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Introduction to Business Law 2105AFE
Lecture 9: Company Law

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The Law of
Companies/Corporations
Objectives / Readings
 Explain the essential characteristics of a ‘company’;
 Understand the different types of companies required
to meet the needs of business and society;
 Understand the duties imposed upon the directors of
a company; and
 Understand how companies may be wound-up.
 Readings – PT 5 Companies & Incorporated
Associations - Chapter 20 pp.546

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The Corporate Concept
 Business undertakings in Australia are to a large
extent carried on through a company structure.
 The reason for this is that companies have distinct
advantages over partnerships or sole traders.
 A partnership is simply no more than an aggregation
of its partners.
 Whereas a company is a distinct legal entity separate
from its individual members or shareholders.

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The Corporate Concept
 A company has capital, provided initially by its
shareholders, which belongs to it and is
available for use in its operations.
 A company has assets that are owned by it
and its liabilities are its responsibilities, not
those of its shareholders.
 It is this separate legal existence that gives
rise to the advantages of the corporate
structure for commercial purposes.

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What is a company/corporation?
 Definition: The term ‘company’ is a general
term with no strict legal meaning. It is a broad
term which usually denotes a business or
professional association. A company is a type
of corporation.
 A registered company creates an artificial
legal personality that can sue and be sued
in its own right.
 A company can enter into contracts in its own
right

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The Nature of a Company
 For a company to exist in a legal sense it
must be registered with the ASIC
under the Corporations Act 2001 (Cth).
 The usual reason for forming a company is
to enable the members to conduct an
enterprise and have only limited liability -
only the money invested in their shares is
at risk.

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Corporate Personality
 A company is a distinct legal entity with an
existence separate from its shareholders,
directors, managers, creditors and
employees.
See: Salomon v Salomon - text p.357.
 A company is regarded as a “legal person”,
giving it the powers and capacity of an
individual, which means that the acts of a
company are its acts, and its assets and
property belong to it.

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The Corporations Act 2001 (Cth.)
 In Australia corporate matters are
administered by Cth. legislation:
- The Corporations Act 2001(Cth.). (CA).
See: www.austlii.edu.au
(go to Cth. Consolidated Acts, choose the
letter ‘C’ and scroll down to The CA).

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Corporate Regulation
 The body charged with corporate regulation in
Australia is: The Australian Securities and
Investments Commission aka ‘ASIC’ or the
‘Corporate Watchdog’.
 The ASIC is accountable to the Parliament and
ultimately to the public
 It is a legal requirement that all companies must be
registered with the ASIC (Form 201).
 The ASIC website sets out the steps for registering a
company. See: www.asic.gov.au go to ‘c’ for
companies’ then ‘starting’ for a step by step
explanation of how to register a company.

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Functions of the ASIC
The principal functions of the ASIC are:
 To register and regulate companies
 Receive and process information
 Register companies and liquidators
 Regulate financial markets and providers of
financial services
 Investigate contraventions of corporations
legislation
 Investigate contraventions of the provisions of
the consumer protection laws

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How to form a company
 Step 1: Type of company
 Step 2: Company name
 Step 3: Registered office
 Step 4: Consents
 Step 5: Replaceable Rules and/or
Constitution?
 Step 6: Share details
 Step 7: Lodge form with the ASIC

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Types of Companies in Australia

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Proprietary Company
 Definition: A proprietary company is one:
– Whose constitution limits membership to 50 non-
employee shareholders (s113CA);
– Who is restricted in transferring shares;
– Who is prohibited from offering shares or
debentures to the public.
– A proprietary company needs only 1 member or
shareholder (s114CA)
– Most companies in Australia are proprietary

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Proprietary Company
 Proprietary Company - further divided into
large and small.
 A small has min 2 of 3 attributes (s45A(2)):
– Consolidated revenue of <$25m
– Value of consolidated assets <$12.5m
– Less than 50 employees
 Most companies in Australia are
proprietary

