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Understanding company law PDF

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understanding company law Phillip Lipton Affiliate, Department of Business Law and Taxation, Monash University Abe Herzberg Affiliate, Department of Business Law and Taxation, Monash University .d e vre Michelle Welsh se r sth Professor g ir llA Department of Business Law and Taxation, Monash University .d e tim iL ytP aila NINETEENTHEDITION rtsu A )la n o isse fo rP ( sre tu e R n o sm o h T .7 1 0 2 © th g iryp o C LAWBOOKCO.2018 PublishedinSydneyby ThomsonReuters(Professional)AustraliaLimitedABN64058914668 19HarrisStreet,Pyrmont,NSW Firstedition 1984 Ninthedition 2000 Secondedition 1986 Tenthedition 2001 Thirdedition 1988 Eleventhedition 2003 Fourthedition 1991 Twelfthedition 2004 second impression with Thirteenthedition 2006 supplementarychapter 1992 Fifthedition 1993 Fourteenthedition 2008 Sixthedition 1995 Fifteenthedition 2010 Seventhedition 1998 Sixteenthedition 2012 Eighthedition 1999 Seventeenthedition 2014 Eighteenthedition 2016 NationalLibraryofAustralia Cataloguing-in-Publicationentry Lipton,P(Phillip),author. Understandingcompanylaw/PhillipLipton,AbeHerzberg,MichelleWelsh. 19thedition. 9780455240213(pbk) Includesindex. Corporationlaw—Australia. Herzberg,A(Abraham),author.Welsh,Michelle,author. ©2018CorporateEducationServicesPtyLtd .d evrese TChoipsypriugbhlticAatcito,nnoispcaorptyorfigithmt.aOythineratnhyanfofromrtohrebpyuarnpyosmeseaonfsan(edlescutbrojencitc,tomtehcehcaonnicdaitl,iomniscrporceospcyriibnegd, underthe r sth photocopying,recordingorotherwise)bereproduced,storedinaretrievalsystemortransmittedwithoutprior gir llA writtenpermission.Inquiriesshouldbeaddressedtothepublishers. .d CopyrightofCthlegislativematerial:AllCommonwealthlegislativematerialisreproducedbypermissionbut e tim doesnotpurporttobetheofficialorauthorisedversion.ItissubjecttoCommonwealthofAustraliacopyright. iL ytP a FsoourgrehptriondwurcittiionngofrropmubtlhiceactuiornrebnetyCoonmdmthoantwpeeramltihttGedovbeyrnthmeeCnotpaygreignhctyAwcitth19th6e8re(Cletvha),nptepromliicsysiroenspsohnosuilbdilbitey. ila rtsu Editors:CorinaBrooks,LaraWeeks A )lan ProductDeveloper:ElizabethGandy o isse Publisher:RobertWilson fo rP ( sre PrintedbyLigarePtyLtd,Riverwood,NSW tu e ThisbookhasbeenprintedonpapercertifiedbytheProgrammefortheEndorsementofForestCertification R no (PEFC).PEFCiscommittedtosustainableforestmanagementthroughthirdpartyforestcertificationof sm responsiblymanagedforests.Formoreinfo:http://www.pefc.org o h T .7 1 0 2 © th g iryp o C to Ilana,Evelyn,Rob,Natalie,Jack,Sam,MatteaandSophia Nan,Jessica,AdamandQuincy EllenandMolly .d e vre se r sth g ir llA .d e tim iL ytP a ila rtsu A )la n o isse fo rP ( sre tu e R n o sm o h T .7 1 0 2 © th g iryp o C preface This edition has been updated throughout to include discussion of the most recent relevant legislative developmentsandsignificantcases.Thelegislativedevelopmentsincludethefollowing. The Insolvency Law Reform Act 2016 (Cth) is the most comprehensive reform of bankruptcy and corporateinsolvencylawsinmorethan20years.ItinsertedintotheCorporationsActanews600Kwhich incorporatestheInsolvencyPracticeSchedule(Corporations)whichsetsoutthemainprovisionsrelatingto companies under voluntary administration; subject to a deed of company arrangement; in liquidation or provisionalliquidation. AccordingtotheExplanatoryMemorandumthethreemainobjectivesoftheInsolvencyPracticeSchedule (Corporations)are: (cid:0) toensurethatanypersonregisteredasaliquidator; (cid:0) hasanappropriatelevelofexpertise; (cid:0) behavesethically;and (cid:0) maintainssufficientinsurancetocoverhisorherliabilitiesinpracticingasaregisteredliquidator; (cid:0) to regulate the external administration of companies (voluntary administrations, deeds of company arrangement, liquidations and provisional liquidations) consistently, unless there is a clear reason to .d treatamatterthatarisesinrelationtoaparticularkindofexternaladministrationdifferently;and e vrese (cid:0) toregulatetheexternaladministrationofcompaniestogivegreatercontroltocreditors. r sth g Amongothermatters,theInsolvencyPracticeSchedule: ir llA .d (cid:0) removesthedistinctionbetweenofficialandregisteredliquidators; e timiL (cid:0) introduces new rules for the registration, regulation, discipline and deregistration of registered ytP liquidators; a ilartsu (cid:0) creates general rules that set out the requirements for conducting external administrations including A )la provisionsdealingwith: n oisse (cid:0) remunerationoftheexternaladministrator; fo rP (cid:0) thedutiesoftheexternaladministratorinhandlingthepropertyofthecompany; ( sretu (cid:0) conflictsofinterest; e R no (cid:0) external administrators’duties in relation to record keeping, reporting toASIC and information sm o provisiontocreditors; h T .71 (cid:0) rulesgoverningcreditorandcompanymeetings; 0 2 © th (cid:0) the creation and conduct of creditors’ committees of inspection to monitor the external g iryp administration; o C (cid:0) the rights of creditors to review the external administration and to remove the external administratorandappointanother; (cid:0) thereviewoftheexternaladministrationbythecourt. ThislegislationisdiscussedinChapters22to25. understandingcompanylaw 8 The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) established a new regulatory framework to facilitate crowd-sourced funding by small unlisted companies. This legislation replaces the provisions dealing with prospectuses and other fundraising disclosure documents in relation to crowd- sourcedfundingoffers.Itsetsouteligibilityrequirementsforacompanythatwishestomakeanofferunder this new regime and regulates such offers and intermediaries including rules dealing with defective disclosuredocumentsandadvertisingrestrictions.TheCorporationsAmendment(Crowd-sourcedFunding for Proprietary Companies) Bill 2017 proposes to extend the CorporationsAmendment (Crowd-sourced Funding) Act 2017 to enable proprietary companies to access crowd-sourced funding (CSF) without requiringthemtoconverttopubliccompanies.TheActandtheBillarediscussedinChapter7. