CORPORATE LAW

Lectures Week 2
 Pre-registration steps
 Complete a Form 201 – contents in
s117(2) see ASIC website asic.gov.au
 Lodge with ASIC
 Pay Fee of $412 for Pty Co
 Upon registration an ACN is given and a
certificate of registration
The Separate Legal Personality
of a Registered Company
Once registered, a company
has the legal capacity and powers of an
individual both within Australia and
elsewhere: see CA s 124(1).
Accordingly, a registered company is said be
a legal entity or person. The word ‘person’
as used in statutes usually includes bodies
corporate such as companies.
 Some of the Things That a
Company Can Do
A company can, for example:
 Contract as principal or agent;

 Hold the legal or equitable title to property

as principal or as a trustee;
 Sue and be sued in its own name;

 Employ persons.
The Relevance of the Separate
Legal Entity Concept to Limited
Liability Companies
 Where a limited liability company incurs a
liability as principal, the creditor can only
look to the company and its assets for
recompense.
 Where all of the shares of the company
are fully paid up, the company’s
shareholders are not liable to pay anything
to the company to allow it to pay its debts.
Salomon v Salomon [1897] AC 22, HL

 Mr Salomon was a successful boot and

shoe manufacturer who carried on his
business as a sole trader.
 He decided to form a company which
would purchase his business.
 The only members of the company were
Mr and Mrs Salomon and their five
children. Each of the seven family
members held one fully paid £1 share.
Shortly after the company was incorporated:
 Mr Salomon and two of his sons were

appointed as the company’s directors.

 The directors caused the company to

purchase the business of Mr Salomon for

£39,000. According to Lord Macnaghten:
‘the price on paper was extravagant. It …
represented the sanguine expectations of
a fond owner rather than anything that
can be called a businesslike or reasonable
estimate of value.’
The company paid the £39,000 purchase
price by:
 Issuing Mr Salomon with 20,000 fully-paid

£1 shares;
 Issuing a £10,000 debenture to Mr

Salomon;
 Discharging about £8,000 worth of the

liabilities that Mr Salomon had incurred as

a sole trader; and
 Paying the balance of about £1,000 in

cash.
 For a variety of reasons, the Salomon
company fell on hard times.
 In an attempt to keep the company going,
Mr Salomon had the company cancel his
£10,000 debenture and re-issue it to Mr
Broderip who paid Salomon £5,000 for it.
 Mr Salomon immediately lent the £5,000
to the company.
 However, the company eventually went
into liquidation after it failed to pay the
interest due to Mr Broderip on his £10,000
debenture.
 The sale of the company’s assets in the
liquidation realised enough to pay most
but not all of Mr Broderip’s claims in
relation to the £10,000 debenture.
 However, unsecured creditors of the
company (including Mr Salomon) stood to
receive nothing of the nearly £11,000
owed to them.
 The company’s liquidator then sought to
hold Mr Salomon responsible for all of the
company’s debts.
The liquidator disputed the validity of the
debentures on the ground of fraud.

The liquidator sought:

 rescission of the agreement transferring

the business from Mr Salomon to the

company,
 cancellation of the debenture, and

 repayment by Mr Salomon of the balance

of the purchase money.

 Broderip v Salomon [1895] Ch D 323

Vaughan Williams J held that the liquidator

was entitled to a declaration that Mr
Salomon was liable to indemnify the
company for all of its unsecured debts and
for all sums due on the debenture.

Vaughan Williams J considered that the

company was carrying on the business as
the agent of Mr Salomon.
‘To allow a man who carries on
business under another name to
set up a debenture in priority to the
claims of the creditors of the
company would have the effect of
defeating and delaying his
creditors. There must be an implied
agreement by him to indemnify the
company. ‘
 Salomon v Salomon & Co Ltd
[1895] 2 Ch 323, CA
The Court of Appeal unanimously dismissed
the appeal of Mr Salomon.

The Court considered that the legislature did

not intend to allow a sole trader to gain the
benefit of limited personal liability.

