Commercial Applications of Company Law 2019 Ebook - (PART A - COMPANIES and COMPANY LAW)

PART A
COMPANIES
AND COMPANY
LAW
Copyright © 2019. Oxford University Press. All rights reserved.
Hanrahan, Pamela, et al. Commercial Applications of Company Law 2019 eBook, Oxford University Press, 2019. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=5649748.
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CHAPTER 1
About Companies
Introduction¶1-001
What is a company? ¶1-050
Companies as a Form of Business Organisation

Introduction¶1-100
What are companies like? ¶1-120
What are listed companies, and who invests in them? ¶1-140
The Architecture of Companies

Introduction¶1-200
How is a company’s capital structured? ¶1-220
How is a company’s management structured? ¶1-240
What are a company’s key legal attributes? ¶1-260
The Historical Development of Companies

How did companies develop? ¶1-300
What are corporations aggregate and joint stock,
and when did these concepts develop? ¶1-320
When did the right to incorporate companies
become generally available? ¶1-340
When was limited liability first introduced? ¶1-360
When were companies first used for small business? ¶1-380
Some Key Terms
What do these terms mean? ¶1-500
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4 About Companies
[¶1-001] Introduction
This book is about company law and how it works to create companies, to organise the
relationships between participants in companies (including the directors and other corporate
officers, and the company’s members), to facilitate the raising of capital by companies
to carry on their activities, and to give legal effect to dealings between companies and
others, such as their creditors and the people with whom they contract. Companies are the
most significant form of business organisation in Australia and in most other developed
economies. This Chapter introduces some of the basic features of companies. The first part
looks at companies as a form of business association and explains the difference between
public listed companies and unlisted (often privately owned) companies. The second part
provides an overview of the structure or architecture of companies. It describes in very
general terms some of the key features of companies. The third part explains the historical
development of companies. The final part defines some of the important concepts discussed
throughout this book.
[¶1-050] What is a company?

A company is an artificial person created by the law. The function of a company in a legal
sense is to hold assets (property) and to carry on a business or other activity, as an entity
separate from the participants (investors, managers) in that business or activity.
Companies come into existence through a process of registration. A person or group
who wishes to use a company to carry on a particular activity makes an application to
the Australian Securities and Investments Commission (ASIC), the Commonwealth
government agency responsible for the formation and regulation of companies, for the
registration of a new company. Provided all the conditions for registration are met, ASIC
will exercise its power to create a new company by registering it. The process of registration
is discussed in detail in Chapter 5. A company’s existence comes to an end when it is de-
registered. De-registration is discussed in Chapter 25.
COMPANIES AS A FORM OF BUSINESS

ORGANISATION
A company is a type of corporation. The terms corporation or body corporate are general
ones, used to describe all artificial legal entities that have the attribute of separate legal
personality. What is meant by separate legal personality? This phrase is defined in ¶3-
100. In brief, it means that a company is treated as a separate person from those who
participate in the company. Because it is a separate person, it has its own legal identity or
personality, which means that it can, for example, hold property in its own name and enter
into contracts in its own name. It can commence or defend legal proceedings in its own
name. Importantly, its liabilities are its own and not those of its members or officers.
¶1-100

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About Companies5
Most corporations that are used to carry on business in Australia are companies,
that is, corporations formed or treated as being formed by being registered under the
Corporations Act 2001 (Cth) (Corporations Act).1 Companies are the focus of this book,
because they are the most common and economically significant form of corporation.2
1
Historically, commercial companies developed as a means of allowing a number of
people to pool their resources (in the form of capital or management skills) to undertake
an enterprise too large for a single individual. Creating a separate legal person to hold
and incur the rights and obligations of the enterprise simplified dealings between the
enterprise and those with whom it conducted business.
With the introduction of limited liability in the middle of the 19th century, certain
types of companies3 also provided a way for participants in an enterprise to limit the extent
to which their own personal wealth was put at risk if the enterprise failed. Limited liability
is discussed in detail in ¶3-300. In brief, limited liability means that even if a company is
unable to pay all of its liabilities, then those participants who have invested money in the
company are not liable to contribute any more than what they have paid (or agreed to pay)
to acquire their shares in order for the company to meet those liabilities. Because liabilities
incurred in running the enterprise are the company’s own, and not the participants’, the
participants generally would not be required to provide any more than their initial or
agreed contribution to the company to meet those liabilities.
Company law developed alongside the company to regulate the relationship between:
• participants in the company
• the company and the state
• the company and those with whom the company had dealings.
The development and structure of company law is discussed in detail in Chapter 2.
Although one of the key drivers of the development of companies was to simplify the
participation of large numbers of people in a collective enterprise, the special characteristics
of companies (in particular, the limited liability conferred on participants) also made the
corporate form attractive to those engaged in small business. Traditionally, the law required
that corporations have more than one member, but it is now possible to incorporate a
company with only one member. This means that it is possible for a single individual to
form a company and conduct his or her business through that company, obtaining the
benefits that flow from using that form of organisation.4
In Australia, companies are used for both large and small business.
1 The Corporations Act is the statute that governs the formation, conduct and termination of companies in Australia.
It is discussed in Chapter 2.
2 The differences between companies and other types of corporations are discussed in Chapter 4.
3 In particular, companies limited by shares.
4 The advantages and disadvantages of using a company to carry on a business are discussed in Chapter 4.
Commercial
Central, Applications of Company Law
http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=5649748. ¶1-100
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6 About Companies
[¶1-120] What are companies like?

There are more than 2.5 million Australian companies. More than 99% of these are
companies limited by shares.
What do these companies actually look like? Some are very large, with billions of
dollars in assets and hundreds of thousands of shareholders. Often, shares in these large
public companies are quoted on the Australian Securities Exchange (ASX), so that they
can be bought and sold through the ASX by investors. The largest entity listed on the
Australian market is the Commonwealth Bank of Australia, which in October had a total
market capitalisation of more than $125 billion.
There are about 2,250 Australian entities listed on the ASX. That is a very small
percentage of companies overall (about 0.1%). But these large listed companies are very
significant in the Australian economy. The total market capitalisation of Australian
companies listed on the ASX as at September 2018 was $1,9879 trillion. Of that, almost
half is made up of the largest 20 companies.5
However, the vast majority of Australian companies by number (almost 99.9%) are
not the large listed companies we read about in the newspaper. While there are many
unlisted companies that operate substantial businesses, most unlisted companies are very
small and have only a few participants.
Statistics collected by the Australian Taxation Office (the ATO) offer a picture of
what companies look like and what they are used for. The most recent statistics indicate
that, in 2015/16, a total of 914,166 companies lodged tax returns in Australia. Based on
company income:
• 14% had total income equal to or less than $0
• 77% were micro-companies (with income of between $1 and $2 million)
• almost 7% were small companies (with income of between $2 million and
$10 million), and
• 2% were medium companies (with income of between $10 million and $100 million).
Large and very large companies, with total income exceeding $100 million, accounted
for only 0.3% of the total number of companies.
Despite accounting for only 0.3% of the total number of companies, large and very
large companies paid about two-thirds of company tax. Company income tax makes up
about 21% of all tax collected in Australia.6
[¶1-140] What are listed companies, and who invests in them?

As noted above, some companies have their shares or other securities listed for quotation on
the ASX. The ASX is one of three listing markets in Australia and is the most significant in
terms of scale. If a company is listed on the ASX, investors can buy and sell the company’s
shares on the stock market conducted by the ASX (or, from November 2011, ASX listed
5 www.asx.com.au/about/historical-market-statistics.htm.
6 ATO Taxation statistics 2015-16 <www.ato.gov.au>.
¶1-140

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About Companies7
securities on the market operated by Chi-X). As at October 2018, there were 2,155 entities
with tradeable equities listed on the ASX; this included 2,015 Australian companies.7
Who owns the shares in listed companies? 1
According to the Reserve Bank of Australia, about half of Australian listed securities
and bonds are owned by foreign investors. Domestic institutional investors, such as
superannuation funds, managed investment schemes, insurance companies and other
investment entities own most of the remaining issued securities, and retail investors, a
relatively small portion (see ¶7-120).
Larger listed companies will generally have at least several thousand shareholders
and, in the case of Australia’s largest companies, may have many more. But the majority
of listed companies by number are actually quite small, with a market capitalisation of less
than $10 million, and may have far fewer shareholders. So there is significant diversity
even between listed entities.
The Australian Share Ownership Study released by the ASX in July 2015 shows
that 6.48 million Australians, or 36% of the adult Australian population, were invested
in the Australian sharemarket, either directly (via shares or other listed investments) and/
or indirectly (via unlisted managed funds) in 2014. While small shareholders comprise
the vast majority by number of shareholders, between them they hold a relatively small
percentage of the total shares on issue. This is very significant because it indicates that large
(generally institutional) shareholders ‘control’ Australian listed companies.
The process of listing and its effect are discussed in greater detail in Chapter 4.
THE ARCHITECTURE OF COMPANIES

As the above discussion indicates, companies come in a great variety of shapes and sizes.
However, companies formed and operating under Australian law have, for the most
part, a common architecture or structure. All companies must have at least one member.
In the case of a company limited by shares, the member will hold a share or shares in
the company. All companies must also have at least one director, who is responsible for
managing the company’s business. Most proprietary companies and all public companies
have a secretary, who has certain administrative responsibilities to fulfil. Larger companies
may also have other officers involved in management.
The following summarises these key features and discusses the architecture of
companies: their capital structure, their management structure and their legal attributes.
7 ASX Historical Market Statistics <www.asx.com.au/about/historical-market-statistics.htm>.
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8 About Companies
[¶1-220] How is a company’s capital structured?

In most cases the commercial activities of companies require the use of a fund of money
or property that belongs to the company. The sources of that fund (referred to in general
terms as the company’s capital) are:
• contributions of capital made by the persons who form the company and persons who
become members after the company is formed
• amounts of credit advanced to the company by creditors, including those who lend
money to the company and those who supply goods and services on credit
• profits (if any) not distributed to members.
These sources of capital are discussed in greater detail in Chapters 18, 19 and 20.
What is equity capital?
The capital contributed by the members of the company is sometimes referred to as equity
capital. In the case of a company limited by shares, the members provide money or property
to the company and receive a share or shares in return.
What is a share?
The share represents a number of rights that may or may not (depending on the terms
of issue of the share) include control rights (such as voting rights and rights to receive
information) and distribution rights (such as a right to receive dividends or to share in the
assets of the company on a winding up of the company).
Once the person has paid money or transferred property to the company and a share
is issued in return, the money or property becomes the property of the company and not
of the member.
A company can issue different classes of shares, with different rights attached to each
class. Examples of classes of shares include preference shares and ordinary shares. Classes
of shares are discussed in Chapter 19.
What does it mean to be a member of a company?
A person who holds shares in a company is a member of the company. Members of

companies have particular rights in relation to the administration of the company’s affairs
that depend on the law and the terms of issue of the share.
The company’s members are, generally speaking, its owners or proprietors. They
are the people who have invested money with the company in the expectation that they
will receive a return on their money if the company is successful, either in the form of
distributions (dividends) paid out by the company during its trading life or in the form of
growth in the value of their investment in the company over time. In the case of a company
limited by shares, the members are the company’s shareholders — the people who have
purchased shares in the company.
Any legal person can be a member of a company. This means that the member does
not have to be a natural person (that is, a human being) but may itself be a company. This
is particularly the case in business enterprises structured as corporate groups. Corporate
groups are discussed in Chapter 4.
¶1-220

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About Companies9
It is possible to form and operate a company with only minimal paid up capital.
Sometimes the total amount subscribed for shares may be as little as $1.00.
What is debt capital? 1
Another important source of capital for companies is debt capital. Like any other legal
person, companies are able to borrow money, and typically a company may borrow money
from a bank or other credit provider to fund its operations. The loan may be secured (by a
charge over some or all of the company’s assets or business) or unsecured. Suppliers may
also supply goods and services to companies on credit.
Persons who lend or advance credit to companies are not members of the company.
Instead, they are in a contractual relationship with it. However, company law does contain
particular provisions that affect the relationship between debtor and creditor where the
debtor is a company. These include rules designed to protect the interests of creditors when
the company becomes insolvent (that is, when the company is unable to meet its debts
when they become due for payment).
[¶1-240] How is a company’s management structured?

Managing companies involves decision-making. That decision-making may include:
• deciding on the appropriate capital structure for the company (whether to borrow
money, to pay dividends, or to increase or reduce the number of shares on issue)
• deciding on the nature and form of the company’s activities (what enterprise to carry
on and how to use the company’s capital).
The distinguishing feature of the management structure of many companies is that
it involves the separation of responsibility for decisions made in constituting and running
the company between members and officers.
Who are the company’s officers, and what is their role?
As explained previously, members of the company are, in a general sense, its proprietors.
The officers of the company are those persons responsible for its management. In small
companies, the members and officers may be the same people (and indeed in single
director/shareholder companies are always the same person). However, in large companies
with many members it is not possible for all the members to take an active part in the
management of the company. In these cases, the separation of the roles of officers and
members in corporate decision-making is more pronounced.
Only a natural person (that is, a human being) can be appointed as an officer of a
company.
The officers of the company include its directors. All proprietary companies are
required to have at least one director and all public companies at least three. Where
a company has more than one director, the directors collectively are referred to as the
board of directors. The directors are selected in the manner agreed between the members
and reflected in the company’s internal governance rules8 and are usually responsible for
8 See ¶1-500 for a definition of internal governance rules. Internal governance rules are discussed in Chapter 5.
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10 About Companies
managing the business of the company. The precise scope of the directors’ powers, and the
division of decision-making power between members and directors, depends on the law
and the company’s internal governance rules. The division of power between directors and
members is discussed in Chapter 6.
Usually, the directors will be responsible for making most decisions affecting the
company, without requiring the approval of members and without being required to
comply with instructions from the members. However, certain fundamental decisions,
such as changes to the company’s internal governance rules and changes that affect the
rights of members, will require the approval of members. The decisions requiring member
approval are discussed in Chapter 7.
In small companies the directors themselves will generally make most of the ongoing
decisions relating to the company. However, in large complex business enterprises the
directors may delegate management functions to the company’s executives, and retain
responsibility for selecting and supervising those executives, and setting the broad strategic
direction for the company.
Directors may be executive or non-executive directors. Executive directors are those
who are employed by the company and devote all or substantially all of their working
time to managing the company’s affairs. Non-executive directors are not employed in the
company’s business and provide an ‘outsider’s’ contribution and oversight to the board of
directors.
All public companies must also have a secretary. Most proprietary companies also
have a secretary, although the appointment of a secretary for a proprietary company has
been optional since March 2000. The secretary is responsible for certain administrative and
reporting functions set out in the law. A person can be both a director and a secretary; a
situation that is common in smaller companies.
In addition to its directors and secretary, a company may have other officers. Company
law imposes certain duties and restrictions on directors and other company officers.
Directors and other officers must act honestly, act in the interests of their company, and
also act with care and diligence. These duties are discussed in Chapters 11–14.
The general responsibility for management of the company remains with the directors
while the company is solvent and operating normally. However, in some circumstances
the management of the company passes from the directors to an external administrator.
This most often occurs when the company is insolvent or is being wound up. Where the
company is being wound up, the person managing the company is called its liquidator.
External administration is discussed in Chapter 25.
[¶1-260] What are a company’s key legal attributes?

Company law clothes companies with special legal characteristics or attributes that enable
them to undertake activities in their own right. The law makes companies into legal entities
that are separate from their participants.
The law also confers on companies the legal capacity (that is, the capacity to do
things that have legal effect) of a natural person. It gives it perpetual succession – that is,
the company continues to exist indefinitely until it is wound up. Winding up is discussed
in Chapter 25.
¶1-260

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About Companies11
Finally, the law confers limited liability on members of companies limited by shares.
The important concepts of separate legal personality, corporate capacity and limited
liability are explained in Chapter 3. 1
THE HISTORICAL DEVELOPMENT OF COMPANIES
[¶1-300] How did companies develop?
It is important, when studying company law, to understand the history of companies
and the development of company law in the social and economic context in which they
occurred. This helps to make clear why the rules evolved in the way they did and how they
work in relation to modern companies.
Some key milestones in the historical development of the modern company were:
• the emergence of the corporation aggregate and the concept of joint stock during the
15th to 19th centuries
• the introduction of legislation to make incorporation available as a general right
in 1844
• the introduction of limited liability under statute in 1856
• the recognition of the proprietary company as a distinct form of company in 1896
• confirmation that the privileges of incorporation extend to small, closely held
companies, in Salomon’s case in 1897
• the statutory facilitation of true ‘one-person’ companies in 1998.
These key milestones are described below.
[¶1-320] What are corporations aggregate and joint stock, and

when did these concepts develop?
The development of the modern Australian commercial company can be traced back to the
earliest corporations aggregate, which emerged in England during the Middle Ages as a
means of conferring on a group of people the capacity to hold and deal with property and
interests to advance their collective aims. Bodies such as municipal boroughs, trade guilds
and colleges facilitated joint activity through conferring legal existence on a group that
was independent of the (perhaps fluctuating) identity of the members from time to time.
Frequently, as was the case with the trade guilds and merchants’ associations, the
corporation existed as the beneficiary of some special right or entitlement conferred by
the Crown, such as a monopoly or the right to control the operation of a particular trade.
The creation of a corporation aggregate — its incorporation — required the consent of
the Crown, through a Royal Charter.
During the 17th century, incorporation was granted by Royal Charter to various
‘merchant venturers’,9 conferring upon them rights to conduct trade in a particular region.
Well known examples of such corporations include the East India Company, the Hudson’s
9 JH Farrar and BM Hannigan, Farrar’s Company Law (4th edn, 1998), p 17.

Commercial
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12 About Companies
Bay Company and the Massachusetts Bay Company, which had clear links to England’s
developing colonial activities. These corporations shared with the modern company the
attributes of separate legal personality discussed below.
What is joint stock, and why is it important?
The 17th century also marked the development of what is known as joint stock. The more
ambitious commercial activities of the period required, in many cases, greater amounts
of capital than a single individual could provide. To meet this need, commercial practice
developed a mechanism whereby a person could invest a sum of money in a venture (or
ongoing series of ventures), receiving in return an entitlement to share in the profits
of the venture. The investors’ entitlement was represented by a share. Such shares were
transferable and could be sold by the investor without the consent of other investors.
In some cases (such as the East India Company) the venture was carried on by
a corporation, and the share represented a claim against the corporation. However, as
incorporation could be achieved only by Royal Charter and was relatively rare, many such
ventures were carried on through a form of unincorporated association that became known
as a ‘joint stock company’.
What is the South Sea Bubble?
By the beginning of the 18th century, there was a well-developed secondary market for
shares in these ventures, and speculation was rife. Shares in one company formed in 1711,
the South Sea Company, rose in price from £100 to £1,000 in a matter of days. It has been
estimated that the amounts invested in such ventures immediately before the collapse of
the boom amounted to £500 million, twice the value of all the land in England at the
time.10 This period is referred to by legal historians as the ‘South Sea Bubble’.
The bubble finally collapsed in 1720, resulting in large losses and considerable
hardship for many members of England’s growing middle class. In response, parliament
passed legislation, called the Bubble Act, to prohibit such associations from acting as
bodies corporate and from issuing transferable shares without the legal authority of a
Royal Charter or an Act of Parliament.

Although the joint stock company became illegal in 1720, the commercial factors that
gave rise to it did not go away, and indeed those factors continued to grow in importance
throughout the 18th century. Incorporation by Royal Charter or Act of Parliament
remained difficult to obtain. Large scale ventures, such as the development of railways,
demanded a means of raising capital from investors to be utilised by managers in these
projects. Lawyers developed the ‘deed of settlement company’ as a means of achieving
these commercial aims while circumventing the prohibition contained in the Bubble Act.11
What were deed of settlement companies?
Deed of settlement companies were, essentially, a combination of association and trust.
The assets of the venture were held on trust by trustees, and the venture managed by the
managers or directors. The venture did not have separate legal personality, and its property,
10 Ibid, 18.
11 Although it is not clear that deed of settlement companies were outside the Bubble Act: ibid, 19.
¶1-320

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About Companies13
rights and obligations were held by the trustees. Investors received a share that represented
an interest in the trust property. Such shares were often expressed to be transferable under
the terms of the trust, which were contained in the deed of settlement. Attempts were
made in drafting the deed of settlement to limit the liability of the investors to the amount
1
invested by them in the enterprise.
By the beginning of the 19th century, deed of settlement companies were becoming
more common in England. However, they were complex to establish and administer,
were ineffectively regulated by the state, and did not confer upon participants many of
the benefits of separate legal personality that a corporation possessed. Following the
repeal of the Bubble Act in 1825, various means of better facilitating and regulating
these commercial arrangements were explored. New legislation for the registration and
regulation of deed of settlement companies was enacted in England in 1844, following the
report by a Parliamentary Select Committee chaired by William Gladstone. The 1844 Act
is sometimes described as ‘the legislative ancestor of modern company law’.12
[¶1-340] When did the right to incorporate companies become

generally available?
The 1844 Act allowed business associations to become companies by a process of registration.
Before that time, incorporation had been a privilege conferred by Royal Charter or by Act
of Parliament. Now, any group wishing to form a company for a lawful purpose could
apply for registration and, by lodging the required information and paying the prescribed
fees, could obtain it. Registration was granted in two stages, provisional and final, with
final registration being available only after the company had secured investments from a
quarter of the proposed final number of investors.
The fact that companies registered under the 1844 Act were corporations, and
therefore had the key attributes of separate legal personality, did not of itself confer limited
liability on the participants in the company. If the debts of a company incorporated under
the 1844 Act exceeded its assets, creditors of the company could pursue individual investors
once their claims against the company had been exhausted. Attempts to limit investors’
liability depended on specific agreement with creditors or on complex drafting in the deed
of settlement itself. However, unlimited liability was seen as a disincentive to investment,
requiring investors to monitor closely the financial position (and therefore ability to meet
their share of any claim by a creditor) of other investors and the activities of managers.
[¶1-360] When was limited liability first introduced?

In 1855, the English Parliament passed the Limited Liability Act 1855, which allowed
those forming a company to elect to do so on the basis that the liability of its investors
would be limited to the amount they agreed to invest in the company. These companies
were required to include the word ‘limited’ in their name, to alert those dealing with the
company to the fact that the liability of the members was limited.
12 RP Austin and IM Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (17th edn, 2018), [2.130].
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14 About Companies
Various reform proposals over the next six years resulted ultimately in the enactment
of the Companies Act 1862 (UK) (the 1862 Act), consolidating the procedures for
incorporation and winding up of companies and putting in place many of the key features
of modern company law. The 1862 Act was adopted by the Australian states as the model
for their own companies legislation and the position in England was therefore mirrored
in Australia. Companies formed under the 1862 Act, on which Australian company law is
substantially based, had many of the attributes of the modern commercial company.
[¶1-380] When were companies first used for small business?

The Chapter so far has discussed the historical development of the company as a means
of bringing together providers of capital (investors) with specialist business managers or
entrepreneurs in larger scale, collective enterprises. Typically this involved asking members
of the public for investment and required a separation of ownership of the enterprise
(which was in the hands of a large, fluctuating membership) and its management. Company
law developed in part for the protection of public investors and adopted the large-scale
collective enterprise as its model.
However, the attributes of companies, in particular the limited liability conferred
on their members, also made them an attractive form through which to carry on small
business. Typically a company formed to carry on a small business would not have public
investors, and would be controlled and managed by its main investor, often a person who
had perhaps conducted the business as a sole trader before its incorporation.
The fact that the ‘corporation aggregate’ model was adopted for company law was
reflected in the fact that the companies legislation required that companies have a certain
minimum number of members. Historically, incorporation required the coming together
or association of more than one person to form a company. This position has now been
reversed by statute (see below).
What was the significance of Salomon’s case?
It was not clear until the landmark English case of Salomon v Salomon & Co Ltd in 1897
that the benefits of incorporation would extend to incorporated small businesses that
were effectively under the control of a single entrepreneur. Salomon’s case is discussed in
detail below. A business formed and operated by Mr Salomon as a sole trader had been
transferred by him to a company which he had formed under the 1862 Act and in which
he was the major shareholder and controller. To meet the then statutory requirement that
a company have at least seven shareholders, shares were issued to other members of his
family, but those family members did not have any real interest in the business.
Mr Salomon transferred his business to the company in order, among other things, to
obtain limited liability. He intended that, if the business failed, his personal wealth would
not be put at risk as he would not be personally liable to satisfy the outstanding claims of
the business’s creditors.
The English Court of Appeal initially took the view that such an arrangement should
not attract all the benefits of incorporation (including limited liability for Mr Salomon
and the other family members). One judge said:
¶1-380

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About Companies15
It would be lamentable if a scheme like this could not be defeated. If we were to permit it
to succeed, we should be authorising a perversion of the Joint Stock Companies Acts …
The transaction is a device to apply the machinery of the [Act] to a state of things never
contemplated by that Act — an ingenious device to obtain the protection of that Act in a
1
way and for objects not authorised by that Act, and in my judgment in a way inconsistent
with and opposed to its policy and provisions.13
Another judge took the view that:

If the legislature thinks it right to extend the principle of limited liability to sole traders
it will no doubt do so, with such safeguards, if any, as it may think necessary. But until the
law is changed such attempts as these ought to be defeated wherever they are brought to
light. They do infinite mischief; they bring into disrepute one of the most useful statutes
of modern times, by perverting its legitimate use, and by making it an instrument for
cheating honest creditors.14
Therefore, the Court of Appeal held that Mr Salomon and his company should not
be accorded the privileges of incorporation. Mr Salomon appealed and the court’s decision
was reversed by the English House of Lords. The House of Lords said, in relation to small
business:
It has become the fashion to call companies of this class ‘one man companies’. That is a
taking nickname, but it does not help one much in the way of argument. If it is intended
to convey the meaning that a company which is under the absolute control of one person
is not a company legally incorporated, although the requirements of the Act of 1862 may
have been complied with, it is inaccurate and misleading: if it merely means that there
is a predominant partner possessing an overwhelming influence and entitled practically
to the whole of the profits, there is nothing in that that I can see contrary to the true
intention of the Act of 1862, or against public policy, or detrimental to the interests of
the creditors.15
The final decision was that the benefits of incorporation were capable of extending
to small, private companies, even though such companies arguably were not the type
of business which the companies legislation was intended to facilitate. The decision in
Salomon’s case confirmed the availability of the limited company as a vehicle for both large
and small business, whether or not it involved public investors.
When was the concept of a proprietary company introduced?
Around the same time that the decision in Salomon’s case confirmed that the benefits of
incorporation were available to small, privately owned businesses, the Victorian Parliament
passed the first legislation in the common law world providing for different, less onerous
regulation of these types of companies. New disclosure requirements designed to protect
public investors, introduced into Victorian law in 1896, were expressed not to apply to
proprietary companies. Proprietary companies are companies that have a limited number
13 [1895] 2 Ch 232 at 340–341, per Lopes LJ.

