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Summary - best final exams notes
Law of Business Organisations (200183)
Western Sydney University
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Final Exam Notes
SEPARATE LEGAL ENTITY:
LIABILITY OF COMPANY FOR CLAIMS OF OWNER/EMPLOYEE ....................................... 3
SEPARATE LEGAL ENTITY:
PERSONAL LIABILITY OF OWNERS ...................................................................... 4
SEPARATE LEGAL ENTITY:
EXISTANCE OF COMPANY WITHOUT DIRECTORS ...................................................... 5
SEPARATE LEGAL ENTITY:
LIFTING OF CORPORATE VEIL ........................................................................... 6
SEPARATE LEGAL ENTITY: LIFTING OF CORPORATE VEIL IN CORPORATE GROUPS .............................................. 7
PROMOTERS: CONSIDERATION .......................................................................... 8
PROMOTERS:
LIABILITY FOR PRE-REGISTRATION CONTRACT ....................................................... 9
PROMOTERS: FIDUCIARY DUTIES (SECRET PROFIT) ................................................. 10
CONSTITUTION:
CONTRACT BETWEEN COMPANY AND MEMBERS ..................................................... 11
CONSTITUTION:
CONTRACT BETWEEN COMPANY AND DIRECTORS ................................................... 12
CONSTITUTION: OBJECT CLAUSE ..................................................................... 13
DIRECTORS: CONSIDERATION .......................................................................... 14
MEMBERS’ POWERS TO MANAGE COMPANY .......................................................... 15
COMPANY’S LIABILITY UNDER CONTRACT ............................................................ 16
COMPANY’S LIABILITY IN TORT ........................................................................ 17
COMPANY’S LIABILITY IN CRIME ....................................................................... 18
MEMBERS’ MEETING: ABILITY TO CALL MEETING .................................................... 19
MEMBERS’ MEETING: IRREGULARITIES ................................................................ 20
MEMBERS’ MEETING: REMOVING DIRECTORS ........................................................ 21
DIRECTORS: DUTY OF CARE ............................................................................ 22
DIRECTORS: DUTY TO AVOID CONFLICT OF INTEREST - DUTY OF GOOD FAITH (e. SECRET PROFIT) .................................................................................. 24
DIRECTORS: RELATED PARTIES TRANSACTION ....................................................... 26
DIRECTORS:
DUTY TO PREVENT INSOLVENT TRADING ............................................................. 27
DIRECTORS: DUTY TO ACT FOR PROPER PURPOSE ................................................................. 28
DIRECTORS: DUTY TO ACT FOR PROPER PURPOSE IN RELATION TO SHARE ISSUE .............. 30
MEMBERS’ REMEDIES: EXPROPRIATION OF SHARES ................................................. 32
MEMBERS’ REMEDIES: DERIVATIVE ACTION ........................................................... 33
MEMBERS’ REMEDIES: OPPRESSION ................................................................... 34
- MEMBERS’ RIGHTS: ACCESS TO BOOKS
- CAPITAL MAINTENANCE: SHARE BUY-BACK AND REDUCTION OF CAPITAL
- CAPITAL MAINTENANCE: DIVIDENDS OUT OF DEBT
- FUNDRAISING: PROPRIETARY COMPANY
- FUNDRAISING: PUBLIC COMPANY
- FUNDRAISING: MISLEADING INFORMATION IN DISCLOSURE DOCUMENTS
- PRIORITY OF CHARGES
- EXTERNAL ADMINISTRATION
- WINDING-UP
- VOIDABLE TRANSACTIONS
SEPARATE LEGAL ENTITY:
PERSONAL LIABILITY OF OWNERS
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Are owners of a company personally liable for debts of the company?
LAW: - SOLOMON’S CASE states that a company is a separate legal entity different from its owners or managers. - s119 states that a company is a separate legal entity coming into existence on registration. - s124(1) states that a company has full legal capacity.