The company was held to be the alias,

agent or trustee of Mr Salomon.
 ‘It never was intended that the company to be
constituted should consist of one substantial
person and six mere dummies, the nominees of
that person, without any real interest in the
company. The Act contemplated the
incorporation of seven independent bona fide
members, who had a mind and will of their
own, and were not the mere puppets of an
individual who, adopting the machinery of the
Act, carried on his old business in the same
way as before, when he was a sole trader. To
legalise such a transaction would be a scandal’:
Lopes LJ at 341.
 The House of Lords Decision
The Court unanimously upheld Salomon’s
appeal. The Court considered that the
company had been formed with at least 7
members, as required by the then
legislation, it was a separate legal
entity capable of acquiring and operating a
business as principal.
It could not be regarded as a mere alias or
agent of its controlling shareholder.
Lord Macnaghten:
‘The order of [Vaughan Williams J] appears to
me to be founded on a misconception of the
scope and effect of the Companies Act 1862.
In order to form a company limited by shares,
the Act requires that a memorandum of
association should be signed by seven persons,
who are each to take one share at least. If
those conditions are complied with, what can
it matter whether the signatories are relations
or strangers?
There is nothing in the Act requiring that the
subscribers to the memorandum should be
independent or unconnected, or that they or
any one of them should take a substantial
interest in the undertaking, or that they should
have a mind and will of their own, as one of the
learned Lords Justices seem to think, or that
there should be anything like a balance of
power in the constitution of the company. In
almost every company that is formed,  the
statutory number is eked out by clerks or
friends, who sign their names at the request of
the promoter or promoters without intending to
take any further part or interest in the matter.’
Salomon v Salomon & Co Ltd finally resolved
the lingering question of whether a sole
trader could gain limited personal liability by
setting up a registered company to carry on
the business.

The current legislation requires a company

to have at least 1 member. This is true of
both public and proprietary companies: see
CA s 114.
Was the sale of Salomon’s business to
the company fraudulent?
The House of Lords considered the sale by
Mr Salomon of his business to the company
was transparent and valid.
The Court assumed that all members of the
company were aware of the true state of
the business and its value. Thus no
member of the company, or the company
itself, had been defrauded even if the
company paid too much.
 Lee v Lee’s Air Farming Ltd
[1961] AC 12
 L operates aerial topdressing business and
forms a Co
 L owns nearly all the shares and runs it
 L crashes plane and dies
 L’s widow claims against Co’s insurance
 Insurance co denies claim
 Privy Council accepts widow’s argument
that L and Co were different legal
Meaning of ‘corporate group’

There are several ways to define

‘corporate group’.

However, for the purposes of this

class, a corporate group consists of
companies that are ‘related’ to each
other.
 Related Companies
Where a body corporate is:
(a) a holding company of another body
corporate; or
(b) a subsidiary of another body corporate;
or
(c) a subsidiary of a holding company of
another body corporate;
the first-mentioned body and the other body
are related to each other: CA s 50.
What is a subsidiary company?
s46
A body corporate is a subsidiary of
another body corporate if, and only if,
(a) the other body (i) controls the
composition of the first body’s board
Or (ii) is in a position to cast or control
the casting of more that one-half of
the maximum number of votes that
might be cast at a general meeting
 CA s 46(a)(iii):
 A body corporate is a subsidiary of
another body corporate if it holds more
than one-half of the issued share capital of
first body (excluding any part of that capital
that carries no right to participate beyond
a specified amount in a distribution of
either profits or capital).
 This test focuses on the percentage of

ordinary share capital held and not on the

voting power attached to that holding.
 What is a ‘holding company’?

Where a company (‘New Moon’) is a

subsidiary of another company
(‘Eclipse’), the other company
(‘Eclipse’) is called the ‘holding
company’ of (‘New Moon’).
‘Holding company’, in relation to a body
corporate, means a body corporate of
which the first body corporate is a
subsidiary: CA s 9.
 What is an ‘ultimate holding
company’?
 ‘Ultimate holding company’, in relation to
a body corporate, means a body corporate
that:
(a) is a holding company of the first-
mentioned body; and
(b) is itself a subsidiary of no body
corporate: CA s 9.
 Lifting the Corporate Veil
 The term ‘lifting the corporate veil’ involves
a court holding that members of a company
are liable for a debt that the company alone
would usually be responsible for as
principal.
 Australian courts, and in particular the High
Court, are very reluctant to imperil the
Salomon principle by lifting the corporate
veil. See Redmond p173 Briggs v James
Hardie & Co Pty Ltd (1989) 16 NSWLR 549
 The Key Company Organs
 The board of directors
 The members in general meeting

These two organs, when acting within

their respective powers, are considered
to act as the company and not as its
agents.
 Company Organ Sources of
Power

 Company’s constitution
 Statutory ‘replaceable rules’