14 Ibid, per Lindley LJ.
15 [1897] AC 22 at 53.
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16 About Companies
of members and that are not permitted to ask the public for investment (except by way
of crowd funding platforms, and then subject to certain requirements). The proprietary
company is by far the most common type of company in Australia.
When did it become possible to have a one-person company?
In 1998, the then Corporations Law (now the Corporations Act) was amended to enable
the use of companies for small, one-person businesses. Since 1 July 1998 it has been
possible to form a company that has only one participant. These are referred to in this
book as single director/shareholder companies. These companies are discussed further in
Chapter 5. The introduction of the single director/single shareholder company represents
the final departure from the concept, reflected in the views of the Court of Appeal in
Salomon’s case, that association of at least two members is necessary to create a company.
SOME KEY TERMS
[¶1-500] What do these terms mean?
Set out below is a summary of some of the terms and concepts introduced in this Chapter.
Company is a particular type of corporation that is formed by being registered under
the Corporations Act. The company is the most common form of corporation used
in Australian business.
Company limited by shares is a particular type of company. In a company limited by
shares, members have purchased shares by making a contribution to the company. If
the company becomes insolvent, the members generally are not required to make any
further contribution to meet the company’s debts.
Corporation or body corporate is the general term used to describe an artificial person
created by law to hold property and legal rights and incur obligations. A corporation
is treated as a separate person from those who own shares in it or participate in its
operation. This means the identity of the corporation is not affected by changes in the
identity of those persons.
Corporations Act (the Corporations Act 2001 (Cth)) is the statute governing the
creation, operation and termination of companies in Australia.
Director is a person appointed in accordance with the company’s internal governance
rules to manage the business of the company. In small companies, the members may
all be directors of the company, but in large public companies, with thousands of
members, this will not be the case.
External administration refers to the situation where management of the company
or its assets has passed from the company’s board of directors to an external person
such as an administrator, receiver or liquidator. Generally this occurs as a result of the
company being insolvent or being wound up.
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About Companies17
Insolvency means that the company is unable to pay all its debts as and when they
become due for payment.
Internal governance rules are the rules agreed by the members of the company that 1
govern matters connected with its internal administration, such as arrangements for
appointing and removing directors, arrangements governing directors’ meetings and
members’ meetings, details of the rights attaching to shares and procedures for the
transfer of shares. A company may use the replaceable rules (which are a set of rules
contained in the Corporations Act) as its internal governance rules, or replace some
or all of those rules with a constitution approved by the members.
Limited liability is a term used to describe the fact that shareholders in a company
limited by shares are not liable to contribute additional money to meet the company’s
debts, beyond the amount initially agreed to be paid for the share.
Listed company is a company that has its shares listed for quotation on the Australian
Securities Exchange (ASX). This means that members of the public can buy and sell
shares in the company through the stock market operated by the ASX. All listed
companies are public companies.
Proprietary company is one type of company — public companies are the other.
Proprietary companies are usually not permitted to have more than 50 members or
to raise money by conducting a public offer of shares (the exception is under the
crowd-sourced equity funding rules). In return for accepting these restrictions,
proprietary companies are exempted from many company law rules that are designed
to protect investors who do not participate actively in the operation of the business.
Most Australian companies are small businesses and most of these are proprietary
companies.
Public company is any company that is not a proprietary company. Public companies
have wider powers to raise capital from members of the public than proprietary
companies, but are subject to more onerous regulation.
Secretary is a person responsible for performing certain administrative functions

required by law in connection with the company. The secretary is appointed by the
directors.
Share is a claim against the company issued by the company to a person who
contributes equity capital to the company. It is a form of personal property that
represents an asset in the hands of the person who owns it. A person who owns a
share in a company is called a shareholder or a member. The members are the ultimate
owners of the company. Shares have rights attaching to them that may give the
holder the right to share in the company’s profits and to have some say in certain
fundamental decisions affecting the company.
Winding up refers to the process by which a liquidator realises and distributes all of a
company’s property in order for the company’s existence to be terminated.
Commercial
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CHAPTER 2
Company Law

Introduction¶2-001
Scope and Operation of Company Law

What is ‘company law’? ¶2-100
What does company law cover? ¶2-120
How is company law enforced? ¶2-140
What are the main sources of company law? ¶2-160
The Corporations Act
What is the Corporations Act? ¶2-200
What is the background to the Corporations Act? ¶2-220
What does the Corporations Act contain? ¶2-240
Other Sources of Company Law

Overview¶2-300
What is case law? ¶2-310
What are the Corporations Regulations? ¶2-320
What is the ASIC Act? ¶2-330
Why are ASIC Regulatory Guides and Instruments
important? ¶2-340
Why are accounting standards relevant? ¶2-350
What are the ASX Listing Rules? ¶2-360
Applying Company Law to Legal Problems

How do you use company law to answer a legal question? ¶2-400
Regulation of Companies
Overview¶2-500
¶1-500
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Company Law19
What is ASIC? ¶2-520

What is ASX’s regulatory role? ¶2-540
What courts have jurisdiction in corporations matters? ¶2-560
2
This Chapter is an introduction to company law. It begins by looking at the scope of
company law, and summarising the issues addressed by company law and the nature of the
obligations and duties created by it.
The second part then goes on to identify the main sources of the legal rules governing
companies and their participants. It includes a detailed treatment of the history, structure
and effect of the Corporations Act 2001 (Cth) (Corporations Act), which is the main statute
governing companies in Australia.
The third part gives some guidance about how to apply the legal rules to a particular
fact situation. It includes some guidance for students of company law about how to
approach problems and questions in class situations and assessment tasks.
The fourth part looks at the way companies are regulated. In particular, it looks at
the role of the Australian Securities and Investments Commission (ASIC), the Australian
Securities Exchange (ASX) and the courts in regulating companies.
SCOPE AND OPERATION OF COMPANY LAW

[¶2-100] What is ‘company law’?
Company law:
• provides for the formation (and, ultimately, termination) of companies
• confers on companies some special attributes (for example, separate legal personality)
• sets out the rules governing the duties of, and relationships between, participants in
companies (for example, the relationship between directors and shareholders)

• facilitates dealings between companies and outsiders (an example of an outsider is a
customer of the company).
These functions of company law are discussed in this Chapter.
As legal entities, companies are subject to the law in the same way as all other legal
persons. This means that laws such as criminal law, property law, contract law, tort law,
trade practices law and environmental law apply to companies (sometimes with some
necessary modifications to take account of the fact that companies are artificial persons).
The fact that these laws apply to companies does not make them part of what we generally
consider to be company law.
[¶2-120] What does company law cover?

The aspects of company law that are dealt with in this book can, for the most part, be fitted
into one of the following four broad categories. Company law deals with:
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20 Company Law
• the creation and termination of companies, and confers on companies and their
participants particular legal characteristics (separate legal personality, legal capacity
and limited liability).
• the relationships (i) between participants in companies (members, directors and other
officers of the company, and sometimes employees), and (ii) between the company and
its participants (in particular, rules relating to members’ rights, directors’ duties and
other matters relating to the management of companies). However, company law is
not the only law that deals with the relationships between participants in companies.
For example, the relationship between employees and their company is regulated by
industrial relations law. (Industrial relations law deals with the working conditions of
employees, including the hours to be worked and the wages to be received.)
• corporate finance. The law sets out special rules that enable companies to raise capital,
including equity capital (raised through the issue of shares by the company) and debt
finance.
• the implications for those outside companies of dealing with a company rather
than an individual. A person may deal with a company voluntarily, for example, by
entering into a contract with the company. A person may also deal with a company
involuntarily, for example, where the person is the victim of a crime or an act of
negligence committed by an officer of the company. There are rules that help determine
when the actions of the officer will be treated as the actions of the company so that
the company is liable to the person affected by the crime or act of negligence.
These four broad themes are reflected in the structure of this book.
How does company law provide for the formation and termination
of companies, and confer their characteristics?
Through the first set of rules, company law provides for the formation and termination
of companies. As companies are artificial legal persons created and extinguished by the
state, laws are necessary to confer or withdraw their existence. The special characteristics
of companies — separate legal personality, corporate capacity and the limited liability
of members — exist because they are provided for by company law. Company law both
confers, and defines the limits of, these characteristics.
How does company law govern the internal management of companies?
The second set of rules governs how the members of the company relate to each other
and to the directors and other officers. The members are the people who own shares in the
company (in the case of a company with share capital). These rules determine the rights
and duties of each type of participant.
Company law establishes the rules for managing companies, providing for the
appointment of officers to run the company, prescribing the respective decision-making
powers of members and directors, and imposing duties on officers in the performance
of their functions and limitations on members’ exercise of their voting powers in certain
circumstances.
In addition, it governs the mechanics of running a company (including the procedures
for calling and conducting meetings of directors and of members), particularly through
¶2-120

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Company Law21
providing the framework for the operation of the company’s internal governance rules. It
also provides for sanctions and remedies where these rules are contravened.
How does company law apply to corporate finance?
Companies are differently positioned from other entities in the way they raise capital.
A company can raise equity capital through the issue of shares, which may be ordinary
2
shares or shares in a class with different or special rights attached. Shares may be issued
fully or partly paid. Company law rules allow for the issue of shares and provide for the
maintenance of the company’s issued capital during its life.
Company law also includes special rules that apply to companies as borrowers. In
particular, it provides for the issue of debentures by companies. Company law and the
related area of corporate insolvency law affect the relationship between companies and
their creditors.
How does company law affect dealings between companies and outsiders?
The fact that companies exist as separate legal persons raises particular issues for those
who deal with them. These are addressed by the third set of rules. These rules operate as an
interface between the company and the operation of the general law.
A person may come to deal with a company voluntarily, where the person elects to
enter into a legal relationship with that company (say through entering into a contract
with the company). A person may involuntarily come to deal with the company where
the company commits a wrong that affects the person and the wrong is capable of legal
remedy. For example, a person who lives next door to a company’s premises may be affected
by a breach by the company of laws preventing pollution.
Because companies, as artificial persons, can only act through individuals, the issue for
the person having dealings with the company is: when is that individual’s actions treated
as actions of the company, so the company is liable for those actions? This is sometimes
referred to as the question of attribution. This is the central concern of the fourth group
of rules.
[¶2-140] How is company law enforced?

Company law operates in some cases to impose duties or obligations on people and
companies. If a person or company breaches one of these rules of company law then,
depending upon which rule is breached, one or both of the following may result:
• The person may be ordered to change their behaviour, or may be subject to a public
law sanction, such as a fine or a term of imprisonment (companies may also have to
pay fines if they breach some rules). A public law sanction is imposed by the state.
• The person or company may be stopped from engaging in the wrongful conduct or
required to do some further act or thing, or required to compensate any person harmed
by the breach, for example, by paying damages. This is a private law remedy — that is,
company law confers private rights on individuals that can be enforced through the
courts.
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22 Company Law
How can company law impose both public and private sanctions?
In some cases, where a person contravenes a part of company law, they can be punished by
the state (in the form of fines or imprisonment). This is because contravention of certain
provisions of the Corporations Act is a criminal offence.
Other provisions of the Corporations Act are civil penalty provisions. Where a
person contravenes a civil penalty provision, they may be subject to criminal prosecution
(if they did so with dishonest intent) or to a civil penalty order (in other cases), which is
also a form of public law or state sanction.
Breaches of certain provisions of the Corporations Act may also result in a person
being banned from participating in the management of companies for a specified period.
These banning orders operate both to protect the public from being exposed to dealing
with people who have a history of unlawful conduct in managing companies, and as a form
of state sanction.
In many cases where a criminal or civil penalty sanction attaches to a contravention,
and in others where it does not, breach of a rule of company law may give rise to a right,
in the person harmed by the breach, to compensation.
Alternatively or in addition to a right to some form of compensation, a person affected
by an act or omission of a person that breaches company law rules may be entitled to ask
the court for orders requiring or prohibiting particular conduct. These are examples of
private law rights or remedies, in that a person affected does not have to rely on the state
to enforce the obligation on their behalf.
Sanctions are discussed in more detail in Chapter 15.
An example of the application of public and private sanctions
The following is an example of the application of public and private law sanctions to a
person who contravenes a requirement of company law.
Example
Assume a director of a company breaches the rule of company law prohibiting

her from making improper use of her position to gain an advantage for herself.1
If she does so dishonestly, the director commits a criminal offence and can be
fined or imprisoned or both.2 If she does so unintentionally, for example thinking
that what she did was in the best interests of the company, then she can be made
the subject of a civil penalty order and required to pay a pecuniary penalty to the
government. This is another form of public law sanction.3 Finally, if the company
has been harmed by her actions, it can seek damages or an account of profits from
the director, to compensate it for the harm it has suffered or the benefit of which it
1 This is prohibited by s 182 and is a breach of the director’s fiduciary obligations to the company.
2 This contravenes s 184 and is an offence. The consequences of committing an offence under the Corporations Act
are set out in Pt 9.4 of the Corporations Act.
3 The civil penalty provisions are contained in Pt 9.4B of the Corporations Act.
¶2-140

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Company Law23
has been deprived.4 It can also seek orders that the director stop doing the harmful
thing. These are private law remedies.
So, company law can work as both a source of private law rights (that is, confer
rights on private citizens that can be enforced by them in the manner of, say, a contract)
and public law duties (that is, impose requirements on people that can be enforced by the
state).
2
[¶2-160] What are the main sources of company law?
Company law is derived from a number of different sources. This means that it may be
necessary to look in more than one place to see if a particular action or proposal is affected
by legal rules. Important sources of company law include:
• the Corporations Act
• case law
• other sources of law, including the Corporations Regulations; the Australian Securities
and Investments Commission Act 2001 (the ASIC Act); ASIC exemptions, modifications
and guidelines; the Australian Accounting Standards Board’s Accounting Standards
and the ASX Listing Rules.
These sources of law are discussed in ¶2-200–¶2-360.
THE CORPORATIONS ACT
[¶2-200] What is the Corporations Act?
The main statute regulating companies in Australia is the Corporations Act. The
Corporations Act contains many of the key legal rules that govern or facilitate the
formation, management, operation and termination of companies.
The Corporations Act also regulates takeovers, provides for the registration and
operation of managed investment schemes, and sets out the licensing and disclosure rules
that apply to financial products, financial services and financial markets. These matters are
related to, but not considered part of, the ‘core’ of company law. An introduction to these
related matters is contained in Chapters 21 and 22.
The Corporations Act commenced on 15 July 2001, replacing the former Corporations
Law (see ¶2-220).
[¶2-220] What is the background to the Corporations Act?

Chapter 1 looked at the historical development of companies. Here, we look at the history
of company law statutes in Australia. The Corporations Act is the most recent in a series
of statutes governing companies which have moved over time towards a national approach
to company law.
4 Under an action for breach of fiduciary duty or pursuant to Pt 9.4B. See Chapter 15 for more detailed discussion.
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24 Company Law
Some key milestones in the evolution of Australian companies legislation are:

• the introduction of separate company law legislation in each state, based on the
English Companies Act of 1862
• the development of the Uniform Companies Acts of 1961
• the introduction of the cooperative scheme legislation in 1981
• the commencement of the Corporations Law in 1991
• the commencement of the Corporations Act in 2001.
These important stages in the development of company law are outlined below.
The early state laws governing companies
Until 2001, the power to make laws relating to companies belonged to the government of
each Australian state and, in the case of the territories, to the Commonwealth Parliament.
As noted in Chapter 1, the historical precursor to the Corporations Act was the
English Companies Act of 1862. By the end of the 19th century, each of the Australian
states had enacted companies legislation based in part on the 1862 Act, although the
precise terms of the statutes differed in each case and some contained unique features, such
as the special provisions relating to proprietary companies introduced into the Victorian
legislation in 1896.
Throughout the first half of the 20th century, each state developed and amended
its own legislation, so that by the end of the 1950s the regulation of companies in the
different states was not uniform.
The Uniform Companies Acts of 1961
As companies expanded their operations beyond state and territory boundaries, it was
felt that this lack of uniform regulation resulted in inconvenience and cost to business.
Attempts were made to overcome these problems through uniform national legislation.5
In the early 1960s, the governments of the various states each agreed with the
Commonwealth to enact uniform companies legislation. This was done progressively
during 1961–1963, with the new legislation coming into force on 1 July 1962 in Victoria,
New South Wales, Queensland and the Australian Capital Territory, on 5 October 1962
in Western Australia, on 1 January 1963 in Tasmania, on 1 July 1963 in South Australia
and the Northern Territory, and on 1 July 1964 in the Territory of Papua and New Guinea,
which was not yet independent of Australia.
Interestingly, this uniform legislation went on to provide the model for the Companies
Act 1965 of Malaysia and the Companies Act 1967 of Singapore.
5 The following discussion shows that, in Australia, uniform national regulation of companies has been seen as an
important goal since the 1950s, and the history of company law since that time shows increasing moves towards
national legislation. It is therefore interesting to note that, in the United States of America, national company law
is not considered important. Each of the 50 American states has its own distinct company law, although American
securities laws (governing the issue of securities to the public and secondary trading in securities, and imposing
certain investor protection requirements on companies that have issued securities to the public) are federal laws.
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Company Law25
This legislation operated throughout the 1960s and 1970s. The administrative
functions connected with company law were carried out by state and territory Registrars of
Companies, which were part of the state and territory (rather than national) bureaucracy.
During the late 1960s and the 1970s, company law, and in particular securities law,
continued to expand and develop. Important reforms adopted by the Commonwealth
and most of the states in 1971–1972 aimed to increase the protection afforded to public
investors in companies through rules governing accounts and audit, takeovers, and trading
in securities on the basis of non-public information.6 2
The sustained boom in mining shares during the late 1960s and its effect on the
operation of Australian stock markets revealed improper trading practices that led to
substantial amendment to the laws governing trading in securities, including the enactment
of Securities Industry Acts in a number of states. The regulatory authorities expanded their
role, from merely operating a registry of companies to taking an active role in policing
conduct. In many states, this expanded role was accompanied by a change of name, from
Registrar of Companies to Corporate Affairs Commission.
Despite its title, the uniform companies legislation of the 1960s was not uniform.
Further, companies having dealings in more than one state or territory were required to
deal separately with the different regulatory authorities in each place. In many cases the
procedures and policies of each regulator were different. This was overcome to some degree
by the establishment of the Interstate Corporate Affairs Commission in 1974, which
provided for a cooperative approach to regulation between the Commonwealth, New
South Wales, Victoria, Queensland and (from 1975) Western Australia. However, other
attempts by the Labor Government during 1972–1975 to introduce national regulation of
companies did not come to fruition.7
The cooperative scheme 1981–1991
Following the change of federal government in 1975, attempts to move towards more
uniform national regulation continued. However, where it had been the Labor Party’s aim
to transfer responsibility for company law to the Commonwealth Parliament, the Coalition
Government favoured an approach under which the states retained responsibility for
company law but enacted and administered it on a more cooperative, coordinated basis. In
1978 a formal agreement was reached between the Commonwealth and the governments
of each of the states which provided that:
• the Commonwealth would enact legislation to serve as the model for uniform
company laws to be enacted by each of the states
• a national regulatory body, the National Companies and Securities Commission
(NCSC), would be established. The state corporate affairs commissions would operate
6 These amendments followed from the report of the sub-committee of the Company Law Advisory Committee,
chaired by Richard Eggleston. The Eggleston Committee was established in 1967 after the collapse of a number of
high-profile finance companies that had borrowed heavily from the public through the issue of debentures (which
are a type of security).
7 These included the proposed Corporations and Securities Industry Bill and National Companies Bill.
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26 Company Law
as delegates of the NCSC and remain responsible for much of the routine work of
company registration.
The agreement provided for the NCSC to be accountable to the Ministerial Council,
which was to be made up of representatives of the Commonwealth and the states. The
Ministerial Council would also be responsible for law reform and questions to do with the
administration of the legislation.
This arrangement was known as the cooperative scheme. A package of uniform
legislation which included the Companies Act 1981 (Cth) and corresponding Codes
commenced in all states and territories except the Northern Territory on 1 July 1981, and
in the Northern Territory on 1 July 1986.
When the Labor Government was returned in 1986, it resumed its push for
Commonwealth regulation of companies. The cooperative scheme, although reasonably
successful, had its critics. Obtaining agreement of the Ministerial Council to amendments
to the law made law reform difficult. Some people felt that there were problems of
ministerial accountability in the structure because of the number of Commonwealth and
state ministers involved in the cooperative scheme. The NCSC was under-resourced and it
was believed that the distribution of functions between the NCSC and the state corporate
affairs commissions led to duplication of functions and inefficiency.
In 1989 the Commonwealth Parliament passed the Corporations Act 1989, by which
it attempted to exercise power to legislate on a national basis with respect to companies.
The 1989 legislation was challenged by the states in the High Court on the basis that the
Commonwealth did not have power under the Commonwealth Constitution to pass it.
That challenge was successful.
The Corporations Law 1991
Following the successful High Court challenge to the 1989 Commonwealth Act, the
Commonwealth negotiated with the states to achieve a cooperative system of regulation
of companies that gave the Commonwealth increased powers over amendments to the
law and responsibility for a unitary regulatory structure. Agreement was reached between
the Commonwealth and state ministers at Alice Springs on 29 June 1990. Under that
agreement, the following arrangements were put in place:
• Each state agreed to enact legislation adopting an amended Corporations Act 1989 as
its state corporations legislation. The adopted legislation was called, in all states and
territories, the Corporations Law.
• Responsibility for regulation of companies and securities was transferred to the
Australian Securities Commission (now called the Australian Securities and
Investments Commission (ASIC)), which is part of the Commonwealth bureaucracy.
• Provisions were included in the legislation to make the Corporations Law operate as
if it were a Commonwealth statute of national application. These included provisions
applying Commonwealth law relating to criminal procedure and administrative review.
Provisions corresponding to the Commonwealth Acts Interpretation legislation were
included in the Corporations Law to ensure that it was interpreted in accordance
with the principles that govern the interpretation of Commonwealth law.
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Company Law27
• Arrangements for amending the law were altered to give the Commonwealth Minister
greater control. The Alice Springs agreement provided for the Commonwealth
Minister to have the power to propose amendments, and gave that minister four votes
and a casting vote on the Ministerial Council to approve those amendments. Each
state minister had only one vote. Amendments to the Corporations Law affecting
national markets (that is, takeovers, fundraising by companies, and the regulation of
the securities and futures markets) did not require the approval of the Ministerial
Council. 2
After its commencement in 1991, the Corporations Law was substantially amended
on a number of occasions. Major amending Acts include the Corporate Law Reform Act 1992
(Cth), the Corporate Law Reform Act 1994 (Cth), the First Corporate Law Simplification Act
1995 (Cth), the Company Law Review Act 1998 (Cth) and the Corporate Law Economic
Reform Program Act 1999 (Cth).
The Corporations Act 2001
The constitutional validity of the cooperative arrangements underpinning the Corporations
Law was cast into doubt in 1999/2000 by a series of decisions of the High Court of
Australia that included Re Wakim8 and R v Hughes.9
In Re Wakim, the High Court held that the cross-vesting arrangements in the
Corporations Law (which allowed the Federal Court and the state Supreme Courts to
hear corporations matters) were incapable of conferring jurisdiction on the Federal Court.
This had the effect of defeating the cross-vesting arrangements set out in the
Corporations Law.
In Hughes, a person charged with an offence under the Corporations Law as it applied
in Western Australia (that is, under the conferring Corporations (Western Australia) Act
1990 (WA)) argued that the Commonwealth Director of Public Prosecutions (the DPP)
did not have the power to prosecute him under what was, essentially, state law.
The High Court held that the DPP was competent to prosecute Hughes under the
Corporations Law because of specific Commonwealth heads of power in the Australian
Constitution. Significantly, Hughes’s charges (which related to an investment scheme

involving the United States) were supported by the Commonwealth’s power to regulate
trade and commerce with other countries and extraterritorial matters. The decision left
open the possibility that, without the link to a direct Commonwealth head of power, a
conferral of authority to the Commonwealth DPP (or other authority such as ASIC) may
prove to be invalid. It may not be possible to establish such a link in the absence of special
facts (such as the overseas transactions present in the Hughes case).
The court noted that a Commonwealth head of power supporting a provision in
the Law ‘will be true of perhaps the very great majority of offences created by the state
legislation which adopts the Law’. But offences such as those relating to trusts and the
formation of companies (unsupported by a Commonwealth head of power) may become
8 (1999) 17 ACLC 1,055; 163 ALR 270.

9 (2000) 18 ACLC 394; 171 ALR 155.
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28 Company Law
unenforceable at a federal level. In fact, past action by ASIC, such as company registration
and granting exemptions or modifications, could be invalid, which in turn could have
implications for the validity of convictions or civil penalties.
To resolve the uncertainty over the constitutional validity of the Corporations Law,
the state Attorneys-General agreed in August 2000 to refer to the Commonwealth the
power to make laws with respect to the matters contained in the then Corporations Law
and Financial Services Reform Bill. The Commonwealth Parliament has power under
s 51(xxxvii) of the Constitution to make laws with respect to ‘matters referred to the
Parliament of the Commonwealth by the Parliament or Parliaments of any State or States,
but so that the law shall extend only to States by whose Parliament the matter is referred,
or which afterwards adopt the law’.
Under the agreement reached between the joint Standing Committee of Attorneys-
General and the Ministerial Council for Corporations, the substance of the Corporations
Law scheme and the powers of Commonwealth authorities to carry out the scheme were
referred to the Commonwealth. This provided a constitutional basis for the Commonwealth
Parliament to enact the Corporations Act 2001 as a Commonwealth law applying of its own
force throughout Australia.
The new Corporations Act came into effect on 15 July 2001, replacing the Corporations
Law. As a result, for the first time in its history, Australia now had a single national law
governing the formation, operation and external administration of companies.
In general, the substantive provisions of the Corporations Act on its enactment were
identical to the former Corporations Law. However, provisions of the Corporations Law
that were included to ensure that it operated as a single law across Australia were removed,
as they were no longer required. Some further changes were made resulting from the fact
that the Corporations Act is a Commonwealth Act, while the Corporations Law was
state law.
It is important to understand that the Commonwealth Parliament’s power to make
laws with respect to companies rests for the most part (although not entirely) on the
referral of power made by the states for the purposes of s 51(xxxvii) of the Commonwealth
Constitution. The referral is limited both in its scope and its duration. The referral allows
the Commonwealth to enact laws in substantially the form of the then Corporations Law
and the Australian Securities and Investments Commission Act 2001 (the ASIC Act — see
below), and to amend those laws in relation to ‘the formation of corporations, corporate
regulation and the regulation of financial products and services’.10 However, the referral
contains provisions that mean that the Commonwealth Parliament cannot use the powers
referred to it to make laws with respect to industrial relations. Also, the referral is for a
defined period, having been put in place initially for five years. It has been extended from
time to time, most recently in 2016.
The referral of power that underpins the Corporations Act operates on the framework
of an inter-governmental agreement made in December 2001. That agreement was
10 See s 4(1) of the Corporations (Commonwealth Powers) Act 2001 of each state. The Corporations (Commonwealth
Powers) Act is the legislation under which the referral is made.
¶2-220

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Company Law29
formalised as the Corporations Agreement 2002. Under the inter-governmental agreement,

ASIC remained, as it had been under the Corporations Law regime, solely responsible for
the general administration of company law (see below). The agreement also provided for
the continued involvement of a Ministerial Council, made up of representatives of the
state and territory governments and the Commonwealth Government. The Ministerial
Council has the right to be consulted on amendments to the Corporations Act. Generally,
amendments to the Corporations Act cannot be made without the approval of at least
three state or territory ministers.11 2
As Commonwealth law, the Corporations Act operates against the background
of other Commonwealth legislation on criminal law, administrative law and statutory
interpretation which applies to Commonwealth legislation generally. (This is sometimes
referred to as ‘adjectival law’.) For example, the Corporations Act is interpreted
in accordance with the Commonwealth Acts Interpretation Act 1901. Similarly, the
Commonwealth Crimes Act 1914 and the Criminal Code Act 1995 apply in relation to
offences against the Corporations Act. The administration of the Corporations Act is
subject to Commonwealth administrative laws including the Administrative Decisions
( Judicial Review) Act 1977, the Freedom of Information Act 1982 and the Privacy Act 1988.
The Corporations Act was substantially amended in 2001 by the Financial Services
Reform Act 2001 and related legislation (FSRA) and in 2004 by the Corporate Law Economic
Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9).
The Corporations Act and the Corporations Regulations are amended quite
frequently. For example, in 2018, the Corporations Act was amended several times,
including by the Treasury Laws Amendment (Putting Consumers First—Establishment
of the Australian Financial Complaints Authority) Act 2018; Treasury Laws Amendment
(2018 Measures No. 1) Act 2018; Treasury Laws Amendment (2017 Measures No. 5) Act
2018; Corporations Amendment (Asia Region Funds Passport) Act 2018; and Corporations
Amendment (Crowdsourced Funding for Proprietary Companies) Act 2018The titles of these
amending Acts refer to the substantial reforms they contain. Keeping up with developments
in the law is a significant challenge for company officers and their advisers.
[¶2-240] What does the Corporations Act contain?

The Corporations Act provides for the formation of Australian companies and the
registration of foreign companies operating in Australia. It also regulates fundraising by
companies, company management, reorganisations, takeovers, and the liquidation and
winding up of companies. The Corporations Act is also the statute that regulates the
operation of financial markets, the provision of financial services and the offer of financial
products in Australia.
The Corporations Act is an extremely long and complicated statute, with over 3,000
separate sections.
11 The Ministerial Council’s approval is not required for amendments to specified provisions of the Corporations Act
dealing with financial products and services, including managed investment schemes, takeovers, fundraising, and
the regulation of the securities and futures industries. However, the agreement does allow the Ministerial Council
to veto changes in these areas in some cases.
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30 Company Law
Does the Corporations Act apply to all kinds of companies?

The Corporations Act contains rules relating to all kinds of companies, so that the rules
governing large public companies like Commonwealth Bank of Australia Limited are
contained in the same statute as the rules governing small proprietary companies. Further,
rules regulating financial markets and the conduct of financial services providers such as
brokers, dealers and advisers are also included in the Corporations Act. Rules about the
sale of financial products as diverse as home insurance, bank accounts, superannuation
products, and securities and futures are also included.
How is the Corporations Act divided up?
The Corporations Act is divided into 29 separate Chapters. They are set out in this table:
Table 2.1 Chapters of the Corporations Act
Chapter 1 Introductory
Chapter 2A Registering a company
Chapter 2B Basic features of a company
Chapter 2C Registers
Chapter 2D Officers and employees
Chapter 2E Related party transactions
Chapter 2F Members’ rights and remedies
Chapter 2G Meetings
Chapter 2H Shares
Chapter 2J Transactions affecting share capital
Chapter 2L Debentures
Chapter 2M Financial reports and audit
Chapter 2N Updating ASIC information about companies and registered schemes
Chapter 2P Lodgments with ASIC
Chapter 5 External administration
Chapter 5A Deregistration and transfers of registration of companies

Chapter 5B Bodies corporate registered as companies, and registrable bodies
Chapter 5C Managed investment schemes
Chapter 5D Licensed trustee companies
Chapter 6 Takeovers
Chapter 6A Compulsory acquisitions and buy-outs
Chapter 6B Rights and liabilities in relation to Ch 6 and 6A matters
Chapter 6C Information about ownership of listed companies and managed investment schemes
Chapter 6CA Continuous disclosure
Chapter 6D Fundraising
Chapter 7 Financial services and markets
Chapter 8 Mutual recognition of securities offers
Chapter 8A Asia Region Funds Passport
Chapter 9 Miscellaneous
Chapter 10 Transitional provisions
¶2-240

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Company Law31
Chapters 2A–2P and 6CA of the Corporations Act, along with Ch 1 (which contains
rules for interpreting and applying the Act) and 9 (which includes some of the consequences
of contravening the Act), make up the core of Australia’s company law and are the focus
of this book. The operation of Ch 6, 6A, 6B, 6C, 6D and 7 (takeovers, fundraising, and
financial services and markets) is explained in Chapters 21 and 22. Chapters 24 and 25
explain the key features of Ch 5 (external administration).
2
OTHER SOURCES OF COMPANY LAW
[¶2-300] Overview
In addition to the Corporations Act, company law rules can be found in:
• case law (or ‘precedent’)
• the Corporations Regulations
• the ASIC Act
• ASIC exemptions, modifications and guidelines
• the accounting standards
• the ASX Listing Rules.
Each of these important sources of company law is described below.
[¶2-310] What is case law?

