SPA233 Corporations Law Report: Company Law Doctrines and Duties

This report provides a detailed analysis of key concepts in Australian corporations law. It begins by explaining the separate legal entity doctrine, supported by case law such as Salomon v Salomon & Co Ltd, Lee v Lee’s Air Farming Ltd, and Macaura v Northern Assurance Co Ltd, highlighting the distinct legal identity of corporations. The report then explores different types of companies, differentiating between companies limited by shares and companies limited by guarantee, and also proprietary and public companies, referencing relevant sections of the Corporations Act 2001. It further elucidates the characteristics and obligations of ASX-listed companies. Finally, the report examines the duties of company directors, including the duty of good faith and proper purpose, the duty to avoid conflicts of interest and the duty of disclosure, the duty of care, skill, and diligence, and the duty to prevent insolvent trading, all in accordance with the Corporations Act 2001.

Running Head: BUSINESS AND CORPORATION LAW 0
SPA233 Corporations Law

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Topic 1
Corporation business structure has many features and a distinct legal personality is one of
them. As per this feature, a coreporation has a distinct identity from its directors, members, and
promoters because the law treats the same as a legal person. A company has all the powers alike
a natural person such as to conduct business activities, to develop a contract with directors,
employee, and other internal as well as external people, the power to sue others and to buy a
property. A company can do all these tasks in its own name. This principle is related to common
law but the same has also been identified under the statue. As per the provisions of section 119
of Corporations Act 2001 (Cth) (CA 2001), a company becomes a legal person at the time of
registration. It means as soon as the company is registered, it also gets a separate identity.
Separate legal feature of the company is also known as separate legal entity doctrine. Because of
this doctrine, directors, and members of the company has their limited liability in relation to
nosiness of the company.
In order to discuss the origin of this doctrine, this is to say that the same has been
established in Salomon v Salomon & Co Ltd [1897] AC 22 and further supported in many other
cases. In this case, a person, Salomon incorporated a company by transferring his current
business assets and attained debentures of the company into consideration. In addition to this, he
had an almost whole shareholding of the company with his other family members. Later on, the
subjective company went into liquidation. At this moment, creditors of the company argued that
Salomon had no preference as he was the majority shareholder of entity and therefore the
company had no separate identity from Salomon. Court set aside these arguments and held that
the company had distinct identity irrespective of the fact that Salomon was the majority
shareholder (Gibson and Fraser, 2013).

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Similar kind of decision was decided in another case namely Lee v Lee’s Air Farming Ltd
(1961) AC 12. In this case, a person named Lee incorporated a company. He holds the position
of managing director and also been appointed as worker of this corporation in the capacity of the
pilot. He died in an accident while performing his job. On the event of his death, his wife
claimed worker compensation as his husband Mr. Lee was covered under this scheme. In this
matter, the court decided that the claim of Mrs. Lee was valid irrespective of the sole ownership
hold by him. The company became a distinct person as soon as the same got incorporated.
Similar to above-mentioned two cases, the separate legal doctrine was established in the case of
Macaura v Northern Assurance Co Ltd [1925] AC 619. In this case, a timber estate owner
transferred his estate to a company and received shares in consideration (similar to Salomon
Case). The company attained an insurance policy with respect to purchased timber. Later on,
timber destroyed because of a fire. In the decision of the case, the court held that it was the
company and not the seller of timber who had interest in the subjective timber. Shareholders
have an interest in the company but the only company has an interest in its property
(Swarb.co.uk, 2019). Here after reviewing facts and decisions of all the discussed cases, it is
clear that company has a separate distinction from all the natural people around such as a
promoter, director, officers, and employees, and the only company is responsible for its
conducts.
Topic 2
a) Here to mention that different kinds of companies are there depending on their features
such as ownership, control, liability, and others. Type of companies is mentioned under
section 112 of CA 2001. Firstly to discuss the type of company's depending on liability of
member, this is to state that various kind of companies are there such as companies

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limited by shares, limited by guarantee, unlimited companies with share capital and no
liability company. A company is termed as limited by shares when the liability of
members is limited up to the due amount of shares. In these companies, members has no
responsibility in respect to debts of the company. The situation of these members can be
understood by an example. For instance, if Mr. X holds 2000 shares of $10 each then his
total liability will be limited up to $20000, no matter how much loss the company suffers.
Here limited liability of shareholders provides that personal assets of them remain secure
while investing in the company. On the different side, in company limited by guarantee,
the obligation of members remains limited up to the extent which they undertake to
contribute to the company. It means at the time of winding up of the company, members-
only required to pay the amount of guarantee. The main difference between a company
limited by shares and limited by guarantee is that in the case of a company limited by
guarantee, the company does not have share capita (Legalvision.com.au, 2019). This is
the reason that people that want to earn profits, often establish their company as limited
by shares. However, this kind of companies i.e. company limited by guarantee imposes
joining fee or subscription fee. Further, in a company limited by guarantee, no
shareholders are there but people who invest in the capital of the company are known as
members of the company. As shares are not there hence members cannot transfer their
shares in case of a company limited by guarantee. The other main difference between
these two companies is that company which is limited by shares distributes its profits
among its shareholders in the form of dividend but the situation is not the same with a
company limited by guarantees. These companies are not restricted from distributing
profits among members under corporations Act 2001 but they often have such restriction