 Corporations Act
 Company’s Constitution
 Almost all companies have a constitution
 The only companies that must have a

constitution are:
a) No liability companies: see CA s 112(2)

b) Charitable companies limited by guarantee

that do not want to have ‘Limited’ as the
last word of their name: CA s 150
c) Public companies that want to be listed on
the ASX: see ASX Listing Rule 1.1
Condition 1A
 The registration application for a public
company must be accompanied by a copy
of its proposed constitution if the company
is to have a constitution on registration:
CA s 117(3).
 A public company must lodge with ASIC a
copy of a special resolution adopting or
amending a constitution within 14 days of
the resolution being passed: see CA s
136(5).
 The constitution of a proprietary company
does not have to be lodged with ASIC
unless ASIC asks for it under CA s 138.
 Main Functions of Constitution
 Divide company’s powers between the
board of directors and general meeting
 State the number of directors that the
company is to have
 State how directors can be appointed and
removed
 Provide for the convening and holding of
company meetings
 Altering the Constitution
 A company may modify or repeal its
constitution by special resolution: s 136(2)
 A ‘special resolution’ is defined by CA s 9
as a resolution:
(i) of which notice has been given as
required by s 249L(1)(c); and
(ii) that has been passed by at least 75%
of the votes cast by members entitled to
vote on it.
 A company cannot contract out of its
statutory right to alter its constitution:
see, for example, Peters’ American
Delicacy Co Ltd v Heath (1939) 61 CLR
457 at 479; Russell v Northern Bank
Development Corp Ltd [1992] 3 All ER
161; [1992] 1 WLR 588, HL.

 A constitution may provide that the special

resolution to alter it does not have effect
unless a further requirement in the
constitution is complied with: s 136(3).
Existing members are not bound by the
following changes to a constitution unless
they consent to them in writing:
a) One which requires a member to take up
additional shares;
b) One which increases a member’s liability
to contribute share capital, or otherwise to
pay money, to the company;
c) One which imposes or increases
restrictions on the right to transfer shares
already held by the member: s 140(2).
At general law, members can challenge the
validity of an alteration to a
constitution on the following grounds:
a) A reasonable person could not consider
the alteration to be in the best interests of
the company.
b) The alteration is unfairly prejudicial to, or
unfairly discriminatory against, one or
more of the members.
Courts are generally reluctant to interfere
with decisions taken by majority vote.
 The Constitution and Replaceable Rules
Section 140(1) provides that a company’s
constitution (if any), and any replaceable
rules that apply to the company, have effect
as a contract:
(a) between the company and each member;
(b) between the company and each director and
company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and
perform the constitution and rules so far as they
apply to that person.
 Replaceable Rules
 42 sections of the Corporations Act are labelled
‘replaceable rule’: see the table in s 141.
 The ‘replaceable rules’ can only apply to:

(a) A company that was first registered after July 1,

1998; and
(b) A company registered before July 1, 1998 which
has repealed its constitution since that date: see
s 135(1).
In both cases, a company’s constitution can
displace or modify a rule: s 135(2).
 Section 140(1) Contracts

director secretary

X Ltd

member member
 The Board of Directors
 Proprietary companies must have at least
one director and public companies at least
3: s 201A.
 All directors must be individuals who are
at least 18 years old: CA s 201B(1).
 Directors derive their powers from the
company’s constitution, the Corporations
Act and the terms of their respective
employment contracts.
 What Are the Usual Powers of the
Directors?
 The power to manage and direct the
company’s business: see, for example, CA
replaceable rule s 198A(1).

 The power to exercise all of the powers of

the company other than the powers that
the Act, or the company’s constitution,
require the company to exercise in general
meeting: see CA replaceable rule s
198A(2).
 What is a ‘General Meeting’?
 The term ‘general meeting’ in company
law means a meeting of the company’s
members.
 What Can Be Done at a General
Meeting?

 The members of a company can do

anything which is within their powers
under the Corporations Act and the
company’s constitution.
 A company in general meeting
usually has the power to:
 Change the company’s constitution by
special resolution: see CA s 136(2).
 Appoint a director by ordinary resolution:
see, for example, CA replaceable rule s
201G.
 Remove a director by ordinary resolution:
see, for example, CA replaceable rule s
203C (pty co); mandatory rule s 203D
(public co).
 Shareholder Meetings
 See Redmond Chapter 6 for aspects such
as who can convene a meeting, the notice
requirements, resolutions, voting and
proxies, quorums and disclosure
obligations.
 Acknowledgement
 These slides and seminar questions have
been adapted from original work
developed and prepared by Associate
Professor Jim Hambrook.