Company Law Notes

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COMPANY LAW – EXAM NOTES Incorporation and Its Effects S117 - All companies must register with ASIC S118 – All companies must have a Number S119 – Once the company is registered with ASIC, the company has a separate legal existence. Separate Legal Entity The separate legal entity notion is shown in Salomon v Salomon where a company shareholder is limited to the amount of share capital they have contributed and they can not be held personally liable for the dealings of the company. This notion of separate legal entity is shown in several cases: Lee v Lee’s Air Farming – The company can enter into contracts with a shareholder as an employee and it is bound because the company is a separate legal entity, distinct from its owner. Macaura v Northern Assurance – Macaura had insured timber in his own name and didn’t transfer the insurance policy to the company, that was formed to mill and fell timber. When timber burned he couldn’t make an insurance claim because the company was a separate legal entity. Industrial Equity v Blackburn – A holding company treated a subsidiary’s profits as if it was its own and went to pay dividends out of those profits. Court held each separate company was a separate legal entity and therefore this approach was invalid. Piercing the Corporate Veil There is however the notion of piercing the corporate vale with holds the directors personally liable for the debts of the company. This only applies to the directors of the company and not the shareholders. Under S588G of the Corporations Act, directors of a company are personally liable for any insolvent trading that the corporation has entered into. This liability arises where directors fail to prevent the company incurring debts when there are reasonable grounds to suspect the company was insolvent. This is shown in a number of landmark cases. Friedrich (Which shows that directors become personally liable for debts incurred during insolvent trading), Morley, Brosnan (States that the director must take an active interest in the company), and Darke (That shadow or defacto directors are still liable for insolvent trading). Under S295/S296/S297 – the consolidated accounts need to comply with accounting standards and give a true and fair view of the companies transactions. S267 states that where a company director loans the company money secured by a charge, then the director can’t enforce the charge within six months of its creation. Otherwise the corporate veil will be pierced. S588V-X holds a holding company liable for the debts of a subsidiary company. This only applies to a holding company and subsidiary relationship. For it to have this relationship, need: • Holding company to hold >50% of the shareholdings in the subsidiary • The Holding company is able to nominate the board members of the subsidiary • They can exercise 50% of the votes at a board meeting of the subsidiary company. There is also some cases that deal with piercing the corporate veil Gilford Motor Co Ltd v Horne – Horne set up a company in direct competition with another company he was MD for, Courts lifted the corporate veil and held the underlying cause of setting up the company was so that Horne could break his restraint of trade clause. Jones v Lipman – A company was set up to avoid entering a contract with another party. Corporate veil was lifted. Smith, Stone v Birmingham – Grouped companies, court lifted the corporate veil to show that the subsidiary company was merely acting as agent for the holding company, therefore holding company is entitled to compensation. Briggs v James Hardie – Briggs contracted asbestos from working with a subsidiary, tried to argue that the holding company was liable and court agreed that the holding company is liable for the actions of a subsidiary. However in Pioneer Concrete v Yelnah – The companies need to act in partnership for the courts to lift the corporate veil, more is required than the mere fact that the companies operated as a group. IN...
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