APPLICATION: <XYZ> is a registered company and therefore a separate legal entity different from <its owners>. The courts do not regard <XYZ> and <its owners> as one due to the concept of separate legal entity.
CONCLUSION: Creditors cannot hold <owners> of <XYZ> personally liable for debts of the company.
SEPARATE LEGAL ENTITY:
EXISTANCE OF COMPANY WITHOUT DIRECTORS
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Does a company still exist if all of its directors die?
LAW: - SOLOMON’S CASE states that a company is a separate legal entity different from its owners or managers. - s119 states that a company is a separate legal entity coming into existence on registration. - s124(1) states that a company has full legal capacity.
APPLICATION: <XYZ> is a registered company and therefore a separate legal entity different from <its directors>. The courts do not regard <XYZ> and <its directors> as one due to the concept of separate legal entity.
CONCLUSION: Even if the directors of a company die, the company remains in existence until it is deregistered since it is a separate legal entity.
SEPARATE LEGAL ENTITY:
LIFTING OF CORPORATE VEIL IN CORPORATE
GROUPS
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions:
- Agency in Corporate Group (SMITH STONE+KNIGHT v BIRMINGHAM)
- Shell company in Corporate Group (BIRD CAMERON CASE)
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Can a court lift the corporate veil in a Corporate Group?
LAW: - SOLOMON’S CASE states that a company is a separate legal entity. - s119 states that a company is a separate legal entity coming into existence on registration. - s124(1) states that a company has full legal capacity. - WALKER v WIMBORNE CASE sets out that each company in a corporate group is a separate legal entity. - The courts enforce the concept of separate legal entity however they are prepared to lift the corporate veil in certain exceptions as in case of agency in corporate groups as in SMITH STONE+KNIGHT v BIRMINGHAM. The courts look at the actual control the parent company has over its subsidiary. - However, for some courts looking at control is not enough but the company has to be a shell company as in BIRD CAMERON CASE.
APPLICATION: <XYZ> is a company with full legal capacity and a separate legal entity within the corporate group. To decide if they are prepared to lift the corporate veil, the courts look at the actual control the parent company has over its subsidiary: 1. Are the profits treated as parent’s profits? 2. Are the managers appointed by the parent? 3. Is the parent the head and brain of the subsidiary company? 4. Is the parent in constant control of the subsidiary? 5. Did the parent make the profits by its skill and direction? 6. Is the parent company governing the subsidiary’s business? Furthermore, some courts look for the subsidiary being a shell company: 1. No assets 2. No employees 3. No own business The courts in this case lift the corporate veil and regard <the parent company> and <the subsidiary> as one.
CONCLUSION: The courts will be prepared to lift the corporate veil.
PROMOTERS: CONSIDERATION
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Is a person considered as a promoter of a company?
LAW: - The term ‘promoter’ is not a term of law and is not defined in the Corporations Act. - As in EMMA SILVER v LEWIS it describes persons involved in setting up a company, even if they are passive beneficiaries as in MANDALAY CASE. - Professionals are not considered promoters as set out in JUBILEE COTTON v LEWIS. Who is a promoter is a question of fact.
APPLICATION: Check for active involvement: planning the company, preparing registration, arranging for directors, searching finance, arranging lease contracts. Check for passive involvement: benefits from creation of company. Check for exception: mere professionals acting purely in their professional capacity are not considered promoters.
CONCLUSION: Persons being actively involved in setting up a company or passive beneficiaries are considered promoters.
PROMOTERS: FIDUCIARY DUTIES (SECRET PROFIT)
STEPS:
Check if person is considered a promoter first
Check liability for breach of fiduciary duty (e. Secret profit or competing with company)
Check disclosure
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Has a promoter breached his fiduciary duty?
LAW: - AEQUITAS v AEFC states that promoters owe a fiduciary duty to the company: they must act honestly, in the best interest of the company and must avoid conflict of interest (until registration). - ERLANGER v NEW SOMBRERO sets out that promoters have to disclose secret profit. - GLUCKSTEIN v BARNES states that full disclosure has to be made to an independent board of directors.