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Benefits of a Proprietary Company
 Only needs to have one director
 Does not have to hold general meetings
 Can pass a resolution without having to hold
a meeting
 Can make loans to directors
 RESTRICTIONS – LIMITED IN NUMBER OF
MEMBERS AND PROHIBITION AGAINST
GOING TO THE PUBLIC TO RAISE FUNDS

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Public Companies
 Definition: A public company
is defined as a company which
is not a private company or a
proprietary company, as such a
public company is subject to
more stringent reporting
requirements.
– E.g Coca-Cola Bottlers Ltd.
Carlton United Breweries Ltd
 Registered public companies in
Australia represent
approximately .65% of all
companies

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Public Companies
 A public company is a company which
has issued securities (shares or
debentures) through an offering, and
which are now traded on the open
market.
 Public companies may be listed or
unlisted on the Australian stock
exchange. (aka ASX)
See: www.asx.com.au

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Advantages of Incorporation
 Liability of share holders is limited to monies owing on shares. The
company creates the profits and has the debts- not the individuals.
 Has powers to do all things an individual can do plus additional powers
– e.g. sell shares in itself.
 Capital can be divided into different categories of shares (different
prices and rights).
 Perpetual succession.
 Enter into contract and own property in own right.
 Sue and be sued in own name
 Transfer shares
 Access to finance

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Disadvantages of Incorporation
 High set up cost
 Management/control vested in the Board
 Procedural obstacles to minority shareholders taking action.
(note there are statutory exemptions to the obstacles)
 Compulsory reporting and auditing requirements- high costs
 Duties and obligations on Directors
 Penalties for Directors
 Director’s guarantees

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Organs of the company
– Board of Directors; and
– Shareholders in
General Meeting.
– Traditionally,
management and
operation of the company
business falls on the
directors

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The Board of Directors
 Definition: The Board of directors is a corporate
organ comprising the directors elected by the
shareholders of a company and having various
functions including;
 a) Appointing and rewarding the CEO
 b) Setting goals and formulating strategy
 c) Approving business plans and setting budgets
 d) Monitoring management performance
 e) Setting and reviewing policy
 f) Reviewing policies for shareholders

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Company Secretary
 Definition: A company secretary is a person
required to be appointed by a company’s
directors and having the responsibility for all
record-keeping within the company.
 A Secretary is an officer of a company
 A public company must have at least one
secretary; s240A(2). A proprietary company
is not required to have a secretary: s240A(1).

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Directors of a Company
Definition: A director of a company is
an officer of a company who has a duty
to control the business of the company,
as a member of the board of directors.
The reason it is necessary to define an
‘officer’ of a company (s9CA) is that an
officer of a company can be held to be
personally liable under statute and
common law

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Officers of a Company
Darvall v Nth. Sydney Brick (1989)
 In Darvall the company in question was
subject to a hostile take over bid. The
directors were of the view that the offer in the
bid was inadequate. As a result they rejected
the bid.
 Darvall (a shareholder) brought an action
against the directors for not accepting the bid
in the best interests of the corporation.
 In doing so the Ct. considered firstly whether
the directors were ‘officers’ of the company
against whom an action could be
commenced. See: s9CA

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Director’s Guarantees
 Incorporation of a company allows the creation of a
separate legal entity, which has the effect of
separating the liability of a company away from its
directors and onto the company entity, this is
sometimes referred to as the ‘veil of incorporation’.
 This is quite often not the reality as to obtain credit
most proprietary companies will be required to give
a personal / director’s guarantee for debts in the
event that the company fails to pay.
See: Bank of Western Australia Ltd v Clift [2010] QSC 366

