Consequences of Incorporation

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CONSEQUENCES OF INCORPORATION
1. What is meant by separate legal entity & the corporate veil? 2. When will the corporate veil be lifted (ie. shareholders held to BE the corporation)? a. Fraud
b. Agency
c. Groups
d. Tort
How does a comp become separate legal entity?
• Comp become SLE on date of certificate of registration and approval with ASIC: s119 CA • Effect: become SLE or “legal person” with legal capacity/powers of corporation: s124

Corporate Veil & Separate Legal Entity

Once comp reg under CA( figurative ‘veil’ or ‘screen’ surrounds corporation.

Rights /liabilities of corp NOT rights/liabilities of members/directors/officers of corp.

THUS: comp (Incorp) is different/separate legal

Salomon v Salomon & Co

• FACTS: Comp – 20K shares + 10K debentures (loan) owned by Mr S (secured cred). 6 other shareholders – Mrs S and 5 children. Financial trouble – loan from Mr B (5K). Liquidated – Mr B paid back. 1K left. • ISSUE: not enough money to pay all sec (Mr S)/unsec creditors (still owed 77K pds). o Comp is essentially “one person” – so it is still a SLE? • LOWER CT (agreed with liquidator):

◦ Comp just nominee/agent/trustee for Mr S
◦ Fraud – comp paid too much money for Mr S’s business ◦ Comp formed for illegitimate purpose (comp is empty shell – just his own business really). • HOL: SLE – thus, S (sec cred) had right to claim before other creds. ◦ Approach: have leg prov of incorporation been satisfied? ◦ If so – is there fraud or agency (eg. Set up comp when business failing to escape liability)? ◦ If not ( incorporation (SLE) can’t be challenged. ◦ ‘the company at law is a different person altogether from the subscribers to the memorandum….nor are the subscribers as members liable in any shape or form, except to the extent and in the manner provided by the Act’

Lee v Lee’s Air Farming Pty Ltd

• FACT: weed spraying plane company. Mr L – governing director, employee and shareholder. L holds 2999 shares, sol holds 1 share. L die (plane crash). Widow claim insurance. Insurance comp refuse – can’t be employee and managing director at same time! • ISSUE: gov director (sole control of comp) – contract with comp as employee? Ie – is he contracting with himself? • HELD: NO

o Application of Salomon’s case – co is separate legal entity: ‘Just as the company and the deceased were separate legal entities so as to permit … contractual relations being established between them, so also were they separate legal entities so as to enable the company to give an order to the deceased.’ o L is NOT the employer. Comp is employer, even though in signed employment contract – L was signing on behalf of the company. When will the corporate veil be lifted?

(EXCEPTIONS TO SLE)
◦ Case law eg Fraud, Agency (Group of Companies), Tort?
◦ Gilford Motors Co Ltd v Horne
◦ Jones v Lipman
◦ Smith Stone & Knight
◦ Statute eg Sections 180-184, 588G, 588FB, 267 Corporations Act ◦ Note lack of overarching regime or policy for lifting the corporate veil FRAUD
Gilford Motors Co Ltd v Horne
• FACT: H (MD) employed by G. Agree while working and afterwards, not to compete. H set up company (J M Horne & Co Pty Ltd ). Shareholders/Dir were Mrs H and H’s business partner – but H was essentially the director (they called his “boss”, Mrs H didn’t take any part in bus, bus partner and Hs’ son were just subordinate employees). G seek injunction against both Mr H and JM comp. • ISSUE: is H and JM SLEs? H claim he was not competing – JM was (claim SLE). • HELD: inj granted – no SLE.

o Comp (JM) was device, cloak, sham – just tool to enable Mr H to engage in fraud/improper conduct (breach of contract). Set up PURELY to avoid legal obligation. o Distinction from Salomon: S didn’t set up comp for purpose of avoiding legal obligations. Jones v Lipman

FACT: L contract to sell prop to J. L change...
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