APPLICATION: <A person> is a promoter of <XYZ> and therefore owes a fiduciary duty to <XYZ>. He/she made a secret profit without disclosing it to an independent board of directors therefore he/ she breached his/her fiduciary duty.
CONCLUSION: A promoter is liable for breach of fiduciary duty. Equitable Remedies: compensation, accounting for profit, rescission of contract, injunction, constructive trust (return of property). [Textbook P456]
CONSTITUTION:
CONTRACT BETWEEN COMPANY AND MEMBERS
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Can <a member/employee> prevent termination of service when mentioned in the constitution?
LAW: - s140(1) states that a company’s constitution is a contract between the company and each member. - The ELEY CASE sets out that the constitution looks at the capacity as a member not as an outsider. The courts ask if the right given in the constitution is a right that comes with the shares.
APPLICATION: <XYZ>’s constitution mentions <member/employee> as <employee> of <XYZ>. <Member/ employee> is a member of <XYZ> since he/she holds shares in the company, therefore the constitution is a contract between <member/employee> and <XYZ>. The employment is not a right that comes with the shares since rights of shareholders do not include employment, therefore <member/employee> is not in capacity of a member but rather in capacity of an outsider.
CONCLUSION: <A member/employee> cannot prevent termination of service on basis of the constitution.
CONSTITUTION: OBJECT CLAUSE
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Is a contract invalid because of breach of constitution?
LAW: - s124(1) states that a company has full legal capacity as a separate legal entity. - As set out in s125(1) a company may place restrictions in its constitution, however this does not limit the company’s powers as a separate legal entity.
APPLICATION: <XYZ>’s constitution states <an object clause>. However, this does not limit the company’s power to contract.
CONCLUSION: The contract is valid.
DIRECTORS: CONSIDERATION
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Is a person considered a director?
LAW: - s9 defines a director of a company as a person who is validly appointed or a person who is not validly appointed but acts in the position of a director (‘defacto director’) or a person who controls the board of directors (‘shadow director’). - s201B(1) sets the minimum age of an director as at least 18 years. - s201G states that a company may appoint a director by ordinary resolution in the general meeting. - s201D states that the director has to consent to the appointment before becoming a director. - CORPORATE AFFAIRS COMMISSION v DRYSDALE sets out that defacto directors are bound by director’s duties. - DEPUTY COMMISSIONER OF TAXATION v AUSTIN sets the test to be whether the person exercised directorial powers.
APPLICATION: Check for valid appointment. Check for exercise of directorial powers. Check for ability to control board of directors.
CONCLUSION: A person who is a director, defacto director or shadow director is bound by directors’ duties regardless whether he is n executive or non-executive director.
COMPANY’S LIABILITY UNDER CONTRACT
STEPS:
How did the company enter into contract? (Direct/indirect, express/implied/apparent, ratification?)
Check any irregularity about the way the contract is entered into. If yes, check if outsider is protected.
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Is a company liable under contract?
LAW: - SOLOMON’S CASE states that a company is a separate legal entity. - s119 states that a company is a separate legal entity coming into existence on registration. - s124(1) states that a company has full legal capacity and can sign contracts. - s127 states that a company can directly enter contracts by signature of common seal witnessed by 2 directors or director and secretary, or without common seal by signature of 2 directors or director and secretary. - s126 sets out that a company can indirectly enter contracts via an agent acting with the company’s express or implied authority on behalf of the company. - FREEMAN v BUCKHURST CASE sets out that a company can indirectly enter contracts via an agent acting with apparent authority on behalf of the company if the person claims to be an agent or the company represents the person as an agent and the third party relied on this representation (‘holding out’). - There is no reliance if the third party knows of the wrong representation (as set out in FREEMAN & LOCKYER CASE) or the third party had reasons to be suspicious (as in PANORAMA DEVELOPMENTS CASE). - Otherwise, the company can also ratify the contract.
