Company Law

Preface x About the authors xi Chapter 1 Business organisations 1 Introduction 3 1.1 Choosing a business structure 3 1.1.1 Sole trader 6 1.1.2 Partnership 6 1.1.3 Joint venture 6 1.1.4 Trust 6 1.1.5 Company 6 1.1.6 Cooperative 6 1.1.7 Incorporated association 7 1.1.8 Hybrid business structures 7 1.2 Sole traders 7 1.2.1 What is a sole trader? 8 1.2.2 Advantages of being a sole trader 9 1.2.3 Disadvantages of being a sole trader 9 1.3 Partnerships 10 1.3.1 What is a partnership? 10 1.3.2 Advantages of a partnership 12 1.3.3 Disadvantages of a partnership 13 1.3.4 Partners’ dealings with each other 14 1.3.5 Partners’ fiduciary and statutory duties 14 1.3.6 Property of a partnership 15 1.3.7 Changes to partners 15 1.3.8 Dissolving a partnership 16 1.3.9 Alternative forms of partnership 16 1.4 Joint ventures 17 1.4.1 What is a joint venture? 17 1.4.2 Advantages of a joint venture 18 1.4.3 Disadvantages of a joint venture 18 1.4.4 The joint venture agreement 19 1.5 Trusts 20 1.5.1 What is a trust? 20 1.5.2 Advantages of a trust 21 1.5.3 Disadvantages of a trust 22 1.5.4 Types of trust 22 1.5.5 Duties, rights, liabilities and powers of trustees 24 1.5.6 Other administrative issues for trustees 26 1.6 Companies 27 1.6.1 Key elements of a company 27 1.6.2 Types of companies in Australia 27 1.6.3 Advantages of a company 29 1.6.4 Disadvantages of a company 29 1.7 Cooperatives 30 1.7.1 Trading cooperatives 30 1.7.2 Non-trading cooperatives 33 1.7.3 The difference between cooperatives and not-for-profit organisations 34 1.8 Incorporated associations 34 1.8.1 Key features of an incorporated association 36 1.8.2 Advantages of an incorporated association 37 1.8.3 Disadvantages of an incorporated association 37 1.9 Hybrid business structures 37 1.9.1 Why have hybrid business structures? 38 1.9.2 Examples of hybrid business structures 39 1.10 Business names 40 1.10.1 Registration 40 1.10.2 What names cannot be registered? 41 1.10.3 Display and use of the business name 42 Summary 43 Key terms 44 Review questions 45 Applied problems 45 Acknowledgements 47 Chapter 2 Companies and incorporation 48 Introduction 49 2.1 Company regulation in Australia 50 2.1.1 The Corporations Act 2001 (Cth) 50 2.2 Classes of companies 51 2.2.1 Proprietary companies 51 2.2.2 Public companies 52 2.2.3 Listed or unlisted 53 2.2.4 Member liability 54 2.2.5 Comparing company types 55 2.2.6 Conversion between proprietary and public company status 57 2.3 Starting a company 57 2.3.1 Step 1: Choose a company structure 57 2.3.2 Step 2: Choose a company name 58 2.3.3 Step 3: Decide how to operate the company 59 2.3.4 Step 4: Understand the legal obligations 59 2.3.5 Step 5: Obtain consent from officers, members and occupiers 59 2.3.6 Step 6: Formally register the company 60 2.3.7 Step 7: Meet legal obligations regarding use of company name, ACN and ABN 60 2.4 Separate legal entity 61 2.5 Corporate groups 63 2.5.1 Legal issues relating to corporate groups 64 2.6 The corporate veil 64 2.6.1 The legal principle of the corporate veil 65 2.6.2 The corporate veil in relation to corporate groups 66 2.6.3 Lifting the corporate veil 66 2.7 Limited liability 69 Summary 72 Key terms 73 Review questions 73 Applied problems 74 Acknowledgements 75 Chapter 3 Company constitution 76 Introduction 77 3.1 Rules and procedures 77 3.1.1 Companies established prior to July 1998 78 3.1.2 Companies established after July 1998 78 3.2 Replaceable rules 79 3.3 The company constitution 83 3.3.1 When is the company constitution adopted? 