Lee v lee's air farming 1961

LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 2 The Australian Constitution & Corporate Law Administration of Corporate Law

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Separate Legal Entity Doctrine

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AIM: At the end of this topic you should understand:

•  The relationship between s 51(xx) Australian Constitution & Corporations Act 2001 (Cth)

•  Role of ASIC Chapter 1 Textbook •  The Separate Legal Entity Doctrine (& Salomon’s

Case) • Corporate Veil Chapter 4 Textbook

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Sources of Company Law • Corporations Act 2001 (Cth) • Australian Securities and Investments Commission Act

2001 (Cth) • Case law • Other sources

•  Corporations Regulations, ASIC guidelines, accounting standards, ASX Listing Rules (for listed companies)

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Prescribed Texts

Thomson Reuters, Corporations Legislation 2018

Thomson Reuters 2018, Corporations Legislation, Includes key section annotations Example: Section 124 p 185

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Information Sources • www.uclaw.com.au/home/ • www.austlii.edu.au SCU Library •  http://scu.edu.au/library/index.php/21/

Corporations Act 2001 (Cth)

• Australia’s company law statute • Came into effect on 15 July 2001 •  Before 2001, Australia’s corporations law was made

up of separate State and Territory Acts

Case law

•  In a common law system, creates binding legal rules (Doctrine of precedent)

• May apply: •  in interpreting rules contained in the Corporations Act •  in imposing additional rules

• Consider - the significance of ‘the facts’ of the case to the facts of a given scenario.

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Source: Textbook page 3

Towards a unified national scheme

• 1901-1950s Separate State acts based on English Companies Act 1862

• 1961-1963: Uniform Companies Act 1961 no mechanism for maintaining uniformity

• 1978-1991: Co-operative Scheme Companies Code 1981; introduction of NCSC and Ministerial Council; problems of inconsistencies, duplication and accountability

Towards a unified national scheme (cont.)

1989: Corporations Act • a proposed national scheme • based on section 51(xx) of the Constitution – known as corporations power

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Australian Constitution Section 51 (xx) The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth.

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NSW v Commonwealth [1990] HCA 2 THE INCORPORATION CASE HCA majority > that part of the Corporations Act 1989 was invalid Section 51(xx) Constitution did not allow the Commonwealth to make laws on incorporation of companies HCA interpreted the phrase ‘formed within the limits of the Commonwealth’ to mean ‘already formed’ Constitutional power did not cover companies yet to be formed.

Towards a unified national scheme (cont.)

•  1 January 1991: Corporations Law Scheme •  State legislation with Cth Act as a schedule • Conferred jurisdiction on Federal Ct, authorised to

exercise jurisdiction under Cth Act •  national administration and enforcement via ASC

(now ASIC) accountable to Commonwealth Parliament (Treasury) - Application Acts still necessary

•  Re Wakim; Ex parte McNally (1999)

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The Present Scheme Corporations Act 2001 (Cth)

• Further negotiation between States and Cth • States conferred authority on to the Cth (s 51(xxxvii) Constitution) • Corporations Act 2001 (Cth) 15 July 2001 • States referred power for 5 year intervals From a pure legal perspective states can recall power, however not politically feasible

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High Court of Australia

Constitutional challenges in the HCA

New South Wales v Commonwealth (1990) Constitution did not allow Cth to make laws on incorporation of companies.

Re Wakim; Ex parte McNally (1999) Federal courts cannot hear matters in relation to state law

Bond v R (2000)

A conferral of authority by the states upon a Cth officer was inoperative pursuant to s109

R v Hughes (2000)

Cth must be able to identify a legislative head of power to support the enactment of Cth legislation

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Corporations Law Bodies

CLERP Financial Reporting Council (FRC) & Financial Reporting Panel (FRP)

ASIC*

Commonwealth Parliament

Commonwealth Treasurer

Parliamentary Joint Committee on

Corporations and Financial Services

Takeovers Panel*

Australian Accountin

g Standards

Board*

Companies Auditors and Liquidators Disciplinary

Board*

Business Regulation

Advisory Group

* Established under ASIC Act

Source Text p 26 ©  Thomson Legal & Regulatory Ltd. All Rights Reserved.