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clause in its articles. Further company limited by guarantee cannot be established as a
public company. The main difference between these two companies is that if a company
limited by guarantee has set up for nonprofit object, then the same can get an exemption
from putting a limited or unlimited word at the end of its name (Companylawclub.co.uk,
2019).
b) Similar to member’s liability, companies can also divide under various categories based
on their ownership such as proprietary company and public company. As per section 45A
of CA 2001, a proprietary company is that which is registered with ASIC under this title
and do not have more than 50 shareholders (Business.vic.gov.au, 2019). Further as per
section 9, a public company is that which is not a proprietary company. Many of the
difference are there between these kinds of companies. One of the differences has already
been mentioned according to that proprietary company cannot have more than 50 non-
employee shareholders whereas such restrictions are not applicable to a public company.
The other differences between these two companies are that a proprietary company can
only be incorporated as limited by shares or unlimited company. It means a proprietary
company can never be a company limited by guarantee as provided under section 112 (1)
of CA 2001 (Legislation.gov.au, 2019). Further, a public company is required to have at
least 3 directors whereas a proprietary company can be incorporated with only one
director. In addition to this, a proprietary company is not required to hold an annual
general meeting whereas the same is an obligation in case of a public company. In this
manner, it is clear that these companies huge difference in common.
c) Public companies can be listed on various stock exchanges in order to make the dealings
more flexible for investors. Australian Stock Exchange is the lead stock exchange of

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Australia and companies listed on the same are known as ASX listed company. As shares
of such companies are listed on this exchange, they have to fulfill some additional
requirements. In other words, they have certain additional obligations. As per these
obligations, listed companies must conduct an annual general meeting annually. Further,
it is the duty of the company to hold an extraordinary general meeting when members
request to do so. Businesses are required to keep their registered office open for a
minimum of 3 hours daily. Further, in the case of ASX listing company, directors can
only be appointed or remove via votes of members. In addition to these rules, corporate
governance principles are also there which are applicable to these companies. These are
total 14 principles which have been developed in the form of recommendation but are
applicable in a mandatory manner (Asx.com.au, 2014). ASX has right that the same can
issue further rules for listed companies of the country.
Topic 3
CA 2001 prescribes a range of duties of directors, which are also there under common
law, some of them are mentioned below:-
a) Duty of good faith and proper purpose:- This duty is outlined under section 181 of the act.
The section states that it is the responsibility of each director and officer to execute his/her
duties in good faith considering the best interest of the company and such discharge must be
for a proper purpose. Here best interest demands that directors must show their attention to
shareholders as a collective group. Further, the term proper purpose says that directors must
take advantage of a favorable opportunity. Taking advantage of favorable opportunity does
not mean that they can use unfair modes for the same.

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b) Duty to avoid conflict of interest and duty of disclosure: - Duty to avoid conflict of interest
reflects under section 182 and 183 of CA 2001. These sections say that directors must not use
the economic info of the company or their designation in the same to generate personal
benefit or in a manner that can prove a loss to the company. In this manner, these sections
make focus on avoidance of conflict of interest. Another duty i.e. duty of disclosure is
mentioned under section 191 of CA 2001 (Australia, 2011). As per this section, if a director
has a substantial individual interest in any decision or transaction related to the company then
it becomes the liability of such director to inform his/her interest to other directors.
c) Duty of care, diligence, and skills- This duty is mentioned under section 180 of CA 2001.
According to this section, directors are required to perform their duties with owed care and
attentiveness similar to a reasonable person. Subsection 2 of the stated section says that while
making a business judgment, directors must make such judgment for a proper purpose, in the
best interest, in an appropriate manner and avoiding conflict of interest. Further, the section
says that while making the business judgment, the director must have a rationale to believe
that the decision is best suitable to the company (Austlii.edu.au, 2019).
d) Duty to prevent insolvent trading: - Insolvent trading refers to that trading which directors do
at the event of insolvency of the company. Section 588G of CA 2001 says that it becomes the
obligation of every director to stop insolvent trading in the company. Three requirements are
there for the application of this section. Firstly, the person must be on the position of a
director when the business incurs a debt. Secondly, at the time of incurring the debt, company
must be insolvent or going to be insolvent because of that debt and at last, the director must
have rational ground to suspect the insolvency of the company. If all these conditions get
satisfied then directors, become liable to prevent insolvent trading (Iknow.cch.com.au, 2019).

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References
Asx.com.au. (2014). Corporate Governance Principles and Recommendations. Retrieved From:
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf
Austlii.edu.au. (2019). Corporations Act 2001 - Sect 180. Retrieved From:
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s180.html
Australia. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act
2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited.
Business.vic.gov.au. (2019). Company. Retrieved From:
https://www.business.vic.gov.au/setting-up-a-business/business-structure/company
Companylawclub.co.uk. (2019). Company Law Basics // Our services. Retrieved From:
https://www.companylawclub.co.uk/companies-limited-by-guarantee
Corporations Act 2001 (Cth)
Gibson, A. and Fraser, D. (2013). Business Law 2014. Australia: Pearson Higher Education AU.
Iknow.cch.com.au. (2019). Insolvent trading. Retrieved From:
https://iknow.cch.com.au/topic/tlp1758/overview/insolvent-trading
Lee v Lee’s Air Farming Ltd (1961) AC 12

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Legalvision.com.au. (2019). Company Structures: Limited by Shares vs Guarantee. Retrieved
From: https://legalvision.com.au/what-is-the-difference-between-a-company-limited-by-
shares-and-guarantee/
Legislation.gov.au. (2019). Corporations Act 2001. Retrieved From:
https://www.legislation.gov.au/Details/C2018C00424
Macaura v Northern Assurance Co Ltd [1925] AC 619
Salomon v Salomon & Co Ltd [1897] AC 22
Swarb.co.uk. (2019). Macaura V Northern Assurance Company Limited: Hl 1925. Retrieved
From: https://swarb.co.uk/macaura-v-northern-assurance-company-limited-hl-1925/