Corporations and Trusts Law Chapter 4 The Company – A Separate Legal Entity: Nature, Regulation And Registration

4.1 Corporations Act 2001 (Cth) A ‘company’ is an incorporated body and is regarded by the law as a separate, artificial legal person. An incorporated body is one which has undergone the process of being incorporated pursuant to the Corporations Act 2001 (Cth). In 2001 the states handed over all necessary powers to ensure a single federal system of registration and regulation of corporations and the Commonwealth parliament passed the Corporations Act 2001 (Cth)

Corporations Act 2001 (Cth) The Act addresses the following matters: registering a company basic features of a company members rights and remedies meetings shares financial reporting and auditing winding up and liquidation takeovers, compulsory acquisitions and buyouts fundraising financial services and markets licencing of providers of financial services  

4.2 Separate Legal Entity A company is regarded by the law as a separate legal person – as an entity separate from its owners, the shareholders, and directors. It owns property in its own right and its property is not the property of its directors, shareholders or members. A company can: incur debts, create contracts, commit torts in its own name.

Veil of Incorporation The fact that a company exists as a separate legal entity from its owners, the shareholders, and the people who carry out company business such as directors, is referred to as the veil of incorporation. Once a company is incorporated a person cannot (usually) look behind the veil and hold the owners or operators of the company liable for company debt. In some circumstances, such as failure to meet directors’ duties or fraud, the veil may be pierced and the relevant officers face personal liability.

4.3 Shareholders and Limited Liability There are many different forms in which a business can be developed and the liability diversified: Companies Limited by Shares Companies Limited by Guarantee Unlimited Liability Companies No Liability Companies

4.4 Classification of Companies: Proprietary or Public A proprietary company must be either a company limited by shares or an unlimited company that has a share capital. It must have a minimum of one and a maximum of fifty non-employee shareholders and a minimum of one director. A distinction is drawn between large and small proprietary companies for reporting purposes.

Classification of Companies: Proprietary or Public  A public company is defined in s9 of the Corporations Act as any company other than a proprietary company. A public company may or may not be listed on the Australian Stock Exchange (ASX). A public company may have a minimum of one shareholder with no maximum limit, and must have a minimum of three directors, two of whom must reside in Australia.

4.5 Australian Securities and Investment Commission (ASIC)   The Australian Securities and Investment Commission is governed by the Australian Securities and Investment Commission Act 2001 (Cth) (the ASIC Act). Aims to achieve maximum credibility for Australian financial and securities markets and for Australian companies. Enforces and regulates company and financial services laws to protect consumers, investors and creditors.

Australian Securities and Investment Commission (ASIC) Goals include; To promote confident and informed participation by investors and consumers in the financial system; To make information about companies and other bodies available to the public; To improve the performance of the financial system and the entities within it.

Australian Securities and Investment Commission (ASIC) ASICs’ main functions are: Enforcement Surveillance Investigation Regulation Provision of advice in relation to law reform Education Compilation, storage and dissemination of corporate information. Monitoring and promoting market integrity and consumer protection.

4.6 Company Registration A company is created through the registration process which leads to incorporation. The registration process involves the lodgement of an Application to Register, which is submitted to ASIC.   Directors, secretaries and members are immediately appointed upon the company’s registration. The company is also allocated an ACN or Australian Company Number which must appear on every public document.

The Company Name A proprietary company must include the word proprietary or the abbreviation ‘Pty’ in its name and must also show the liability of its members unless the members liability is unlimited.   Only a company name that is not already registered to a company or business may be used and certain words and phrases cannot be used. Businesses can use the ABN number as the company name.

Replaceable Rules or Constitution Before an application to register a company may be lodged, decisions must be made as to how the company will be internally governed. Either by: replaceable rules, its own constitution. or a combination of both.

4.7 Factors to Consider after Registration Financial Records Large propriety and public companies have to produce yearly audited financial reports. Small proprietary companies do not have to do this. However, basic financial records must still be kept for managing and monitoring the company’s financial position and for tax purposes, including: General ledger, Cash records Debtor and sales records Creditor and purchases records Wage and superannuation records A register of property, plant and equipment Inventory records Investment records Tax returns and calculations Deeds, contracts and agreements

Factors to Consider after Registration Obligations of Directors To be honest and careful in their dealings at all times. To know what their company is doing financially and practically. To ensure that the company can and does pay its debts on time. To ensure that the company keeps proper financial records. To act in the company’s best interests. To ensure that any information received is used properly and in the best interests of the company. To disclose any conflicts of interest.

4.8 Promoters and Pre-Incorporation Contracts Promoters are essentially people who are involved in the formation or setting up of a company. Promoters automatically stand in a ‘fiduciary relationship’ with the company being formed.   The promoter therefore has a duty to; Avoid the potential for personal gain Keep the company fully informed.