Bank of Western Australia Ltd v Clift [2010]
 The pl. lent money to two companies, TDC Acquisition Pty Ltd
(TDC) and Medeco Australia Pty Ltd (Medeco).
 The def. was the sole director of TDC and Medeco. The def.
had provided director’s guarantees for the loans provided by
the pl. to TDC and Medeco.
 Medeco went into administration in February 2010.
 The plaintiff issued default notices to TDC and Medeco,
followed by demands to the def. under the director’s
guarantees.
 Medeco went into liquidation in March 2010. In May 2010, the
pl. commenced a proceeding against the def. seeking to
enforce the guarantees.
 In August 2010, an administrator was appointed to TDC
whereupon remaining revenue from asset sales were
distributed to the creditors (BWA).
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Director’s (personal) Guarantees
 Definition: Director’s Guarantee
A ‘director’s guarantee’ is a secondary agreement
where an individual (being a director of a
proprietary company*) assumes responsibility for
the debts of the company in the event of payment
default.
It is common for banks or creditors call on
directors of proprietary companies to give their
personal guarantee in respect of debts of the
company.
(*Director’s of public companies do not give director’s guarantees)
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Director’s (personal) Guarantees
 E.g. The director of a proprietary company
may, for example, be asked by a bank or
creditor to provide security for a loan or credit
facility in the form of personal assets.
 If the company does not repay the loan as
agreed (with the bank or creditor)
the director may be personally liable.
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**Vote Break** Guarantor
Definition: A guarantor is a person who becomes
secondarily liable for another’s persons debt or performance if
the original debtor defaults on payment.
A guarantee can be given by a guarantor signing a director’s or
personal guarantee.
Case: CBA v Amadio (1983)
In Amadio the parents of a young builder signed a personal
guarantee against their house as a security so that the bank
would advance more funds to complete the son’s project. The
project failed and the bank attempted to collect the guarantee
from the parents (guarantors).
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Fiduciary Duty
 Definition: A ‘fiduciary duty’ is a duty to act in good
faith for the benefit of another. A fiduciary duty arises
where there is a special relationship of trust.
 Director’s like partners, trustees and agents owe a
fiduciary duty to those they could easily harm.
 The three central tenets of fiduciary duty governing
corporate behaviour are:
- Not to make a secret profit
- To avoid a conflict of interest
- To act for a proper purpose

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Fiduciary Duty
 Fiduciary duty is an equitable principle to act
in good faith, taking care and exercising due
diligence and not to act out of conflict of
interest. (i.e. governed by common law)
 The common law principle of Fiduciary Duty
was established in:
- Regal (Hastings) Ltd v Gulliver (1967) p 311
- Boardman v Phipps [1967]

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The Corporate Veil
 The ‘corporate veil’ establishes the
separate legal entity of a company, giving the
company the benefit of limited liability.
– See: Salomon v Salomon (Text p.357)
 However the court may ‘lift the veil’, and
take action against the directors personally:
– where a group of companies issues group accounts
– where there is insolvent trading
– where a contract is avoided using a company
– where a company is used as a vehicle for fraud
– Where a company is formed for an improper or illegal
purpose
– See: Green v Bestobell Industries

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Green v Bestobell Industries Pty
Ltd [1982] SCA WA (Lifting the Veil)
 In G v BIPL it was held that Green had
breached his fiduciary duty in attempting to
acquire for himself a business opportunity
that he knew would be sought by his
employer; Green was therefore held to
account for any profits to his employer

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Director’s Duties
 Definition: Director’s duties are imposed
personally upon directors or officers of a
company by both statute and common law.
Duties arise largely from the fiduciary position
held by the director or officer and include the
duty to act in good faith for the benefit of the
company as a whole.
 Breach of director’s duties carries both civil and
criminal penalties
Statute: The Corporations Act 2001 (Cth.) -
deals with director’s duties under ss180-197.

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Statutory Duties of Directors
 s180 Care and diligence- civil obligation
only Care and diligence--directors and other
officers
s180(1) A director or other officer of a
corporation must exercise their powers and
discharge their duties with the degree of care
and diligence that a reasonable person would
exercise.
See: ASIC v Gallagher & ASIC v Adler

s180(2) - Defence against s180(1)
Duties of Directors
 s180(2) is a defence against a breach of s180(1)
 A director or other officer of a corporation who makes a
business judgment is taken to meet the requirements of
subsection s180(1), and their equivalent duties at common law
and in equity, in respect of the judgment if they:
- (a) make the judgment in good faith for a proper purpose; and
- (b) do not have a material personal interest in the subject
matter of the judgment; and
- (c) inform themselves about the subject matter of the
judgment to the extent they reasonably believe to be
appropriate; and
- (d) rationally believe that the judgment is in the best interests
of the corporation.
See: AWA v Daniels 37

