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CLWM4000
Business & Corporations Law
Legal Nature, Formation & Types of
Companies, Company Constitution
& Contracts with Companies
Lecture Ten
COMMONWEALTH OF AUSTRALIA
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Topic objectives
1. Explain what is the legal nature of a company
2. Explain how is a company formed
3. What are the different types of companies
4. What is a company constitution
5. How does a company enter into a contract
6. When is it bound by contract entered on its behalf by its
agent
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References
Chapter
Reference
Chapters 12
Textbook
Tutorial.
Why companies?
They provide a good vehicle for conducting business
It is a business structure that separates ownership
(shares) from management (directors)
It also allows the owner (shareholder) to limit their
liability in the event the company goes into liquidation
(insolvency)
Discussion point: Companies should be contrasted with
(1) Sole proprietors (2) partnerships and (3) trusts
Nature of a company
Companies are separate legal entities with their own
rights and obligations under law
Companies are created by registration under the
Corporations Act 2001 (Cth)
Under s124 (1) of Corporations Act a company has full
legal capacity from the date of its incorporation
This means it can do all things a separate legal entity (such
as a person) can do such as own and dispose of property
Once registered it is quite separate from its directors and
shareholders
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Proprietary company
A proprietary company is a privately owned company with the
following characteristics:
1.Limited to a maximum of 50 (non employee) shareholders
2.It cannot have shares sold on the stock exchange
3.It must have share capital
4.It requires its name to include the word proprietary in it
5.It can have as few as one director
Discussion point: Discuss an example of a private company
such as a single director company run by a local tradesman
Public company
A public company is usually listed on the stock exchange and
has many shareholders with the following characteristics:
1.Minimum of one shareholder
2.Minimum of three directors
3.Can have an unlimited number of shareholders
4.Its shares may be sold on the stock exchange
5.If it is a limited liability company (explained later) this word
must appear in its name
Discussion point: Describe an example of a public company
such as BHP
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Limited liability
Limited liability companies means that the extent of the
shareholders liability to contribute to the debts of the
company on winding up is limited to any amount (if any)
unpaid on the issue price of the shares
Discussion point: Discuss what this means in the context
of a shareholder that has 100 shares with an issue price
of $2 per share paid up to $1 per share in the event of
winding up
Unlimited companies
They may be proprietary or public if they have share capital
There is no limit on the shareholders liability
Liability of shareholders may extend to their personal assets
This type of company may not be suitable for general
trading companies
Discussion point: What types of business operation might
this type of company be suitable for?
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No Liability companies
Must be public in nature
Must only be for mining companies
Capital can be raised by making calls on shareholders (on
the unpaid part of the issue price) and this can be done
without any disclosure document i.e. A prospectus
A shareholder is not required to pay such calls but if they
do not pay on a call they forfeit their shares
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Salomons case
Refer to case discussion.
The case facts highlights that control and management of a
company remain distinct from its ownership (shareholders)
Discussion point: Why did the court say that Salomon was
entitled to get his debt paid out in advance of unsecured
credits of the company even though he was the Managing
Director and major shareholder of the company?
Registering a company
A company is created on registration
This is to be contrasted with a partnership which
does not require registration
An application to register a company is pursuant to
s117 Corporations Act
The application would include the type of company,
initial shareholders, directors, and other officers
such as company secretary
The company once registered will have an
incorporation certificate issued with an ACN number
A Companys Constitution
From July 1998 a company has the option to adopt its own
set of rules governing the internal management of the
company known as a constitution
Alternately if a company decides (for whatever reason) not
to adopt its own set of rules as a constitution then the
replaceable rules contained throughout the Corporations
Act will automatically apply as its internal rules
If it adopts a constitution that only adopts some of the
matters contained in the replaceable rules then it will have
internal rules made up as a combination of both
Discussion point: Discuss in class the type of things the
internal rules might cover
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Managing a Company
A company must act through its agents
This means the directors, officers, and senior management
that have the authority of directors delegated to them
The essential point here is that the directors have the
statutory authority to manage the company
The directors are, therefore, responsible for the policies and
management decisions made on behalf of the company
A companys powers
A companys constitution (or replaceable rules) sets out
the internal rules of the company
They may also set out the powers & purposes of the
company
Despite what powers the company is stated to have,
anything it does is not invalidated because it may have
acted outside of its stated powers
S125 Corporations Act makes it clear that any action
outside of its stated powers & objects is not invalidated
because of this
Discuss: What does this mean in practical terms? Give an
example as a class discussion
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