1. Limited Liability 2. Separate Legal Entity 3. Concept of the `veil of

Introductory: Unless otherwise stated all sections stated are from the Corporations
Act.
1. Limited Liability
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Company’s debts are separate from its members because company is a
separate legal entity.
Statutory/ contractual limitation on extent members liability in event company
suffers loss
Members not personally fully liable for their company’s debts
Member’s liability depends on type of company that has been incorporated i.e.
ltd by shares
2. Separate Legal Entity
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A company is regarded by law as a separate legal entity i.e. artificial person
Company’s ‘eyes, brain and limbs’ are human persons who perform task on
company’s behalf i.e. officers - directors/ company secretary) Soloman
3. Concept of the ‘veil of incorporation”
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The company’s separate legal existence = veil of incorporation’ shielding
officers/ members who have limited liability from outside scrutiny i.e.
creditors
Veil may be lifted:
Common Law
o Fraud Re Darby i.e. buying another company to gain profits
o Avoiding legal obligations Gilford Motor Co
o Invovement in director’s breach of duties – Green v Besto Bell
Industries
Corporations Act
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Insolvent trading s 588G, 588J, 588K, 588M
Uncommercial transactions: 588FB, 588FE(3)
Security interests granted to officers: 588FP, 588FP(1)
Financial assistance: 260A, 260D.
Taxation legislation: Income Tax Assesment Act 1997 (Cth).
4. Classification of Companies (s 112)
! By public status
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Proprietary Company (Pty Ltd): ss 9, 45A(1)
o Small Proprietary Co 45A(2)
o Large Proprietary Co 45A(3)
o Single director/single shareholder Pty Company: ss 135(1), 198E,
201F, 202C
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Public Company (s 9)
o Listed on Australian Securities Exchange (ASX)
o Unlisted
! According to liability by members
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Limited by shares
Limited by guarantee (no shares, no shareholders – charities usually).
Unlimited with share capital (can go back to members to pay off creditors as
many times as they want – NOT popular).
No liability (Mining only).
113(3): If proprietary CANNOT offer shares to public – offence of strict liability.
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Change of Company type/Conversion: ss 163-4.
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5. Registration
Stage 1: Pre-registration requirements
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Name of company: can be ACN
o Limited Company: (Ltd)
o Proprietary Limited: Pty Ltd
o No Liability: NL
o Can reserve name: s 152(1)
o Names identical or unacceptable: s 147
Stage 2: Application for registration: s 117
• Form 201
• Application content: s 117(2)
• Consent: s 117(5)
• Constitution & RR (if company decides to create one upon registration) s 134
Stage three: Registration by ASIC and issuing of Certificate: ss 118-119
• Certificate of registration:
o Company name, & ACN s 118
o Company exists on registration day: s119
Stage Four: Post registration requirements
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Appoint members, directors and company secretary of newly created company
s 120
Registered office s 121
Common seal s 123
ACN ss 9, 118
Registers ss 168-178
Financial record and auditor ss 286. 327A, 325
Bank account
Public Officer: Income Tax assessment
Appointment of directors AFTER registration
1. If there is a Company Constitution FOLLOW THAT
2. Otherwise: Replaceable Rules: ss 201G and 201H
• A company may appoint a director by resolution (s 9 definition)
passed at a general meeting OR
• The other directors may appoint a person as a director.
o Proprietary: Appointment MUST be confirmed by the
general meeting within 2 months after the appointment is
made. If the appointment is not confirmed, the person
ceases to be a director at the end of those 2 months
o Public: Company must confirm appointment by resolution
at the company’s next AGM. If the appointment not
confirmed then person ceases to be director at end of AGM.
3. Then: Look at the validity of the meeting
a. Notice (21 days, written notice to both directors and shareholders: s
249J(1).
b. s 249D (5)
4. Consequences: Procedural irregularities
a. s 1322
b. “A proceeding under this 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 by order declares the
proceeding to be invalid”.
Promoters and Pre-Registration Contracts
ss131 – 133; 711, 728, 729.
1. Ascertain whether said person could be defined as a promoter.
! ‘Promoter: A person who is party (whether in an active or passive role) to the
formation of a company with the expectation of deriving a profit thereby: Tracey v
Mandalay
! Any person actively involved in playing a role in organizing the formation of a
company falls within the definition of a promoter: Twycross. This includes
negotiating preliminary agreements.
! A person who forms a proprietary company to purchase a business run by a sole
trader is a promoter: Salomen
! A person who takes no ACTIVE part in the incorporation of a company and the
raising of its share capital, but leaves this to others on the understanding that they will
profit, may also be a promoter.
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Common law position abandoned as per s 133
Fiduciary relationship exists between promoter and the (later-formed
company) Aequitas
2. Go through steps in Section 131(1): Enables the outsider to enforce a preregistration contract against the company if it ratifies the contract after it is
registered. If ratification does not occur within the agreed time (or reasonable
time) then person who entered the contract on its behalf becomes personally
liable to pay damages to the other contracting party 131(2).
a. Bay v Illawarra: Accountant bought office supplies (pre-reg).
Contract was not ratified. Other party sought to sue all four promoters.
Court held only accountant liable. Court noted, however that
accountant would have separate right to claim against other promoters
if he acted as their agent in relation to the contract.
b. Under 131(2) damages are the amount the company would be liable to
pay if it had ratified the contract but did not perform it at all: includes
any lost profits and wasted expenditure.
c. Both parties may enter into a new contract in substitution of the preregistration contract, known as novation: s131(2)-(3).