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 introduces two important reforms. These included the creation of a safe harbour insolvent trading defence for directors and a new ipso facto regime. The safe harbour defence protects directors from personal liability where they start developing one or more courses of action that are reasonably likely to provide a better outcome for the companythananimmediateliquidationoradministration.Theipsofactoregimepreventsacreditorfrom using the company’s financial position at the time of a scheme of arrangement, administration or receivershiptotriggerthecreditor’srighttoenforcetheloan.Thesafeharbourdefenceandtheipsofacto regimearediscussedinChapters13.5and24respectively. TheCorporationsAmendment(ProfessionalStandardsofFinancialAdvisers)Act2017(Cth)(Cth)aimsto raise the education, training and ethical standards of financial advisers who provide personal advice on morecomplexfinancialproductstoretailclients.ThisisdiscussedinChapter19. InSeptember2017thegovernmentreleasedforpubliccommentapackageofreformsCombattingIllegal Phoenixing to crack down on illegal phoenix activity; the stripping and transfer of assets from one company to another to avoid paying liabilities. Amongst other things the proposals foreshadow the .de introduction of a Director Identification Number to identify directors. The proposals are principally vre se discussedinChapter13.5. r sth gir llA .d T20h1e7gotoveimrnpmroenvteaplrsootercetlieoansefdoranwhexisptloesbulorewderrasfitnotfhtehceoTrproearsauteryanLdawfinsaAnmcieanldsemcetonrts(.WThheisBtlielbllioswdiesrcsu)sBseildl e tim inChapter13.6. iL ytP a Recentsignificantcasescoveredinthiseditioninclude: ila rtsu ASICvCassimatis(No8)[2016]FCA1023whichconsideredtheliabilityofdirectorsforbreachoftheir A )la dutyofcarewhentheyexposetheircompanytotheriskofcivilliability.TheisdiscussedinChapter13.4. n o issefo In the Matter of HIH Insurance Ltd [2016] NSWSC 482 which applied a market-based causation rP ( sre approach in assessing whether there had been misleading or deceptive conduct in relation to a financial tu product.ThisisdiscussedinChapter19. e R n osm We thank Michael Duffy and Wayne Gumley for their helpful comments and suggestions. We also thank o h Lauren King and Meridith Borthwick for their assistance in helping us compile the bibliographies at the T .71 endofvariouschapters. 0 2 © th g iryp o C preface 9 We have been very grateful for the work of our longstanding editor, Corina Brooks. Unfortunately, she tookillbeforecompletingtheeditorialproduction.Wewishheraspeedyrecovery.WethankLaraWeeks for stepping in to complete the editorial production and are appreciative of her efforts. We also acknowledge the work of Elizabeth Gandy, theThomson Reuters product developer who shepherded the publicationofthisedition. Last but by no means least we would like to extend special thanks to our families who, as always, have provideduswithgreatsupportandencouragement.Thisworkisdedicatedtothem. PHILLIPLIPTON ABEHERZBERG MICHELLEWELSH Melbourne 27October2017 .d e vre se r sth g ir llA .d e tim iL ytP a ila rtsu A )la n o isse fo rP ( sre tu e R n o sm o h T .7 1 0 2 © th g iryp o C Table of Contents preface.........................................................................................................................................................................................vii 1 regulatory framework ...................................................................................................................................................... 1 2 registration and its effects ......................................................................................................................................... 25 3 types of companies ......................................................................................................................................................... 79 4 constitution and replaceable rules..................................................................................................................... 105 5 the company's relations with outsiders.......................................................................................................... 129 6 promoters and pre-registration contracts ..................................................................................................... 169 7 fundraising ....................................................................................................................................................................... 181 8 share capital.................................................................................................................................................................... 213 9 membership..................................................................................................................................................................... 257 10 dividends........................................................................................................................................................................... 285 11 debentures and personal property securities ............................................................................................ 293 12 directors ............................................................................................................................................................................ 321 13 overview and summary of directors' duties................................................................................................. 361 .d evre 14 shareholders' meetings............................................................................................................................................ 