83 3.3.2 The contents of the company constitution 84 3.4 Objects clause 85 3.4.1 Practical implications of the objects clause 86 3.5 Who is bound by the replaceable rules and constitution? 88 3.5.1 Contract between the company and each member 89 3.5.2 Contract between the company and each director and company secretary 89 3.5.3 Contract between a member and each other member 90 3.5.4 Remedies for breach of statutory contract 91 3.6 Changing the rules of a company 91 3.6.1 Process to change the constitution 92 3.6.2 The purpose and fairness of the change 92 3.6.3 Application of changes to existing members 93 3.6.4 Entrenched provisions 93 Summary 94 Key terms 94 Review questions 95 Applied problems 95 Acknowledgements 96 Chapter 4 Promoters and pre-registration contracts 97 Introduction 98 4.1 Promoters 98 4.1.1 Identifying promoters 100 4.2 Duties and liabilities of promoters 101 4.2.1 Disclosure 103 4.3 Remedies for breach 105 4.4 Pre-registration contracts 106 4.4.1 The superseded common law 106 4.4.2 Pre-registration contracts under the Corporations Act 107 Summary 110 Key terms 110 Review questions 111 Applied problems 111 Acknowledgements 112 Chapter 5 Companies, outsiders and corporate liability 113 Introduction 115 5.1 How companies exercise their legal capacity and powers 115 5.1.1 Corporate liability 116 5.2 Determining whether a contract is binding by and against the company 116 5.2.1 Entering a contract directly 117 5.2.2 Entering a contract indirectly 119 5.3 Determining whether an agent has substantive authority 120 5.3.1 Actual authority 120 5.3.2 Apparent authority 122 5.4 The indoor management rule 124 5.4.1 Ultra vires 125 5.4.2 Indoor management rule and constructive notice 126 5.5 Statutory assumptions by outsiders in dealings with the company 128 5.5.1 Entitlement to make assumptions 128 5.5.2 Assumptions that can be made 128 5.6 Liability in tort and in crime 131 5.6.1 Primary liability 131 5.6.2 Vicarious liability 132 5.6.3 Liability in tort 132 5.6.4 Liability in crime 133 Summary 136 Key terms 136 Review questions 137 Applied problems 138 Acknowledgements 139 Chapter 6 Membership, members’ powers and dividends 140 Introduction 141 6.1 Members as owners 141 6.1.1 Membership 143 6.1.2 Recording membership 143 6.1.3 Limit on members’ rights 151 6.2 Members’ meetings 152 6.2.1 Types of members’ meetings 153 6.2.2 Calling a meeting 154 6.2.3 Proceedings at members’ meeting 159 6.3 Dividends 164 6.3.1 Entitlement to dividends 164 6.3.2 Payment of dividends 165 6.3.3 Consequence of improper dividend payment 166 6.3.4 Taxation of dividends 166 Summary 167 Key terms 168 Review questions 168 Applied problems 168 Acknowledgements 170 Chapter 7 Corporate governance and company management 171 Introduction 172 7.1 Corporate governance 172 7.1.1 Theories of corporate governance 173 7.1.2 A working definition of corporate governance 174 7.1.3 Corporate governance and company management 176 7.2 Officers 176 7.2.1 Directors 177 7.2.2 Company secretary 179 7.2.3 Senior managers 180 7.3 Roles and powers of directors and members 180 7.3.1 Directors 181 7.3.2 Members’ powers over directors 186 7.4 Appointment, remuneration, resignation, removal 187 7.4.1 Appointment of a director 187 7.4.2 Directors’ remuneration 190 7.4.3 Resignation and vacation of office 191 7.4.4 Removal of directors 191 Summary 193 Key terms 194 Review questions 194 Applied problems 194 Acknowledgements 196 Chapter 8 Directors’ and officers’ duties A 197 Introduction 199 8.1 Officers’ duties 199 8.1.1 Duties under common law and equity 200 8.1.2 Duties under the Corporations Act 201 8.1.3 The interaction of general law and statutory duties 202 8.1.4 Penalties and remedies 203 8.2 The duty of care and diligence 203 8.2.1 Who owes the duty of care and diligence? 