Transcript CHAPTER 4 CONSEQUENCES OF REGISTRATION At the end of this topic you should know: • the effects of registration, the most important being.

CHAPTER 4
CONSEQUENCES OF REGISTRATION
At the end of this topic you should know:
• the effects of registration, the most important being the
creation of a separate “legal person”; and
• what is meant by “piercing the corporate veil”, together with
some examples under both general law and statute.
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Effects of Registration
Being able to sue/be sued in company’s own name.
Continued existence despite changes to its members
(only ceases when struck off register by ASIC).
Can acquire, hold and dispose of assets (shares do
not confer a proprietary interest in the company’s
assets: Macaura v Northern Assurance Co Ltd [1925]
AC 619.
Can enter into contracts and incur liabilities in
company’s own name.
All powers of a natural person plus “corporate” powers
(eg to issue shares and grant floating charges).
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Effect of Registration
registration
creates
separate legal entity
facilitates
limited liability
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The Company as a Separate Legal Person
The full implications of a company being a separate
legal person (that is, separate and distinct from its
members and directors) were not recognised until the
famous case of Salomon v Salomon & Co Ltd [1897].
The House of Lords held that, even though Salomon
controlled the company, the company was a separate
legal entity and it, not Salomon, was running the
company so Salomon was entitled to recover the
secured debt owed to him: Salomon v Salomon & Co
Ltd [1897].
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Salomon’s Case
SALOMON V SALOMON (1897) HOUSE OF LORDS
sold
Facts:
Pty Ltd
Salomon’s
shoe
business
debentures
cash
Salomon
20,001 shares
Issue: Could Salomon get priority for
(residual) £1,000 secured by his debentures?
family 6 shares
(as Salomon’s
nominee)
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Corporate Veil
The “corporate veil” exists once a company is registered
and it separates the company from the people who formed
it (and from those who become its members).
Company
separate legal entity
with own:
• assets
• liabilities
• contracts
Members
VEIL
• own shares but not a
proprietary interest in
the company’s assets
• may also be a creditor,
debtor or director of the
company
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Corporate Veil
Sometimes people form a company to take
advantage of the veil of incorporation because it acts
as a shield to protect them from personal liability,
particularly in the event of insolvency of the company.
The continuing problem of “phoenix companies”
illustrates one situation where unscrupulous
entrepreneurs have used the corporate form to avoid
creditors.
There have been a number of statutory reforms in
2012 to redress this problem: see [4.40].
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Lifting the Corporate Veil – Statutes
Taxation, OH&S and environmental protection
statutes, and regulatory regimes such as banking,
foreign investment, broadcasting and gaming are
among those that provide for lifting the corporate veil.
Certain sections of the Corporations Act also lift the
corporate veil by imposing personal liability or other
restrictions on members, directors or other officers of
the company.
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Lifting the Corporate Veil – Statutory Examples
Some examples of lifting the corporate veil in the
Corporations Act are:
• insolvent trading (ss 588G-588M, ss 588V-588X);
• uncommercial transactions (ss 588FB-588FF,
s 588G(1A));
• unreasonable director-related transactions
(s 588FDA);
• employee entitlements (Pt 5.8A);
• company officer security interests (s 588FP); and
• financial assistance (s 260D(2)).
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Lifting the Corporate Veil – General Law
Other instances where the corporate veil is pierced
arise where there is no relevant statutory provision but,
for some overriding policy reason, a court has decided
to lift the veil.
Australian courts have been more reluctant to do this
than the English and American courts to lift the
corporate veil: Repatriation Commission v Harrison
(1997).
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Lifting the Corporate Veil –
General Law Examples
The following are areas in which the corporate veil
has been lifted in Australia:
• Taxation: Commissioner of Taxation v Whitford’s
Beach Pty Ltd (1982);
• Competition and consumer law: Spreag v Paeson
Pty Ltd (1990); and
• Tort: Briggs v James Hardie & Co Pty Ltd (1989).
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Lifting the Corporate Veil –
General Law Examples
It is difficult to reconcile the English and Australian cases
beyond identifying general descriptive categories such as:
• fraud: Re Darby [1911];
• agency: Smith Stone & Knight Ltd [1939], and Briggs
(1989);
• partnership: Walker (1987);
• trust: Green [1982];
• avoidance of a legal obligation: Gilford Motor Ltd
[1933], Creasey (1992), and Re H [1996]; and
• also, there may be special facts to lift the veil in order to
prevent a “substantial injustice”: Walker (1987).
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Corporate Groups
A corporate group exists where there are either crossholdings and/or cross-directorships between
companies.
Depending on the context, the Corporations Act applies
two different tests to determine whether the relationship
between companies is sufficient for those companies to
be considered to be a corporate group for legal
purposes.
For insolvent trading purposes, apply s 46: see [4.100].
For the purposes of the related party provisions, apply
the control test: s 50AA: see [4.100].
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A Simple Corporate Group
100%
100%
Each of these companies
is a subsidiary of A LTD.
60%
D LTD is also a subsidiary
of C LTD.
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Corporate Groups
As a general rule, the Corporations Act, like the
general law, preserves the separate existence of each
legal entity within the group.
However, there are some important exceptions:
• certain holding companies can be liable for the
debts of a subsidiary (ss 588V-588X);
• consolidated financial statements must be prepared
for the whole of a corporate group (s 296); and
• a subsidiary cannot acquire shares in its holding
company or give financial assistance for that
purpose: Pt 2J.2.
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Problems of Corporate Groups
A problem may arise for employees or third parties in
circumstances where their contractual relationship is
with a company in the corporate group with no
assets. The assets are held by another company in
the corporate group.
The corporate veil would prevent successful claims
against the company in the corporate group with no
assets, unless lifted by the courts: see [4.120],
Patrick Stevedores v Maritime Union of Australia
(1998).
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.