577 se r sth 15 financial reporting and disclosure..................................................................................................................... 603 g ir llA 16 auditors.............................................................................................................................................................................. 631 .d etim 17 members' remedies .................................................................................................................................................... 657 iL ytP 18 takeovers .......................................................................................................................................................................... 705 a ilartsu 19 financial services and markets ........................................................................................................................... 739 A )la 20 managed investments.............................................................................................................................................. 789 n o isse 21 ASIC's investigatory and information-gathering powers.................................................................... 799 fo rP( sre 22 corporate insolvency ................................................................................................................................................. 813 tue 23 receivership .................................................................................................................................................................... 837 R n osm 24 voluntary administration........................................................................................................................................ 861 o h T .7 25 liquidation ........................................................................................................................................................................ 909 1 0 2 © th table of cases............................................................................................................................................................................ 1007 girypo ttaabblleeooffCthoerpCoorraptoiornatsioRnesgAulcatt.i.o..n..s......................................................................................................................................................................................................................................................................................11002619 C tableoftheAustralianSecuritiesandInvestmentsCommissionAct..................................................................................1071 tableofCodes..........................................................................................................................................................................1073 tableofstatutes.......................................................................................................................................................................1075 index........................................................................................................................................................................................1079 chapter 1 regulatory framework [1.05] whatisacompany?........................................................................................................3 [1.10] historyofcompanylaw..................................................................................................5 [1.10] earliestcompanies....................................................................................................... 5 [1.15] earlycompanieslegislation........................................................................................ 6 [1.20] caselawandlegislation.............................................................................................. 7 [1.25] developmentofAustraliancompanylaw........................................................................7 [1.25] constitutionalposition................................................................................................ 7 [1.30] previousregulatoryschemes...................................................................................... 8 [1.62] CorporationsAct2001.................................................................................................10 [1.65] AustralianSecuritiesandInvestmentsCommission......................................................10 [1.70] objectivesofASIC..................................................................................................... 11 [1.75] functionsandpowersofASIC................................................................................. 11 .d [1.80] registeringcompanies...................................................................................... 12 e vre [1.82] registeringbusinessnames.............................................................................. 12 ser sthg [[11..8950]] nreagtuiolantaiolndaotafbfiansaen.c..i.a..l..s..e..r.v..i.c..e..s...a..n..d...m...a..r..k..e..t.s...................................................................................................1132 ir llA [1.95] takeovers...........................................................................................................13 .de [1.100] powersofinvestigation................................................................................... 13 tim iL [1.105] powerstobringlegalproceedings................................................................. 14 ytP [1.110] educationrole.................................................................................................. 