COMPANY LAW

LAW2450
TOPIC NOTES

TOPIC 1: Introduction to Company Law

Topic 1: Introduction to Company Law 1

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Topic 1: Introduction to Company Law 2

Contents
Learning Outcomes
1. Introduction
2. Defining main types of legal structure for business in Australia
a. Company
b. Sole trader
c. Partnership
d. Joint venture
e. Trust
3. Corporations
a. Proprietary Companies
b. Public Companies
4. Separate Legal Entity / Corporate Veil

Learning Outcomes
• Understand how to determine the correct structure for a client
• Understand why a company is the appropriate structure
• Understand the types of companies available in Australia
• Understand the legal consequences of incorporating a company

Readings Topic 1
Modules 1 & 2 of the Highly Recommended Text

Topic 1: Introduction to Company Law 3

1. Introduction

This week we will first look broadly at the operation of organizational structures in
the social sphere, and analyze the way those organizations are treated at law. Most
importantly, this topic introduces the organizational structure called the ‘company’,
and the main legal organisations that we will consider in this course.

The legally recognized organisations on which we will focus in the introductory

component of this subject include the sole proprietor, unincorporated associations,
incorporated associations, partnerships, trusts and, corporations.

2. Business Structures
a. Company
The company is the most common business structure for organisations in Australia.
A company or corporation is a separate legal entity formed under the Corporations
Act 2001 (Cth). As a separate legal entity, a company can enter in contracts, sue and
be sued in its own name.

Further details about a company can be found on page 7 of the Text Book

b. Sole Trader

A sole trader or sole proprietorship is a business that is owned by one person and
that has no legal existence separate from that person. Because the business has no
separate legal existence from its owner, a sole trader is personally responsible for
the debt of the business.

Further details about sole trader can be found on pages 6-7 of the Text Book.

c. Partnership

A partnership is a relationship or association between two or more entities, carrying

on a business in common with a view to making a profit. Each partner in a
partnership is personally liable for all the debts of the partnership, even in they are
caused by decision or acts by other partners.

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Further details about partnership can be found on pages 6, 10 - 17 of the Text Book.

d. Joint Venture

A joint venture is another way to structure a business involving multiple people,

particularly where two or more people or parties come together in business. The
parties are only responsible for their respective obligations, not for the obligation of
any of their joint venture partners.

Further details about joint venture can be found on pages 6, 18 -23 of the Text Book.

e. Trust

A trust is referred to in this course as a legal organisation because it involves an

arrangement of things and people; however, it does not mean that a trust is
recognised at law as an organisation. A trust is relationship or association between
two or more parties, whereby one party holds property in trust for the other. The
parties to an express trust are the settlor, the trustee and the beneficiary.

Further details about trusts can be found on pages 6, 20-28 of the Text Book.

3. Corporations
The Corporations Act governs the registration and use of different types of
companies, classified by reference to the basis and the extent of the members’
liability and according to whether they are public companies or proprietary
companies.

In this course we will use The Corporations Act as tool of reference as we look at
topics such as directors’ duties & liabilities, shareholders’ rights & remedies,
financial reporting provisions; and requirements for company meetings in more
detail.

a. Proprietary Company

Under section 113 of the Corporations Act, a Proprietary Company (also known as
Private Company) is a company with no more than 50 non-employee members.
Proprietary companies can be small or large, depending on the amount of revenue

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they make, how many assets they hold, and how many employees they have.
See section 45A of the Corporations Act and pages 44-45 of the Text Book for more
details.

b. Public Companies

Under section 9 of the Corporations Ac, a public company is a company is a company

that has more than 50 non-employee shareholders and engages in public
fundraisings. For a public company to engage in public fund raising it must be listed
on the Australian Securities Exchange (ASX). See section 113 Corporations Act for
more details.

Public Companies can be categorized by their listing status; listed or unlisted. A

listed company is a public company that participates on a public securities
exchange such as ASX, where as an unlisted company is a public company that does
not participate on a public securities exchange.

The main classes of a public company are: companies limited by shares,

companies limited by guarantee, unlimited companies and no liability
companies. See section 112 of the Corporations Act and pages 47 – 49 of the Text
Book for more details.

3. The ‘Separate Legal Entity’ concept & the Corporate Veil

A company, once registered, is a separate legal entity, distinct from its members
and those that manage its operations. A company can:
 incur debts in its own name;
 holds property, and undertake; and
 sue and be sued.
See section 119 of the Corporations Act for further details.
The legal principle of the corporate veil comes from the case Salomon v Salomon &
Co Ltd [1897] AC 22, the leading case on the establishment of the doctrine of
separate legal personality. The corporate veil concept is an expression used to
describe the legal rules that keep participants separate from the company in a legal

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sense. In essence it means that no-one can claim that the company’s obligations,
liabilities, rights or property are the participants.

However, there are a few circumstances where the law will ‘lift the corporate veil’.
Under the Corporations Act, this mainly occurs where there are dealings between a
director and the company and the director attempts to get a benefit over a third
party or creditor. Other statutes (e.g. Tax, OHS, Fair Work) will operate to hold
directors personally liable in certain situations.

A related concept to the company being a separate legal entity is that members of
‘limited’ companies have limited liability. This means that Liability is limited to the
amount of any unpaid share capital or guarantees given. Members are legally
responsible for the debts of a company only to the extent of the unpaid amount on
the nominal value of their shares. See section 516 of the Corporations Act for further
details.

Another related concept to the company being a separate legal entity is that
contracts entered into before the company was registered (called ‘pre-incorporation
contracts’) require further steps to be taken for the company to be bound by those
contracts. See sections 131-133 of the Corporations Act for further details.

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