Corporate Law: Legal Entity, Insolvent Trading, Internal Management, Remedies

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Law 202

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Part A
Answer 1
A corporation has a “separate legal entity” which is recognised
under the law, and it allows the company to form contractual
relationships, purchase or sell property, sue third parties or get sued as
given in “
Salomon v Salomon & Co Ltd (1897) AC 22”. Corporations can
also issue their shares to the public with an objective to raise capital for
their operations and liability of its shareholders remains limited to the
amount of share which they purchase (Goulding, 2013). The “
Corporations
Act 2001 (Cth) (CA)” provides key provisions which recognise the legal
entity of the company along with identification of its ability to issue
shares. Under chapter 2B of CA, provisions regarding basic features of a
company are given in which section 124 (1) provides that the company
has “legal capacity and powers” as an individual in the eyes of the law
(Legislation, 2019). Subsection 1 further provides that this power enables
the company to issue or cancel shares or debentures, grant options, grant
a security interest, distribute property or others. Pursuant to section 254A
(1), the power to “issue bonus, partly-paid, preference and redeemable
preference shares” to the public and specific certain rights and terms
along with these shares such as voting rights, interest payment, the
priority of payment and others (Legislation, 2019). Another right of a
company is identified under section 254B (1) which provides that the
company can determine the terms of the issues which are issued and
identify rights and restrictions for each class of shares.
Answer 2
The definition of insolvent trading is given under section 588G of CA
which provides that “if the directors incurred or allowed the company to
incurred debt when it is insolvent which could lead to its liquidation, then
they can be held personally liable for those debts” (Legislation, 2019).
Section 588G identifies a duty of directors to make sure that they must

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avoid incurring a debt when the company is insolvent, or it is likely to
become insolvent. The provisions of this section apply to the individual
who is a director of the company (subsection 1 (a), incurred the debt
(1(b)) and has reasonable grounds to suspect that the company is
insolvent (1(c)) (Tiba, 2019). In the case of “
Woodgate v Davis (2002) 55
NSWLR 222”, the court provided that the director owes a duty to protect
the welfare of the stakeholders based on which they must avoid insolvent
trading which is a criminal offence. Section 588H provides provisions
regarding defences; subsection 2 provides that if the director has
reasonable ground to believe that the company was solvent, then this
principle did not apply. In case the director relied on a competent and
reliable person for identifying solvency of the company, then the duty is
not breached. In “
Hall v Poolman (2007) 215 FLR 243”, it was held that
the directors could not be held liable for the debt incurred during
insolvency if they rely on the defence of section 588H. Section 588M
provides that the director who is charged under section 588G (2) or (3)
will be held liable for repaying the debt which was incurred due to
insolvent trading (Austlii, 2019).
Answer 3
Section 134 of CA provides that the “internal management of a
company is governed by its constitution, replaceable rules or a
combination of both”. These documents play a crucial role in the
governance of the company since section 140 provided that they define
the relationship between the organisation and its directors, shareholders
and other officers (ASIC, 2017). Section 135 (1) provides that the
replaceable rules are options for companies and they apply on those
organisations that were formed after 1998 or those companies that were
formed before 1998; however, they have repealed their constitutions
(Austlii, 2019). This section also provides that there are specific
replaceable rules which only apply to proprietary companies and others
only apply to public companies. The provisions that are given under the
CA that apply on replaceable rules are provided under section 141.