14 a ila [1.115] consumerprotection........................................................................................14 rtsuA [1.120] theASX......................................................................................................................14 )lan [1.125] TakeoversPanel..........................................................................................................15 o isse [1.130] financialreportingsystem..........................................................................................16 fo rP( sre [1.135] FinancialReportingCouncil..................................................................................16 tu [1.140] AustralianAccountingStandardsBoard.............................................................. 17 e R no [1.145] AuditingandAssuranceStandardsBoard............................................................17 sm o [1.155] CompaniesAuditorsDisciplinaryBoard.....................................................................18 h T .7 [1.160] CorporationsandMarketsAdvisoryCommittee........................................................18 1 0 2 © [1.165] ParliamentaryJointCommitteeonCorporationsandFinancialServices....................19 th giryp [1.170] recentreforms............................................................................................................19 o C understandingcompanylaw 2 key points (cid:1) Acompanyisanartificialentityrecognisedbythelawasalegalpersonwithitsownrights and liabilities. It is regarded as an entity that is separate and distinct from its owners (its shareholdersormembers)andmanagers(itsdirectorsandofficers). (cid:1) Company law is a combination of case law and legislation largely contained in the CorporationsAct2001(Cth).TheCorporationsActschemewasdevelopedtomeettheneed foruniformAustralia-widecorporationslegislation,administeredbyasingleCommonwealth authority,theAustralianSecuritiesandInvestmentsCommission(ASIC). (cid:1) Companiesvarygreatlyinthescaleoftheirbusinesses,theirobjectivesandtheirnumbers ofshareholders.ThelargestcompaniesinAustraliachoosetohavetheirshareslistedonthe AustralianSecuritiesExchange(ASX)whichoperatesthelargestAustralianstockmarketin which shares of listed companies and other entities can be bought and sold. Listed entities mustcomplywithdetaileddisclosureobligationsandotherrequirementsimposedbytheASX ListingRulesaswellastheCorporationsAct. .d e vre se r sth g ir llA .d e tim iL ytP a ila rtsu A )la n o isse fo rP ( sre tu e R n o sm o h T .7 1 0 2 © th g iryp o C chapter1 regulatoryframework 3 what is a company? [1.05] A company is an artificial or fictitious entity recognised by the law as a legal person with its own rights and liabilities. The terms “company” and “corporation” are oftenusedinterchangeably.TheCorporationsAct2001(Cth)s9definitionofacompany includesacompanyregisteredundertheActoritspredecessors.Acompanyisonetypeof corporation: s 57A.Acorporation also includes any body corporate formed under other legislation and unincorporated bodies that may sue and be sued or hold property in the nameofanofficeholderappointedforthatpurpose. Companies are a widely used form of business organisation. There are more than 2.5 millioncompaniesregisteredinAustraliaandtheyvarygreatlyinthesizeofbusinessthey conduct and the number of shareholders they have. The overwhelming majority of companiesoperatesmallbusinessenterprisesandaretypicallycontrolledbyanindividual personorafamily. Afundamentalcharacteristicofacompanyisthatithasitsowncorporatepersonality Acompanyisa and is a separate entity distinct from its shareholders, its directors who control its separateentity distinctfromits management, and its officers and employees. The fact that a company is regarded as an shareholders, entity separate from its shareholders, directors and others means that the company may directors,officers andemployees. ownproperty,enterintocontractsandsueandbesuedinitsownname. Aconsequenceoftheseparatelegalentityconceptisthatacompanyhasalifespanthat ispotentiallyunlimited.Itsdirectorsandshareholdersmaychangebutthisdoesnotaffect thecompany’sexistenceasalegalperson.Eventhoughacompanyisinasenseafictitious entity,ithasthesamelegalcapacityandpowersasahumanbeing.Itisthereforeableto .de engageinanybusinessoractivityandmayacquireandexerciserightsinthesamewayas vrese anindividual. r sth gir llA .d oneLimofitethdeliambailiintyriseaasnoontshewrhimyppoerotapnletcchhaoraocsteertiosticfoorfmneaarlcyoamllpcaonmyptaoniecsonandducitsothfteeinr e tim businesses. Limited liability means that shareholders are not personally liable for their Limitedliabilityis iL ytP aila cshoamrpesantyh’astdtehbetys.oTwhne wshhaircehhoinldcelursd’esliaabniylityunipsaliidmiatemdoutontpaoyninpgarthtleyipssauide pshriacreeso.fTthhee acchonmairmpaapctnoeriertiassn.titcof rtsu implicationsofacompanybeingaseparatelegalentityandlimitedliabilityarediscussed A )la at [2.15]–[2.35]. That chapter also contains a comparison of a company with a n o isse partnership and a trust, the other common forms of business organisations: see fo rP [2.285]–[2.345]. ( sre tu The transferability of shares is a feature that distinguishes a company from a e R no partnership.Asageneralrule,shareholdersareabletotransferorselltheirsharesfreeof sm o any restrictions and free transferability of shares is a requirement for listing on a stock h T .7 exchange. Shareholders of listed public companies who wish to sell their shares do not 1 0 2 © need to obtain approval from other shareholders or the company’s directors. Free thg transferability of shares facilitates stock exchange share trading. Most closely held irypo companieswithfewshareholdersrestrictthetransferoftheirsharesbyprovisionsintheir C constitutionswhichrequireapprovalofthedirectorsbeforesharescanbetransferred.The proprietarycompanyreplaceableruleins1072Gisanexampleofsuchaprovision. Some companies, particularly those that operate large businesses, frequently organise their affairs in a corporate group structure with a holding company that controls a

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