Auditing & Assurance Standards Board (AUSAB)

Corporate Law Economic Reform Program •  Established in 1997 to develop policy in wider economic

framework • Company Law Review Act 1998 • Corporate Law Economic Reform Act 1999 •  Financial Services Reform Act 2001 • Corporations Legislation Amendment Act 2003 • Corporate Law Economic Reform Program (Audit Reform

and Corporate Disclosure) Act 2004 • Corporations Amendment Act (No. 1) 2005 • Corporations Amendment (Takeovers) Act 2007 • Corporations Legislation Amendment (Simpler Regulatory

System) Act 2007 • Corporations Amendment (Insolvency) Act 2007 • Cross-Border Insolvency Act 2008

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Australian Securities & Investments Commission (ASIC)

•  See: http://www.asic.gov.au Textbook p 15-21 •  Part of the Commonwealth Government •  Treasurer is the responsible Minister •  Responsible for administering Corporations Act •  Responsible for forming, terminating and regulating

companies • Consists of three Commission members and a large

staff •  Strategic priorities:

•  Promoting investor and financial consumer trust and confidence •  Ensuring fair, orderly and transparent markets •  Providing efficient and accessible registration

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ASIC (cont)

Objectives set out in section 1(2) of ASIC Act Functions, under section 11 : •  registration of companies • collection and dissemination of corporate information

• surveillance, investigation and enforcement • education •  law reform

Australian Securities Exchange • Usually referred to as ASX • A private, for profit organisation that provides an organised market for listed securities

•  Companies can choose to “list”, allowing their securities to be traded in that market

• Contract with ASX to comply with the Listing Rules

• ASX monitors companies, enforces the Listing Rules and co-operates with ASIC

• Continuous disclosure • Corporate governance

HALF TIME!

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Effect of registration

registration

separate legal entity

limited liability

creates

facilitates

Salomon’s Case SALOMON v SALOMON (1897) HOUSE OF LORDS

Issue: Could Salomon get priority for

(residual) £1,000 secured by his debentures?

©  Thomson Legal & Regulatory Ltd. © All Rights Reserved.

Facts: Salomon’s shoe

business

Pty Ltd

sold

debentures cash

Salomon 20,001 shares family 6 shares

(as Salomon’s nominee)

Salomon’s case – facts (cont.) • Downturn/strikes in boot industry •  Salomon & Co went into liquidation • Company’s assets insufficient to pay both

•  Debenture holder (secured creditor) •  Ordinary, unsecured creditors

•  Liquidator, on behalf of unsecured creditors •  Objected to payment of secured debt •  Argued company acting as either agent (or trustee) for

Salomon •  Argued that Salomon should indemnify the company for its

debts

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Salomon decisions Trial: found for liquidator (acting for unsecured creditors) •  Company conducted business as agent for Salomon. •  Business = Salomon’s business (high degree of control) •  Salomon as Principle, to indemnify his Agent (Salomon &

Co Ltd) against business liabilities Court of Appeal: found for liquidator •  Company = trustee, holding business on trust for Salomon •  Trustee entitled to indemnity from beneficiary for debts

incurred as trustee •  Salomon incurred liability to liquidator to pay trade

creditors

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Salomon in the House of Lords •  Reversed earlier decisions •  Salomon & Co Ltd neither agent nor trustee • Debenture was valid •  Salomon succeeded in claim against Salomon & Co

Ltd as secured creditor •  Structure of company compliant with Companies

Act 1862 (UK)

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Legal consequences of the separate legal entity principle

On incorporation: • Distinction between private and company debts • Distinction between private and company assets • A company may contract with its members (>

multiple capacities) • A company may be liable in tort to a member

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Distinction between private and company assets

• Company may own assets in its own right, section 124 •  Sole director and sole member companies • Macaura v Northern Assurance Co Ltd [1925] AC 619

