Corporate Law

This document provides an introduction to corporate law, covering topics such as the formation of companies, management structure, members' liability, and shares. It also offers advice on dealing with specific issues in corporate law. Suitable for students studying corporate law or anyone interested in understanding the basics of corporate law.

Corporate Law 1
CORPORATE LAW
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Corporate Law 2
CORPORATE LAW
Introduction to Companies
A company is formed via a process of registration as provided by the relevant statute.
A company may be described as a legal artificial person. A company has a separate
personality from its members and owners. A legal person may be either a human being or a
company.
The main purpose of companies is to unite people and collect capital with the aim of
running a business. They are mostly small businesses which are run by an individual most
times. The law offers protection to the people against paying the company’s debts. The only
amount they may lose is the amount used for investment in the company.
Companies have one member or more who are also referred to as shareholders and
they invest money through subscription for shares or even acquiring of shares from an
already existing shareholder which is referred to as equity capital shares capital. These shares
are paid when the company has made money. Creditors of a company include suppliers,
employees, and lenders. The debt capital must be paid and may include interest whether or
not the business is successful.

Corporate Law 3
Management Structure
The management of the business is left in the hands of a board of directors. This
responsibility is delegated to the Chief Executive Officer and executive members in large
companies. Directors are rarely recruited as members due to their expertise or separation of
ownership or management. Decision making has to favour the company and not necessarily
or directly the shareholders. It is the members right to vote on certain issues. This does not
necessarily include general management calls or decisions.
Members’ Liability
Members of a company have a limited liability unlike the company itself which has
unlimited liability. In Salomon v Salomon (1897), it was determined that Mr. Salomon’s
priority in the debenture over other underprivileged creditors would depend on whether the
company was a separate legal entity from its controller. In another case, Lee v Lee’s Air
Farming Ltd, the issue in question was whether Mr. Lee could be the controller and employee
of the company at the same time. Also, in the case of Macaura v Northern Assurance, the
issue was whether Mr. Macaura could be the owner of a property which belonged to a
company that he controlled.
Shares
Shares refer to claims against a given company which have particular rights attached
to them. They include valuable assets that the shareholder can sell. The transfer of shares may
be difficult. The company’s assets are not owned by the shareholders. On the contrary, the
company owns the assets while the shareholders now own the company.
Classes of shares are created with different attaching of rights such as voting rights (as
these may vary), dividends’ rights and rights and priorities for repaying capital or surplus

Corporate Law 4
while winding up. The company decides these rights under s. 254B of the Corporations Act
2001. The Directors have the power of issuing shares under s. 198 A but this may require
approval by shareholders if there is a requirement for the amendment of the constitution.
Operation of Company Law
Company law provides private rights between parties such as company members.
Breaching the Corporations Act provisions may result to a criminal offence or other State
sanction. The Act also provides the framework for forming, conducting and terminating
companies in Australia.
Advice to Tony
S. 140 of the Corporations Act, 2001 (Cth) provides for the effects of breach of a
constitution and the replaceable rules. Tony wishes to rely on this section of the act because
he is not bound in writing for the modification of the initial constitution formed together with
his friends, including Ella who has become the sole director of the company.
Tony also wishes to rely on s. 232 to 234 which cover oppression of a member or
shareholder of a company. This is because he views the actions of Ella who is the sole
director to be oppressive and unfairly prejudicial against him as she does not even offer him
the new shares yet all the required amount of $ 1.5 million is successfully raised without
Tony being part of it. Tony would like to receive a court order to this effect.
He also seeks for winding up of the company under s. 461 of the Act on the ground of
the director having acted in the affairs of the company while having their own interests
instead of the members’ interests at large. Another reason for the option of winding up of the
company is the prejudice and oppression undergone at the hands of the company’s director.

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Tony may successfully make an application in the court seeking for the winding up of
the existing company. This is because the sole director of the company has prioritized her
personal interests instead of looking at the interests of the rest of the members of the
company. The court has the power to order for the winding up of a company on looking at the
particular facts and circumstances of the prevailing situation. Tony may also apply for
termination payments in case he goes for the option of winding up. This is because the
company will no longer exist and therefore their shares can no longer benefit him and the rest
of the members other then Ella, the sole director of the company.
Tony can also mobilise the other members of the company for the removal of the
director. This is provided for under proprietary companies under section 135 of the Act.
When the members come together and combine their shares and assets against the director,
they may successfully manage to remove the director and thereafter organize fresh elections
for the best interest of the company. This option may however prove to be difficult as the
director is in a powerful position and has great influence to enable him or her to thrive in such
an arrangement.