Case law is another important source of the rules that govern companies. Australia has a
‘common law’ system of law in which the recorded decisions of courts operate as binding
statements12 of the way in which statutory provisions are to be interpreted. Those decisions
may also themselves be a source of legal rules not recorded or recorded fully in legislation.13
That is, case law (or ‘precedent’) can be a source of both:
• additional binding rules of law that are not contained in the Corporations Act
• binding statements governing interpretation of the provisions of the Corporations  Act.
How do we use case law to find legal rules?

Many students have difficulty using case law to interpret legislation or to find additional
legal rules. Under the Australian system of law, judges can only make decisions on the
issues brought before them by the parties to the litigation and on the particular facts of
12 Under the doctrine of ‘precedent’, a decision of a superior court (that is, a court ranked above another in the
hierarchy of courts) binds a lower court. This means that, if a judge or panel of judges in a superior court has stated
that, for example, a provision of a statute should be interpreted in a particular way, judges in lower courts must also
adopt that interpretation. The High Court of Australia is the most superior of all Australian courts. Its decisions
bind all other Australian courts.
13 The process of recording legal rules in legislation is called ‘codification’. Civil law systems such as those found in
many European and Asian countries have fully or almost fully codified laws.
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32 Company Law
the case presented to them.14 The system is an adversarial one, in which the parties to
the litigation are responsible for discovering and presenting the facts to the court, and
preparing arguments about the way in which the law should be applied.
The judgment will generally contain an outline of the facts presented to the judge,
a summary of the opposing legal arguments put by the parties, and the judge’s decision
on what the correct law is and how it should be applied to the particular facts before the
court. The judge’s decision is only a statement of the law as it applies to the particular facts
before the court.
In later cases that deal with similar issues, lawyers take the reasoning applied by the
judge in the earlier judgment and argue either that the facts of the later case are so similar
to those in the earlier judgment that the same outcome should result, or that the facts are
so different that a different approach should be adopted.15
Case law therefore operates as a guide to what the law is, or how it should be applied,
when the facts in issue are similar to the ones on which an earlier, binding decision has
been reached.
Some important characteristics of case law
Case law is ‘reactive’ in the sense that courts must wait for parties who have a disagreement
to come before them to ask for an adjudication on an issue. This means its coverage is
essentially piecemeal — that is, if no one has brought a dispute on an issue before a court,
there will be no applicable case law. This has two important implications for company law:
1. Company law by its nature often involves commercial disputes. Because of delays and
costs in litigation, commercial parties will often prefer to come to an arrangement
privately to settle disputes without going to court.
2. There is often a considerable delay between the time at which a new provision is
included in the Corporations Act and the time at which (if ever) it comes before the
courts for interpretation.
As seen throughout this book, there are a number of key provisions of the Corporations
Act on which there is little or no applicable case law.
[¶2-320] What are the Corporations Regulations?

Additional rules, including rules relating to more mechanical, administrative matters,
are set out in the Corporations Regulations. The Corporations Regulations are arranged
in Chapters that mirror those of the Corporations Act. The Regulations prescribe, for
example, the content of the various forms that are required to be lodged with ASIC or used
under the Corporations Act. However, the Regulations are not limited to administrative or
procedural matters and in some areas do affect the operation of the principal Act.
14 Sometimes judges will include in their reasons for judgment opinions about matters not directly in issue. For
example, a judge may express a view about what the applicable law would be if the facts of the case were different.
These statements are referred to as obiter dicta (that is, a remark made in passing) and are not binding (although they
may be persuasive) in later cases.
15 Alternatively, the lawyers may argue that the earlier judgment was incorrectly decided.
¶2-320

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Company Law33
[¶2-330] What is the ASIC Act?

The Australian Securities and Investments Commission Act 2001 (ASIC Act) is the Act that
establishes ASIC and confers upon it its powers to administer the Corporations Act and
police the activities of companies. ASIC’s role in the administration of company, securities
and financial services law is explained in ¶2-520 below.
2
The ASIC Act contains a number of important provisions relating to corporate
regulation, the financial reporting system and consumer protection in the financial sector.
In the area of corporate regulation, the ASIC Act provides for the establishment
and operation of ASIC, and confers upon ASIC its powers to undertake investigations
and gather information. It also establishes a number of bodies connected with the
administration of company law, including the:
• Parliamentary Joint Committee on Corporations and Financial Services (which
oversees the operations of ASIC)
• Takeovers Panel (which conducts hearings to determine if unacceptable conduct has
occurred in relation to takeovers and other acquisitions of shares)
• Companies Auditors and Liquidators Disciplinary Board (which deals with
disciplinary matters relating to the duties and functions of auditors and liquidators).
In relation to the financial reporting system, the ASIC Act facilitates the
development of accounting standards and auditing and assurance standards, and provides
for the operation of the:
• Financial Reporting Council (which is responsible for broad oversight of the
standard-setting process and monitoring the operation of accounting standards)
• Australian Accounting Standards Board (which makes accounting standards for use
by companies)
• Auditing and Assurance Standards Board (which makes auditing and assurance
standards).
The consumer protection laws governing the financial sector are contained in Div 2,
Pt 2 of the ASIC Act. The Part makes particular conduct in relation to financial products
and financial services unlawful — it covers (among other things) unfair contract terms,
unconscionable conduct, misleading or deceptive conduct, and unlawful sales practices.
The rules correspond in large part to the consumer protection laws that apply to the rest
of the economy (other than the financial sector) under the Australian Consumer Law.
ASIC has responsibility for regulation in this area in relation to the financial sector, while
the Australian Competition and Consumer Commission and the State and Territory Fair
Trading Offices look after the rest of the economy.
[¶2-340] Why are ASIC Regulatory Guides and Instruments

important?
In determining which rules apply to a proposed corporate action, the participants in, or
advisers to, a company may need to consider any exemptions from, modifications to, or
guidelines for interpreting the Corporations Act granted or laid down by ASIC.
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34 Company Law
ASIC modifications and exemptions

ASIC is given the power, under the Corporations Act, to modify the application of, or
grant exemptions from, certain parts of the Act to individual applicants or classes of
applicants. ASIC, in its discretion, can modify, or grant exemptions from, many provisions
of the Act, including those relating to:
• public issues of debentures, under Pt 2L.7
• financial reports and audit, under Pt 2M.6
• takeovers, under s 655A
• public issues of securities, under s 741.
The effect of an order made by ASIC under these powers is to alter the law as it
applies to the person the subject of the order. That is, the ASIC instrument has the effect
of amending the law in that particular situation.
ASIC has made over 100 instruments that alter the law in this way. Until 2015
these instruments were known as class orders but now they are called ASIC Legislative
Instruments. They apply, without the need for a separate application by each company, to
all companies falling within the class described. ASIC can also make ‘one-off ’ orders for
special relief on the application of a single company.
In ascertaining the rules that apply to a proposed corporate action governed by any of
these provisions, company participants and their advisers will need to determine whether:
• exemptions from or modifications of the relevant provisions have been granted by
ASIC instrument, or
• whether it is possible and desirable to apply to ASIC for relief from the operation of
those provisions in the company’s individual circumstances.
ASIC has issued Regulatory Guides that set out the policy guidelines in accordance
with which it will exercise its discretion in these matters.
ASIC Regulatory Guides
ASIC has issued a large number of policy documents and other guidance that, while not
having force of law, indicate the manner in which ASIC proposes to interpret the law and
exercise its regulatory powers and discretions. The Regulatory Guides are available on the
ASIC website at www.asic.gov.au.
[¶2-350] Why are accounting standards relevant?

As explained later in Chapter 17, companies are required to keep financial records relating
to their affairs, and some companies who are required to prepare financial reports (including
financial statements) have those reports audited, lodge copies of them with ASIC and
send copies to members.
Section 296 of the Corporations Act requires that, except in certain limited
circumstances, the financial report must comply with the accounting standards. The
accounting standards are defined in Pt 2M.5 of the Corporations Act and are standards
made by the Australian Accounting Standards Board (AASB).
¶2-350

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Company Law35
Knowing and understanding the accounting standards is important for reporting

companies, not only in the preparation of their financial reports but also in the planning
stage of corporate transactions.
[¶2-360] What are the ASX Listing Rules?

As noted in Chapter 1, some companies are ‘listed’ companies — that is, their securities
are listed for quotation on the public stock market conducted by the ASX. The ASX is
a private company (not a government body) that provides a trading facility for securities
2
issued by companies listed on it. Listing means that securities issued by the company can
be bought and sold by investors through a public and transparent market. The reasons for
listing and its consequences are discussed in Chapter 4.
When they list, companies agree as part of a contract with ASX that they will
comply with rules imposed under the ASX Listing Rules. These rules are additional to
those imposed on companies by the Corporations Act. The Listing Rules cover a variety
of matters, such as imposing additional disclosure requirements and imposing additional
requirements that a company must meet before the company enters into certain types of
transactions or issues new securities. The purpose of the Listing Rules is to ensure that the
market for listed companies’ securities is transparent, liquid and informed, and that the
interests of the companies’ public shareholders are protected.
Only listed companies and their participants (and in some cases, entities controlled
by listed companies) are required to comply with the Listing Rules.
The Listing Rules are ‘additional and complementary to companies’ common law and
statutory obligations’.16 If a company or its participants breach the Listing Rules, ASX can
remove or suspend that company’s securities from quotation.17
While the Listing Rules essentially operate as private law that is binding only as a
matter of contract between the ASX and the listed company, they do have some statutory,
public law force. This is because s 793C of the Corporations Act gives the courts the
power, on the application of ASIC, the ASX or a ‘person aggrieved’, to order any person
obliged to comply with the Listing Rules (which may include the company, its directors
and officers, and its controlled entities) to do so. If the person then fails to comply with the
Listing Rules, that person will be in contempt of the order of the court.
Where the ASX Listing Rules impose additional requirements on listed companies
relevant to the matters discussed in this book, those Listing Rules are discussed briefly.
16 Foreword to the ASX Listing Rules.

17 This sanction is not always an appropriate one, because of the very serious harm that can be done to investors in the
company by removing their means of disposing of their shares.
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36 Company Law
APPLYING COMPANY LAW TO LEGAL PROBLEMS

[¶2-400] How do you use company law to answer a legal question?
The various types of company law rules referred to in this Chapter (sourced from the
Corporations Act, case law, etc) can be used to answer a legal question in much the same
way as other types of laws. Judges use the approach outlined below when writing their
judgments. Equally, students who are studying law subjects — whether at law school or in
a commerce degree — need to become familiar with this approach.
In many law subjects, assessment will include ‘hypothetical’ questions in an exam or
skills assignment. The technique used for answering them is well established. Students at
law schools in the United States quickly become familiar with this approach, known as the
‘IRAC approach’, which has the following elements:
• I = Issue
• R = Rule of law
• A = Application to the facts
• C = Conclusion
Issue: which issue or issues are involved in the question?

A ‘hypothetical’ question in an exam usually consists of about one page of facts and then a
set of instructions (eg ‘Advise Fred on whether he can sue Maria’).
The facts will be designed to allow you to display your knowledge of the particular
area of law under examination. It is possible, however, that not all the facts are relevant to
answering the question. You must decide at this stage which particular part (or topic) of
company law applies to the facts.
Rule of law: what precise legal rule or rules are relevant to the facts?
With your knowledge of the Corporations Act, case law containing company rules, and
other sources of company law, you need to make a decision about which legal rule or rules
are relevant to the facts before you. Having identified the right rule or legal principle,
you need to state it clearly and state where it comes from. For example, you may want
to consider a rule or procedure that comes from the Corporations Act. In this case you
write down the correct section number (for example, if you are discussing the business
judgment rule, you need to write ‘s 180(2)’). If you are discussing a principle that comes
from a decision of a court (for example, where a court has indicated how a rule is to be
interpreted or applied) you must state the name of the case. This is referred to as ‘authority’
and is crucial in legal reasoning and writing.
Application of the rule: how does it apply to the facts of the problem?
You will then need to ‘apply the law to the facts’. This is a very important step. Sometimes
there will be a clear-cut answer. On other occasions the answer will not be clear-cut and
you may have to argue ‘both sides of the argument’ in your answer. Even if the question
asks you to advise only one party, you will need to explain both sides of the argument if
the answer is not clear-cut.
¶2-400

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Company Law37
Conclusion
You should come to a conclusion based on your argument. It is a good technique to fix
your conclusion firmly in your mind and then make sure that each step of your argument
is targeted at that conclusion.
REGULATION OF COMPANIES
2
[¶2-500] Overview
Company law is made up of a combination of legal rules that facilitate the use of
companies as vehicles for commercial enterprise, and legal rules that regulate the activities
of companies and their participants. The regulation of companies and their participants
involves making laws (a function of parliament), administering those laws (a function
of the Commonwealth Treasurer and ASIC) and resolving disputes under those laws (a
function of courts).
Companies that choose to list on the ASX agree to subject themselves to the ASX
Listing Rules. The ASX has a role to play in supervising and enforcing compliance with
the Listing Rules.
This part examines the role of ASIC, the ASX and the courts in company law.
[¶2-520] What is ASIC?

The Australian Securities and Investments Commission (ASIC) is the main regulator
of companies and the body responsible for carrying out the administrative functions set
out in the Corporations Act. It is established and operates under the ASIC Act. ASIC’s
operations fall within the ministerial responsibility of the Commonwealth Treasurer.
ASIC is an independent Commonwealth government body which has regulated
financial markets, securities, futures and corporations since January 1991. From 1998,
ASIC became responsible for consumer protection in superannuation, insurance, deposit
taking and, from 2002, credit. In 2010, ASIC’s responsibilities were expanded to include:
• supervision of trading on Australia’s licensed equity, derivative and futures market
(taking over this function from ASX from 1 August 2010)
• regulation of consumer credit and finance broking (referred by the states with effect
from 1 July 2010)
• licensing of traditional trustee companies (from May 2010).
ASIC’s mandate expanded further in 2012 and 2013 to include responsibility for the
national business names register and OTC derivatives markets.
The breadth of ASIC’s mandate is illustrated in Figure 2.1.
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38 Company Law
Figure 2.1 Additions to ASIC’s Mandate
ORIGINAL ASIC/ASC JURISDICTION ADDITIONS TO MANDATE
Managed investment scheme regime Added in 1998

(sig. amendments 1998) Australian Consumer Law—
• Obligations of responsible entities Financial Services
• Scheme registration • General prohibitions
• Unfair contracts
Market supervision
(FMI and participants Added in 2002
licensing and oversight) Financial Services Conduct and
Disclosure, including for securities,
banking, insurance and superannuation
Insolvency regime and • Licensing
liquidator oversight • Financial advice
• Product disclosure
• Specific conduct obligations
Auditor oversight (enhanced 2004)
Added in 2006
Corporate regulation (general) Superannuation
• Prospectus • Choice of funds and portability reforms
• Mergers and acquisitions
• Financial reporting Added in 2010–11
• Directors duties Consumer credit regime
• Debenture regime • Licensing
• Members rights • Conduct
• Continuous disclosure • Disclosure
Market supervision
Corporate registry function • Transfer of ASX supervision
• Company register • Competition in markets reforms
Added in 2012
Corporate registry function
• Business name register
Added in 2013
Financial Services Conduct
and Disclosure
• Future of Financial Advice (FOFA)
Market supervision
• OTC derivative reform
Source: The ASIC Capability Review Panel, Fit for the future – A Capability
Review of ASIC, p35 (footnotes omitted)
ASIC’s Annual Report 2017–18 provides a snapshot of the entities it regulates and its
operations. It is reproduced in Table 2.2.18
18 ASIC Annual Report 2017/18, pp. 192–193.
¶2-520

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Company Law39
Table 2.2 Five-year summary of key stakeholder data, 2013–18
Business data 2017–18 2016–17 2015–16 2014– 2013–14

15
Companies (total) 2.6m 2.5m 2.4m 2.2m 2.1m
New companies 244,510 249,394 246,051 235,182 212,573
2
registered
AFS licensees 6,170 6,058 5,511 5,198 5,101
Authorised market 65 1
67 1
52 50 50
infrastructure providers1
Registered company 4,226 4,365 4,483 4,596 4,729
auditors
Registered liquidators 663 713 707 711 696
Registered managed 3,726 3,632 3,619 3,642 3,673
investment schemes
Credit licensees 5,503 5,576 5,726 5,779 5,837
Fundraising documents 898 1,017 891 1,078 1,095
lodged
Takeover bids monitored 36 41 40 43 59
Fundraising where $3.5bn $7.2bn $6.4bn $9.4bn $6.7bn
ASIC required
additional disclosure
Recoveries, costs, $437.8m $849.7m4 $217.4m $61.1m $214.6m
compensation fines or
assets frozen
% successful criminal 99% 90% 96% 85% 90%
and civil litigations2
Criminal and 138 220 181 167 149
civil litigation and
administrative actions
concluded3
Criminals imprisoned 6 13 13 12 14
Reports of crime or 9,567 9,011 9,751 9,669 10,530
misconduct finalised
Total searches of ASIC 122.5m 90.6m 90.7m 86.2m 76.2m
databases
Business names (total) 2.2m 2.2m 2.1m 2.2m 1.9m
New business names 366,181 348,266 337,413 327,687 299,988
registered
Registered SMSF 6,039 6,339 6,671 6,669 7,073
auditors
% company data lodged 94.6% 94.6% 95% 96% 96%
on time
Fees and charges $1,227m $920m $876m $824m $763m
collected for the
Commonwealth
Staff (average FTEs) 1,6566 1,640 1,627 1,609 1,773
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40 Company Law
1. We changed the methodology for reporting the number of authorised market infrastructure providers
in 2017–2018. This figure now includes exempt financial markets, licensed clearing and settlement (CS)
facilities, exempt CS facilities, licensed trade repositories and credit rating agencies in addition to domestic
and overseas financial markets.
2. Excludes administrative actions and summary prosecutions for strict liability offences.
3. Excludes summary prosecutions for strict liability offences.
4. In 2016–17, the Queensland Supreme Court imposed financial penalties on four former officers and
the fund manager of the MFS Investment Management Ltd. The court also ordered that the four former
officers pay various amounts in compensation to Premium Income Fund, ranging from $28,738,517 to
$205,755,601. On 23 June 2017, all the defendants appealed the decision and the compensation remains
unpaid. One of the former officers (Anderson) discontinued his appeal on 29 September 2017 and paid
the $500,000 he was ordered to pay by way of pecuniary penalty. The remaining appeals were heard by the
Queensland Court of Appeal between 4 and 18 June 2018. The court’s decision has been reserved.
5. Data rounded. This data excludes contractors and secondees from other agencies.
6. Plus 91 FTE staff working on Enforcement Special Account matters, and an additional 80 FTE
providing enforcement support services and legal counsel.
What is the structure of ASIC?

ASIC has a staff of about 1,860 people19. In 2017–18, ASIC raised $1,227 million for the
Commonwealth in fees, charges and supervisory cost recovery levies, an increase of 33%
from 2016–17. The increase in revenue relates mainly to the recognition of supervisory
levies recoverable from industry for ASIC’s regulation related costs, that commenced in
2017–18. In 2017–18, ASIC received approximately $348 million in appropriation revenue
from the Government, including $26 million for the Enforcement Special Account (ESA),
representing a $6 million or 2% increase compared with 2016–17. The $6 million increase
in appropriation revenue relates mainly to new funding provided to ASIC in 2017–18 for
the Royal Commission.20
ASIC consists of a chairman and not less than three and no more than eight
individual commission members.21 Until 2009, the commission typically had three full-
time members. The number was increased in 2009 and in 2018 ASIC was to have six
members (including the chairman). The members are chosen by the government.
Responsibility for the different aspects of ASIC’s role is divided internally by the
commission’s staff. Organisational details are provided on ASIC’s website (www.asic.gov.
au).
What are ASIC’s main functions?
A significant part of ASIC’s resources are devoted to the regulation of financial markets and
to consumer protection functions in relation to the financial system generally. A detailed
discussion of those responsibilities is beyond the scope of this book; emphasis is instead
placed on ASIC’s functions in relation to the regulation of companies.
19 ASIC Annual Report 2017–18, p. 171.

20 ASIC Annual Report 2017–18, p. 22.
21 Section 9 of the ASIC Act.
¶2-520

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Company Law41
ASIC’s main functions in connection with the regulation of companies are:

• Registering companies. When a person wants to form a new company, or change
the status of an existing company, that person lodges a registration application with
ASIC. ASIC enters the proposed new company on its register of companies, and by
that process, the company is incorporated.22
2
• Gathering and disseminating information about companies. Companies are required
to provide certain information about their participants, their operations and their
financial affairs to ASIC. ASIC maintains a record of that information and makes
the information available (through a ‘company search’) to people interested in the
company.23
• Educating companies and individuals about the law. ASIC issues Regulatory Guides
and other publications which are designed to help people understand and comply
with the Corporations Act.
• Modifying the Corporations Act in certain circumstances. As noted in ¶2-340,
ASIC has the power to modify the operation of, or grant exemptions from, certain
provisions of the Corporations Act in certain circumstances. In this way, the law can
be adjusted to take account of special circumstances, without the need to include in
the Corporations Act special arrangements to deal with every possible contingency
or unusual circumstance, however remote or unlikely.
• Registering company auditors and liquidators. ASIC is responsible for registering
persons qualified to act as auditors or liquidators of companies.
• Investigating breaches of the law. ASIC has both informal and formal powers to
investigate suspected breaches of the Corporations Act. Often, these investigations
occur as a result of a person complaining to ASIC.
• Enforcing the law. ASIC can enforce the law by taking certain administrative action
(for example, revoking a licence or issuing a banning order), by bringing an action
for breach of the civil penalty provisions under Pt 9.4B of the Corporations Act, by
bringing civil proceedings under s 50 of the ASIC Act on behalf of persons harmed
by breaches of the Corporations Act or by referring a breach to the Commonwealth
Director of Public Prosecutions for criminal prosecution.24
In performing its functions and exercising its powers, ASIC is required by legislation
to strive to meet the objectives set out in s 1(2) of the ASIC Act. These objectives include:
• maintaining, facilitating and improving the performance of the financial system and
the companies and other entities within that system in the interests of commercial
certainty, reducing business costs, and the efficiency and development of the economy
• promoting the confident and informed participation of investors and consumers in
the financial system.
22 See Chapter 5 for a discussion of the procedure for registering companies.

23 The information collected by ASIC, and the means for accessing it, are discussed in Chapter 17.
24 ASIC’s enforcement powers are described further in Chapter 15.
Commercial
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42 Company Law
[¶2-540] What is ASX’s regulatory role?

As noted in Chapter 1, some companies elect to have their securities listed for quotation
on the stock market conducted by the ASX. When they do so, they contract with the ASX
that they will comply with the Listing Rules. The ASX acts as a ‘regulator’ in the sense that
it polices compliance by listed companies with those rules.
However, it is important to remember that the ASX is a private, for-profit company,
not a governmental or regulatory agency.
Section 792D of the Corporations Act requires the ASX to cooperate with ASIC
in the performance of ASIC’s functions. This may include providing information to
ASIC about listed companies or the activities of participants in the securities markets. In
addition, the ASX must notify ASIC if it believes that a person is breaching the Listing
Rules or the Corporations Act. Sometimes a breach of the Listing Rules may be grounds
for ASIC to commence an investigation of the listed company.
[¶2-560] What courts have jurisdiction in corporations matters?

Companies are legal persons capable of suing and being sued in their own name — that
is, they can be the plaintiff or defendant in a civil proceeding, or a defendant in a criminal
proceeding. The following writings review the jurisdiction of courts over companies,
explaining which courts are allowed to hear matters in which companies are involved.
What courts have jurisdiction over companies generally?
In matters other than those arising under the Corporations Act, companies are subject to
the ordinary jurisdictional rules. For example, an action to recover a debt would be brought
in the state court system, in either a lower court (like the Magistrates (or Local) Court or
the County (or District) Court) or a superior court (a state Supreme Court) depending on
the amount of money involved and the current rules setting out the monetary limits for
jurisdiction for courts in the relevant state. The same would be true for tort claims, such as
claims by or against the company for negligence.
Claims under particular statutes such as the Competition and Consumer Act 2010
(Cth)25 are brought in the court having jurisdiction under the relevant Act. In the case
of actions under the Competition and Consumer Act, for example, the Federal Court has
jurisdiction.
What courts have jurisdiction over matters arising under the
Corporations Act?
Matters arising under the Corporations Act fall into two categories:
• actions for breach of a provision of the Corporations Act (criminal, civil penalty
and civil)
• proceedings in accordance with the Corporations Act (such as an application for an
order for winding up a company under s 471).
25 Formerly the Trade Practices Act 1974 (Cth).
¶2-560

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Company Law43
Which court has jurisdiction to hear or decide a matter under the Corporations Act
depends on the particular matter. Some matters can be decided in the general court system
(for example, by a Magistrates Court or District Court), subject to relevant jurisdictional
limits. Other matters arising under the Corporations Act are expressly reserved to the
Federal Court of Australia, the Family Court, or the state or territory Supreme Courts.
Where a matter is reserved in this way, the relevant section of the Corporations Act will
refer to ‘the Court’, rather than ‘a court’.
Under the Corporations Act, civil jurisdiction is conferred by Div 1 of Pt 9.6A on the 2
Federal Court and the state and territory Supreme Courts. This means that civil matters
arising under the Corporations Act can be heard by any of these courts, subject to general
legal rules about bringing cases in the most appropriate forum. Criminal jurisdiction is
conferred by Div 2 of Pt 9.6A of the Corporations Act. The criminal courts of the states
and territories have jurisdiction with respect to offences under the Corporations Act.
Commercial
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CHAPTER 3
The Legal Nature of Companies

Introduction¶3-001
The Separate Entity Doctrine

What is separate legal personality? ¶3-100
What happened in Salomon’s case? ¶3-120
What are the consequences of treating the company as a
separate legal entity? ¶3-140
Corporate Capacity
What do we mean by corporate capacity?¶3-200
How do companies do things of legal effect? ¶3-220
How wide are the powers of companies? ¶3-240
What is the effect of any internal limitations on powers? ¶3-260
Limited Liability
What is limited liability? ¶3-300
What is the rationale for limited liability? ¶3-320
How is limited liability affected by contract? ¶3-340
Piercing the Corporate Veil

How does the corporate veil operate in relation to tort
claimants? ¶3-400
How does the law mitigate the rigour of the separate
entity
doctrine? ¶3-420
In what circumstances have courts pierced the corporate
veil?¶3-440
¶2-560
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The Legal Nature of Companies45
When have courts pierced the corporate veil at general

law?¶3-460
How do the insolvent trading provisions operate to pierce
the corporate veil? ¶3-480
Corporate Liability
How can a company be liable for wrongs? ¶3-500
On what basis can companies be liable for torts? ¶3-510
Which crimes can companies commit? ¶3-530
Is vicarious liability possible for crimes?
Is direct liability possible for crimes?
¶3-540
¶3-550 3
Chapter 1 looked at the commercial and functional nature of companies and provided a
broad overview of the structure and some of the key features of companies. This Chapter
drills further into the idea of companies by looking particularly at the legal nature of
companies.
Companies have two particularly significant legal characteristics or attributes that
enable them to function as legal persons (that is, juristic entities capable of doing acts of
legal effect) in their own right. These are:
• separate legal personality, and
• legal capacity.
A third important legal attribute of companies limited by shares is that the members
of the company enjoy limited liability.
These attributes, and what they mean for companies, their participants and other
people, are discussed in this Chapter.
There are some circumstances in which the law will ‘look through’ separate legal
personality of a company, for example to treat assets or liabilities of the company as if

they were assets or liabilities of the company’s members. Lawyers refer to this (perhaps
misleadingly in some respects) as ‘piercing the corporate veil’. The circumstances in
which the corporate veil might be pierced, and the implications of doing that, are also
explored here.
As a legal person, a company can be held liable for criminal and civil wrongs. The
final part of this Chapter explains how the law imposes liability on companies in these
circumstances.
THE SEPARATE ENTITY DOCTRINE

[¶3-100] What is separate legal personality?
The law treats a company as being a separate person from its members and those who
manage its operations. This is the doctrine of separate legal personality.
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46 The Legal Nature of Companies
The central distinguishing characteristic of a company is that it is treated as a

separate person from its participants. This means that the company can incur and receive
obligations and hold property in its own name. For example, a company can lend or borrow
money, enter into contracts with its participants and with outsiders such as suppliers and
customers, be the registered proprietor of land and own chattels (personal property), be a
lessee or lessor, operate a bank account and take out insurance, and act as trustee of a trust
in its own right. The company can be the plaintiff or the defendant in civil proceedings,
and in certain cases may be the defendant in criminal prosecutions. The rights it holds and
the obligations it incurs are the company’s own, not those of its managers, the people who
have invested in it or its employees.
One judge described the doctrine of separate legal personality in 1923 in the
following terms:
Between the investor, who participates as a shareholder, and the undertaking carried
on, the law imposes another person, real though artificial, the company itself, and the
business carried on is the business of the company, and the capital it employs is its capital
and not in either case the business or the capital of the shareholders. Assuming, of course,
that the company is duly formed and is not a sham (of which there is no suggestion here),
the idea that it is a mere machinery for effecting the purposes of the shareholders is a
layman’s fallacy. It is a figure of speech, which cannot alter the legal aspects of the facts.1
The fact that the company is treated as a separate person from its participants means
that the company continues unchanged even if the identity of the participants in it changes.
It also means that the company can enter into legal relationships with its participants,
for example as debtor and creditor or as employee and employer. If the company and its
participants were not separate legal persons, these relationships would not be possible.
In addition, companies are treated as separate entities liable for income tax under the
Income Tax Assessment Act 1936 (Cth) (the ITAA).
The separate legal personality of companies was recognised and affirmed in the
famous 19th century decision of the English House of Lords in Salomon v Salomon & Co
Ltd. This case is recognised as one of the most important cases in company law.2
[¶3-120] What happened in Salomon’s case?