- s128 and s129 as well as the TURQUAND CASE (‘indoor management rule’) set out that outsiders can assume that the internal rules of a company are complied with, except for actual knowledge or suspicion that this is not the case (as stated in s128(4) and the NORTHSIDE DEVELOPMENTS CASE)
APPLICATION: <XYZ> is a company and therefore has full capacity to contract. Check for direct contract by signature. Check for irregularity in signature. Check for indirect contract via agent on behalf of company. Check for express authority: Was he asked to do so? Check for implied authority: Is he limited by the constitution? Does he act within his implied powers? - Managing director for day by day management of the company. - Company secretary for administrative affairs. - Head of Marketing Department for marketing affairs. - Head of Financial Department for financial affairs. Check if company represented him as an agent. Is his action within his apparent authority? Check if there is reliance (no knowledge, no suspicion)? If not binding, check ratification. Check for breach of constitution and apply indoor management rule.
CONCLUSION: Company is liable for the contract directly or indirectly.
COMPANY’S LIABILITY IN TORT
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Is a company liable for damages under tort?
LAW: - SOLOMON’S CASE states that a company is a separate legal entity. - s119 states that a company is a separate legal entity coming into existence on registration. - s124(1) states that a company has full legal capacity. - A company can be PRIMARILY LIABLE as set out in BOLTON ENGINEERING CASE via managers acting as the mind and will of the company (‘organic approach’). - A company can be SECONDARILY LIABLE for its employees acting within scope of their employment as set out in LLOYD v GRACE.
APPLICATION: <A person> is a <senior manager> of <XYZ> responsible for <area of responsibility>. As such he/she is responsible for <wrongs committed> in <area of responsibility>. When deciding to <commit the wrong> he/she is acting as the mind and will of the company. His/her knowledge was the knowledge of the company.
<A person> is an <employee> of <XYZ> responsible for <area of responsibility>. As such he/she is responsible for <wrongs committed> in <area of responsibility>. When deciding to <commit the wrong> he/she is acting within scope of his/her employment.
CONCLUSION: <A company> has primary or secondary liability for damages under tort.
MEMBERS’ MEETING: ABILITY TO CALL MEETING
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Can a member request a members’ meeting?
LAW: - s249D(1) states that directors must hold a general meeting if a requesting member has 5 % of the votes or at least 100 members request the meeting. - s249Q stets out that the meeting must be held for proper purpose, ie. for purposes involving shareholders rights. - A meeting called to harass the company or the directors is not for proper purpose as set out in HUMES CASE. - A meeting called to interfere with the director’s power to manage the company’s business (except if the constitution allows it) is not for proper purpose as set out in NRMA v PARKER. - It is not relevant if the member calling the meeting acts in self-interest or by ill-will as set out in NRMA v SCANDRETT. - It is not relevant if the proposed resolution is likely to be defeated, causing inconvenience or expense as set out in HUMES CASE. - s249D(5) states that the directors must call the meeting within 21 days after request. - s249F states that members can call a meeting at their own expense
APPLICATION: <A member> holds <X%> of the shares of <XYZ> which is more than the required 5 % of the votes. Check for proper purpose.
CONCLUSION: <A member> can request a members’ meeting or call the meeting at his own expense.
MEMBERS’ MEETING: IRREGULARITIES
STEPS: n/a
❑ <XYZ> PTY LTD is a proprietary company because it has PTY in its name.
❑ <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Is a members’ meeting valid if there are irregularities?
LAW: - s1322(2) states that a members meeting is not invalid due to procedural irregularities if there is no substantial injustice since the outcome of the meeting would not be different.
APPLICATION: Check for procedural irregularity: e. Absence of quorum, deficiency of notice, failure to call a poll... Check for substantial injustice: Would the outcome of the meeting be different?
CONCLUSION: The courts may render the meeting invalid if a substantial injustice is caused.
Summary - best final exams notes
Course: Law of Business Organisations (200183)
University: Western Sydney University
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