204 8.2.2 To whom is the duty of care and diligence owed? 204 8.2.3 Determining whether a director has breached their duty of care 205 8.2.4 The consequences of breaching the duty 205 8.3 The standard of care 206 8.3.1 The minimum standards of care 206 8.3.2 The standards of care by types of officers 207 8.4 Diligence 209 8.4.1 Attending board meetings 210 8.4.2 Delegation 210 8.5 Defences against a breach of duty of care and diligence 212 8.5.1 The business judgment rule in statute 212 8.6 The duty to prevent insolvent trading 214 8.6.1 The duty to prevent insolvent trading under s 588G of the Corporations Act 215 8.6.2 When is a debt incurred? 216 8.6.3 Other requirements as to incurring debts 218 8.6.4 The time at which a company becomes insolvent 218 8.6.5 Reasonable grounds for suspecting insolvency 218 8.6.6 Defences to a breach of s 588G 218 8.6.7 Penalties and remedies 219 8.6.8 A safe harbour against liability for insolvent trading 219 Summary 221 Key terms 221 Review questions 222 Applied problems 222 Acknowledgements 225 Chapter 9 Directors’ and officers’ duties B 226 Introduction 227 9.1 Good faith 227 9.2 Best interests of the company 229 9.2.1 Members’ interests — individuals, classes and as a whole 230 9.2.2 Creditors’ interests 230 9.2.3 Employees’ interests 231 9.2.4 Corporate groups’ and nominee officers’ interests 232 9.3 Proper purpose 233 9.3.1 Determining a breach of the duty of proper purpose 233 9.3.2 Defences for breach of proper purpose 234 9.4 Conflict of interest under general law 235 9.4.1 When a conflict may arise 235 9.4.2 Defences 239 9.5 Statutory provisions relating to conflict of interest 240 9.5.1 Related party transactions 241 9.5.2 Defences 242 9.6 Remedies and penalties for breach of duty 244 9.6.1 Summary of consequences for breaches of directors’ duties 245 Summary 246 Key terms 246 Review questions 247 Applied problems 247 Acknowledgements 250 Chapter 10 Financing a company via equity or debt 251 Introduction 252 10.1 Choosing between equity and debt 252 10.2 Issuing shares 254 10.2.1 Definition of a share 254 10.2.2 Share issues 255 10.2.3 The statutory power to issue shares 256 10.3 Different types of shares 257 10.3.1 Ordinary shares 258 10.3.2 Bonus shares 258 10.3.3 Preference shares 258 10.3.4 Partly paid shares 259 10.3.5 Equity crowdfunding 259 10.4 Debt financing 260 10.5 Debentures 262 10.5.1 Statutory requirements to issue debentures 263 10.5.2 Parties to a debenture 263 10.6 Security for debts 264 10.6.1 Registration of a security 264 10.6.2 Circulating and non-circulating security interest 265 10.6.3 Negative pledges 266 10.6.4 Romalpa clause 267 10.6.5 Voidable antecedent transactions in the event of insolvency 267 Summary 269 Key terms 269 Review questions 270 Applied problems 271 Acknowledgements 271 Chapter 11 Disclosure 272 Introduction 273 11.1 Why disclosure is required 274 11.2 Hard, hybrid and soft law 274 11.2.1 Australian Securities and Investments Commission 274 11.2.2 Australian Securities Exchange 275 11.2.3 Australian Accounting Standards Board 275 11.2.4 Auditing and Assurance Standards Board 276 11.3 Annual reporting 276 