The fact that a company was a legal entity separate from its participants was affirmed just
over 100 years ago in the leading case of Salomon v Salomon & Co Ltd.3
What are the facts in Salomon’s case?
Mr Salomon ran a boot manufacturing business as a sole trader. After the business was
established, Mr Salomon incorporated a company in which he and members of his family
1 Gas Lighting Improvement Co Ltd v IRC [1923] AC 723 at 740–741, per Sumner LJ.
2 The definition of ‘person’ in s 6 of the ITAA includes companies. If a company derives income, it is a ‘taxpayer’
assessable to pay income tax.
3 [1897] AC 22.
4 Company charges are explained in Chapter 18.
¶3-120

Hanny 4pp.indb 46 11/26/2018 3:29:26 AM

were the only shareholders, and he sold the business to the company. The company paid
Mr Salomon part of the purchase price for the business immediately (in the form of shares
in the capital of the company) and agreed to pay the remainder over time. To secure its
obligation to pay, the company gave Mr Salomon security over its assets in the form of a
company charge.4
The effect of the charge was that the company’s assets had to be used to pay out Mr
Salomon in full before they could be applied to pay out the company’s other unsecured
creditors.
Mr Salomon controlled the company by holding almost all the shares in the company
and also through his appointment as its managing director, and through an agreement
with the members of his family that they would exercise their rights to participate in the
management of the company in accordance with his directions.
3
What was the legal issue in Salomon’s case?
When the company’s business failed, the value of the assets was insufficient to pay out both
Mr Salomon and the company’s other creditors. The creditors argued that Mr Salomon
should not receive the benefit of the charge (giving him the right to be paid in priority
to them), because the degree of control he exercised over the company meant it should
be treated as being his agent, or trustee for him, in the conduct of the business. If the
company were Mr Salomon’s agent, or were operating the business as trustee for him, he
would have been required to indemnify the company for the debts it had incurred.
What did the court decide?
The case is significant because the House of Lords held that, despite the fact that Mr
Salomon controlled the company, it was not his agent or trustee. The company was treated
as operating the business in its own right and as being separate from its controller, Mr
Salomon. Therefore, the charge given by the company to Mr Salomon was valid and he
was entitled to be paid his debt, even though other creditors of the company would not be
paid because the company had insufficient assets to pay all its creditors.
The fact that a company is a separate entity from its controllers was emphasised in the
context of corporate groups5 by the High Court in its decisions in Industrial Equity Ltd v
Blackburn6 and Walker v Wimbourne.7
[¶3-140] What are the consequences of treating the company as a

separate legal entity?
The consequences of treating the company as a separate person from its participants
include the following.
5 Corporate groups are discussed in Chapter 4.

6 (1977–1978) CLC ¶40-370; (1977) 137 CLR 567.
7 (1975–1976) CLC ¶40-251; (1976) 137 CLR 1 at 6–7, per Mason J.
8 There are exceptions to this general rule. Creditors may be able to recover money owed to them by a company from
the company’s directors or shareholders in certain circumstances.
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• A company’s obligations and liabilities are its own, and not those of its participants.
Where a company incurs a contractual obligation or a liability in tort, that obligation
or liability is the company’s and not an obligation or liability of its members or
officers. Because companies are separate entities, creditors of a company are generally
unable to look to the participants in the company to pay the company’s debts.8
• A company can sue and be sued in its own name. Section 119 of the Corporations Act
2001 (Cth) (Corporations Act) provides that, when a company is registered, it ‘comes
into existence as a body corporate’. As such, from that time it can sue or be sued in
its own name. This means that it is not necessary for the members of the company or
its officers to be named as parties to the legal proceedings where the proceedings only
involve the company.
• A company has perpetual succession. This means that the company is a continuing entity
in law with its own identity regardless of changes in its membership. It continues in
existence, unchanged, even if its original members die, sell their shares to others or
otherwise cease to participate as shareholders. The company continues in existence
until it is de-registered under the statutory procedure set out in the Corporations Act.
• A company’s property is not the property of its participants. Unlike the beneficiaries of
a trust, the participants in a company have no proprietary (legal or equitable) interest
in the company’s property. They therefore have no ‘ownership’ rights in respect of it.
Macaura v Northern Assurance Co Ltd is an example of this principle. In this

case,9 Mr Macaura transferred his interest in a timber plantation to a company
controlled by him. He had insured the timber in his own name but failed to transfer
the insurance policy to the company. When the timber was destroyed by fire, the
insurance company refused to pay out under his policy because he did not have
an ‘insurable interest’ in the timber as he was not its owner. The company was the
owner of the timber.
• A company can contract with its controlling participants. Because they are separate
legal entities, a company and its participants can enter into contracts with each other.
For example, as seen from Salomon’s case, a company can lend money to or borrow
money from its controlling shareholder.
In Lee v Lee’s Air Farming Ltd,10 the controlling shareholder and managing director
of a company that operated a business which involved aerial top-dressing of
farmland was killed in a flying accident. His widow successfully argued that she
was entitled to a payout under workers compensation insurance for her husband’s
death because her husband was a ‘worker’, that is, he had entered into a contract
9 [1925] AC 619.
10 [1961] AC 12.
¶3-140

Hanny 4pp.indb 48 11/26/2018 3:29:26 AM

of service with the company. Unless the company and its controller were separate
legal entities, the finding that a contract existed between them would not be open
to the court, because a contract requires at least two separate parties.
CORPORATE CAPACITY
[¶3-200] What do we mean by corporate capacity?
The foregoing explains the fundamental principle of company law that a company is
separate from its participants. Here we examine more closely the principle that a company
is a legal person, that is, an entity that (although artificial) is recognised by the law as being
3
capable of interacting with others in a manner that has legal effect.
Companies’ ability to do acts of legal effect is referred to as their capacity. Companies
have the legal ability to do most things that a natural person can do and some additional
things. Their capacity is conferred by s 124 of the Corporations Act, which is discussed
below. A company’s constitution may include internal limitations on its permitted activities,
but these do not affect the validity of its acts.
[¶3-220] How do companies do things of legal effect?

As described in the following writings, companies have the legal capacity to do most of the
things that a natural person can do and some additional things (such as issue shares) that
they need to do because they are companies.
Companies, of course, are an abstraction. They do not have any physical identity and
are incapable of ‘doing’ acts in a physical sense. For example, a company does not have a
hand with which it can sign a contract. Companies must act through natural persons, such
as their officers or members.
Chapter 6 explains that companies can act directly through one of the organs of the
company (the board of directors or the members in general meeting), acting within the
scope of their respective powers. Companies can also act indirectly through their agents,
appointed under the principles of agency law. The manner in which companies enter into
binding contracts with others is explained in Chapter 23.
[¶3-240] How wide are the powers of companies?

When a new company is created by registration, the Corporations Act confers on that
company power to do acts that have legal effect. In many respects, the capacity of a
company to do acts having legal effect is the same as that of a natural person.
Section 124 of the Corporations Act gives a company the legal capacity and powers
of a natural person. This means that a company can do anything that a natural person can
do, such as enter into contracts and hold property, although the company’s capacity does
not extend to things that, by their nature as artificial persons, companies are unable to
11 (1993) 11 ACLC 856; 10 ACSR 776.
Commercial
Hanny 4pp.indb 49 11/26/2018 3:29:26 AM

do (such as marry or appear in person — that is, without a legal representative — before
a court): see Simto Resources Ltd v Normandy Capital Ltd.11 In addition, companies have
certain powers that natural persons do not have, such as the power to issue shares and
debentures.
The approach taken in s 124 confers wide powers on a company. Not all corporations
have such wide powers. In the case of many statutory corporations, their powers will be
limited to doing acts related to the purpose for which they were established. For example,
the Australian Securities and Investments Commission (ASIC) is a body corporate12 and
its powers are limited to ‘whatever is necessary for or in connection with, or reasonably
incidental to, the performance of its functions’,13 which include the functions described in
Chapter 2 of this book.14 If ASIC attempted to do something that was not necessary for
the performance of its functions, that act would be of no legal effect by operation of a legal
rule known as ultra vires.15 Therefore, a company registered under the Corporations Act
has wider powers than many other types of corporations.16
[¶3-260] What is the effect of any internal limitations on powers?

The fact that a company has such wide powers may not suit all of its participants. For
example, the members of a joint venture company (in which neither member has control
of the company) may wish to restrict the company’s activities to particular, pre-agreed
objects. To this end, participants in companies may agree between themselves that the
company will limit its activities in certain ways.
By including such restrictions in the company’s constitution, those restrictions will
bind not only those who agree to them at the time, but also the company and any person
who becomes a member or officer of the company at a later time.17
Such restrictions are envisaged by s 125(1) of the Corporations Act, which provides
that ‘if a company has a constitution, it may contain an express restriction on, or a
prohibition of, the company’s exercise of any of its powers’. Under s 125(2), ‘if a company
has a constitution, it may set out the company’s objects’. The intention of participants in
including an objects clause in the constitution may be that the company’s activities be
restricted to things consistent with or incidental to those objects.
12 Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), s 8.
13 ASIC Act, s 11(4).
14 ASIC is a statutory corporation formed under the ASIC Act and its powers are conferred by s 11–12A of the
ASIC Act.
15 Literally, ‘beyond power’.
16 Before 1 January 1984, companies did not have the wide powers now conferred on them by s 124 of the Corporations
Act. Then, companies only had power to do what was necessary for, connective with, or incidental to the attainment
of particular purposes set out in the company’s memorandum of association (which at that time made up part
of what is now the company’s constitution). In order to confer upon companies the widest possible capacity, it
became the practice of lawyers to draft long objects clauses, dealing with every possible activity they could imagine,
for inclusion in a company’s memorandum of association. Occasionally, you will still see older companies with
memoranda of association that include such clauses. Their effect is discussed below.
17 This is because a company’s constitution operates as a statutory contract binding on all its participants, under s 140.
The constitution is discussed in detail in Chapter 5.
¶3-260

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In the case where a company does have provisions in its constitution limiting its
objects or restricting or prohibiting the exercise of any of its powers, what is the effect of
an act by the company that is outside the scope of those restrictions?
Section 125(1) states that ‘the exercise of a power by the company is not invalid
merely because it is contrary to an express restriction or prohibition in the company’s
constitution’. Section 125(2) states that ‘an act of the company is not invalid merely because
it is contrary to or beyond any objects in the company’s constitution’. The intention of
these provisions is to abolish the doctrine of ultra vires as it applies to companies, so that
third parties that deal with companies can enforce obligations incurred by companies, even
where those obligations were incurred in breach of these internal restrictions.18
However, there can be consequences resulting from acts which are outside
restrictions in the company’s constitution. Such acts may amount to a breach of the
3
statutory contract represented by the company’s constitution. The effect of breaches of a
company’s constitution is discussed in Chapter 5. Causing the company to do something
inconsistent with these restrictions may also amount to a breach of duty or other wrongful
conduct on the part of the person (such as a director) who caused the company to do
the act, and consequences may attach for that breach. Directors’ duties are discussed in
Chapters 11–14.
LIMITED LIABILITY
[¶3-300] What is limited liability?
Companies limited by shares have an additional legal attribute that is significant to their
use as a form of business organisation — the liability of the members to contribute to the
debts of the company is limited to the amount (if any) remaining unpaid on their shares.
This is referred to as limited liability.
Limited liability means that a member of a company limited by shares is usually not
required to contribute amounts from their personal wealth beyond the subscription price
of their shares to meet the debts of the company.

The liability of members to contribute
In a company limited by shares, the initial members of the company subscribe for shares
that represent a claim against the company and to which certain rights (such as control
rights and distribution rights) attach. Members who join the company after its initial
registration may do so by subscribing for new shares in the company or by acquiring
already issued shares from another member.
Subscription for shares involves the person who wishes to become a member of
the company paying an amount of money (referred to as the issue price or subscription
18 It should be noted that both s 125(1) and 125(2) state that an act or the exercise of a power of a company is not
invalid merely because it is outside the restrictions imposed by the constitution. This suggests that other conduct of
a person dealing with a company may affect the validity of the act. In particular, if a person dealing with a company
has been aware that the act was inconsistent with the restrictions contained in the constitution, any contract may
be voidable as against that person at the option of the company.
Commercial
Hanny 4pp.indb 51 11/26/2018 3:29:26 AM

amount) to the company in return for the share. The issue price is determined by the
directors at the time they decide to issue the new share.
When a new share is issued by a company, the directors may require payment in full
of the issue price, or may allow the member to pay part of the issue price at the time of
issue and the remainder at some time in the future. A share issued on this basis is called a
partly paid share.
What is the underlying principle?
The underlying principle of limited liability is that a member who holds a share in a
company is not required to contribute to the company to meet the debts of the company,
beyond the amount initially subscribed, or agreed to be subscribed, for the share. This
principle is reflected in the definition of ‘company limited by shares’ contained in s 9 of
the Corporations Act, as ‘a company formed on the principle of having the liability of its
members limited to the amount (if any) unpaid on the shares respectively held by them’.
Where a member holds a fully paid share, that member is not required merely
because of that membership to contribute any further amount to the company to cover
the company’s debts in the event that the company’s own assets are insufficient to do so.
Where a member holds a partly paid share, that member is required to pay the balance of
the issue price to the company when the company makes a call on the member to do so.
Generally speaking, the amount contributed by members by way of subscription for
share capital is intended to remain in the company for the duration of its operations.
Members will be entitled to a return of their capital prior to winding up only in certain
limited circumstances. In particular, they will not be entitled to a return of capital where it
results in insolvency. On winding up, members can expect a return of their capital only if
the company has sufficient assets, once all its debts are discharged, to do so.
[¶3-320] What is the rationale for limited liability?

As illustrated in Chapter 1, limited liability granted by statute is a relatively recent
phenomenon in Anglo-Australian company law, dating only from 1855. The effect of
limited liability is to transfer the risk of corporate failure from the investors in the venture
carried on by the company to its creditors.
In Edwards v Attorney-General of New South Wales,19 a case arising out of the

arrangements put in place by the James Hardie group to fund compensation
payments to asbestos victims, Young CJ summarised the purpose of limited liability
in the following terms:
Up until 1855 in England, when the Limited Liability Act was enacted, British
business was at a distinct disadvantage because people were not prepared to
take the risk of being liable for unlimited contributions where an entrepreneurial
scheme failed. There were some avenues open to secure limited liability, such
as registering the company in France and including a complex limited liability
19 (2004) 22 ACLC 1,177 at [74]–[77]; 50 ACSR 122.
¶3-320

Hanny 4pp.indb 52 11/26/2018 3:29:26 AM

clause to the deed of settlement … The Limited Liability Act … the forerunner
of the modern law, set up a system whereby people could simply by registering
with the appropriate official, create a new corporate entity with limited liability,
trade and take risks in advancing the economy of the nation without the
consequence of losing everything if the venture failed.
The purpose of the Corporations Act and its predecessor was for
permitting the economy to be advantaged by such entrepreneurial ventures
with limited liability and to regulate the rights of members inter se [and] the
rights between members and creditors of corporations.
As time went on, it was realised that fraudsters could manipulate the
system so as to perpetrate fraud and exceptions were placed against limited
liability such as liability for trading while insolvent. Nonetheless the essential 3
purpose of the Act remains.
Because of the principle of limited liability, if a company fails, the investors’ loss will
be limited to the amount initially subscribed, or agreed to be subscribed, to the company.
This may be as little as a few dollars, perhaps even less. Creditors of the company may lose
all or substantially all of the money owed to them. This is because, once the company’s
assets are exhausted, the principle of limited liability prevents the creditors from looking
to any of the participants in the company to make up any shortfall.
So it is important to remember that limited liability is a privilege conferred by law on
members of a company limited by shares. Limited liability is said to:20
• encourage risk taking and entrepreneurial behaviour by enabling investors to
quarantine their wealth from particular risky undertakings.
• decrease the need for shareholders to monitor the managers of companies in which
they invest, because the financial consequences of company failure are limited.
Shareholders may have neither the incentive (particularly if they have only a small
shareholding) nor the expertise to monitor the actions of managers. The potential
costs of operating companies are reduced because limited liability makes shareholder
diversification and passivity a more rational strategy.

• provide incentives for managers to act efficiently and in the interests of shareholders
by promoting the free transfer of shares. This argument has two parts to it. First, the
free transfer of shares is promoted by limited liability because, under this principle,
the wealth of other shareholders is irrelevant. If a principle of unlimited liability
applied, the value of shares would be determined partly by the wealth of shareholders.
In other words, the price at which an individual shareholder might purchase a share
would be determined in part by the wealth of that shareholder, which would now be
at risk because of unlimited liability. The second part of the argument (that limited
liability provides managers with incentives to act efficiently and in the interests of
shareholders) is derived from the fact that if a company is being managed inefficiently,
20 These reasons are drawn from F Easterbrook and D Fischel, The Economic Structure of Corporate Law (1991), p 41–
44.
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shareholders can be expected to be selling their shares at a discount to the price which
would exist if the company were being managed efficiently. This creates the possibility
of a takeover of the company and the replacement of the incumbent management.
• assist the efficient operation of the securities markets because, as was observed in the
preceding point, the prices at which shares trade do not depend upon an evaluation
of the wealth of individual shareholders.
• permit efficient diversification by shareholders, which in turn allows shareholders
to reduce their individual risk. If a principle of unlimited liability applied and
a shareholder could lose his or her entire wealth by reason of the failure of one
company, shareholders would have an incentive to minimise the number of shares
held in different companies and insist on a higher return from their investment
because of the higher risk they would face. Consequently, limited liability not only
allows diversification but permits companies to raise capital at lower costs because of
the reduced risk faced by shareholders.
• facilitate optimal investment decisions by managers. Limited liability provides
incentives for shareholders to hold diversified portfolios. In these circumstances,
managers should invest in projects with positive net present values, and can do so
without exposing each shareholder to the loss of his or her personal wealth. However,
if a principle of unlimited liability applied, managers may reject some investments
with positive present values on the basis that the risk to shareholders is thereby
reduced. ‘By definition this would be a social loss, because projects with a positive net
present value are beneficial uses of capital.’21
However, these benefits come at a cost. Perhaps, knowing that their personal assets
are protected from claims against a company, the natural persons who run a company
may be less careful than they would otherwise be, for example in matters of public safety.
Persons who did not voluntarily choose to deal with a company with few assets, such as
those who are harmed by a negligent act of a company, may be deprived of compensation.
[¶3-340] How is limited liability affected by contract?

Some creditors are not happy to deal with companies on the basis that they have no
recourse to the assets of the company’s participants in the event that the company fails. In
these situations the creditor may want to enter into a separate agreement with a member
or some other person, making that person responsible for a company’s debts in certain
circumstances. This would be a matter of contract between the particular member and the
creditor.
Often, in the case of small companies, a major creditor such as a bank may ask the
members of the company to provide a guarantee to the bank of the amount lent to the
company. A guarantee is a promise to pay another person’s debt if the other person refuses
or is unable to do so. In this example, the members of the company would agree with the
bank to pay the company’s debt if the company is unable to do so from its own resources.
21 Ibid, p 44.
¶3-340

Hanny 4pp.indb 54 11/26/2018 3:29:26 AM

PIERCING THE CORPORATE VEIL
[¶3-400] How does the corporate veil operate in relation to tort
claimants?
A person who is injured by another may be entitled to recover damages or compensation
for their injury if the facts establish a valid legal claim under tort law (for example, the
law of negligence). What happens where the defendant in such a claim is a company and
the court orders that the company pay damages or some other form of compensation that
exceeds the value of the company’s assets?
One of the consequences of a company’s separate legal personality is that its debts
(including judgment debts) are its own and not those of its participants. The shareholders
3
or managers of a company will not be required to make up the difference between the
company’s assets and the amount of the debt unless the court is prepared to depart from
the general rule and pierce the corporate veil in one of the ways described below.
For example, imagine person X is injured by the negligence of a company, Y Pty
Ltd. Y Pty Ltd has one shareholder who is very wealthy. X sues Y Pty Ltd and is awarded
damages of $100,000. However, Y Pty Ltd only has assets of $2 and is not insured. In this
case the maximum X could, in practice, recover from Y Pty Ltd is $2. Unless the courts are
prepared to pierce the corporate veil, X would be unable to recover the remainder of the
judgment from the wealthy shareholder.
The effect of the separate legal personality of companies on tort claimants is illustrated
by the case of Briggs v James Hardie & Co Pty Ltd.22
In the James Hardie case, Mr Briggs was employed by a subsidiary of James Hardie
& Co Pty Ltd that operated an asbestos mine. Mr Briggs contracted asbestosis and
wanted to sue both the subsidiary (which was insolvent) and the parent company.
To sue the parent company successfully, Mr Briggs would be required to pierce the
corporate veil separating James Hardie from its subsidiary.
The matter went before the New South Wales Court of Appeal on a preliminary
point. To win on this preliminary point, Mr Briggs needed to persuade the court that
it was at least possible that a court considering the merits of the claim would find
that there was sufficient evidence to pierce the corporate veil and hold the parent
company liable for the acts and omissions of the subsidiary.
The Court of Appeal held that the matter should go forward. In the course of its
decision, the court raised the possibility that different considerations should apply
where the claim arises in tort rather than through a person voluntarily agreeing to
deal with a company (as in cases involving breach of contract). Rogers AJA referred
to a suggestion:
… that the real determinant in tort cases should be whether a corporation
‘should be permitted to shift the risk and responsibility for such occurrences
22 (1989) 7 ACLC 841; 16 NSWLR 549.
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to the victims or the general public by operating the business as a corporation

without sufficient capital or insurance to cover foreseeable risk.
However, the matter did not proceed beyond this preliminary stage, and the court
was not required to reach a final decision on this point. In James Hardie & Co Pty Ltd v
Putt (1998) 43 NSWLR 554, the Court of Appeal held that in the absence of evidence
that a subsidiary company was a mere façade, the fact that a parent company exercised
control and influence over its subsidiary did not of itself justify lifting the corporate veil so
as to create a duty of care on the part of the parent company towards an employee of the
subsidiary. This remains the law.
[¶3-420] How does the law mitigate the rigour of the separate

entity doctrine?
Despite the general rule established by Salomon’s case,23 that a company and its participants
must be treated as separate legal entities, courts are sometimes asked to ‘pierce the
corporate veil’ and mitigate the rigour of the separate entity doctrine. One judge has said
that principle, ‘as best it can be identified, addresses the dishonest use of corporate vehicles
to evade legal liability by fixing others with the liability evaded. The principle does not
extend to holding the natural person who is the principal of a company liable for the
contractual obligations of the company under a contract expressly entered into with the
company alone’.24
This request may come from a creditor of the company, who wants a participant such
as a major shareholder or director to be held liable for the company’s debt. Salomon’s case
was an example of such a claim by creditors which was unsuccessful. Or it may come from
the participants in the company itself, for example because they are seeking to establish
some legal interest in the company’s property, as was the situation in Macaura’s case (see
¶3-140), where again the claim was unsuccessful.
However, in some cases the courts have been prepared to pierce the corporate veil
and treat the company’s rights, privileges, duties, liabilities or acts as those of its members.
Incorporation does not fully ‘cast a veil over the personality of a limited company through
which the courts cannot see’ (Littlewoods Mail Order Stores Ltd v McGregor),25 and in some
circumstances it will be appropriate for the court to look through the veil of incorporation
to discover the identity of the participants in the company and impose liability upon them.
Further inroads have been made into the doctrine of separate legal personality by
provisions of the Corporations Act itself, imposing liability for an insolvent company’s
debts on certain participants in some circumstances.
23 Salomon v Salomon & Co Ltd [1897] AC 22; see ¶1-380.

24 Davies v Apted [2013] SASCFC 92 at [3]‌(Kourakis CJ).
25 [1969] 3 All ER 855, per Denning MR.
¶3-420

Hanny 4pp.indb 56 11/26/2018 3:29:26 AM

[¶3-440] In what circumstances have courts pierced

the corporate veil?
As the law currently stands, it is only in exceptional circumstances that courts will pierce the
corporate veil and treat a company’s rights, privileges, duties, liabilities or acts as belonging to
or being the responsibility of another. This may occur:
• at general law, where the corporate form is being used to avoid an existing legal duty;
where the company is acting as the agent or partner of its controller; or where a particular
law shows an intention that the corporate veil should be disregarded in applying it, or
• under statute, through the insolvent trading provisions.
It is important to remember that these circumstances represent exceptions to the
general rule that each company must be treated as a separate legal person. In particular,
3
the courts often note that a person cannot choose to use the corporate form where it suits
them, and then later ask the courts to disregard the legal effect of that form:
If people choose to conduct their affairs through the medium of corporations they are
taking advantage of the fact that in law those corporations are separate legal entities,
whose property and actions are in law not the property or actions of their incorporators
or controlling shareholders. In my judgment controlling shareholders cannot, for all
purposes beneficial to them, insist on the separate identity of such corporations but then
be heard to say the contrary when [it is no longer in their interest].26
[¶3-460] When have courts pierced the corporate veil

at general law?
On occasions, courts have been prepared to pierce the corporate veil so that, instead of the
company remaining opaque, it can be looked into to discover its participants. There is no
all-embracing principle as to when the corporate veil will be pierced.27 However, it may be
possible to group the decided cases under the following headings.
Where the corporate form is used to avoid an existing legal duty

It is usual and appropriate for persons forming a company to carry on business to do so
for the purpose of limiting their personal liability for obligations or liabilities incurred in
the future by the company in carrying on that business. This is one of the key rationales
for using a company limited by shares to carry on a business. However, it is not lawful to
form a company to avoid an existing legal obligation or liability, for example one under a
contract.28
26 Tate Access Floors Inc v Boswell [1991] Ch 512 at 531, per Browne-Wilkinson VC.
27 RP Austin and IM Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (17th edn, 2018), [4.250].
28 A company cannot be formed with the intention of avoiding a public law obligation (such as a rule of criminal
law or a regulatory standard) either. If a person formed a company for the purpose of carrying on an illegal or
unlawful activity (that is, to break the law) with the intention that the company, and not the person themselves,
would be liable for the consequences of the illegal or unlawful act, the company would be considered a sham and its
incorporation would not be effective.
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If a company is formed for the ‘sole purpose of or for the dominant purpose’ of doing
something that one of the participants is prevented from doing in its personal capacity
through an existing legal obligation, the courts may pierce the corporate veil to treat the
obligation that binds the participant as one that also binds the company.
Cases cited in support of the proposition that the courts will pierce the corporate veil
to treat obligations imposed on participants in a company as binding on the company in
circumstances where the company has been used to avoid that duty include Gilford Motor
Co Ltd v Horne and Jones v Lipman. However, neither case is particularly strong authority
and alternative grounds for the finding of the court in each case can be put forward.29
In Gilford Motor Co Ltd v Horne,30 Mr Horne had been employed as Managing Director
of Gilford Motor. In his employment contract, he had agreed to a ‘non-compete’
clause, the purpose of which was to prevent him from leaving Gilford Motor and
setting up in opposition to it. Under the contract, he was subject to a contractual
agreement not to solicit customers of Gilford Motor. After he resigned as Managing
Director of Gilford Motor, he set up a business in competition to it. The evidence
showed that Mr Horne was concerned that, in doing so, he might be in breach of his
contract not to solicit Gilford’s customers. A company was established to conduct
the new business, in which the only shareholders were Mr Horne’s wife and one of
his business associates. The company conducted the rival business and Mr Horne
ran the company.
Gilford Motor argued that the court should pierce the corporate veil to
recognise that the person behind the new company was Mr Horne and to treat the
company, along with Mr Horne, as being bound by the non-compete clause in the
contract. The court found, in this case, that the company had been formed for the
sole or dominant purpose of avoiding the non-compete clause. It was prepared to
treat the company, along with Mr Horne, as being bound by it.
In Jones v Lipman,31 Mr Lipman entered into a contract to sell land to the plaintiffs.
Before the sale was completed, Mr Lipman transferred the land to a company
controlled by him. The intention was to put the land beyond the reach of the
purchasers — while they would be entitled to sue Mr Lipman for damages for
failure to transfer the land to them, they would not be able to compel him to do so
because the land had been transferred to a third party, the company. In this case,
the court pierced the corporate veil and treated the contractual obligation on Mr
Lipman to transfer the land as also binding on the company. This was because the
court took the view that the company had been used by Mr Lipman as a device to
avoid his existing contractual obligations.
29 Austin and Ramsay, above note 26, [4.250].