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Statutory Duties of Directors
 s181 Good faith - civil obligations Good
faith--directors and other officers
(1) A director or other officer of a corporation
must exercise their powers and discharge
their duties:
(a) in good faith in the best interests of the
corporation; and
(b) for a proper purpose.
See: ASIC v Adler & ASIC v Rich

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Statutory Duties of Directors
 s182 Use of position -civil obligations Use
of position--directors, other officers and
employees
(1) A director, secretary, other officer or
employee of a corporation must not
improperly use their position to:
(a) gain an advantage for themselves or
someone else; or
(b) cause detriment to the corporation.
See: ASIC v Rich

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Statutory Duties of Directors
 s183 Use of information--civil
obligations Use of information--directors,
other officers and employees
(1) A person who obtains information because
they are, or have been, a director or other
officer or employee of a corporation must not
improperly use information to:
(a) gain an advantage for themselves or
someone else; or
(b) cause detriment to the corporation.
See: ASIC v Vizard

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Statutory Duties of Directors
 s184 Good faith, use of position and use of
information--criminal offences* Good faith--
directors and other officers
(1) A director or other officer of a corporation commits
an offence if they:
(a) are reckless; or
(b) are intentionally dishonest; and fail to exercise their
powers and discharge their duties:
(c) in good faith in the best interests of the corporation;
(d) for a proper purpose.
See: ASIC v Adler
(* s184 - is only applied in the most serious circumstances, it also involves a change in the
standard of proof from the ‘balance of probabilities’ to ‘beyond reasonable doubt’)

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s189 - Defence against s180(1) &
s181 - Duties of Directors
 s189 is a defence against s180(1) and s181
s189 Provided it is done in good faith (a) a director
may rely on information, or the professional or expert
advice, given or prepared by:
(i) an employee of the corporation
(ii) a professional advisor
(iii) another director or officer
(iv) a committee of directors
See: AWA v Daniels p 371

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Director’s Duty: Disclosure of
Material Personal Interest
 S191 Material personal interest- director's
duty to disclose director's duty to notify
other directors of material personal interest
when conflict arises
(1) A director of a company who has a material
personal interest in a matter that relates to the
affairs of the company must give the other --
directors notice of the interest.
See: ASIC v Gallagher

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Breaches of Director’s
duties
Case Law: ASIC v Adler & 4 Ors [2002]
(see text p.369)
 Mr Adler was an officer of HIH Insurance
Ltd, a public company which collapsed
to the tune of $5.3billion.
 In ASIC v Adler the Court held that Mr. Adler was
guilty of 185 breaches of The Corporations Act
including: ss180,181,182,183, 191, 193.
ss206E,209,260,260A,260C,260D (Disqualification
from Managing Corporations)
 Mr A was fined $2m, banned from acting as an officer
of a company for 20 years and gaoled for 2 years.

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Case Examples:
Breaches and Defences to Director’s Duties
ASIC v. Rich (2003) (The One-Tel Case)
HELD: As an officer of the company Rich was
negligent and misused his position in regard to his
duties owed to OT - ss9,181,182CA
AWA V Daniels (1992)
HELD: As a defence director’s may rely upon advice
given by other company officers (e.g. auditor’s)
- ss9,180(2),189CA
ASIC v Gallagher (1993)(The Rothwell Bank Case)
HELD: Gallagher as a director of RBC failed to act
with care and diligence and failed to declare a
material personal interest - ss9,180(1),191CA

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Insider Trading
 Definition: The term ‘insider trading’ refers
to transactions in shares of publicly held
corporations by persons with inside or advance
information (i.e information that is not readily
available) on which the trading is based.
 s1042-3CA - Prohibited conduct by person in
possession of inside information and ……
 s183CA - Use of information- must not improperly
use information to: (a) gain an advantage for
themselves or someone else; or (b) cause
detriment to the corporation.
See: ASIC v Vizard p 372