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A company may contract with its members

• Company may contract with its members Lee v Lee’s Air Farming Ltd (1961) Ac 12 (Privy Council) •  Lee died in plane crash while “working for” Lee’s Air

Farming Ltd •  Insurance company argued that Mr Lee could not be

a worker and employer at the same time •  Privy Council held that Salomon allowed Mr Lee to act

in differing capacities as governing director, shareholder and employee

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The corporate veil • COMPANY

Separate legal entity with own: • Assets •  Liabilities • Contracts

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•  INCORPORATORS •  DIRECTORS •  MEMBERS

•  own shares but not a proprietary interest in the company’s assets

•  may also be a creditor, debtor or director of the company

V E I L

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Lifting the Veil Existence of veil can be abused consider the position of: • unsecured creditors • tort claimants

Because of abuses, the veil is sometimes lifted to impose liability on: • controllers • directors (eg, Gilford Motors, Re Darby) • holding/parent company (eg, s 588V)

The corporate veil may be … • Lifted

• Pierced

Discussed in Atlas Maritime Co SA v Avalon Maritime Ltd [1991] 4 All ER 769

> Impact on Salomon’s case? Considered by UK Supreme Court in Prest v Petrodel Resources Ltd [2013] 2 AC 415

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Lifting the veil (cont) Sometimes the lifting is to confer an advantage

(“reverse lifting”) eg, Smith Stone & Knight, Lee’s Air Farming)

Two methods of lifting (1) if statute has express provision (2) under general law principles

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Statutory grounds Under Corporations Act 2001 (Cth)

•  insolvent trading (ss 588G, 588V, 596AC) • uncommercial transactions (ss 588FB-588FF) •  financial assistance (s 260D(2))

• Under other legislation (eg, taxation, occupational health and safety, environmental protection and various regulatory regimes)

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General Law Examples

•  No relevant statutory provision, but, for some overriding policy reason, a court decides to lift the veil

•  Australian courts have been more reluctant to do this than the English and American courts

General law grounds Difficult to reconcile cases but consider general descriptive categories •  Fraud Re Darby; Ex Parte Brougham [1911] 1 KB 95 •  Evasion of an existing legal obligation Gilford Motors Co Ltd v Horne [1933] 1 Ch D 935 Commissioner for Fair Trading v TLC Consulting Services Pty Ltd [2011] QSC 233 • Agency Smith, Stone & Knight v Birmingham Corporation [1939] 4 All ER 116 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467

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A Simple Corporate Group

Thomson Legal & Regulatory Ltd. All Rights Reserved.

B LTD

D LTD

C LTD

A LTD

Each of these companies is a subsidiary of A LTD.

D LTD is also a subsidiary of C LTD.

60%

100% 100%

General law grounds Difficult to reconcile cases but consider general descriptive categories •  Fraud Re Darby; Ex Parte Brougham [1911] 1 KB 95 •  Evasion of an existing legal obligation Gilford Motors Co Ltd v Horne [1933] 1 Ch D 935 Commissioner for Fair Trading v TLC Consulting Services Pty Ltd [2011] QSC 233 • Agency Smith, Stone & Knight v Birmingham Corporation [1939] 4 All ER 116 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467

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General law grounds (cont.) • Company knowingly participates in breach of

director’s fiduciary duties Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 •  Tort Briggs v James Hardie & Co Pty Ltd (1987) 16 NSWLR 549 •  Part of a group of companies DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (but see s 588V) •  Possibly, if interests of fairness and justice require

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AIM: At the end of this topic you should understand:

•  The relationship between s 51(xx) Australian Constitution & Corporations Act 2001 (Cth)

•  Role of ASIC Chapter 1 Textbook •  The Separate Legal Entity Doctrine (& Salomon’s

Case) • Corporate Veil Chapter 4 Textbook

Next Week

Topic 3 •  creation of a company •  types of companies •  promotion •  formation & •  the company’s constitution.

Tutorial/ Collaborate