30 [1933] Ch 935.
31 [1962] 1 WLR 832.
¶3-460

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Where the company is acting as the agent or partner of the controller

Because they are separate legal persons, it is possible for a company to be the agent or
partner of its controller. However, this depends on establishing particular facts. As
explained in Salomon’s case, the fact that a person controls a company is not sufficient to
make the company an agent of the person.
If a person incurs an obligation or holds a right as agent for another person (called
the principal), then the right or obligation belongs to the principal. Therefore, if a company
were treated as the agent of a person who controlled it, any rights or obligations of the
company arising under the scope of the agency would be treated as rights or obligations of
3
the controller. This would have the effect of piercing the corporate veil.
Research on cases where it is argued that the corporate veil should be pierced suggest
that the existence of an agency relationship between a company and its controller (most
often, a parent company) is the ground most frequently argued before the courts.32
In some very limited circumstances, English courts have been prepared to treat
the company as the agent or partner of its controllers, where the company was clearly
under-resourced to carry on the activities for which it was formed and did not operate
independently in any way from its controllers. For example, in Smith, Stone & Knight
Ltd v Birmingham Corporation,33 a company (the parent company) that controlled another
company (its subsidiary) argued successfully that the subsidiary should be treated as
carrying on its business as agent for the parent company, entitling the parent company
to receive compensation for disruption to its business when the premises on which the
business was conducted were compulsorily acquired by the local council.34
A review of the relevant case law has suggested that such a finding is more likely where
the controller is a company rather than a natural person.35 The basis on which a subsidiary
may be treated as an agent of the parent has been summarised in the following terms:
Where a company is the ostensible executor of some function but, not having been
provided by its controller with resources necessary to do so as an independent entity,
relies on the resources of its controller, the controller is liable to be treated as the true
executor of the function … Although control of a company by members (even a sole

member) as such does not make the company an agent of the member, the additional
factor of failure to provide adequate resources for the company’s function may lead a
court to say that an under-resourced company is an agent for its controller.36
Where the law shows an intention that the corporate veil be disregarded

In some cases, courts have found that a particular legal rule should be interpreted as
requiring them to ignore the corporate veil.
32 I Ramsay and G Stapledon, ‘Corporate Groups in Australia’, (2001) 29 Australian Business Law Review 7.
33 [1939] 4 All ER 116.
34 The concepts of parent company and subsidiary are discussed in this Chapter. Other cases in which a similar
approach has been adopted are discussed in Austin and Ramsay, above note 26, [4.250].
35 Ramsay and Stapledon, above note 31.
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For example, during the First World War, legislation was passed in Britain preventing
people from trading with the enemy. To give effect to that legislation, an English court
was prepared to look through a company incorporated in Great Britain to discover the
nationality of its controllers: see Daimler Co v Continental Tyre and Rubber Co (Great
Britain) Ltd.37
Such an approach is based on some clearly discernible policy underlying a particular
law (in this case, the law preventing trading with the enemy) rather than on general
principles of company law.
In some statutes, it is expressly stated that the corporate veil should be disregarded
in some circumstances. This may occur where the law seeks to regulate the ownership
of particular enterprises or assets. Examples of this include laws regulating banking,
broadcasting, foreign investment and gaming, where the corporate veil can be lifted in
some circumstances. The takeover laws also provide mechanisms by which the identity of
participants in companies must be discovered.
An empirical study of piercing the corporate veil
Although there is a significant amount of literature by commentators discussing the
doctrine of piercing the corporate veil, there is only one empirical study of the Australian
cases relating to this doctrine. In this study, the authors present the results of analysis of
104 cases involving an argument to pierce the corporate veil. Some of the findings are:
• there has been a substantial increase in the number of piercing cases heard by courts
over time
• courts are more prepared to pierce the corporate veil of a proprietary company than a
public company
• piercing rates decline as the number of shareholders in companies increases
• courts pierce the corporate veil less frequently when piercing is sought against a parent
company than when piercing is sought against one or more individual shareholders
• courts pierce more frequently in a contract context than in a tort context.38
[¶3-480] How do the insolvent trading provisions operate to pierce

the corporate veil?
In cases where a company has been trading while insolvent,39 the Corporations Act
itself has the effect of piercing the corporate veil and making certain of its participants
responsible for restoring the company to the position it would have been in if the insolvent
trading had not occurred.
Chapter 12 explains that a company’s directors can be liable under s 588G of the
Corporations Act where they have failed to prevent the company from trading while it is
37 [1916] 2 AC 307.
38 I Ramsay and D Noakes, ‘Piercing the Corporate Veil in Australia’, (2001) 19 Company and Securities Law
Journal 250.
39 A company is insolvent when it cannot pay its debts as they fall due for payment.
¶3-480

Hanny 4pp.indb 60 11/26/2018 3:29:27 AM

insolvent. Liability can arise where a person is a director at the time the company incurs a
debt, and the company is insolvent at that time or becomes insolvent by incurring that debt
(or debts including that debt). If, at the time, there are reasonable grounds for suspecting
that the company is or would become insolvent, and the director is or ought to be aware
of those grounds, then the director contravenes s 588G(2) if he or she fails to prevent the
company from incurring the debt.
Unless a statutory defence to liability is available, the director can be ordered to pay
to the company compensation equal to the amount of any loss or damage suffered by
the person to whom the debt is owed, under Div 4 of Pt 5.7B of the Corporations Act.
Further, the creditor may be entitled to recover that amount directly from the director, as
a debt due to the creditor, provided certain statutory requirements are met.
The Corporations Act also makes a holding company liable for insolvent trading by
3
its subsidiary. Section 588V is similar to s 588G except that there is no need to show that
the holding company has failed to prevent the subsidiary from incurring the debt. Simply
being a holding company at the time the debt is incurred, in circumstances where the
holding company or its directors40 had or ought to have had the requisite knowledge, is
enough to establish a contravention.
The definition of ‘holding company’ is contained in Div 6 of Pt 1.2 of the Corporations
Act, which is discussed in Chapter 4.
Under s 588V, liability can arise where a company is a holding company at the time
the company incurs a debt, and the company is insolvent at that time or becomes insolvent
by incurring that debt (or debts including that debt). If, at the time, there are reasonable
grounds for suspecting that the company is or would become insolvent, and the holding
company or any of its directors is or ought to be aware of those grounds, then the holding
company contravenes s 588V(1).
Certain defences to liability are available under s 588V. These defences mirror those
contained in s 588H of the Corporations Act, discussed in Chapter 12. It is a defence if it
is proved that, at the time the debt was incurred, there were reasonable grounds to expect
solvency or if the holding company took all reasonable steps to prevent the subsidiary
incurring the debt.
Section 588W of the Corporations Act allows the subsidiary’s liquidator to recover
from the holding company an amount equal to any loss or damage suffered by an unsecured
creditor as a result of the relevant debt having been incurred. Amounts recovered by the
insolvent subsidiary are then available for distribution among the company’s creditors
(with unsecured creditors having priority in relation to those amounts).
CORPORATE LIABILITY
[¶3-500] How can a company be liable for wrongs?
The fact that a company is a legal person means that it can be held accountable when it
commits civil and criminal wrongs. The challenge for corporate law is that because the
40 Other than a director absent from management for good reason: s 588X(4).
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company is an artificial person, it can only act through human actors. When (and how)
should the company be held accountable for civil and criminal wrongs committed by those
actors?
The differing ways in which courts and legislatures make companies liable in these
circumstances are summarised in Figure 3.1. The way in which companies can be liable in
contract for the acts of their agents is discussed in Chapter 23.
Figure 3.1 How can companies be liable for civil and criminal wrongs?
CIVIL WRONGS CRIMES
VICARIOUS DIRECT VICARIOUS DIRECT

LIABILITY LIABILITY LIABILITY LIABILITY
Attribution of Attribution of For common For statutory Attribution of Attribution of

fault under fault by law crimes offences fault under fault by
common law statute common law statute
[¶3-510] On what basis can companies be liable for torts?

The law of ‘torts’ is the law of civil wrongs. These legal principles and doctrines give people
a right to bring a civil action for compensation where the security of their person or
property is invaded. Examples of torts include: negligence, nuisance, passing off, trespass
(to goods, land or person), defamation, injurious falsehood, deceit, conspiracy and breach
of statutory duty.
The person who commits a tort against another person is called a ‘tortfeasor’.
Companies can be treated as the tortfeasor through vicarious liability or direct liability.
What is vicarious liability?
The law of torts makes an employer (whether it is a company or not) liable ‘vicariously’ for
the acts and omissions of its employees — provided that the employees are acting within
the scope of their employment.
What is direct liability?
Under the doctrine of vicarious liability, there is no suggestion that the company itself
committed the tort. Rather, the doctrine operates to make one party (the employer) liable
for something done by another party (its employees).
In contrast, the courts — and, more recently, legislatures — have developed
mechanisms under which a company is treated as having committed a tort (or other civil
wrong) itself. This is called direct or primary liability. In some cases, it is the common law
that attributes fault to the company, and in other cases, it is a statute that does this.
¶3-510

Hanny 4pp.indb 62 11/26/2018 3:29:27 AM

In the case of Lennard’s Carrying Company, Limited v Asiatic Petroleum Company,

Limited,41 Lennard’s Carrying Company, Limited (Lennard’s) owned a ship designed
for carrying oil in bulk. The ship was managed by John M Lennard & Sons Limited.
Mr Lennard was a director of each company and he was the registered managing
owner of the ship.
The ship had defects in its boilers and was unseaworthy. While on charter
and loaded with benzene, the ship encountered bad weather and became grounded
due to the faulty boilers. This led to an explosion and the ship and its cargo were
destroyed.
The purchaser of the benzene, Asiatic Petroleum Company, Limited, claimed
damages for loss of the cargo. Lennard’s relied on s 502 of the Merchant Shipping
Act 1894, which relieved the owner of a ship from liability for loss or damage of
3
goods by reason of fire ‘happening without his actual fault or privity’.
The evidence indicated that Mr Lennard knew or had no excuse for not knowing
of the defects in the ship’s boilers and its unseaworthiness, but Mr Lennard did not
give evidence at the trial.
In considering whether the incident had taken place without the actual fault or
privity of Lennard’s, Viscount Haldane LC said:
… a corporation is an abstraction. It has no mind of its own any more than it has
a body of its own; its active and directing will must consequently be sought in
the person of somebody who for some purposes may be called an agent, but
who is really the directing mind and will of the corporation, the very ego and
centre of the personality of the corporation …
… if Mr. Lennard was the directing mind of the company, then his action
must, unless a corporation is not to be liable at all, have been an action which
was the action of the company itself within the meaning of s. 502 …
… It must be upon the true construction of that section … that the fault or
privity is the fault or privity of somebody who is not merely a servant or agent
[of the company], but somebody for whom the company is liable because his
action is the very action of the company itself …
Lennard’s was not successful in relying on s 502. The House of Lords treated
Mr Lennard’s action as the company’s action.
How is fault attributed to a company under the common law?
In HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd,42 Denning LJ said:

A company may in many ways be likened to a human body. It has a brain and
nerve centre which controls what it does. It also has hands which hold the tools
and act in accordance with directions from the centre. Some of the people in the
41 [1915] AC 705.
42 [1957] 1 QB 159 at 172.
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Hanny 4pp.indb 63 11/26/2018 3:29:27 AM

company are mere servants and agents who are nothing more than hands to do
the work and cannot be said to represent the mind or will. Others are directors
and managers who represent the directing mind and will of the company, and
control what it does. The state of mind of these managers is the state of mind
of the company and is treated by the law as such … Whether [the] intention [of
a particular company officer or officers] is the company’s intention depends on
the nature of the matter under consideration, the relative position of the officer
or agent and the other relevant facts and circumstances of the case.
This extract describes the way in which fault is attributed to a company under
the common law. The courts look for the company officer or officers who can be
said to be the ‘directing mind and will’ of the company — at least for the type of
transaction in question — and impute to the company any negligence (for example)
that those officers have displayed.
Under this approach, the officers concerned are treated not merely as agents
of the company, but as the company.
How is fault attributed to a company by statute?

Some statutes say that a breach of a particular section is not an offence (that is, not a crime)
but go on to allow certain people to bring civil legal proceedings seeking compensation
for any loss caused by the breach. Often these statutes will say that, where a company is
involved, the company is liable for all acts and omissions of its directors, employees and
agents acting within the scope of their authority. This removes the need to look for the
directing mind and will. For example, s 769B of the Corporations Act says that, subject
to certain exceptions, ‘conduct engaged in on behalf of a body corporate by a director,
employee or agent of the body, within the scope of the person’s actual or apparent
authority… is taken for the purposes of a provision of [Chapter 7 of the Corporations Act]
or a proceeding under this Chapter to have been engaged in also by the body corporate’.
[¶3-530] Which crimes can companies commit?

Depending on the jurisdiction, crimes may be entirely spelt out in statutes, or partly spelt
out in statutes and partly in the common law. For example, in some places, murder and
manslaughter are matters of common law.
Where crimes are defined in a statute, the statute43 will often say that companies are
included in any reference to a ‘person’ doing something.
In relation to crimes governed by the common law, whether a company can be guilty
is a matter of construing the elements of the crime and seeing whether it is possible for a
company to commit the crime.
In all cases, a company cannot commit a particular crime if imprisonment is the only
possible punishment. In some places, the only punishment for murder is imprisonment (or
even capital punishment), and so a company could not be convicted of murder in those places.
But, in many places, it is now possible for a company to commit manslaughter — hence the
43 Or an Acts Interpretation Act applying to that statute.
¶3-530

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expression ‘corporate manslaughter’. Sometimes, a statute will say that, where a company is
involved, any term of imprisonment is to be converted to a fine.
[¶3-540] Is vicarious liability possible for crimes?

As with torts, companies can sometimes commit a crime vicariously. In relation to statutory
offences, it is a matter of looking at the statute and determining whether the legislature
intended that an employer (whether a company or other entity) could be liable for an act
or omission of an employee: see Mousell Bros Ltd v London and North Western Railway Co44
and R v Australasian Films Ltd.45
[¶3-550] Is direct liability possible for crimes?

For companies to be held directly liable for crimes, the courts must attribute fault to the
3
company.
Attribution of fault at common law
The ‘directing mind and will’ concept that developed in the application of civil liability to
companies has been extended to the criminal arena. In Tesco Supermarkets Ltd v Nattrass,46
the House of Lords recognised that, in large companies, there will often be extensive
delegation starting at the board of directors. Therefore, while the board, the CEO and
other senior executives will often be the directing mind and will (or ‘speak and act as the
company’),47 sometimes the amount of authority delegated to a person lower down the
management chain will mean that:
• their acts can be treated as the company’s acts
• their intention (state of mind) in carrying out those acts can be treated as the
company’s intention.
The courts have also recognised that, in certain circumstances, the actions and
omissions of relatively low-level employees may be attributed to a company. This is
recognised in the important English case of Meridian Global Funds Management Asia Ltd
v Securities Commission.48 In deciding whether a company should be liable for a breach of

a civil penalty provision in the Corporations Act, one judge said:
It is their conduct and position in the company that has to be analysed to determine
whether the company is directly or only vicariously liable for their behaviour. If their
behaviour is not able to be treated as part of the directing mind and will of the company,
it may yet be attributed to the company by primary rules of attribution found in the
company’s constitution or the principles of company law as well as by general rules, the
rules of agency and vicarious liability, or, if appropriate, by special rules of attribution in
44 [1917] 2 KB 836 at 845–846.

45 (1921) 29 CLR 195.
46 [1972] AC 153.
47 Ibid at 171.
48 [1995] 2 AC 500; [1995] 3 All ER 918. This is a decision of the Privy Council on appeal from New Zealand,
concerning a company’s liability for a contravention of the NZ securities laws.
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particular cases used to determine whose acts, knowledge or state of mind were, for a
particular purpose, intended to be attributed to the company.49
For example, ABC Developmental Learning Centres Pty Ltd v Wallace50 involved an
alleged breach of two sections of the Children’s Services Act 1996 (Vic). A child aged
nearly three had escaped from a childcare centre into the surrounding streets
while the staff were not looking. He was returned unharmed by a neighbour, but the
company that operated the childcare centre was charged with breaching s 26 of the
Children’s Services Act (which required the company, and its staff, to ensure that
every reasonable precaution was taken to protect the child from any hazard likely
to cause injury) and also s 27 (which required the company and its staff to ensure
that the child was adequately supervised).
The company argued that the failures of its staff should not be attributed to
the company because there was no allegation of systemic or similar failure against
the company. Therefore, the staff, if anybody, was entirely to blame. The court
disagreed. Bell J said:
Where the employees are low-level, as in this appeal, the company can still be
identified with their actions if this is required by the terms of the offence and
the achievement of the policy objectives of the enabling statute. The need to
ascertain the nature of the offence and the policy of the statute comes through
strongly in the decided cases … These cases all have an important feature in
common with the present case — the offences concerned were regulatory in
nature. Such offences are typically created in legislation regulating a sphere
of social or economic activity in the public interest. The legislation may, in that
sphere, lay down a standard of action or behaviour for everybody bound by the
legislation, companies and natural persons, to follow. If the person does not
follow the standard, the legislation may allow he, she or it to be prosecuted
for an offence … [W]‌ here appropriate, the courts will fashion a rule of
attribution that counts, as a company’s, the actions of employees, of whatever
level, whose work involves the performance of a regulatory obligation on the

company’s behalf … The critical consideration in this case is that the policy
of the Children’s Services Act is the protection of children. Young children in
the absence of their parents or guardians for potentially long periods during
the day are an extremely vulnerable group in our community. The legislation
makes provision for the protection, supervision and care of such children by
services into whose custody they have been entrusted. By reference to the
protective policy of the Children’s Services Act and the nature of the relevant
offences, I conclude that the obligation to protect and supervise children may
be criminally enforced against both a proprietor company and its staff. Where
such a company operates a child care centre with staff who fail to perform
49 Australian Securities and Investments Commission v Managed Investments Pty Ltd (in liq) [2016] QSC 109 at [590],
(Douglas J) referring to Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500;
[1995] 3 All ER 918.
50 [2006] VSC 171.
¶3-550

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these obligations, the company can be held accountable and the staff do not
bear the potential liability alone.
Attribution of fault by statute

Sometimes the way in which criminal fault may be attributed to a company is set out in
a statute, so that the common law principles outlined above are no longer relevant. Some
statutes — like the Competition and Consumer Act 2010 (the Competition and Consumer
Act) — impute to a company:
• the conduct of every ‘director, servant or agent of the [company, carried out] within
3
the scope of the person’s actual or apparent authority’51
• the state of mind of every ‘director, servant or agent of the [company, acting] within
the scope of the person’s actual or apparent authority’.52
For offences created by laws of Australia’s Commonwealth Parliament, the Criminal
Code Act 1995 (Cth) applies. The Part of the Commonwealth Criminal Code that establishes
the principles for corporate criminal responsibility can make companies criminally liable
in a much wider range of circumstances than is possible under the common law principles
for attributing criminal fault to a company (the Tesco approach discussed above). However
the operation of this Part of the Code is sometimes excluded in relation to particular parts
of Commonwealth law (see, for example, s 769A of the Corporations Act which excludes
its operation in relation to Chapter 7 of the Corporations Act).
Under Part 2.5 of the Code:
• if a ‘physical element’ of a statutory offence is committed by an employee, agent or
officer of a company acting within the person’s actual or apparent scope of employment
or authority, the physical element is also attributed to the company
• if intention, knowledge or recklessness is an element of a statutory offence, then that
state of mind must be attributed to a company where, among other things:
– the company’s board or senior management tacitly or impliedly authorised or
permitted the offence to be committed

– a ‘corporate culture’ existed within the company that encouraged or tolerated
failure to comply with the statutory section in question, or
– the company had failed to create and maintain a corporate culture that required
the statutory section in question to be complied with
• if negligence is an element of a statutory offence, then even if no individual employee,
agent or officer of the company has been negligent, the company may still be found
negligent if the conduct of two or more of its employees — aggregated — was
negligent
51 Section 84(2) of the Competition and Consumer Act 2010 (Cth) (the Competition and Consumer Act). See also s
250(2) of the Life Insurance Act 1995 (Cth) (the Life Insurance Act).
52 Section 84(1) of the Competition and Consumer Act, formerly the Trade Practices Act 1974 (Cth). See also s 250(1)
of the Life Insurance Act.
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• a company may be found to have been negligent where the committing of a statutory
offence was substantially due to:
– inadequate corporate management, control or supervision of the conduct of
employees, agents or officers, or
– failure to put in place adequate information and reporting systems.53
53 Sections 12.2 to 12.4 of the Criminal Code.
¶3-550

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CHAPTER 4
Companies and Business Planning

Introduction¶4-001
Comparing Companies with Other Forms of Organisation

What are the different forms of organisation? ¶4-100
What are associations? ¶4-110
What other structures can be used for not-for-profit
activities? ¶4-115
What is sole proprietorship? ¶4-120
What is partnership? ¶4-130
What are joint ventures? ¶4-140
What is a trust? ¶4-150
What is a managed investment scheme? ¶4-160
What are indigenous corporations? ¶4-165
What are ABNs, ACNs, ARBNs and ARSNs? ¶4-170
Choice of Form of Business Organisation

How do we choose between the different forms of
business organisation? ¶4-200
What are some of the advantages of the corporate form? ¶4-220
What are some of the disadvantages of the
corporate form? ¶4-240
What is the most appropriate form? ¶4-260
Types of Companies
Overview of the different types of companies ¶4-300
How are companies classified according to the
members’ liability? ¶4-320
How are companies classified as public or
proprietary? ¶4-340
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70 Companies and Business Planning
Can companies change type? ¶4-360

What is a registrable body? ¶4-380
Corporate Groups
What are corporate groups? ¶4-400
Why use a corporate group, rather than an individual
company? ¶4-420
Group relationships — the definitions ¶4-440
In what circumstances does the law recognise and
regulate corporate groups? ¶4-460
Listing on the Australian Securities Exchange

What is listing? ¶4-500
Why do companies list? ¶4-520
How do companies list? ¶4-540
Chapter 1 established that the company limited by shares is a common form of business
organisation in Australia — there are more than 2.5 million registered companies in
existence. Chapter 3 looked at the legal nature of companies; it considered a number of
important legal concepts related to companies including the separate entity doctrine, the
notion of corporate capacity, limited liability, piercing the corporate veil and corporate
liability for civil and criminal wrongs.
This Chapter compares companies with other forms of business and not-for-profit
organisations, to decide when a company is the most appropriate form of organisation for
a particular activity. The advantages and disadvantages of the corporate form are explored.
Under Australian law, there are different types of companies that can be formed
and different ways in which companies are classified. In some cases, different rules and
requirements apply depending on how the company is classified, as seen later in the book.
The third part of this Chapter explains the different types of companies and the fourth
part looks at the concept of corporate groups.
The fifth part of the Chapter deals with the reasons for, and process of, listing on the
Australian Securities Exchange (ASX).
COMPARING COMPANIES WITH OTHER FORMS

OF ORGANISATION
[¶4-100] What are the different forms of organisation?
Chapter 1 explained that companies have particular legal characteristics that distinguish
them from other forms of business and non-business organisations. In this part, companies
¶4-100

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Companies and Business Planning71
are compared and contrasted with other types of structures or organisations through which
people routinely conduct their activities.
Not-for-profit activities (such as sporting or community service groups) may be
conducted through unincorporated or incorporated associations or through various
types of companies and other corporations (including companies limited by guarantee).
Associations are discussed at ¶4-110 below and the not-for-profit sector at ¶4-115.
Business activities may be carried on by a person as a sole trader or by a group of people
through a general or limited partnership or unincorporated joint venture. Alternatively, a
business may be carried on by a trustee (which may itself be a company) for the benefit of
beneficiaries of a trust. These different structures are explained in ¶4-120–¶4-150.
Many publicly offered investment vehicles structured as trusts or operating through
other, non-corporate structures are ‘managed investment schemes’ for the purposes of the
Corporations Act 2001 (Cth) (Corporations Act). Managed investment schemes must be
4
registered with the Australian Securities and Investments Commission (ASIC) and are
governed by structural and investor protection requirements contained in Ch 5C of the
Corporations Act, as explained in ¶4-160 below.
Where a business is carried on by a person (whether a natural person or a corporation)
other than in their own name, the person is required to register the business name in each
state or territory in which the business operates.
[¶4-110] What are associations?

Unincorporated associations
Unincorporated associations are clubs and societies which are formed to carry on various
activities but where the members do not aim to make a profit and distribute it to themselves.
If they did, the members would be partners in a partnership because, as explained below,
a key part of the definition of a partnership is that the partners are carrying on business
in common with a view to making a profit. Of course an unincorporated association may
make a profit as an incidental result of some of its activities. However, this profit must
be used for the purposes of the association and cannot be distributed to the individual
members of the association.
An unincorporated association is not a separate legal entity. This means that it cannot
hold property in its own name (property must be held in the names of the individual
members of the association) and the association is unable to enter into contracts in its
own name. Neither can the association sue or be sued in its own name. The members of
an unincorporated association do not have the benefit of limited liability. However, where
the members have elected a committee to conduct the management of the association, as a
general rule it will be the members of the committee, rather than all of the members, who
are required to defend any legal proceeding brought against the unincorporated association
by someone who has been injured by the activities of the association.1
1 AS Sievers, Associations and Club Laws in Australia and New Zealand (2nd edn, 1996), 38.
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Incorporated associations
An association may incorporate under the Associations Incorporation Act of the state
or territory in which the association operates. The benefits of incorporation, which are
described later in this Chapter, are then available to the association. These include limited
liability for the members of the association. In addition, the association will be able to hold
property in its own name. However, a very important restriction is that associations which
are formed primarily for trading or other business purposes, or which make profits that
are distributed to members, cannot incorporate under an Associations Incorporation Act.2
[¶4-115] What other structures can be used for not-for-profit

activities?
Not all not-for-profit entities are associations. Some are registered companies (including
companies limited by guarantee) or other types of corporations (such as indigenous
corporations, discussed at ¶4-165 below). Charities and not-for-profit entities are
regulated by the Australian Charities and Not-for-profits Commission (ACNC). In
October 2018 there were approximately 54,000 entities registered with the ACNC. These
entities were each engaged across a wide range of activities such as religious organisations,
parents and citizens committees or associations, universities and research organisations,
non-government schools, animal welfare organisations, international aid agencies, family
violence support organisations, aged care centres and child care groups, cultural institutions
such as museums and galleries, environmental protection groups and legal aid centres.
Almost two-thirds of Australia’s registered charities (63%) are classified as small, with
annual revenue of $250,000 or less. Of this majority, approximately one-third is very small,
with annual revenue of less than $50,000. Also, just under half of Australia’s registered
charities (44%) employ no staff and are entirely volunteer-run. Only a minority of charities
are classified medium (17%), with annual revenue between $250,000 and $1,000,000, or
large (19%) with annual revenue of over $1,000,000.3
[¶4-120] What is sole proprietorship?

The expression sole proprietorship or sole trader is used to describe the situation where an
individual person carries on a business in his or her own name. Where a sole proprietorship
exists, there is no separation between the business and personal assets or obligations of the
person conducting the business. The sole proprietor signs all the contracts relating to the
business, owns its assets and is personally liable for all its debts.
Because the income generated by the business is the income of the proprietor, the
proprietor is the taxpayer and the business losses or profits can be offset against the
proprietor’s other income.
2 Ibid, 88–89.
3 www.acnc.gov.au.
¶4-120

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[¶4-130] What is partnership?

General partnership
A partnership is an association of people carrying on business in common with a view
to a profit. There is no need to take any formal legal steps to create a partnership —
it simply arises as a matter of law where two or more people are in this relationship.
However, usually the terms of the agreement between partners are recorded in a formal
legal document referred to as a partnership agreement.
A partnership is not a separate legal entity.4 Like sole proprietors, the individual
partners in a partnership must own the assets of and incur the obligations relating to the
partnership’s business personally and in their own names. This means, for example, that if
partners in a firm want to borrow money to expand the firm’s business, they would each
have to sign the loan contract and each would be personally liable to the lender for the full
amount of the debt.5
Unlike shareholders in a company, partners do not have limited liability unless they
are partners of a limited partnership (see below).
4
Partners are agents6 for each other with respect to the conduct of the business. This
means that an individual partner can incur an obligation for which all the other partners
are also responsible. Unless they have agreed otherwise, partners have a right to participate
in the management of the business and share in its proceeds equally.
If the identity of the partners changes, for example because a partner resigns or a
new partner joins, the original partnership is dissolved and a new one is formed. This
may require the transfer of assets and obligations from the retiring partner or to the new
partner. This process of transferring assets and obligations can be quite complex. Any single
partner can cause the partnership to be dissolved. Further, the right to be a partner cannot
be assigned or transferred to another person without the unanimous consent of the other
partners (although it is possible to assign the income attributable to a partnership share).
The profits and losses generated by the partnership business are taxable in the hands
of the individual partners, and can be offset against their other income. Unlike a company,
a partnership is not taxed as a separate entity.

