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Australian Corporations Law and Corporate Groups, Case Study Example

Pages: 8

Words: 2177

Case Study

Australian law defines companies as incorporated bodies that are created by a process of registration controlled by the Australian Securities and Investments Commission (Lipton, Herzberg, and Welsh 436). It is important to note that although the terms ‘company’ and ‘corporation’ are used to describe businesses, they hold different legal definitions according to the law. The term ‘corporation’ is specifically defined as ‘any artificial legal entity, as opposed to a natural legal personality’ and ‘a company, any body corporate, and an unincorporated body that has become incorporated under State law’ (436). Australian corporation law deals with corporate groups in the context of separate but legal entities due to their classification as a ‘separate artificial person’; therefore, the advisory board and shareholders of the corporation are not individually responsible for the financial decisions it makes as an entity1. Due to a corporation’s classification as a ‘separate legal entity’, it is the company rather than the individual who owns property acquired by the company; in addition, the owner of the company considered to be an employee of the company by law (Lee, Macaura)2,3.

Individual members of corporations are protected as consequence of the ‘separate legal entity’ classification. This is also known as the ‘veil of incorporation’ because company members, employees, directors, and shareholders can never be made solely responsible for the decisions that the incorporated company makes and acts upon. However, it is important to understand that this ‘veil of incorporation’ only exists for legal decisions and actions; members of a corporation cannot use the corporation to commit any acts that State law would deem as illegal. Therefore, an essential component of Australian corporations law involves this concept; lawyers and judges need to be able to determine the difference between wrongful actions committed by the company and wrongful actions committed by the individual. The Corporation Act states that ‘the veil of incorporation’ can be lifted when directors of the corporation make such illegal decisions; the illegal decisions that can provoke the lifting of this veil include cases of fraud, avoidance of legal obligations laid out in contractual agreements, and wrongful actions of a subsidiary company based upon directions laid out by the parent company.

Increasingly over the last 30 years, the development of complex corporate groups has facilitated the opportunity to move assets between companies in that group. The main issue with corporate groups is that they are composed of many different individual companies. Of course, different companies within a corporate group will have different creditors who’s separate interests deserve protection’ (455). According to Australian law, subsidiary companies are considered to conduct business as agents for their parent company; despite this, they are treated as separate legal entities and are responsible for their own finances. Even though these agent companies are responsible for factors such as debt, their actions are considered to be directed by the parent company; if these acts are found to be criminal, the agent is not responsible under agency law, to a certain extent.

The existence of complex corporate groups often makes it difficult for creditors to determine which company they are dealing with directly. In the case Qintex Australia Finance Ltd v Schroders Australia Ltd called a legal need to determine which parties should be responsible for repaying the creditors in situations where there is a significant financial loss. Since this case, State law has determined that corporation directors are personally responsible for their company’s debt in cases where the company is insolvent4. This law is on the grounds that the directors of the company are primarily responsible for knowing whether or not their company is insolvent; continuing as if this is not the case is either ignorant or criminal. Therefore, the ‘veil of incorporation’ is lifted and they are required to pay the company’s debt to the creditors; in addition, it may be determined that the directors are criminally liable if their interactions with the creditors were found to be dishonest. Occasionally directors who intend to cheat creditors will give an asset away in an uncommercial transaction; this is typically done in an attempt to transfer responsibility of the asset from one member of the complex corporate group to another. To prevent such occurrence, State law created s 588FB in an effort to prevent situations in which an asset is disposed of at a discounted price that cannot be reasonably be justified by typical business practices. To further protect against unreasonable financial exchanges between members of complex corporate groups, State law dictates that directors who make financial decisions that impact the wage of their employees may be personally responsible to pay those wages, directors who provide financial assistance to a third party company by means of a loan are responsible for paying back the loan, and trustees are responsible for paying debts incurred by the trust and directors will be responsible for paying this debt if the trustees are unable5.

While company directors remain primarily responsible for unreasonable debts incurred by the company, members of the company are protected as a result of ‘limited liability’. Therefore, the law recognises that members of the company are not fully responsible for the debts incurred by the company; rather, they are responsible on the basis of the type of company they belong to. It is important to remember that the company as an entity is primarily responsible for paying back its debts; the responsibility of paying the debt usually falls to the director when the company is unable to do so on its own. The responsibility of paying back the debt rarely falls to the members although it does on occasion. In situations where members of the corporation are awarded limited liability, the responsibility of paying back the debt may fall to the creditors whether they are secured or unsecured. This dichotomization of security level leads to enhanced risk for certain creditors while it protects others; unsecured creditors will by definition suffer the greatest financial loss if the limited liability corporation is unable to pay back its debts on its own.

