Questions to ponder

What is the concept of separate legal entity?

 A legal entity, typically a business, that is defined as detached from another business or
individual with respect to accountability. A separate legal entity may be set up in the case of a
corporation or a limited liability company, to separate the actions of the entity from those of the
individual or other company. (GOOGLE)
 A company once registered is a separate legal entity from its members and those that manage
its operations. A company can incur debts in its own name, hold property take and defend legal
action. The company continues unchanged even if members and operators change. Section 119
CA. A company comes into existence as a body corporate at the beginning of the day on which it
is registered. The company’s name is the name specified in the certificate of registration. (Slides)
 This means that the company is separate from the people that run company and own it. Its
obligations and property ate its own and not those of its participants. The company can sue and
be sued in its own name. Its existence continues unchanged even if the identity of the
participants changes. A company can contract with its participants. (Extras)

Characteristics of an incorporated entity?

 Once incorporated a company, it has separate legal personality, perpetual succession and power
to hold property. It is capable of suing and being sued. It is also capable of exercising all the
functions of an incorporated company, this includes the power to issues shares/debentures.

What is the concept of limited liability?

 Limited liability is shareholders’ liability to a company are limited to their shares and the ability
to be an employee of the company to minimise tax and contribute to superannuation.
Companied limited by shares can be either public or proprietary companies which registered
under the Corporations Act.
 Companied limited by shares are the most common type and raise funds by issuing shares.
Section 9 CA defines company limited by shares as a company formed on the basis that the
liability of the members limited to the amount of any unpaid on the shares held by them. Shares
can be fully paid or partly paid. Section 148 CA requires a limited company to have the word
limited on the end of its name so creditors are aware that the liability of the shareholders is
limited and debts only satisfied from the assets of the company.
 Companied limited by guarantee when the members of the company have their liability limited
to the amounts that they have undertaken to contribute to the company in the event of a
winding up. It has no share capital and only contribute on winding up and not during the
operations. Amount to be paid by the members is called members guarantee. There will be no
capital raised initially and such companies are used for clubs charities and non-trading activities.
Capital will come from donations subscriptions.

Members’ rights – statutory contract s140 CA

In Lecture 3
Does law protect minority shareholders?
 According to s231, a person is a member of a company if they:
a. are a member of the company on its registration; or
b. agree to become a member of the company after its registration and their name is entered
on the register of members; or
c. Become a member of the company under section 167 (membership arising from conversion
of a company from one limited by guarantee to one limited by shares).
 Fiduciary duty owned by Majority shareholders, under most states’ corporation laws, the
majority shareholders owe a fiduciary duty to the minority shareholders. This means that
majority shareholders must deal with minority shareholders with candor, honesty, good faith,
loyalty, and fairness.

Insolvency issues – Voluntary administration (VA), receivership and liquidation.

 A company is solvent if it is able to pay all debts as and when they become due and payable:
Corporations Act 2001 s95A(1). A company who cannot do this is insolvent: s95A(2) CA.
 S459C Corporations Act, company is presumed to be insolvent if any of the following events
occurred in the three months before an application for winding up is made:
1. The company has failed to comply with a statutory of demand for payment
2. The company has failed to satisfy a judgment debt;
3. A receiver has been appointed over company property; or
4. A person was appointed to enter into possession or assume control of property of the
company

 Voluntary administration is a way for an insolvent company to have a moratorium or safety zone
from creditors’ claims while a decision is made about the future of the company. The decisions
for a company are:
1. Execute a ‘deed of company arrangement”
2. Wind up the company or
3. Return control to the board of directors
 Appointment of administrator who takes complete control of an insolvent company for a short
period of time. His objectives is to investigate the affairs of the company and report whether a
compromise or arrangement can be agreed and is acceptable to the company and creditors
 While a company is under administration, the administrator takes complete control of company
for a short time. Administrator is the only person who can deal with the company property. The
directors are no longer in charge. He or she (Administrator) reports to creditors.
 Qualification: must be a registered liquidator (s448B CA); must be independent (s448C CA)
 The fate of a company is decided by creditors ultimately:
1. winding up or
2. enter into deed of arrangement; or
3. Terminate administration.
 Advantages: cheaper, quick, facilitate negotiation of compromises, arrangements, less legal
court cases.
 Voluntary Administrator is usually appointed by:
1. The company (directors by majority) – s436A CA
2. Liquidator or provisional liquidator - s436B(1) CA
3. Substantial secured creditors (debenture holder) –s436C CA
 In most cases directors initiate VA is because directors must satisfy that the company is insolvent
or likely become insolvent in the future. As VA gives the company a moratorium (“breathing
space”) -allows a decision to be made as to whether the company is to be placed in liquidation
or to continue trading. Directors can be personally liable if the company trades while it is
insolvent (s588G CA), so to protect themselves, they apply for VA. Any guarantee by directors of
company debts cannot be enforced during VA (a Moratorium on all claims, with some
exceptions). No need for approval from shareholders, or creditors or court
 In a rare cases VA is initiated by liquidator or creditor.

 A secured creditor with a charge may put a company into receivership. In the event of the
company defaulting on the loan, the secured creditor may appoint a receiver to receive or seize
the asset under charge and liquidate the charged asset to satisfy the debt. Regulated by Pt 5.2 of
Corporations Act.
 Receivership comes about because of failure of company. It is to deal with the financial affairs of
the company and pay outstanding debts. Action can be taken by creditors owed money or by
directors to appoint a receiver. A receiver appointed by secured creditor takes possession of
secured property, sells it, repays the secured creditor and accounts for any surplus to the
company. Therefore only secured creditor can enforce their rights without going to court.
 A company is in receivership when a receiver is appointed over some or all of the company’s
property.

 In a process of liquidation, S472(1) CA – if winding up is order, a court can appoint an official

liquidator. S532 CA – a liquidator must:
1. Not be insolvent under administration – s532(7) CA;
2. Be registered as a liquidator – s532(8) CA;
3. Give consent to act – s532(9) CA;
4. Be a member of ICA, CPA Australia etc
5. Qualifications in accountancy and law
6. Be experienced in winding up companies
7. Lodge a bond with ASIC as security for performance of duties
 The liquidator is a fiduciary and owes duty to the company. He is to conduct impartial
investigation of the company’s affairs, Take possession of company assets, Realize the
company’s assets, Keep proper financial accounts, Lodge notices with ASIC:
1. Notice of appointment,
2. Report if any breaches of CA,
3. Statement of financial position every 6 months
 Duties of liquidator is also to determine the debts payable by the company, Distribute the
proceeds amongst those with legitimate claims, Any surplus to the members, Deregister the
company.
Possible theory questions
The separate legal entity theory for corporations involve the notation of a ‘corporate
veil’.
 The separate legal entity means that the company is separate from the people that run company
and own it. Its obligations and property ate its own and not those of its participants. The
company can sue and be sued in its own name. Its existence continues unchanged even if the
identity of the participants changes. A company can contract with its participants.
 Corporate veil is expression that lawyers use to describe the legal rules that keep participants
(members, officers) separate from the company in a legal sense. It reflects and results from
company’s separate legal personality.
 This would stop the law from “seeing” the participants that make up the company i.e. the
owners and the operators. Means that the law cannot look through the veil of incorporation and
say that the company’s obligations, liabilities, rights or property are obligations, liabilities, rights
or property of the participants.