Under s 115 of the Corporations Act, partnerships with more than 20 partners are
not permitted without the consent of the relevant minister. Once the number of partners
4 Court rules in most states allow a partnership to sue and be sued in the firm’s name. This is done only to simplify
procedures by making it unnecessary to name each partner separately. It does not affect the legal nature of the
partnership.
5 The liability of partners is joint and several. Several liability is liability which can be divided among those who have
caused some harm or wrongdoing so that each wrongdoer is only responsible for their part of the harm caused.
Joint liability is where two or more persons are jointly liable for some harm or wrongdoing which means that if one
of these persons is unable to pay their share of the liability (for example because they are bankrupt), then the other
persons who are jointly liable must pay the entire amount. Where liability is joint and several, the liability can be
enforced individually against one or more of the persons responsible or against all of the persons jointly.
6 An agent is a person who, as a matter of law, can act for another person. Provided the agent acts within the scope
of his or her authority, the principal (that is, the person on whose behalf the agent acts) is bound by the acts of the
agent. Agency in the context of company law is discussed in Chapter 23.
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exceeds 20, the firm must incorporate. However, the Corporations Regulations 2001
(Corporations Regulations) allow certain types of businesses to operate with more than
20 partners, including law firms and accountancy firms.
Limited partnership
Limited partnership is a special form of business association permitted under statute
in all states and territories. It allows investors who want only to contribute capital to a
business, and to have no say in its day-to-day management, to join with others to invest in
a partnership structure but with the benefit of limited liability. Formal requirements must
be complied with in order to form a limited partnership.
A limited partnership must have at least one general partner,7 who is generally the
person who carries on the business and who does not have limited liability, and at least
one limited partner, who is the person contributing capital to the venture. As long as the
limited partner does not involve itself in the management of the business, its liability will
be limited to the amount contributed to the partnership. However, the benefit of limited
liability will be lost if the limited partner participates in management.
Limited partnerships are rarely used in Australia because (with the exception of
venture capital limited partnerships) they are taxed on the same basis as companies. In the
absence of more attractive tax treatment, it is often considered preferable to use a company
rather than a limited partnership because there is no need in a company to have a general
partner with unlimited liability, nor is there a risk that investors will lose the benefit of
limited liability if they involve themselves in the day-to-day management of the business.
Venture capital limited partnerships are a special type of limited partnership that can
invest in certain eligible investments and receive special tax treatment (including flow-
through tax treatment in most cases).
[¶4-140] What are joint ventures?

An unincorporated joint venture is simply a contractual arrangement between two or more
people that they will cooperate to conduct a particular venture or related ventures. The
joint venture is not a separate legal entity and the assets and obligations of the venture are
those of the venturers personally.
Sometimes it can be difficult to distinguish between a partnership and a joint venture.
Generally, in a joint venture, the participants’ respective contributions and entitlements will
be agreed in advance, and will be quite specific. This can be important in demonstrating
that the parties are not conducting a business ‘in common’, making the arrangement a
partnership.
Unlike partners, joint venturers are not agents for each other and their liability with
respect to debts incurred in the course of the venture, while personal and unlimited, is
several and not joint.8
7 The general partner may itself be a corporation.

8 See note 5 for a definition of joint and several liability.
¶4-140

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[¶4-150] What is a trust?

Many businesses are conducted through trusts. A trust arises where one person is required
to hold or invest property for the benefit of another person. The person who holds the
property is the trustee, and the people who are entitled to enjoy the property and receive
the income or other proceeds from it are the beneficiaries.
A trust is not itself a legal entity. The person who contracts or holds property for a
trust is the trustee. Trustees are personally liable for debts incurred on behalf of the trust,
although generally the trustee will have a right to be indemnified (or reimbursed) out of
trust assets for the amount of the claim.9 The beneficiaries generally are not liable for the
debts incurred by the trustee unless they have given specific directions to the trustee and
the debt arises as a result of the trustee acting in accordance with those directions.
Trusts are often used in family businesses to enable the distribution of income derived
from the business to a number of beneficiaries. Often, a company is incorporated to act
as trustee of the trust and conduct the business for the benefit of the beneficiaries. This is
sometimes referred to as ‘income splitting’. Provided the trust income is fully distributed, 4
it is not taxable in the hands of the trustee.
[¶4-160] What is a managed investment scheme?

Many commercial arrangements, particularly investment arrangements, are carried out
through vehicles known in the Corporations Act as managed investment schemes. These
schemes are often structured as trusts or as webs of contractual arrangements between the
manager of the scheme and its investors. There is an enormous variety of such schemes.
They range from multi-billion dollar property trusts, cash management trusts, equity
funds, diversified funds and hedge funds to agribusiness schemes such as olive groves,
vineyards and timber plantations. They also include smaller syndicated investments such
as property or racehorse syndicates.
Such schemes are separately regulated under Ch 5C of the Corporations Act.
To be caught by Ch 5C, the arrangement must come within the definition of a
managed investment scheme contained in s 9 of the Corporations Act.10 The definition
is made up of a broad, functional description of things that may be considered managed
investment schemes, followed by a list of express exclusions.
The functional description captures:
(a) a scheme that has the following features:
(i) people contribute money or money’s worth as consideration to acquire rights
( interests ) to benefits produced by the scheme (whether the rights are actual,
prospective or contingent and whether they are enforceable or not); and
(ii) any of the contributions are to be pooled, or used in a common enterprise,
to produce financial benefits, or benefits consisting of rights or interests in
9 A trustee may lose its right of indemnity where it has acted in breach of trust.
10 For a detailed discussion of the definition of managed investment schemes, see P Hanrahan, Managed Investments
Law & Practice (CCH, looseleaf ).
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property, for the people (the members) who hold interests in the scheme or as
people who have acquired interests from holders; and
(iii) the members do not have day-to-day control over the operation of the scheme
(whether or not they have the right to be consulted or to give directions).
Among the things expressly excluded by para (c) to (n) of the definition in s 9 are
bodies corporate, franchises, life insurance statutory funds and regulated superannuation
funds. The effect of para (iii) of the definition is that arrangements like general partnerships,
in which all the partners play a role in the day-to-day management, are not caught.
Managed investment schemes can be structured in a number of different ways.
The most common forms are unit trusts, contractual syndicates or ventures, and limited
partnerships (or variations of them).
In a unit trust, investors subscribe for units that represent uniform fractions of the
beneficial interest in the trust property. The funds subscribed are held in trust by the
operator (or a custodian on behalf of the operator) and invested to produce income or
capital growth, or both, for the members. The operator may or may not charge a fee,
collected from trust assets, in return for investment and management activities carried out
by it (either directly or through a delegate) in connection with the trust.
Contractual syndicates or ventures generally involve investors entering into one
or more contractual arrangements with the operator — and, in some cases, with other
investors — that provide for the operator to undertake certain activities for the benefit of
the investors, where those activities amount to a common enterprise. Contributions made
by the investors are used to produce the benefits promised by the arrangements.
Some arrangements that come within the definition of ‘managed investment scheme’
must be registered with ASIC under s 601ED of the Corporations Act. Section 601ED(1)
of the Act provides that, subject to s 601ED(2), a managed investment scheme must be
registered if:
(a) it has more than 20 members;
(b) it was promoted by a person, or an associate of a person, who was, when the
scheme was promoted, in the business of promoting managed investment

schemes; or
(c) a determination [made by ASIC] under subsection (3) is in force in relation to
the scheme and the total number of members of all of the schemes to which the
determination relates exceeds 20.11
Schemes that meet none of the criteria above are not required to be registered.
Section 601ED(2) of the Corporations Act goes on to provide that:
A managed investment scheme does not have to be registered if all the issues of interest
in the scheme that have been made would not have required the giving of a Product
Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered
when the issues were made.
11 ASIC has power under s 601ED(3) of the Corporations Act to declare schemes to be related.
¶4-160

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The issue of interests in a scheme requires a Product Disclosure Statement only if the
issue is to a retail client as defined in s 761G or 761GA of the Corporations Act and none
of the exemptions in the Corporations Act or the Corporations Regulations apply. The
meaning of retail client is discussed in Chapter 22.
It is an offence to operate a scheme that should be registered under Ch 5C but is not
registered: s 601ED(5).
To be registered under Ch 5C, the scheme must meet certain structural and other
requirements. The operator of the scheme (referred to in the Corporations Act as its
responsible entity) must be an Australian public company that holds an Australian financial
services licence12 authorising it to operate the scheme. To obtain that licence the operator
must demonstrate to ASIC that its organisational competence and its resources (financial
and non-financial) are adequate for it to operate the scheme.
Also, Ch 5C provides that the scheme must have a constitution that is legally
4
enforceable and a compliance plan that sets out adequate measures that the responsible
entity is to apply in operating the scheme and ensuring compliance with the Corporations
Act and the scheme’s constitution. The responsible entity’s compliance with the plan must
be audited. Further, unless the majority of the responsible entity’s directors are independent
or external directors, a compliance committee must be established to monitor the adequacy
of the plan and the responsible entity’s compliance with it.
Chapter 5C imposes obligations on the responsible entity and its officers to
act honestly, with care and in the best interests of the members. It also gives scheme
members certain control rights, such as rights to vote on certain matters and to remove
the responsible entity.
[¶4-165] What are indigenous corporations?

Not all corporations are registered under the Corporations Act. Aboriginal and Torres
Strait Islander organisations can elect to register under the Corporations (Aboriginal and
Torres Strait Islander) Act 2006 (the CATSI Act), which came into force on 1 July 2007,
replacing the Aboriginal Councils and Associations Act 1976 (ACA Act). Some factors
unique to the CATSI Act include:
• indigeneity—a majority of members and directors must be Indigenous
• internal governance rules—a corporation’s constitution must meet minimum standards
of governance and must be approved by the Registrar of Indigenous Corporations
• purpose—some types of organisations are inappropriate for registration under the
CATSI Act, for example trade unions or corporations providing financial services
• corporate membership—bodies corporate or peak bodies can become members
• specialised assistance—in contrast to other regulators, the Registrar can provide
assistance to CATSI corporations
• specialised regulatory powers—the Registrar has the power to appoint examiners and
administrators
12 Australian financial services licences are discussed in Chapter 22.
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Hanny 4pp.indb 77 11/26/2018 3:29:27 AM

• mandatory incorporation—corporations holding or managing native title under the

Native Title Act 1993 and the Native Title (Prescribed Bodies Corporate) Regulations
1999 must be incorporated under the CATSI Act
• transfers—the CATSI Act contains transfer provisions which allow organisations
to transfer to the CATSI Act, provided they meet the minimum requirements (for
example the Indigeneity requirement).13
Indigenous corporations do not have an Australian Company Number (ACN), but
instead have an Indigenous Corporation Number (ICN) at the end of their name.
[¶4-170] What are ABNs, ACNs, ARBNs and ARSNs?

As discussed above, there are a number of different types of vehicles through which
business or not-for-profit activities can be carried on. Often you can identify the type of
vehicle being used by its ABN, ACN, ARBN or ARSN, or by the words or abbreviations
included in its name.
The ABN or Australian Business Number is allocated by the Australian Tax Office.
A person or entity needs an ABN to register under the Goods and Services Tax (GST)
regime that operates in Australia. The effect of this requirement is that most businesses,
in whatever form they are structured, have an ABN. The ABN is an 11-digit number (eg
ABN 12 123 456 789).
The ACN or Australian Company Number is allocated by ASIC when a company
is registered under the Corporations Act: see ¶5-120. If the entity being dealt with has
an ACN, it is an Australian registered company. As an Australian registered company its
name will include the words ‘Limited’, ‘Proprietary Limited’, ‘Proprietary’ or ‘No Liability’,
depending on which type of company it is: see ¶4-300.
The ARBN or Australian Registered Body Number is allocated by ASIC when a
foreign company or registrable Australian body is registered: see ¶4-380. If the entity
being dealt with has an ARBN, it is either a foreign company or a registrable Australian
body (such as an incorporated association that operates outside its home jurisdiction).
The ARSN or Australian Registered Scheme Number is allocated by ASIC when a

managed investment scheme is registered under Ch 5C of the Corporations Act: see ¶4-
160. If the entity being dealt with has an ARSN, it is a registered managed investment
scheme.
Each of the ACN, ARBN and ARSN numbers have nine digits and in all cases will
be the same as the last nine digits of the entity’s ABN.
13 www.oric.gov.au.
¶4-170

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CHOICE OF FORM OF BUSINESS ORGANISATION

[¶4-200] How do we choose between the different forms
of business organisation?
Chapter 1 noted that any person who wishes to do so can incorporate a company to carry
on a lawful business enterprise. Often businesspeople and their advisers assume that a
company is the most appropriate form of business organisation — the reasons usually
advanced are that using a limited company ‘ensures’ that the personal assets of the investors
in, and managers of, the business are protected from claims by the company’s creditors,
and that there is a tax advantage to using a company because the rate of income tax
payable by companies is lower than that paid by individuals. The following discussion
reveals, however, that the reality is somewhat more complicated than this and that a whole
range of factors must be considered before making the decision, in a particular case, to use
a company to carry on a business.
In summary, some of the perceived advantages of the corporate form include limited
4
liability, perpetual succession, free transferability of interests and the ability to give a
floating charge. Perceived disadvantages include the costs involved, the requirements for
public reporting and the duties imposed by company law on participants in a company.
[¶4-220] What are some of the advantages of the corporate form?

In the following writings, some of the possible advantages in using a company to carry on
a business are identified.
Limited liability
The key difference between corporations and other forms of business association is that
the corporation is a separate legal entity. As such, its debts are its own and not those of its
participants. In limited companies, the liability of the company’s members to contribute
to meet the company’s debts is limited to a pre-agreed amount. In the case of companies
limited by shares, the members’ liability is limited to the amount (if any) remaining
unpaid on the members’ shares. This is referred to as limited liability, which is discussed in
Chapter 3.
By electing to use a limited company to carry on a business, a person investing in
that business can decide how much capital (that is, money or assets) the person wishes to
invest in the company. The person makes that investment and is issued with shares in the
company in return. The company then begins to trade, incurring obligations to creditors
such as lenders, suppliers and employees.
If the company is unsuccessful, it may reach a position where its liabilities exceed its
assets and it becomes unable to pay its debts as and when they fall due. In such circumstances,
the company is insolvent. Assuming the company’s controllers have not acted unlawfully,
on insolvency the company’s members would lose their initial investment but would not
be required to contribute any more money (other than any amount unpaid on partly paid
shares) to meet the company’s debts. Once the company’s assets are exhausted, creditors
are unable to recover any further amounts.
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Hanny 4pp.indb 79 11/26/2018 3:29:28 AM

So limited liability is seen as a means for entrepreneurs and other investors to decide
how much of their own personal wealth to risk in a particular business venture and to
quarantine the remainder of their personal wealth from that risk. Similarly, a larger
company may decide to quarantine the risk of, say, a new project by incorporating a
separate subsidiary to carry on that project. If the project fails, the parent company stands
to lose only the amount it invested in the subsidiary.
Perpetual succession
A second significant advantage of using the corporate form to carry on business is that
a company has perpetual succession. This means that a company’s existence continues
indefinitely until it is brought to an end through winding up and de-registration,14 despite
changes in the identity of its participants.
In other forms of business association that are not separate legal entities (such as
sole proprietorship or partnership), the business assets and obligations are held by the
individual participants. This means that if the identity of the participants changes (for
example, because a sole proprietor dies or partners resign from or join a partnership), it
may be necessary to transfer those assets and obligations.
So a company’s perpetual succession can be an advantage where it is intended that
the business will be ongoing. It allows for assets and obligations to be held in the company
indefinitely, reducing the cost and complexity involved in transferring those assets and
obligations if the identity of the participants in the enterprise changes.
Free transferability of interests
A corollary of limited liability and perpetual succession is that the corporate form is
uniquely well suited to the free transferability of investors’ interests. Company law
provides for free transferability as the ‘default rule’ (that is, the rule that applies unless the
participants in a company elect to displace it). In contrast, the default rule in partnership
is that partnership interests cannot be assigned.
Companies, by effectively ‘unitising’ investors’ interests in the business in the form
of shares, create fungible securities that are capable of being traded through organised
markets such as stock exchanges. The fact that shareholders in companies have limited
liability means that potential purchasers are not required to go to the expense of discovering
all the potential claims against them or the creditworthiness of the other investors in the
company. This reduces the transaction costs of investing in companies as against investment
in other forms of business association and facilitates the operation of stock exchanges (the
liquidity of which is an important contributor to companies’ ability to raise finance from
the investing public).
Companies as large commercial enterprises
As noted above, s 115 of the Corporations Act prohibits ‘outsize partnerships’. Generally,
partnerships with more than 20 partners are not permitted. This means that, where it is
proposed to have more than that number of investors in an enterprise, the corporate form
should be used.
14 See Chapter 25.
¶4-220

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Corporate law as a standard form contract between participants

In all but sole proprietorships and single director/shareholder companies, business
associations involve relationships between participants. The respective rights and
responsibilities of investors, managers and creditors must be agreed between those
participants. In many respects, the law can be seen to provide ‘standard form’ terms
governing aspects of those relationships. The law as it applies to different forms of business
association provides mandatory rules (that is, by electing that form of business association,
the participants agree to be bound by these rules) and default rules (that is, rules that apply
in that form of business association unless the participants agree that the rules should be
altered or excluded).
Where the law itself provides rules governing the relationship of participants that
are appropriate for the enterprise to be carried on, this can reduce cost and uncertainty
for the participants. This is because there is less need to obtain legal and other advice
4
to customise the rules for the particular circumstances, or to have lengthy agreements
governing all possible situations prepared and executed by all the participants (including
new participants as they join). The rules of general application found in the law are often
settled and may have been the subject of judicial interpretation or academic commentary,
so that participants can be confident of the likely application of the rules in any given
situation.
This can be illustrated by, for example, comparing the default rules under the law of
partnership and company law about the right of investors to participate in management
and to share in profits.
Under the law of partnership, the default rules assume that all the partners will be
active participants in the management of the enterprise. They will all have an equal say on
important decisions affecting the business. In addition, unless the default rule is modified
in a partnership agreement, they will all participate in the profits of the business equally.
Further, each partner is an agent for the others, giving one partner the ability to bind all
the others personally.
The default rules for company law assume that management powers will be exercised
by a governing body — the board of directors. Individual shareholders may have only
limited rights to participate in decision-making. Because of this division between
ownership and control, company law contains rules designed to protect shareholders and
prevent directors using their control of the company to their own advantage. Participants
in companies are not agents for each other, although Chapter 23 outlines that certain
company officers can bind the company itself in certain circumstances. In company law,
the default rule is that shareholders are entitled to participate in the profits of the business
pro rata by reference to the amount of capital contributed by them, rather than equally
regardless of their contribution.
So, particularly for business enterprises that involve a separation of ownership and
control, company law can provide a useful set of rules to govern the relationship between
participants. Even for other companies that do not have this separation, company law has
developed a set of rules that are appropriate or that can be customised at a lower cost than
would otherwise be possible. In addition, one of the comparative strengths of company
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Hanny 4pp.indb 81 11/26/2018 3:29:28 AM

law is its flexibility. As discussed in Chapter 19, companies may issue shares of different
classes, with different rights (particularly control rights and distribution rights) attaching
to those classes of shares. This means that the differing interests of different classes of
investors can be easily accommodated. Similarly, arrangements for management (such as
special restrictions on officers’ powers) can be incorporated into the existing framework of
company law through the company’s constitution.
Another example of the flexibility of company law is that there are different types of
companies, for example, public and proprietary companies. It is possible to change from
one type of company to another type.
Taxation consideration
Companies are ‘taxpayers’ for the purposes of Australian income tax legislation. They pay
income tax at a lower marginal rate than individuals, and small companies pay a lower rate
of tax than large companies.
The entity level taxation imposed on companies results, to a degree, in ‘double
taxation’ of company profits. This is because the company pays tax on its taxable income
at its marginal rate, and then when its after-tax profits are distributed to shareholders as
dividends, the shareholders pay tax at their marginal rate on the amount of the dividend.
However, this is offset to a certain degree by ‘dividend imputation’, a process by which the
shareholder receives a credit for a pro rata share of the tax paid by the company, to be offset
against the shareholder’s own liability to pay tax on the amount of the distribution.
The individual tax position of an investor in an enterprise will determine whether a
form of business association that attracts entity level taxation (such as a company) or one
that does not (such as a trust or a partnership) is the most appropriate for that investor.
[¶4-240] What are some of the disadvantages of the

corporate form?
The foregoing discussion canvassed some of the possible advantages of using a company
to carry on a business. It is clear from that discussion that the question of whether the
particular characteristic is an advantage or not depends on the individual circumstances

of the participants in the enterprise. This part looks at what are perceived to be the main
disadvantages of the corporate form — the costs in establishing and administering
a company, and the extent to which the Corporations Act requires participants in
companies to disclose information about the company’s financial affairs. Also, because the
Corporations Act includes a number of public law obligations, breach of which may attract
criminal sanctions, this additional layer of accountability should be taken into account.
Establishment and administration costs
The costs of forming a company are described below. In each individual case, they
must be compared with the costs involved in other forms of business association. For
example, although there are no formalities such as registration associated with forming a
partnership, most partnerships would require a customised partnership agreement which
may be expensive to draft.
¶4-240

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Companies and their participants have ongoing administrative obligations

throughout the company’s life. These obligations are described in Chapter 17, and their
extent depends on the nature of the company. For small proprietary companies, these
obligations are considerably less onerous than for listed public companies. Maintaining
records, making the public filings, and disclosing information to members all have a cost,
both in professional fees such as accounting and audit costs, legal fees, and the costs of
registry services, and in management time diverted from managing the company’s business
to complying with legal and regulatory requirements.
Publicity
All companies are required to disclose information about participants to ASIC (and
therefore the public generally) and their shareholders. These disclosure obligations are
detailed in Chapter 17.
Chapter 17 also discusses that all companies other than small proprietary companies
and some small companies limited by guarantee, are required to disclose to ASIC
(and therefore to make public) their key financial information on a periodic basis. This
4
information is readily available to anyone who seeks it, including government departments
and regulatory agencies, the company’s competitors, and creditors of the company and its
individual participants.
In addition to this periodic reporting, companies that are disclosing entities under the
Corporations Act (generally speaking, companies with public shareholders) are required to
disclose material information about themselves publicly as it becomes available.
These disclosure obligations may make it difficult to keep private the information
about businesses conducted through a company. This can operate to the competitive
detriment of the company.
Public law obligations
Companies are legal entities created by government exercising political power on behalf
of the people. They and their participants have special powers and privileges as a result of
that process of incorporation. In return, companies and their participants are required to
submit themselves to regulation under public law. Many of the obligations imposed on
companies and their participants under the Corporations Act are public law obligations,
in the sense that they can be enforced by the state through criminal sanctions or the
imposition of civil penalties.
In this respect, company law differs from the law regulating other forms of business
association. For example, the breach by a partner of their duty to avoid conflicts of interest
would not attract public law sanctions, but the breach by a director of their duty to avoid
conflicts may result in a substantial fine or a period of imprisonment, depending upon the
statutory provision which has been breached.15
15 Criminal sanctions may apply where the director has acted dishonestly. See Chapter 15 for discussion of the
consequences of breach of duty.
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[¶4-260] What is the most appropriate form?

The decision as to the most appropriate form of business association for a particular
enterprise requires careful consideration of all of the factors described above. For most
larger enterprises, particularly those that propose to raise capital from the public, a company
will be the most appropriate form of business association. In smaller businesses, the choice
may be less clear-cut. However, many small businesses do elect to use the corporate form,
largely because of the perceived advantages in obtaining limited liability. This is true even
where agreements with the company’s main finance creditors have the practical effect of
restricting the benefits of limited liability to the day-to-day debts of the business and
involuntary liabilities such as legal claims.
TYPES OF COMPANIES
[¶4-300] Overview of the different types of companies
The Corporations Act allows for registration of different types of companies, classified by
reference to the basis and extent of the members’ liability and according to whether they
are public companies or proprietary companies.
Once the decision is made to use a company as the form of business association
for a particular enterprise, the choice then becomes one between the different types of
companies that can be formed under the Corporations Act. The following writings look at
the different types of companies and introduce their main characteristics.
Figure 4.1 Types of companies
Corporations
Other corporations
Companies registered under
(eg incorporated associations,
the Corporations Act
statutory corporations)
Public companies Proprietary companies
Limited by shares Limited by shares
Limited by guarantee Unlimited with share capital
Unlimited with share capital
No liability
Companies are classified in two main ways. Firstly, they are classified according to the
nature of the members’ liability. Secondly, they are classified according to whether they are
public or proprietary.
¶4-300

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[¶4-320] How are companies classified according to the members’

liability?
Companies are classified according to the members’ liability in the following ways.
Companies limited by shares
Companies limited by shares are the most common form of company in Australia.
Generally speaking, they are the most appropriate form of company for general business
activities.
A company limited by shares is defined in s 9 of the Corporations Act as ‘a company
formed on the principle of having the liability of its members limited to the amount
(if any) unpaid on the shares respectively held by them’. In these companies, members
contribute, or agree to contribute when called upon to do so, money or property as share
capital. In return they are issued with fully or partly paid shares.16
Other types of companies
Companies limited by shares are the most common form of company and are the focus of
4
this book. Other types of companies are listed below:
• Unlimited companies, in which members have no limit placed on their liability.
These companies are often used where the rules of a particular profession (such as
law) prevent a limited company from carrying on that profession. A practitioner
may nevertheless wish to incorporate to obtain the other benefits of incorporation
described above.
• Companies limited by guarantee, which are companies formed on the principle
of having the liability of its members limited to the respective amounts that the
members guarantee to contribute to the property of the company if it is wound up.
These companies are often used for non-profit activities such as independent schools.
• No liability companies, which are a special type of company, the activities of which
must be limited to mining, and which have no statutory or contractual right to recover
unpaid calls: s 112(2) of the Corporations Act. These companies have ‘No Liability’ or
‘NL’ in their name.
[¶4-340] How are companies classified as public or proprietary?