11.3.1 Financial report 278 11.3.2 Directors’ report 286 11.3.3 Auditor’s report 286 11.4 Fundraising 286 11.4.1 Disclosure when issuing securities in the primary markets — s 706 288 11.4.2 Disclosure when selling securities in the secondary markets (secondary sales) — s 707 288 11.4.3 When disclosure is not required for issuing securities 288 11.4.4 Form and content of fundraising disclosure documents 289 11.5 Misleading and deceptive disclosure 291 11.5.1 Liability for defective disclosure 292 11.6 Continuous disclosure 294 11.6.1 Section 674 and ASX Listing Rule 3.1 295 11.6.2 Continuous disclosure and generally available information 297 11.6.3 Continuous disclosure and material effect 298 11.6.4 Liability and offences relating to continuous disclosure 298 11.7 Insider trading 299 11.7.1 Sections 1043A and 1042A 300 11.7.2 Insider trading and information 301 11.7.3 Insider trading and materiality 301 11.7.4 Insider trading and generally available information 301 11.7.5 Insider trading exceptions 301 11.7.6 Liability and offences relating to insider trading 302 Summary 303 Key terms 304 Review questions 304 Applied problems 305 Acknowledgements 306 Chapter 12 Members’ remedies 307 Introduction 308 12.1 Members’ rights and remedies 309 12.1.1 The balance of majority and minority members’ rights 309 12.1.2 Statutory and contractual rights 310 12.1.3 Remedies 310 12.2 Statutory remedies 312 12.2.1 The oppression remedy 312 12.2.2 Winding up a company 316 12.2.3 Statutory injunction 317 12.3 Statutory derivative action 319 12.3.1 Parties that can seek to bring a statutory derivative action 319 12.3.2 Proceedings will be on behalf of the company 319 12.3.3 When the court will grant leave 320 12.4 Personal action 321 12.4.1 A member’s personal rights 321 12.4.2 Statutory contract 322 12.4.3 General law remedies 322 Summary 324 Key terms 324 Review questions 325 Applied problems 325 Acknowledgements 327 Chapter 13 Receivership and administration 328 Introduction 329 13.1 Insolvency 329 13.1.1 The test for insolvency 330 13.2 Receivership 331 13.2.1 Appointment of the receiver 332 13.2.2 Effects of receivership 333 13.2.3 Role of the receiver 333 13.2.4 Powers of the receiver 336 13.2.5 Duties and liabilities of the receiver 336 13.2.6 Termination of receivership 337 13.3 Voluntary administration 337 13.3.1 Appointment of an administrator 338 13.3.2 Effects of administration 339 13.3.3 Role of the administrator 339 13.3.4 Powers of the administrator 339 13.3.5 Duties and liabilities of a voluntary administrator 339 13.3.6 Process of voluntary administration 340 13.3.7 Deed of company arrangement 341 13.3.8 Termination of voluntary administration 341 Summary 343 Key terms 343 Review questions 343 Applied problems 344 Acknowledgements 344 Chapter 14 Liquidation 345 Introduction 346 14.1 Liquidation or winding up 346 14.1.1 Voluntary winding up 348 14.1.2 Compulsory winding up 349 14.2 Appointment of a liquidator 349 14.2.1 Powers of the liquidator 350 14.2.2 Duties and functions of a liquidator 350 14.3 Property available to a liquidator 351 14.3.1 Voidable transactions 351 14.3.2 Types of voidable transactions 352 14.3.3 Defences for creditors 356 14.4 Final distributions and deregistration 356 14.4.1 Distribution to creditors 357 14.4.2 Deregistration of company 358 Summary 359 Key terms 359 Review questions 359 Applied problems 360 Acknowledgements 361 Appendix A: Retrofit consitution 362 Appendix B: Legislative appendix (e-chapter) Index 391