The most significant political act in the history of Australian corporations law occurred in 1989 when the Commonwealth Parliament issued both the Corporations Act of 1989 and Australian Securities Commission Act. Before this movement, the Commonwealth, States, and Northern Territory failed to be united under a common law; this created the first national effort to regulate corporations and address many of the legal issues that had no clear resolution under the Co-operative Scheme. When the Corporations Act officially began to have legal measure on January 1, 1990, it worked to delegate responsibilities of both the States and the Commonwealth in terms of regulatory duties. Since there was much debate over the power that either the States or the Commonwealth should be given over such jurisdiction, the Corporations Act was revised in 2000 and the edited act came into effect in 2001. Under this agreement, the Attorneys-General of the States agreed to hand over the power they were granted by the act to the Commonwealth in order to ensure a ‘Federal Corporations Act’. As a consequence, the Australian Securities and Investments Commission Act of 2001 came into play in order to carry out the guidelines set by the Corporations Act. The ASIC is responsible for providing information to corporations that will enhance their compliance to the law. In addition, this group is expected to maintain and improve the performance of the financial system and maximize the economy, maintain public confidence in the national financial system, physically enforce the policies set fourth by the Corporations Act, and ensure that related information is distributed to the public upon request. ASIC is also responsible for regulating other financial agencies made necessary by the Corporations Act. They are to staff and support these financial agencies and advise the Minister about changes to the Corporations Act in regards to additional resources they may need to carry it out. Therefore, violations of the Corporations Act are primarily investigated by the ASIC and their associated agencies; in addition, they are the ones who investigate corporations they suspect of fraud.

As mentioned earlier, many corporations have limited liability which protects the individual members of the company. Some companies however, do not have this protection under law; the primary distinction between corporations who are allowed limited liability and those who are not are a direct result of the classifications of these companies according to their public status and other related characteristics. Overall, corporations can be classified according to their public status, the liability level of their members, whether they are recognised as foreign or domestic, whether they function as a group of companies, and whether they are a trustee. An individual company’s obligations to the Corporations Act varies greatly depending on whether the company is considered public or private. Proprietary companies are generally smaller in size and are usually considered to be family businesses; to be legally classified as a proprietary company, it must have less than 50 non-employee stockholders, it must not raise funds from the public by offering shares, it can have only up to 50 members, and directors must be at least 18 years old. Propriety companies can then be classified as small or large depending on several features; a small proprietary company is considered to have an annual gross operating revenue of less than 25 million dollars, and their annual profit is expected to be less than 12.5 million dollars. Meanwhile ‘public companies’ are those who fall into a category other than that of proprietary companies. These companies are free to sell shares to the public to any extent they desire, they must be incorporated with at least one member, and there must be at least three directors and at least two of these directors must be residents of the Australian nation. Frequently, the liability of company members is affected by whether the company is proprietary or public. Companies who are ‘limited by shares’ are by definition formed on the principle of having the liability of its members limited to the amount unpaid respectively on the shares held by them; limited companies must add the name ‘Limited’ to their title in order to remain in compliance with the Corporations Act. Limited companies can be either public or proprietary and it is important to understand that the members of limited companies have limited liability. On the other end of the spectrum are unlimited or no liability companies; therefore, the members of these companies are responsible for paying the debts of their company if it has insufficient funds to do so itself. Unlimited companies can be proprietary companies; companies with no liability can only be a member of the mining industry.

One of the most important jobs of corporations layers is the ability to interpret and understand whether a company is obeying laws set fourth by both the commonwealth and the individual State that it is registered to. Although the corporations act shifted focus from shared power between the commonwealth and the State to mainly the commonwealth, some State laws can still operate on the companies.

It is important to return to the fact that corporations can function as groups because a lot of corporation fraud is committed by a company’s attempt to transfer liabilities between these groups. The Corporations Act is the main law to study when determining who is responsible for these illegal acts. As stated earlier, the law requires that one company be considered the holding company while the other companies in the group are to act as subsidiaries. A holding company is rigidly defined as a body corporate of which the first body corporate is a subsidiary. A subsidiary company is therefore defined as a company in which the holding company is able to exert control over the composition of the board of directors. Ultimate holding companies have power over all of their subsidiaries, while related bodies can have an altered chain of command.

Ultimately corporations who participate in complex corporate groups must keep track of who is responsible for the actions of their companies. In the case of corporations with limited liability, the primary responsibility of paying back debt falls to the corporation itself. If the corporation is unable to, this responsibility then falls to the directors and then the creditors themselves. In situations where the company has unlimited liability, this responsibility will then fall to all members of the company. If a corporation commits a crime and the director is found to have purposely committed this crime to benefit himself or the company, the ‘veil of incorporation’ can be lifted and the director is responsible. It is of utmost importance to remember that all of the information regarding the complexities of corporate groups is set fourth by the Corporations Act and regulated by the ASIC; directors who commit crimes will be subjected to their regulation.

Works Cited

[1925] AC 12 Macaura v. Northern Assurance Co Ltd.

[1961] AC 22 Lee v Lee’s Air Farming

[1987] ALR 155 The company as a separate legal entity Salomon v Salomon

Kirby, M. Company Law in Australia: Principles and Applications, 2005. Web. 4 Sept. 2013. <http://www.hcourt.gov.au/assets/publications/speeches/former-justices/kirbyj/kirbyj_18mar05a.html>

Lipton, Herzberg, & Welsh. Understanding Company Law. Thompson Reuters, 2013.

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