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Insider Trading:
ASIC v Vizard (2005)
Vizard was a lawyer, television celebrity (‘Tonight Show host)
and a ‘consultant’ to Telstra from1996-2000.
FACTS: ASIC commenced an action against Vizard suspecting that he
had used misused confidential Telstra information in regard to alleged
insider trading of shares in 3 listed public companies: Sausage Software
Ltd, Computer Share Ltd, Keycorp Ltd.
ASIC initially charged Vizard (as an officer of Telstra) with breaches of
s182 – misuse of position, s183 – misuse of information, s1042-3 – insider
trading and s184 - criminal offence. Vizard initially planned to plead not
guilty. However ASIC agreed to drop the s184 charge in return for a guilty
plea. Vizard subsequently pleaded guilty to ss182,183 and s1042-3.
HELD: Vizard was found guilty of breaches of ss182,183 and 1042-3.
Vizard was disqualified from being involved in the management of
companies for a period of seven years and received pecuniary penalties of
$390,000.

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Insider Trading
 Case Law: R v Rivkin [2004]
In 2004 the high profile Sydney
stockbroker Rene Rivkin was
prosecuted for the insider trading of Qantas shares.
Mr. Rivkin was sentenced to imprisonment for a term
of 9 months to be served by way of periodic
detention, and was fined the sum of $30,000.
 Recent academic reports suggest that over 5% of
trading on ASX is done with the benefit of ‘inside’
information – i.e. insider trading

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Insolvency and Insolvent Trading
 Definition: Insolvency
Insolvency occurs when the
assets of an entity are insufficient to
pay the liabilities at any given time
resulting in an inability to pay debts as they are due.
 Definition: Insolvent Trading:
Insolvent trading occurs when a director incurs a debt
when the firm is insolvent.

Insolvent Trading
 Section 588G of the Corporations Act 2001
imposes a duty upon directors to prevent a
company incurring a debt while it is insolvent.
 Case: ASIC v Plymin (Water Wheel Co.s)
In Plymin, Elliot (a non-executive) director
had failed to prevent a company from
incurring debts at a time when it was
insolvent and had thereby contravened
section 588G of the Corporations Act.
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ASIC V Plymin (cont.)
 To succeed against Plymin, ASIC had to
establish on the balance of probability that:
- the companies were insolvent at the time debts
were incurred;
- at that time there were reasonable grounds for
suspecting that the companies were, or would,
become insolvent; and
- the directors were, or a person in a like position
would have been, aware that there were
reasonable grounds for suspecting insolvency.
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ASIC V Plymin (cont.)
 Held: Elliot (aka) the ‘Goanna’
(as an officer of Plymin) had breached s588G – by
allowing the company to trade (incur further credit)
whilst insolvent.
 The Plymin companies were subsequently placed into
voluntary administration in February 2000.
 ASIC then commenced civil proceedings against the
managing director, chairman of the board and Elliott
(as an officer / director) for contravention of the
insolvent trading provisions.
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Remedies for Breach of
Director’s/Officers duties
 The CA provides a range of civil and criminal
remedies and penalties. The civil remedies
are;
– Pecuniary Fines – s1317G
– Compensation – s1317H(1)
– Account of profits – s1317H(2-5)
– Injunctions - s1324
– Disqualification – s206C,D,E
– Removal by members – s203C
(In addition the court may make whatever orders it
deems appropriate, including winding the
company up s233CA)

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Companies in Financial Difficulty

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Voluntary Administration
 Why would a company enter into VA?
– Maximise the chance of a company, or its
business continuing in existence; and
– If it is not possible to ‘trade out of trouble’
maximise the return to creditors and members
– Administrators need to advise on whether to:
• enter into deed of company administration
• bring the administration to an end
• wind the company up

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Receivership
 A receiver is appointed
by one or more creditors
to protect the rights of
the secured creditor(s).
 The receiver takes
possession of the
property over which the
creditor has a security.

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Winding up
 The end of the company
 Liquidation = winding up
 Liquidator – is charged with the task of
protecting the assets of the company
and obtaining the best outcome for the
creditors.