A person proposing to apply for registration of a company limited by shares must decide
whether they wish the company to be a proprietary company or a public company. The
main differences between proprietary and public companies are that:
• proprietary companies are usually not permitted to have more than 50 shareholders
(excluding shareholders who are employees).
16 Fully paid shares are issued when the member pays the full amount of the subscription price to the company at
the time the share is issued. When the member pays part of the subscription price initially and agrees to pay the
remainder when the company makes a call, the member is issued with a partly paid share. See also Chapter 19.
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• proprietary companies are not allowed to undertake certain fundraising activities that
require the issue of a prospectus. This includes offering to issue shares to the public
generally.
As noted in Chapter 2, the Corporations Act imposes more onerous obligations
on public companies and their participants than on proprietary companies and their
participants. The exception is where a proprietary company has raised funds from investors
using a crowd-funding platform. For this reason, it is generally appropriate to incorporate
as a proprietary company unless the special restrictions that apply to public fundraising
by proprietary companies are inappropriate for that enterprise. Examples of the additional
obligations imposed on public companies that may not apply to proprietary companies
include:
• public companies are required to hold an annual general meeting: s 250N of the
Corporations Act
• public companies are required to lodge financial reports regardless of the size of the
company’s operations: s 292 of the Corporations Act
• special restrictions on transactions with related parties apply to public companies
under Ch 2E of the Corporations Act
• public companies must have three directors while proprietary companies need only
one director: s 201A of the Corporations Act
• public companies must have a secretary: s 204A of the Corporations Act
• the resignation of an auditor of a public company requires the consent of ASIC: s 329
of the Corporations Act
• directors’ reports of a public company must contain statements about the qualifications
of directors, their attendance at meetings of directors, their shareholdings or their
contracts with the company: s 300(10) of the Corporations Act
• special rules apply to the appointment of public company directors: s 201E of the
Corporations Act
• restrictions apply to the removal of public company directors: s 203D and 203E of

the Corporations Act.
In addition, resolutions of proprietary companies (but not public companies) that
must be passed at general meetings of shareholders may be deemed to have been passed
even though no meeting was held, provided all shareholders sign a document stating that
they support the resolution: s 249A of the Corporations Act.17
The law applies slightly differently to companies that raise funds from investors using
the crowd-sourced funding (CSF) regime contained in Part 6D.3A of the Corporations
Act. Proprietary companies that access the CSF regime are not limited to 50 shareholders,
but must:
• maintain a minimum of two directors
17 This procedure of holding meetings ‘on paper’ cannot be used where the resolution is to remove an auditor of the
company: s 249A of the Corporations Act.
¶4-340

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• prepare annual financial and directors’ reports in accordance with accounting

standards
• have their financial reports audited once they raise $3 million or more from CSF
offers, and
• comply with the existing related party transaction rules that apply to public companies.
Because proprietary companies have these advantages, unless it is expected that the
company will have more than 50 non-employee shareholders or will want to invite the
public to subscribe for shares in the company outside the CSF regime (things which
a proprietary company is not permitted to do), it is generally more advantageous to
incorporate as a proprietary company: s 113 of the Corporations Act.
Proprietary companies
A proprietary company is any company that is registered as, or converts to, a proprietary
4
company under the Corporations Act: s 45A(1). A proprietary company limited by shares
must always include the words Proprietary Limited or the abbreviation Pty Ltd in its
name: s 148(2) of the Corporations Act.
Some (but not all) proprietary companies are single director/shareholder companies. It
is possible for a proprietary company to have only one member, who is a natural person and
is also the company’s director. The Corporations Act contains special provisions relating
to corporate decision-making that apply only to these companies. These provisions are
discussed in Chapter 5 of this book.
The Corporations Act differentiates between small proprietary companies and large
proprietary companies. As Chapter 17 explains, large proprietary companies are subject to
more extensive disclosure and reporting obligations than small proprietary companies are.
This is because a small proprietary company usually is not required to prepare financial
statements or lodge them with ASIC, or to appoint an auditor. The test of whether a
proprietary company is small or large is set out in s 45A of the Corporations Act.
A company is small if it satisfies at least two of the following three tests:
• the consolidated gross operating revenue for the financial year of the company and
the entities it controls (if any) is less than $25 million
• the value of the consolidated gross assets at the end of the financial year of the
company and the entities it controls (if any) is less than $12.5 million
• the company and the entities it controls (if any) have fewer than 50 employees at the
end of the financial year.
Otherwise, the company is treated as a large proprietary company.18 A company may
change from being a small proprietary company to being a large proprietary company (or
vice versa) from year to year, depending on its operations during that year.
18 A single director/shareholder company may be a large proprietary company or a small proprietary company,
depending upon whether it satisfies these tests.
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Hanny 4pp.indb 87 11/26/2018 3:29:28 AM

Public companies
Any company that is not incorporated as, or converted to, a proprietary company is
treated as a public company. As illustrated throughout this book, some provisions of the
Corporations Act, including the requirement to hold annual general meetings of members,
apply only to public companies. Generally speaking, a company limited by shares will be
formed as a public company (or converted to public company status) only if it is intending
to have public shareholders or it is proposing to engage in activities only permitted to
public companies.19 Public companies may be listed or unlisted, but all companies listed
on the ASX are public companies.
Number of companies
At the end of June 2014, there were over 2.11 million registered companies in Australia.
The vast majority are companies limited by shares. Table 4.1 provides the breakdown by
type of company as at that date (the most recent for which the data are available).
Table 4.1 Breakdown by company type as at 30 June 2014
Company type Number

Public companies limited by shares 7,292
Private companies limited by shares 2,093,231
Companies limited by guarantee 14,230
Companies limited by shares and guarantee 238
No liability companies 163
Unlimited liability companies 348
Source: RP Austin and IM Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law
(16th edn, 2015), [2.520]
[¶4-360] Can companies change type?

A company that is initially incorporated as a particular type may, because of changes to

its activities over time, wish to convert to another type. For example, a small business that
began life as a proprietary company may later wish to ‘go public’20 and raise share capital
from the public to fund further expansion. In these circumstances, it would be required to
convert from a proprietary company to a public company.
What is the required procedure?
The procedure for converting from one type of company to another is set out in Pt 2B.7
of the Corporations Act. The company must pass a special resolution21 to change its type
19 For example, a person proposing to operate a managed investment scheme must be a public company: s 601FA of
the Corporations Act.
20 The expression ‘go public’ is a commercial one, often used to describe the process by which companies first offer
their shares to the public and perhaps list on the ASX.
21 A special resolution is one supported by at least 75% of those who vote on the resolution.
¶4-360

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and then comply with various registration requirements, including providing information
to ASIC. If the change of type is one permitted under the Corporations Act, ASIC will
then alter the details of the company’s registration to reflect the change of type. The
change does not create a new legal entity or affect the company’s existing relationship
with outsiders: s 166.
[¶4-380] What is a registrable body?

Companies registered under the Corporations Act can carry on business throughout
Australia. Certain other entities operating outside their home jurisdiction, however, must
be specially registered with ASIC under Pt 5B.2 of the Corporations Act. The registration
requirement extends to registrable Australian bodies which operate outside their home
jurisdiction. This would include, for example, incorporated associations that operate across
state borders. It also extends to foreign companies which include bodies corporate formed
outside Australia that carry on business in the jurisdiction.
On registration with ASIC, such an entity receives an Australian Registered Body 4
Number (ARBN), which must be included on all its public documents and negotiable
instruments: s 601DE of the Corporations Act.
CORPORATE GROUPS
[¶4-400] What are corporate groups?
The discussion in this book to date has treated individual companies as being discrete in a
commercial as well as a legal sense. However, the reality is that, for all but the very smallest
commercial enterprises, most businesses operating in the corporate form are conducted
through groups of companies rather than individual companies.
The expression corporate group is used loosely to describe the situation where control
of one or more companies is in the hands of another company. The degree of control that
the latter company is required to exercise over the former before they are treated as being
a group tends to depend on the context in which the expression is used. Some of the
definitions that the Corporations Act uses to determine whether companies are in a group
relationship for different purposes are discussed below.
[¶4-420] Why use a corporate group, rather than an individual

company?
The participants in a business enterprise may choose to conduct that enterprise through a
number of separate companies, rather than a single company, for a number of reasons. In
particular, these may include:
• perceived organisational benefits in separating out the management of different
aspects of the enterprise
• a wish to rely on the doctrine of limited liability to quarantine the risk of one part of
the enterprise from the assets of the remainder.
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Are corporate groups common?

Most listed companies use a group structure. A study showed that 89% of Australia’s
top 500 listed companies had at least one controlled entity in 1997. The average number
of controlled entities was 28, and the median figure was 11 controlled entities. Ninety
per cent of the controlled entities were wholly owned subsidiaries. The largest corporate
groups at that time in Australia included News Corporation Ltd with 778 controlled
entities and BHP Ltd, which had 379 controlled entities.22
Does the law treat corporate groups differently?
For the most part, company law treats each company in a corporate group as a separate
entity, and there are few special rules that apply particularly to group companies. The
limited circumstances in which the law does recognise, and address directly, corporate
groups are outlined below.
[¶4-440] Group relationships — the definitions

Where company law does recognise and regulate group relationships, it does so only where
the relationship between the companies in question falls within the relevant definitions.
In some cases, the law applies to related bodies corporate. In others, the wider concept of
control is used to define the existence of a group.
Holding companies, subsidiaries and related bodies corporate
Some parts of the Corporations Act impose special obligations on companies and their
participants where a relationship of holding company and subsidiary company exists.
Division 6 of Pt 1.2 of the Corporations Act provides that a company is a subsidiary
of another company (called its holding company) if and only if:
• the holding company controls the composition of the subsidiary’s board (one company
is taken to control the composition of another’s board if:
by exercising a power exercisable (whether with or without the consent or concurrence

of any other person) by it, can appoint or remove all, or the majority, of the directors of
the [company])
• the holding company is in a position to cast or control the casting of more than one-
half of the votes at a general meeting of the subsidiary
• the holding company holds more than one-half of the issued share capital (excluding
non-voting shares) of the subsidiary, or
• the subsidiary is a subsidiary of another subsidiary of the holding company: s 46 and
47 of the Corporations Act.
Companies will be treated as holding company and subsidiary where they satisfy
any one of these tests. However, the categories clearly overlap. For example, where one
company (H Co Ltd) holds over 50% of the issued shares in another (S Co Ltd) in which
directors are elected by a resolution of shareholders in a general meeting and all the issued
22 I Ramsay and G Stapledon, ‘Corporate groups in Australia’, (2001) 29 Australian Business Law Review 7.
¶4-440

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shares are ordinary shares of the same class, H Co Ltd will usually satisfy each of the first
three limbs of the definition.
The definition of a subsidiary was considered in Ho v Akai Pty Ltd (2006) 24 ACLC
1,526. In this case, companies in the Akai group had entered into an agreement
with another group, Grande, under which Grande could operate the business of
the Akai group. The Full Court of the Federal Court found that, on its terms, this
agreement was not enough to make the Grande company a holding company of the
Akai company. Their Honours concluded that:
… the Agreement and the authority given by it did not … extend beyond its
declared purpose of managing the actual businesses of the companies
concerned. Like Gyles J, we do not consider that the Agreement was intended
to, or did, give Grande Group Ltd the power to control the composition of the
board of Akai Australia or to control its general meeting. It neither addressed
nor mandated interference in the internal constitutional arrangements of the 4
individual Akai companies as such notwithstanding the contractual transfer of
the power of management from the board that it effected.
Figure 4.2 Simple group structure
H Co Limited
S Co Limited X Co Limited
Y Co Limited
In Figure 4.2, S Co Ltd, X Co Ltd and Y Co Ltd are all subsidiaries of H Co Ltd. H

Co Ltd is the holding company of S Co Ltd, X Co Ltd and Y Co Ltd. Y Co Ltd is also a
subsidiary of S Co Ltd, and S Co Ltd is the holding company of Y Co Ltd.
Division 6 of the Corporations Act also contains other provisions refining the
definition. In particular, s 48 excludes certain shareholdings when deciding whether one
company is a subsidiary of another.
Companies that are in the relationship of holding company and subsidiary are referred
to in the Corporations Act as related bodies corporate. A subsidiary is also a related body
corporate of all other subsidiaries of its holding company. Therefore, all the companies
illustrated in Figure 4.2 are related bodies corporate.
Companies in which all the issued shares are held by a holding company or its
nominee are referred to as wholly owned subsidiaries.
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Controlled entities
In some parts of the Corporations Act, corporate groups are defined more broadly than
the basis described above. In certain cases, the Corporations Act imposes special rules on
companies and the entities they control. Some examples are given below.
The concept of control is defined in s 50AA. Section 50AA(1) states that ‘an entity
controls a second entity if the first entity has the capacity to determine the outcome of
decisions about the second entity’s financial or operating policies’. In deciding whether the
test is met, the practical influence exerted by the first entity and any practice or pattern of
behaviour affecting the second entity must be taken into account.
All subsidiaries are entities controlled by their parent company. But the concept of
controlled entities is wider than that of subsidiaries, so that a company could be controlled
by another company without being its subsidiary.
[¶4-460] In what circumstances does the law recognise and

regulate corporate groups?
The most important of the special rules that apply to corporate groups are as follows:
• Insolvent trading. A holding company may, in certain circumstances identified in
s 588V of the Corporations Act, be liable for debts incurred by a subsidiary after
that subsidiary became insolvent. Section 588V uses the holding company/subsidiary
definition rather than the broad definition of control in s 50AA. Section 588V is
discussed in ¶3-480.
• Related party transactions. Chapter 2E of the Corporations Act contains special
rules that regulate transactions by public companies (and entities controlled by
public companies) with related parties of the public company. Chapter 2E of the
Corporations Act is discussed in Chapter 14. The concept of ‘related party’ in Ch
2E includes companies in a control relationship with the public company. In other
words, Ch 2E uses the broad definition of control in s 50AA rather than the holding
company/subsidiary definition.
• Financial statements. The accounting rules for company financial statements and
reporting in Ch 2M of the Corporations Act allow for the preparation of consolidated
or group financial statements, and for group reporting and disclosure. As such,
they arguably represent the most significant acknowledgment in company law of
the commercial significance of corporate groups. The accounting rules use a broad
definition of control that reflects s 50AA.
• Large and small proprietary companies. The assets and operations of companies and
entities controlled by them are taken into account in determining whether a particular
company is a small or large proprietary company. The broad definition of control in
s 50AA is used for determining what entities are controlled by a proprietary company.
• Directors’ duties. Section 187 of the Corporations Act allows a director of a wholly
owned subsidiary to act in the interests of the parent company in some circumstances.
¶4-460

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LISTING ON THE AUSTRALIAN SECURITIES

EXCHANGE
[¶4-500] What is listing?
Chapter 1 noted that some companies elect, by entering into a contract with the ASX, to
be admitted to the Official List of the ASX and have one or more classes of their securities
granted Official Quotation for trading on the stock market conducted by the ASX. Such
companies are usually referred to as ‘listed companies’. Once the company is listed and
its securities quoted, those securities can be bought and sold by investors through the
electronic marketplace conducted by the ASX.
Although there are over 2.5 million Australian companies, only 2,015 are listed on
the ASX. All listed companies are public companies, but not all public companies are
4
listed. There are a number of other, smaller exchanges in Australia, including the Bendigo
Stock Exchange and the National Stock Exchange.
The following looks briefly at the reasons why a company might choose to apply for
listing, the eligibility criteria adopted by the ASX and the process of listing.
[¶4-520] Why do companies list?

By arranging for its securities to be listed on the ASX, the company creates an organised,
liquid and transparent market for those securities. Securities for which there is a ready
market are more attractive to investors than those for which no market exists. This helps
the company to raise additional capital from the investing public when it needs to do so.
The reasons why liquid investments are more attractive to investors than illiquid
investments belong more to the realm of finance theory than company law. It is sufficient
here to note that the fact that liquid securities are more attractive to investors has
important implications for companies trying to raise new capital. In particular, investors
will generally be prepared to pay a higher price for a liquid security than an illiquid one
offering the same potential returns, and a larger number of investors will be interested in
acquiring liquid rather than illiquid investments.
So listing, by creating a liquid market for a company’s securities, can lower the
company’s cost of capital. In addition, there may be other benefits, such as increased
prestige or better relationships with lenders and suppliers. Offset against these benefits are
the costs of complying with the additional disclosure and other obligations contained in
the ASX Listing Rules.23 There are also additional, more onerous, obligations imposed on
listed companies by the Corporations Act itself. These additional requirements relate to the
disclosure of directors’ interests, matters relating to the way general meetings are held and
proxies are dealt with, and directors’ and officers’ remuneration (including the provisions
allowing for shareholders to consider and vote on a requirement for a remuneration report
in s 250SA and Div 9, Pt 2G.2 of the Corporations Act, discussed below).
23 See P Marshman and P Davies, ‘The role of the stock exchange and the financial characteristics of Australian
companies’, in R Bruce et al (eds), Handbook of Australian Corporate Finance (1991), ¶75-115.
Commercial
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[¶4-540] How do companies list?

Public companies proposing to list must make an application to the ASX. (Proprietary
companies cannot list and must first convert to public company status.) The ASX has a
discretion (so long as it is acting properly) to accept or reject any application. The ASX
sets out the criteria for listing in Ch 1 of the Listing Rules. These criteria are designed
to ensure that only companies of sufficient size and quality to attract investor interest are
included in the Official List. Generally speaking, the ASX will require that:
• the company has a constitution and the constitution is consistent with the Listing
Rules (for example, the constitution cannot include any restrictions on the right of
members to transfer their shares)
• a prospectus or information memorandum containing detailed information about the
company and the securities is prepared
• the company applies for quotation of its ‘main class’ of securities (usually, its ordinary
shares)
• the company has at least 400 security holders in the class of securities to be quoted
holding at least $2,000 worth of those securities each (or at least 350 with $2,000
each and 25% unrelated or 300 with $2,000 each and 50% unrelated)
• the company meets certain tests designed to measure its viability. Generally, it will
be required to show net profit of $1 million over the past three years and $400,000
over the past 12 months, and either net tangible assets of at least $3 million or market
capitalisation of at least $10 million at the time of listing. It must also meet other
financial tests.
The company must satisfy additional ASX requirements relating to the issue price,
spread of securities holdings and terms of issue of each class of security to be quoted. The
prerequisites for Official Quotation are set out in Ch 2 of the Listing Rules. Listing Rule
6.1 states that the terms (including voting rights) of any equity securities to be quoted
must be ‘appropriate and equitable’ in the opinion of the ASX.
Usually a company proposing to list will make its application to the ASX in conjunction
with a public offer of securities in the company. In these circumstances, the company will
prepare a prospectus relating to the issue and lodge that document with ASIC.24 At the
same time, it will prepare its application for listing in the form of Appendix 1A to the
Listing Rules. The application form is in three parts:
• in Pt 1, the company applies for admission to the Official List and for quotation of its
securities
• in Pt 2, the company provides information on its securities, officers, compliance with
admission criteria, capital structure and operations
• in Pt 3, the company agrees to comply with the Listing Rules.
The application is generally made to the ASX just after the prospectus relating to the
proposed share issue is released. The company must also pay an admission fee to the ASX,
24 The prospectus requirements are discussed in Chapter 21.
¶4-540

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which is calculated by reference to the value of the securities for which quotation is sought.
The minimum fee is $25,000; this increases depending on the value of the securities.
The company’s application is then accepted or rejected by the ASX.
Once listed, a company pays an annual fee to the ASX, which is calculated by reference
to the value of the company’s quoted securities.
Listed companies are subject to special disclosure requirements, including additional
disclosure obligations relating to executive remuneration: see Chapter 17.
4
Commercial
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CHAPTER 5
Constituting Companies

Introduction¶5-001
Registration of Companies
How are companies created? ¶5-100
What is the required procedure? ¶5-120
Company names ¶5-140
Pre-registration Activities
Pre-registration contracts ¶5-200
Who are the company’s promoters? ¶5-220
Internal Governance Rules
What are internal governance rules? ¶5-300
How can the rules be tailored? ¶5-320
What were memoranda and articles of association? ¶5-340

What changed in 1998? ¶5-360
The Replaceable Rules
When do the replaceable rules apply? ¶5-400
What do the replaceable rules contain? ¶5-420
When is it appropriate to use the replaceable rules? ¶5-440
The Constitution
What is the effect of a constitution? ¶5-500
Why adopt a constitution? ¶5-520
How does a company adopt a constitution? ¶5-540
How does a company amend or repeal a constitution? ¶5-560
¶4-540
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Constituting Companies97
How does a constitution operate to displace or

modify the replaceable rules? ¶5-580
Legal Effect of the Internal Governance Rules

How do the internal governance rules work? ¶5-600
How are the rules interpreted? ¶5-620
How are the rules enforced? ¶5-640
What happens if the rules are not observed? ¶5-660
Single Director/Shareholder Companies

What is a single director/shareholder company? ¶5-700
What rules govern single director/shareholder companies? ¶5-720
This Chapter is concerned with the way in which companies are constituted (that is, how
they are set up). It has three parts.
5
The first part describes how companies are formed, which occurs through a process of
registration with the Australian Securities and Investments Commission (ASIC).
The second part deals with the liability of the company and those involved in
establishing it (called its promoters) for things that occur while the company is being
set up.
The third part explains what is referred to in this book as the company’s internal
governance rules. The internal governance rules are the rules agreed between the
participants in a company that govern the internal conduct of the company’s affairs.
REGISTRATION OF COMPANIES
[¶5-100] How are companies created?

Companies are created (or incorporated) through being registered by ASIC. A person
wishing to create a company lodges an application for registration with ASIC and pays
the prescribed fee. The application form must contain certain information about the new
company. The requirements for registration are explained below.
A person proposing to use a company to carry on a business has a choice of either
registering a new company themselves or acquiring an already registered company from
another person. Companies that have been registered for the purpose of being on-sold
and that have not traded prior to sale are often referred to as shelf companies.1 A number
of these companies may be formed by law firms or accountancy firms and made available
for purchase as a service to their clients. Before amendments to the (then) Corporations
Law were made in 1998, incorporating a company was quite complex, and acquiring a
1 This is a commercial term, not a legal one.
Commercial
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98 Constituting Companies
shelf company reduced the administrative burden for businesspeople. Shelf companies are
particularly useful where a new company is required urgently for a particular project.
[¶5-120] What is the required procedure?

The first step in registering a company is to lodge an application form with ASIC. The
contents of the application form are prescribed by s 117 of the Corporations Act 2001 (Cth)
(Corporations Act). A copy of the form is included in Chapter 27. In order to be able to
complete the form, the person proposing to register the company will need to:
• decide whether the company will be a proprietary company or a public company.
• decide who will be the member or members of the company. All companies must
have at least one member: s 114 of the Corporations Act. The planners will also need
to decide the number of shares to be taken up by each member and whether those
shares are to be divided into different classes. If the shares are to be divided into
different classes, the rights attaching to each class must be decided.2
The proposed members must consent in writing to becoming members of the
company: s 231 of the Corporations Act.
• decide who will be the director or directors of the company. A proprietary company
must have at least one director ordinarily residing in Australia, and a public
company must have at least three directors, with at least two ordinarily residing in
Australia: s 201A of the Corporations Act. The directors must give their consent in
writing to being appointed as directors: s 120 of the Corporations Act.
• decide who will be the secretary or secretaries of the company. All public
companies must have at least one secretary, and the secretary must consent to the
appointment: s 204A of the Corporations Act.
• choose an address to be the company’s registered office: s 121 of the Corporations Act.
• decide whether the company’s internal arrangements will be governed by the
replaceable rules or whether a constitution replacing some or all of those rules is to be
adopted: Pt 2B.4 of the Corporations Act (see ¶5-300 for discussion of the internal
governance rules of companies).
• choose a name for the company: Pt 2B.6 of the Corporations Act.
The procedure for registering a company is set out in s 117 of the Corporations Act.
The person proposing to register the company must complete and lodge a Form 201 with
ASIC, detailing the arrangements set out above, and pay a registration fee. If the company
is to be a public company and will have a constitution, a copy of the constitution must be
lodged with the application.
If the application is complete and the fee has been paid, ASIC will register the
company and allocate its Australian Company Number (ACN).3 ASIC then issues a
registration certificate containing details of the registration: s 118 of the Corporations Act.
2 Classes of shares are discussed at ¶18-220.

3 The ACN is a unique nine-digit number allocated to the company by ASIC on its registration: see ¶4-170.
¶5-120

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The new company comes into existence at the beginning of the day on which it is
registered: s 119 of the Corporations Act.
[¶5-140] Company names
All companies must have a name. The person registering the company can choose
a particular name for the company (in which case that name must be included in the
application for registration) or decide to use the company’s ACN as its name.
Special rules apply to selecting and using a company name other than its ACN, and
these are set out in Pt 2B.6 of the Corporations Act. Certain names are prohibited under
the Corporations Act and the Corporations Regulations. A name that is identical to
another corporation’s name or a registered business name is not acceptable, nor are names
that are offensive or that imply a connection with the government or the Crown or with
other protected names such as Sir Donald Bradman.4
Limited public companies5 must include the word ‘Limited’ or the abbreviation ‘Ltd’
in their name unless exempted from the requirement to do so. Proprietary companies
must include ‘Proprietary Limited’ or ‘Pty Ltd’. No liability companies must include ‘No
Liability’ or ‘NL’: s 148.
Companies can change their name after registration in accordance with the procedure
laid down in Div 2 of Pt 2B.6 of the Corporations Act. A change of name requires a 5
special resolution of the members: s 157.6
PRE-REGISTRATION ACTIVITIES
[¶5-200] Pre-registration contracts
Although registration of a company can now be achieved relatively quickly, it may be
that the particular circumstances of a transaction require that certain agreements or
arrangements be entered into on behalf of the company prior to the time at which it comes
into existence under s 119 of the Corporations Act.

For example, a decision may be made to form a company to acquire a particular asset
or to pursue a particular business opportunity. For commercial reasons, the promoters of
a company (see ¶5-220) may wish to enter into contracts with third parties to procure
the asset or opportunity before the formalities of establishing the company have been
completed.
Until a company is registered, it has no legal capacity to enter into contracts or to
appoint agents to act on its behalf.
4 See reg 2B.6.01 and 2B.6.02 and Sch 6 of the Corporations Regulations. Other names require the consent of the
relevant minister. For example, a person wishing to register a company name that includes the word ‘ANZAC’
must obtain the consent of the Minister for Veterans’ Affairs, while including the word ‘Bank’ or something similar
requires the consent of the Treasurer.
5 This includes public companies limited by shares and companies limited by guarantee.
6 A special resolution is one supported by at least 75% of those who vote on the resolution.
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In the past, this raised problems for promoters and those with whom they sought to
contract. The promoters could be held personally liable on the ‘contract’ they had purported
to make on behalf of the yet-to-be-formed company, or they could be liable for breach of
warranty of authority to act as an agent if the company did not get up or failed to honour
the contract. The third parties could be unsure about who had a contractual relationship
with them.
Part 2B.3 of the Corporations Act attempts to address this problem. Section 131
applies where a person enters into, or purports to enter into, a contract on behalf of, or for
the benefit of, a company before it is registered. It says that the company becomes bound
by the contract and entitled to its benefit if the company, or a company that is reasonably
identified with it:
• is registered, and
• ratifies (ie adopts) the contract
within the time agreed by the parties, or if there is no agreed time, within a reasonable
time after the contract is entered into.
The new company’s ratification of the contract can be express or implied. Express
ratification occurs when the company acknowledges that it is party to the contract, by
unequivocal words or conduct. Implied ratification can occur in various ways; for example,
the company might not expressly acknowledge that it is party to the contract, but if it acts
in a way which can only be explained on the basis that it accepts the contract as binding
on it, that may be sufficient. The key is that the company acts in a way that shows to the
other party that it intends to be bound by the contract: Aztech Science v Atlanta Aerospace
(Woy Woy).7
If the company is not formed or chooses not to ratify the contract within the required
time, then the person who entered into the contract is liable to pay damages to the other
party. In proceedings for damages where the company has been formed but has not ratified
the contract, the court can make various orders against the company where appropriate
(for example, because the company has benefited from the contract).
Where a company ratifies a pre-registration contract but does not perform it, the
person who made the contract can be held liable for that non-performance.
[¶5-220] Who are the company’s promoters?

The people who act to bring about the formation and registration of a company are
sometimes referred to as ‘promoters’. Typically, a company is formed to commence a new
business or take over an existing business. In the historical case of Twycross v Grant,8 the
court described a promoter as ‘one who undertakes to form a company with reference to
a given project and to set it going, and who takes the necessary steps to accomplish that
purpose’.
7 (2005) 23 ACLC 1,903; [2005] NSWCA 319.

8 (1877) 2 CPD 469 at 541.
¶5-220

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The promoters control the fate and direction of the new company. As another court
said in Erlanger v New Sombrero Phosphate Co Limited,9 promoters:
have in their hands the creation and moulding of a company: they have the power of
defining how, and when, and in what shape, and under what supervision, it shall start
into existence and begin to act as a trading corporation.
The law imposes certain duties on company promoters that are designed to prevent
them abusing that power by, for example, causing the new company to purchase property
from them at an inflated price or to enter into a contract with them on terms unfavourable
to the company.
The law treats promoters as being in a fiduciary relationship with the company.
The nature of the fiduciary relationship is discussed in further detail in the Chapters on
directors’ duties (see Chapters 11–14). (Directors are also in a fiduciary relationship with
the company.) In short, this means that promoters are subject to rules prohibiting them
from making their position a source of profit for themselves or anyone else, and from
putting themselves in a position of conflict of interest without the fully informed consent
of the company. Where they deal with the company, the promoters have a duty of full
disclosure.
5
INTERNAL GOVERNANCE RULES
[¶5-300] What are internal governance rules?
As noted in Chapter 2, one of the functions of company law is to regulate the relationship
between participants in companies. One of the ways in which company law achieves this
is to provide a legal framework for agreement between those participants on matters of
internal administration relating to the company. Company law provides a mechanism
by which participants can agree on the basis on which various things connected with
the ongoing operation of the company will be carried out. The rules or arrangements
agreed between the participants are referred to in this book as the company’s internal
governance rules.
What follows is a discussion of the internal governance rules that apply to all
companies other than single director/shareholder companies and the special arrangements
that apply to the conduct of corporate functions by single director/shareholder companies.
Many of the arrangements covering a company’s internal functioning are set out
in its internal governance rules, which will consist of the replaceable rules contained
in the Corporations Act or a constitution, or a combination of the two. The internal
governance rules have effect as contractual obligations on the company, its members and
officers. Changes to the internal governance rules generally require a special resolution of
members.10
9 (1878) 3 App Case 1218 at 1236.

10 A special resolution is a resolution passed by at least 75% of the votes cast by members entitled to vote on the
resolution. Member voting rights are discussed in Chapter 7.
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A company’s internal governance rules will consist of:

• the replaceable rules set out in the Corporations Act
• a constitution, or
• a combination of the replaceable rules and a constitution.
These concepts are explained below. An example of a constitution is included in
Chapter 27. Typically, a company’s internal governance rules will deal with the following:
• the appointment, removal and powers of the company’s officers (directors and
secretary)
• the procedure for convening and conducting directors’ meetings
• the procedure for convening and conducting members’ meetings (including voting
rights)
• any special rights attaching to classes of shares
• rules relating to dividends
• rules relating to the transfer and transmission of shares.
[¶5-320] How can the rules be tailored?

It is open to the members of a company to decide the precise form of the rules to be adopted
by the company so as to meet the company’s particular requirements. The Corporations
Act provides a set of model rules, in the form of replaceable rules, which a company may
adopt as its internal governance rules but it is not obliged to do so. For example, the
members of one company may decide that directors should be elected by the majority of
members voting in general meeting. Another company may decide that each shareholder
or class of shareholders should have the right to nominate a person to be a director. Those
different arrangements would be reflected in each company’s internal governance rules.
For listed companies, the ASX (Australian Securities Exchange) Listing Rules
impose some restrictions on the form of internal governance rules, which are designed to
protect public shareholders. Those restrictions are discussed below.

