footnote example of a book citation: (4) Fisse B & Braithwaite J, The

Impact of Publicity on Corporate Offenders New York (1983) 1.
 The Takeovers Panel
Established in 2001 under the provisions
for takeovers in the Corporations Act it
consists of a panel of industry experts
appointed by the government sec 657A.
While a takeover bid for a listed company
is in play the panel temporarily replaces
the courts as a supervisory body for the
quick and efficient resolution of any
disputes between the takeover parties.
 The ASX
Throughout the 20th cent. Each state in Australia operated its own
independent stock market and agency for the registration of companies.
After an amalgamation of the state markets in 1998 into one - the Australian
Securities Exchange was formed as a public company with the authority to
enable the listing of public companies and provide a market for the sale of
shares and other financial securities ( such as derivatives) for all Australian
companies and foreign companies registered in Australia.
The ASX must insure that the market operates with integrity in a fair, orderly
and transparent manner by ensuring compliance with continuous disclosure
requirements and listing rules.
The ASX Corporate Governance Principles and Recommendations
(2007) provide companies with comprehensive guidelines for good
corporate governance and management.
In recent times there has been debate as to whether the ASX itself should
be controlled by a listed company is this a conflict of interest?- and
whether other operators of alternative markets ( eg. The Singapore Market)
should be allowed to operate in Australia to provide competition for the ASX.
ASIC has taken over some of the powers of the ASX.
 Financial Regulation
The Corporations Act makes provision for the regulation and supervision of
financial markets and the financial services industry through the issuing of
licences, enforcement of financial services disclosure documents and
requirements, and the monitoring of standards and behaviour of financial
service product providers. Part 7, ss 760 1022 C.

Australian Prudential Regulation Authority ASIC Act s 5 supervises Banks

and other financial lenders.
(FRC) Financial Reporting Council ASIC Act s 235
Financial Reporting Panel ASIC Act 239
(AASB) Australian Accounting Standards Board ASIC Act s 236
Companies Auditors and Liquidators Disciplinary Board Corp Act s 1292,
ASIC Act s 214
Independence of auditors see Corp Act s 324 AF (1).
Post GFC there have been significant legislative reforms to the financial
services industry eg. Financial planners and service providers must now
disclose commissions and trailers on financial products that they may
recommend. These protections are now being reviewed again by the Abbott
Government with a view to reducing the red tape and obligations on Financial
planners. COMMONWEALTH BANK FAILURE is relevant.
Assessment Answer Technique
See Guide on Blackboard
Law problems are solved by using ILAC.
The test/exam will consist of legal
problems and hypothetical case studies
where students are required to be able to
analyse the problem and identify the Topic
area and legal issues, then identify the
relevant source of law and legal rules,
explain how the rules apply and reach a
conclusion.
 Assessment continued
The Test is worth 40% of the final mark.
The Exam is 60% - 2 hours writing with 10 mins
reading time. They are OPEN BOOK which
means that any materials, books, notes, tutorial
questions and notes, lecture slides and notes,
photocopies, statutes and textbooks can be
taken into the exam BUT NOT DICTIONARIES
nor ELECTRONIC DEVICEs.
There are 3 problem exam questions
 Tutorials give continuous
Feedback on Assessment
Tutorials are important because the Tutors
give direct feedback by going over
suggested answers and approaches to
ALL tutorial questions.
The tutorial questions may be used as a
basis for the test and exam questions.
Students can make their own notes in
tutorials which can be taken into the exam.
 Course Organisation
Importance of Tutorials
You have contact with your tutors every
week and you are encouraged to ask them
questions in the tutorial in regard to each
Topic area.
Do not use the tutorial exercises at the end
of each chapter in your text book, for
tutorials the questions are listed on
Blackboard.
 Student attendance in face to
face learning is key to success
Student attendance at Tutorials is a key to
success on your Test and Final
Examination.
Each tutorial question could be the basis
for a Test or Exam question therefore the
explanation of how to answer each tutorial
question and discussion with your Tutor is
crucial assessment feedback.
 Topic 1- Key Focus Points
Origin of the name corporation.
First model Company Law Statute in 1862
Companies have different features to
Partnerships and Trusts what are they?
Salomons case (1897) was the first test case of
the legal entity of a company in the Companies
Act 1862 explain the case.
What does lifting the veil mean?
The states lost control of companies, how?
 Key Focus Points -continued
There are some significant federal bodies
that play in the regulation of companies
and company law what are their roles?
ASIC
Takeovers Panel
ASX
APRA
AASB