Company law provides the framework for the operation of the internal governance
rules by setting out procedures for the adoption or amendment of replaceable rules and
giving legal force to those rules. This framework is explained later in this Chapter.
[¶5-340] What were memoranda and articles of association?

The source and nature of a company’s internal governance rules, described above, changed
significantly with the commencement of the Company Law Review Act 1998 (the Company
Law Review Act) on 1 July 1998. It is important, in examining the current operation of the
law relating to internal governance rules, to understand the source and nature of internal
governance rules prior to 1998. Set out below is a brief summary of the law prior to that
date. Before 1 July 1998, each company was required, on formation, to adopt:
• a memorandum of association
• articles of association.
¶5-340

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Historically, the memorandum of association was the document by which the

original incorporators signalled their intention to form a company. The memorandum of
association was required to state the name of the company, the amount of share capital
and the number of shares; that the liability of the members was limited; and the names,
addresses and occupations of, and number of shares subscribed by, the initial subscribers.
In older companies, the memorandum of association may also have included an objects
clause, which (as is explained in Chapter 3) was the source of the company’s legal
capacity and powers before the enactment of the predecessor to the current s 124 of the
Corporations Act.11
The company’s articles of association were its by-laws. Typically, they contained rules
governing the things now the subject of a company’s internal governance rules, such as
appointment, removal and powers of officers, meeting procedures and so on.
The (then) Corporations Law had included a set of model articles of association for
a company limited by shares. These model articles were referred to as the Table A articles
of association. A company could have chosen to adopt the Table A articles as its articles of
association, or to adopt different articles. Some companies used a combination of Table
A articles and specific articles designed to meet the particular requirements of the company.
5
The Corporations Law and the general law contained rules governing the operation
and amendment of a company’s memorandum and articles of association, and the
relationship between them.
Companies incorporated before 1 July 1998 will, therefore, have a memorandum and
articles of association, unless they have since repealed them. Such companies continue to
operate under the rules contained in the memorandum and articles, which operate as their
constitution in the manner described below.
[¶5-360] What changed in 1998?

The requirement that a company have a memorandum and articles of association had been
part of company law since the 19th century. However, as part of the push to simplify and
modernise company law in the 1990s, it was decided to abolish these requirements and
instead adopt a system of ‘replaceable rules’, to be included in the Corporations Act itself,
which a company could use as its internal governance rules, or replace with something
more suitable, as it wished.
Unlike the former Table A, the replaceable rules are not grouped together in one
place, but are spread throughout the Corporations Act. For example, the replaceable rules
relating to the appointment, removal and powers of directors are included in Ch 2D which
deals with officers. Replaceable rules dealing with meetings are contained in Ch 2G which
contains the provisions of the Corporations Act dealing with meetings. One of the reasons
for adopting this structure was that it was felt that including the replaceable rules with
the relevant legislative provisions made it easier for companies and their participants to
11 See ¶3-240. Section 124 is the section that gives companies the legal capacity and powers of a natural person.
Before the equivalent of s 124 was enacted, companies only had the capacity to do things consistent with the objects
set out in their memorandum of association.
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locate all of the rules impacting on a particular act, whether those rules were part of the
company’s internal governance rules or requirements of the legislation.12
Another reason for the change was to simplify and reduce the cost of forming
companies, by reducing the amount of paperwork that had to be prepared and lodged.
The Explanatory Memorandum to the Company Law Review Bill said, in relation to
the changes made by the 1998 legislation:
The memorandum of association will be abolished. Companies will not need to have
articles of association. To enable companies to function without articles of association,
the basic rules of internal management which are now normally in a company’s articles
will be placed in the Law as ‘replaceable rules’. The rules will be replaceable in that a
company will be able to adopt a constitution which displaces some or all of them. These
rules are based on Table A, which currently provides model articles of association and
will operate in substantially the same way as Table A. Existing companies will continue
to have their memorandum and articles as their constitution unless they repeal them.13
The position since the enactment of the Company Law Review Act is set out in s 134
of the Corporations Act, which provides that ‘a company’s internal management may be
governed by provisions of this Law that apply to the company as replaceable rules, by a
constitution or by a combination of both’. Companies that retain their memorandum and
articles of association from before 1 July 1998 are treated as having adopted a constitution
in those terms, which displaces the replaceable rules for that company.
THE REPLACEABLE RULES
[¶5-400] When do the replaceable rules apply?
As noted above, a company may choose to have its internal management governed by the
replaceable rules set out in the Corporations Act. If the company was formed on or after 1
July 1998, it may make that election simply by not adopting a constitution. If the company
was formed before 1 July 1998, it can invoke the replaceable rules by repealing its existing
memorandum and articles of association: s 135 of the Corporations Act.
The replaceable rules apply to a company unless displaced or modified in accordance
with s 135(2) by operation of s 135(1). The way in which the replaceable rules may be
displaced or modified by a company’s constitution is discussed below, in the section dealing
with constitutions.
If the replaceable rules contained in the Corporations Act are amended by parliament,
those amendments automatically apply to the company.
Section 135(1) states that the replaceable rules do not apply to single director/
shareholder companies, that is, to proprietary companies in which the same person is both
its sole director and its sole shareholder. Single director/shareholder companies, therefore,
have no internal governance rules unless they have adopted a constitution. If an additional
12 Explanatory Memorandum to the Company Law Review Bill, para 8.21.

13 Explanatory Memorandum to the Company Law Review Bill, para 3.2.
¶5-400

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member or director joins such a company, the replaceable rules will then apply to the
company unless they are displaced by a constitution.
[¶5-420] What do the replaceable rules contain?

The Corporations Act contains 42 replaceable rules which appear throughout the statute.
They are listed in s 141 of the Corporations Act, which is reproduced below.
Section 141 Table of replaceable rules

141 The following table sets out the provisions of this Act that apply as
replaceable rules.
Provisions that apply as replaceable rules

Officers and Employees
1 Voting and completion of transactions — directors of proprietary companies 194
2 Powers of directors 198A
3
4
Negotiable instruments
Managing director
198B
198C 5
5 Company may appoint a director 201G
6 Directors may appoint other directors 201H
7 Appointment of managing directors 201J
8 Alternate directors 201K
9 Remuneration of directors 202A
10 Director may resign by giving written notice to company 203A
11 Removal by members — proprietary company 203C
12 Termination of appointment of managing director 203F
13 Terms and conditions of office for secretaries 204F
Inspection of books
14 Company or directors may allow member to inspect books 247D
Directors’ meetings
15 Circulating resolutions of companies with more than one director 248A
16 Calling directors’ meetings 248C
17 Chairing directors’ meetings 248E
18 Quorum at directors’ meetings 248F
19 Passing of directors’ resolutions 248G
Meetings of members
20 Calling of meetings of members by a director 249C
21 Notice to joint members 249J(2)
22 When notice by post or fax is given 249J(4)
22A When notice under paragraph 249J(3)(cb) is given 249J(5)
23 Notice of adjourned meetings 249M
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Provisions that apply as replaceable rules

24 Quorum 249T
25 Chairing meetings of members 249U
26 Business at adjourned meetings 249W(2)
27 Who can appoint a proxy 249X
[replaceable rule for proprietary companies only]
28 Proxy vote valid even if member dies, revokes appointment, etc 250C(2)
29 How many votes a member has 250E
30 Jointly held shares 250F
31 Objections to right to vote 250G
32 How voting is carried out 250J
33 When and how polls must be taken 250M
Shares
33A Pre-emption for existing shareholders on issue of shares in proprietary company 254D
33B Other provisions about paying dividends 254U
34 Dividend rights for shares in proprietary companies 254W(2)
Transfer of Shares
35 Transmission of shares on death 1072A
36 Transmission of shares on bankruptcy 1072B
37 Transmission of shares on mental incapacity 1072D
38 Registration of transfers 1072F
39 Additional general discretion for directors of proprietary companies to refuse to 1072G
register transfers
[¶5-440] When is it appropriate to use the replaceable rules?

In deciding whether it is appropriate to rely on the replaceable rules as the company’s
internal governance rules, it is very important for the company, its participants and their
advisers to look closely at each replaceable rule to determine whether, in the individual
circumstances of the company, that rule is an appropriate one for the particular company.
In light of their particular form, it seems that the replaceable rules are perhaps most
suitable for an unlisted company with more than two members in which it is proposed
that the members be bound by a principle of ‘majority rule’ in relation to the internal
administration of the company’s affairs. They may not be suitable for a company with two
equal shareholders or in situations where each shareholder is to have particular rights, such
as the right to representation on the board of directors. Where a company is proposing
to issue classes of shares with particular rights attaching, it may need to supplement the
replaceable rules with a constitution setting out those rights. The replaceable rules are not
sufficient on their own for companies that propose to issue partly paid shares, because they
do not include the necessary provision for calls and forfeiture.
Some companies, including ASX listed companies, cannot use the replaceable rules
as their internal governance rules. This is discussed in ¶5-520.
¶5-440

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The replaceable rules do not provide for indemnification of directors and officers
for liabilities incurred by them in performing their functions. Subject to Pt 2D.2 of the
Corporations Act, a company may wish to include such a provision in its constitution.
THE CONSTITUTION
[¶5-500] What is the effect of a constitution?
Instead of relying on the replaceable rules as its internal governance rules, a company may
choose to adopt a different set of rules in the form of a constitution. The memorandum and
articles of association of a company formed before 1 July 1998 are taken together to make
up the company’s constitution after that date under s 1415 of the former Corporations
Law, unless they have been repealed or amended since in accordance with s 136. For such
companies, it appears that none of the replaceable rules will apply.
Section 135(2) of the Corporations Act provides that ‘a section or subsection that
applies to a company as a replaceable rule can be displaced or modified by the company’s
constitution’. The following discussion examines the circumstances in which a company
5
may wish to displace or modify the replaceable rules, and the means by which that can
be done.
Members of public companies that have adopted a constitution can obtain a copy of
that constitution from the company under s 139 of the Corporations Act. Also, because
public companies are required to lodge their constitutions and details of any amendments
to them with ASIC, it is possible for any person to obtain a copy of a public company’s
constitution by conducting a search of ASIC’s records.14 There is no requirement for a
proprietary company to lodge a copy of its constitution with ASIC unless ASIC requests
it under s 138.
An example of a company constitution is included in Chapter 27.
[¶5-520] Why adopt a constitution?

A company may choose to adopt a constitution for a number of reasons, including the
following:
• to substitute different rules for some or all of the replaceable rules. The replaceable
rules may be unsuitable for the particular company, for example, because it is a joint
venture company with two equal shareholders and the participants do not want to
rely on principles of majority rule in relation to, say, the appointment of directors
• to supplement the replaceable rules; to address matters not covered by them. For
example, the company may wish to provide for the issue of different classes of shares
or of partly paid shares, or to provide for directors to retire by rotation. The company
may wish to include a provision indemnifying company officers
14 The lodgment requirement is contained in s 117 and 136(5). ASIC can require a public company to lodge a
consolidated copy of its constitution under s 138 of the Corporations Act.
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• to collect all of the internal governance rules into a single document, for the convenient
reference of officers and members
• to ensure that, if parliament amends a replaceable rule, that amendment does not take
effect unless it is specifically adopted by the company
• to avoid legal uncertainty about certain aspects of the replaceable rules, such as
questions over whether decisions made under them are reviewable under principles
of administrative law15
• for listed companies, to meet the requirements of the ASX Listing Rules
• to incorporate restrictions on the company’s objects. Companies that engage in
charitable activities and wish to apply for an exemption from the requirement to
include the word ‘Limited’ in their name must have a constitution that restricts their
objects to charitable purposes: s 150 of the Corporations Act. Mining companies that
wish to incorporate as ‘no liability’ companies must have a constitution that restricts
their objects to mining purposes: s 112(2) of the Corporations Act.16 The effect of
such restrictions is discussed in Chapter 3, in the writings dealing with corporate
capacity (see ¶3-200).
[¶5-540] How does a company adopt a constitution?

Companies can choose to adopt a constitution on registration. This is done by each
person who is proposing to become a member agreeing in writing to the terms of the
proposed constitution before the application for registration is lodged: s 136(1)(a) of the
Corporations Act. Companies may adopt a constitution at any time after registration by
special resolution: s 136(1)(b).
In passing a resolution to adopt a constitution, the members of the company will be
bound by the rules that govern the exercise of their voting rights, described in Chapter 9.
Further, if the effect of adopting the constitution is to alter existing class rights, special
rules may apply under Pt 2F.2 of the Corporations Act. Part 2F.2 is discussed in ¶7-340.
Where a company has passed a resolution to adopt a constitution, that resolution will
take effect on the day it is passed or on a later date specified in the resolution (unless it also
involves a change of name, change of type or variation of class rights): s 137.
[¶5-560] How does a company amend or repeal a constitution?

If a company has a constitution, either because it has adopted one under s 136(1) of
the Corporations Act or because it was formed before 1 July 1998 and has retained its
memorandum and articles of association, it may wish from time to time to amend that
constitution. Alternatively, it may wish to repeal that constitution, and instead rely entirely
upon the replaceable rules. Amendment to and repeal of the constitution are governed by
s 136 and 137 of the Corporations Act.
15 See RP Austin and IM Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (17th edn, 2018), [6.011].
16 No liability companies are discussed briefly in ¶4-320.
¶5-560

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Section 136(2) provides that, generally, amending or repealing a company’s

constitution requires a special resolution of members. However, a company may include in
its constitution a further requirement that must be satisfied before the special resolution
takes effect. For example, in a small company, the members may agree that amendments to
the constitution require the written consent of all of the members. If such a requirement
were included in the constitution, any purported amendment to the constitution by special
resolution would not take effect unless that additional requirement was satisfied: s 136(3).
Such a provision itself cannot be altered unless the additional requirement is met: s 136(4).
Again, in passing a resolution to amend or repeal a company’s constitution, the
members are bound by the rules governing the exercise of their voting rights and, where
relevant, the provisions of the Corporations Act governing variation of class rights.
Where a company has passed a resolution to amend or repeal a constitution, that
resolution will take effect on the day it is passed or on a later date specified in the
resolution (unless it also involves a change of name, change of type or variation of class
rights): s 137.17
Public companies that amend or repeal their constitution must give notice to ASIC
under s 136(5).
[¶5-580] How does a constitution operate to displace or modify 5

the replaceable rules?
Section 135(2) states that ‘a provision of a section or subsection [of the Corporations
Act] that applies to a company as a replaceable rule can be displaced or modified by the
company’s constitution’.
Where, in adopting a constitution, the company’s intention is to displace or modify
one or more of the replaceable rules, the constitution should make it clear that this has
been done. Otherwise, it may be unclear when, and to what extent, a provision in a
constitution is intended to modify or displace a replaceable rule. For example, a difficulty
may be created where a company’s constitution does not expressly exclude a particular
replaceable rule but deals with a matter covered by a replaceable rule, in a manner that is
inconsistent with that rule.
LEGAL EFFECT OF THE INTERNAL

GOVERNANCE RULES
[¶5-600] How do the internal governance rules work?
A company’s internal governance rules operate as a contract. This contract is created, not
by all the parties signing it in the usual way, but by statute.
Section 140 of the Corporations Act states that:
17 The date on which a resolution to change the company’s name becomes effective is prescribed by s 157(3), to change
type by s 246D(3), and to vary class rights by s 246E.
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a company’s constitution (if any) and any replaceable rules that apply to the company
have effect as a contract:
(a) between the company and each member; and
(b) between the company and each director and company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and perform … the rules so far as they
apply to that person.
The provision reflects earlier legislative provisions which had operated to give a
company’s articles of association effect as a contract under seal.18
Section 140 is important in determining:
• the manner in which the internal governance rules are to be interpreted
• the rights of the company, its members and officers to require compliance with the
internal governance rules
• the consequences of a failure, by some person who is bound Yby them, to comply with
the internal governance rules.
[¶5-620] How are the rules interpreted?

The fact that the internal governance rules apply as a contract means that the courts will
interpret them according to the rules of construction applicable to contracts generally.19
This would appear to be the case in relation to the replaceable rules, as well as any
internal governance rules contained in a constitution. In other words, in interpreting the
replaceable rules as they apply to a particular company, the court would not rely on the
rules of interpretation governing the Corporations Act itself, but instead on principles of
contract law. This would include interpreting the internal governance rules to give them
business efficacy: Rayfield v Hands.20
In construing a company’s constitution ‘ “it may be proper to place greater store by the
constitutive text in construing a company’s constitution as opposed to a private contract”,21
and the range of surrounding circumstances that may be taken into account might be more
limited than in the case of some commercial contracts’.22
[¶5-640] How are the rules enforced?

The fact that the internal governance rules apply as a contract between the persons
described in the section would appear to mean that each rule is capable of being enforced
by the relevant party. However, s 140 of the Corporations Act is not so broad as to give
every person the right to have the company’s affairs conducted in accordance with the
internal governance rules. There are certain legal limitations that apply that may affect
18 Former s 180.
20 [1960] Ch 1.
21 Lion Nathan Australia Pty Ltd v Coopers Brewery Limited [2006] FCAFC 144; (2006) 156 FCR 1 at 587 [124].
22 AvSuper Pty Ltd v Commonwealth Managed Investments Limited [2010] NSWSC 1499 at [37].
¶5-640

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a person’s ability to require that another person do something that is required under the
internal governance rules.
First, s 140 is limited in that it provides for the internal governance rules to have
effect as a contract only:
• between the company and each member
• between the company and each director and secretary
• between each member and each other member.
So, the internal governance rules do not operate as a contract between a member
and an officer, or between an officer and another officer. Further, the contract cannot be
enforced by outsiders.
For example, in Eley v Positive Government Security Life Assurance Co Ltd,23 the
company’s articles of association stated that Mr Eley should be the company’s
solicitor. When the company ceased to employ him as its solicitor, he sued to
enforce the relevant article under the predecessor to s 140. However, he failed
because the court held that the statutory contract is a deemed contract only as
5
between the parties referred to in the section.
Second, to the extent that s 140 confers rights or obligations on a member, it does
so only if (and while) the person is a member and only in their capacity as a member.
Generally speaking, a person becomes a member on registration of the company if they are
named in the application for registration, or on their name being entered in the company’s
register of members following issue to them of new shares in the company, or transfer to
them of existing shares from an existing shareholder. Applicants for membership may be
unable to enforce the statutory contract until they are registered as members: see Bailey v
NSW Medical Defence Union Ltd.24
The member is bound and entitled only in its capacity as a member. For example, if a
provision of a company’s internal governance rules purported to impose some obligation

on a person in their capacity as an employee of the company, and that person also happened
to be a member of the company, the company could not use the person’s status as a member
to enforce the internal governance rules under s 140 against them in their capacity as
employee.25
23 (1875) 1 Ex D 20; affirmed (1876) 1 Ex D 88.

24 (1995) 13 ACLC 1,698; 132 ALR 1; 10 ACSR 521. Depending on the facts, it may be that an applicant for
membership has rights on the terms of the internal governance rules under an actual (as distinct from the statutory)
contract arising on the application.
25 Where the internal governance rules purport to confer rights on members otherwise than in their capacity as
members, those rights cannot be enforced through a contractual action based on s 140. For example, in Eley’s case
the court said that, even though Mr Eley was a member, he was not entitled to rely on the articles as a binding
contract with respect to matters separate from his rights as a member. In Hickman v Kent or Romney Marsh Sheep
Breeders’ Association [1915] 1 Ch 881 at 900, the court observed that: ‘this much is clear — first, that no article can
constitute a contract between the company and a third person; [and] secondly, no right merely purporting to be
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Third, a member cannot enforce compliance by the company with a procedural

requirement in the internal governance rules where failure to comply with that requirement
can validly be excused by a majority of members in general meeting. This is discussed
further in Chapter 15.
Fourth, a member’s right to enforce the internal governance rules under s 140 may
be limited to those of the rules that confer rights that are personal to the member in its
capacity as such. The right to vote conferred under the replaceable rule in s 250E would
be an example of such a right. Some courts have gone further than this, to suggest that a
member would be able to sue to enforce basic constitutional provisions such as provisions
relating to the make-up of the company’s board of directors.26 However, s 140 would not
appear to extend so far as to enable a member to sue to enforce every provision of the
internal governance rules.
In Smolarek v Liwszyc,27 a case involving failure to follow a company’s replaceable

rules, the court said ‘It is accordingly plain, from [s 140], that it imposes a duty
upon each of the parties to that deemed contract to comply with the replaceable
rules so far as they apply to that person … Of course, a provision of the statutory
contract cannot be enforced unless it affects the member in his or her capacity as
a member … If the act or omission complained of is a wrong to the company alone,
the members’ standing to sue becomes doubtful’.
[¶5-660] What happens if the rules are not observed?

Part 2B.4 of the Corporations Act is drafted so that, although they are contained in the
Corporations Act, the replaceable rules do not operate as public law requirements, but
instead as contractual terms binding on a company, its members and officers only by
operation of s 140 and not by force of law.
Unlike many other provisions of the Corporations Act, a failure to comply with the
replaceable rules that apply to a company is not of itself a contravention of the Corporations
Act. This means that the provisions in the Corporations Act creating criminal or civil
liability for breach of the Act, or allowing for statutory injunctions against breach of the
Act, do not apply: s 135(3). In this sense the replaceable rules represent private rather
than public law obligations. So, for example, a person seeking an injunction requiring
given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance,
as solicitor, promoter … can be enforced against the company …’
26 In Kraus v J G Lloyd Pty Ltd [1965] VR 232, a shareholder successfully brought a personal action to enforce the
company’s internal governance rules relating to the appointment of directors. A person had been appointed as
a director, and refused to retire at the end of her term in accordance with the company’s constitution. The other
director continued to treat her as a director. The court held that where a person purporting to be a director and
acting as such is invalidly in office, a shareholder has individual membership rights which he or she may personally
enforce by action for injunction to restrain the offending director from acting, and requiring the officers of the
company to convene a general meeting of shareholders to elect directors.
27 (2006) 24 ACLC 512, 664.
¶5-660

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compliance with the replaceable rules must do so under the ordinary jurisdiction of the
Supreme Court, rather than under s 1324 of the Corporations Act.
If a provision of a company’s internal governance rules (whether a replaceable rule or
a provision of a constitution) has not been observed, then the following may result:
• In the case of non-compliance by the company, a member may be able to obtain
a declaration or injunction requiring the company to comply, provided the rule is
one that a member can enforce on the principles set out above.28 A director or the
company secretary may also be able to enforce the internal governance rules on
this basis.
• In the case of non-compliance by a member, another member or the company may be
able to obtain declaratory or injunctive relief, or damages.
• In the case of non-compliance by a director or secretary, the company may be able to
obtain declaratory or injunctive relief, or damages.
As noted in ¶5-520, a company’s constitution may include restrictions on its objects.
If a company acts outside its stated objects, or breaches a restriction or prohibition on
the exercise of its powers contained in the constitution, the act is not invalid, but those
5
participants that caused the company to breach its constitution may be liable to the other
participants in the company.29
Non-compliance with the internal governance rules may amount to a procedural
irregularity. For example, the internal governance rules will generally specify the required
number of members for a quorum. Holding a meeting without a quorum may be a
procedural irregularity. In cases of procedural irregularity, s 1322 of the Corporations
Act applies. The effect of s 1322 is that a proceeding under the Corporations Act is not
invalidated because of any procedural irregularity unless the court is of the opinion that
the irregularity has caused or may cause substantial injustice that cannot be remedied by
any order of the court, and the court by order declares the proceeding to be invalid: see
¶8-620.
SINGLE DIRECTOR/SHAREHOLDER COMPANIES

[¶5-700] What is a single director/shareholder company?
Chapter 1 explained that, since 1998, it has been possible to form and conduct a
proprietary company in which the sole shareholder is also the only director.30 Because
such companies have only one participant, the rules of company law (including the rules
that are contained in the internal governance rules) that regulate the relationship between
multiple participants have no application to them.
28 Damages are not available where the claim is brought by a member against the company: Houldsworth v City of
Glasgow Bank (1880) 5 App Cas 317.
29 See ¶3-200 on corporate capacity.
30 Because s 201A of the Corporations Act requires that a public company have at least three directors, a public
company cannot be a single director/shareholder company.
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However, such companies are legal persons separate from their participant and must
act as such. The Corporations Act provides some rules relating to the operation of such
companies, which are summarised below.
[¶5-720] What rules govern single director/shareholder

companies?
Section 135 of the Corporations Act provides that the replaceable rules do not apply to a
proprietary company while the same person is both its sole director and sole shareholder.
Instead, s 198E, 201F and 202C contain certain provisions that govern the operation
of single director/shareholder companies. These provisions apply whether or not the
single/director shareholder company has adopted a constitution.
They state that:
• The director may appoint another director by recording the appointment and signing
the record: s 201F.
• The director may exercise all of the powers of the company except any powers that
the Corporations Act or the company’s constitution (if any) requires the company
to exercise in general meeting: s 198E(1). The powers that must be exercised by the
company in general meeting are described in Chapter 7.
• The business of the company is to be managed by or under the direction of the
director: s 198E(1).
• The director may execute a negotiable instrument such as a cheque, and may determine
that a negotiable instrument may be executed in a different way: s 198E(2).
• The director is to be paid any remuneration for being a director that the company
determines by resolution. The company may also pay the director’s travelling and
other expenses properly incurred by the director in connection with the company’s
business: s 202C.
Where something must be done by the member of a single director/shareholder
company in their capacity as a member, it can be done by the member recording a resolution
in writing and signing it. This is provided for under s 249B of the Corporations Act. The
resolution must be recorded in the company’s minute book: s 251A.
Section 201F deals with the situation where the sole participant in a single director/
shareholder company dies or is otherwise incapacitated, by providing for their personal
representative to take over the company. There may be some problems with the operation
of s 201F, for example where there is a delay between a person’s death and (because they
are intestate) the appointment of a personal representative.31
31 For a more detailed discussion of the law relating to single director/shareholder companies, see R Zakrzewski,
‘The law relating to single director and single shareholder companies’, (1999) 17 Company and Securities Law
Journal 156.
¶5-720

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Commercial Applications of Company Law 2019 Ebook - (PART A - COMPANIES and COMPANY LAW)

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PART A

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Companies as a Form of Business Organisation

The Architecture of Companies

The Historical Development of Companies

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[¶1-050] What is a company?

COMPANIES AS A FORM OF BUSINESS

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[¶1-120] What are companies like?

[¶1-140] What are listed companies, and who invests in them?

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THE ARCHITECTURE OF COMPANIES

7 ASX Historical Market Statistics <www.asx.com.au/about/historical-market-statistics.htm>.

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[¶1-220] How is a company’s capital structured?

A person who holds shares in a company is a member of the company. Members of

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[¶1-240] How is a company’s management structured?

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[¶1-260] What are a company’s key legal attributes?

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[¶1-320] What are corporations aggregate and joint stock, and

9 JH Farrar and BM Hannigan, Farrar’s Company Law (4th edn, 1998), p 17.

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Royal Charter or an Act of Parliament.

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[¶1-340] When did the right to incorporate companies become

[¶1-360] When was limited liability first introduced?

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[¶1-380] When were companies first used for small business?

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Another judge took the view that:

13 [1895] 2 Ch 232 at 340–341, per Lopes LJ.

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Secretary is a person responsible for performing certain administrative functions

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Scope and Operation of Company Law

Other Sources of Company Law

Applying Company Law to Legal Problems

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What is ASIC? ¶2-520

SCOPE AND OPERATION OF COMPANY LAW

companies (for example, the relationship between directors and shareholders)

[¶2-120] What does company law cover?

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[¶2-140] How is company law enforced?

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Assume a director of a company breaches the rule of company law prohibiting

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[¶2-220] What is the background to the Corporations Act?

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Some key milestones in the evolution of Australian companies legislation are:

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Constitution. Significantly, Hughes’s charges (which related to an investment scheme

8 (1999) 17 ACLC 1,055; 163 ALR 270.

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PART A

[¶1-120] What are companies like?

9 JH Farrar and BM Hannigan, Farrar’s Company Law (4th edn, 1998), p 17.

Another judge took the view that:

13 [1895] 2 Ch 232 at 340–341, per Lopes LJ.

Scope and Operation of Company Law

Other Sources of Company Law

What is ASIC? ¶2-520

SCOPE AND OPERATION OF COMPANY LAW

[¶2-120] What does company law cover?

[¶2-220] What is the background to the Corporations Act?

Some key milestones in the evolution of Australian companies legislation are:

8 (1999) 17 ACLC 1,055; 163 ALR 270.

[¶2-310] What is case law?

• binding statements governing interpretation of the provisions of the Corporations  Act.

How do we use case law to find legal rules?

Act on which there is little or no applicable case law.

[¶2-330] What is the ASIC Act?

[¶2-360] What are the ASX Listing Rules?

16 Foreword to the ASX Listing Rules.

[¶2-520] What is ASIC?

ASIC’s main functions in connection with the regulation of companies are:

[¶2-540] What is ASX’s regulatory role?

25 Formerly the Trade Practices Act 1974 (Cth).

Piercing the Corporate Veil

[¶3-120] What happened in Salomon’s case?

11 (1993) 11 ACLC 856; 10 ACSR 776.