18/09/2015

CLWM4000
Business & Corporations Law
Legal Nature, Formation & Types of
Companies, Company Constitution
& Contracts with Companies

Lecture Ten

COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on
behalf of Kaplan Business School pursuant to Part VB of the Copyright
Act 1968 (the Act).
The material in this communication may be subject to copyright under
the Act. Any further reproduction or communication of this material by
you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business School
and other materials copyrighted by Law in Commerce, 5th Edition.
Do not remove this notice.

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

18/09/2015

References
Chapter
Reference

Chapters 12

Textbook

Law in Commerce 5th Edition

Sweeney, OReilley & Coleman

Tutorial.

Tutorial Week 11 Refer Detailed Weekly

Schedule for question numbers

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

18/09/2015

Powers of a company under s124(1)

This section gives the company the same power as
an individual
Anything a person can do, such as own property or
enter into contracts under their own name, a
company can do
It also has additional powers that a human person
cannot do such as issue shares and issuing
debentures to lenders (proof of a loan)
Discussion point: Discuss what this means in terms of
running a business

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

18/09/2015

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

Companies limited by guarantee

Such companies must be public companies
They do not have share capital
The original guarantors guarantee to pay a stipulated
amount to meet the companys debts in the event of
winding up
The guarantee can only be called upon in the event of
winding up
Discussion point: Describe what type of entity might use
a company limited by guarantee

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?

18/09/2015

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

Separate legal entity

A company is a separate legal entity
This means it exists separately from its shareholders
and directors
That means any legal liability of the company is not
the liability of its directors or its shareholders
This principle was firmly established in the case
Salomon v A Salomon and Co Ltd [1897]
Discussion point: Discuss this concept in the context
of a debt owed by the company

Salomon v Salomon (1897)

Mr. S was a sole trader and then sold his shoe repair business
to a company he had set up.
He and his 6 family members were shareholders.
Mr. S made a loan to the company that was secured over
company property.
The company later failed and they were not enough assets to
pay all creditors.
The liquidator did not think Mr. S should be paid back his loan
as in his view the company & Mr. S were one and the same.
House of Lords rejected this view as the company was a
separate legal entity.

18/09/2015

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

18/09/2015

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

When is a company liable in contract?

A company acts through its human agents
The question is: when is a company liable for the actions of its
human agents
The main issue here is when a company becomes contractually
liable
Under s124 Corporations Act a company has all the powers of a
natural person: this includes the power to enter into a contract
This means that a company can enter into any contract that a
person can

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

18/09/2015

How does a company sign a contract?

A company might sign a formal contract just like a person might
S127 Corporations Act sets out the manner in which this may be done
A formal contract may be signed by 2 directors or a director and
company secretary
For a single director company who has a director also the company
secretary then that will also suffice
This may be done with, or without the company seal
The company constitution may (or may not) prescribe this method
Even if not in accordance with its constitution, then any contract
entered into by the company (even if not in accordance with s127) is
still binding on the company

What about other situations?

A company can enter into a contract through its agents, such
as directors
An agent may contract on behalf of a company provided they
act under express or implied authority from the company
This is stated under s126 (1) Corporations Act
What is necessary is to consider what types of authority the
company can bestow on an agent
This covers both express and implied authority and ostensible
authority

Types of authority: actual authority

Actual authority may be express or implied
Express actual authority is the authority expressly given
(either in writing or orally) to the agent
Implied actual authority is the authority the agent has
from the position they hold in other words what is
presumed to be authority of that position
It may also include authority that is reasonably
associated with carrying out the express actual authority

18/09/2015

Types of authority: ostensible authority

Suppose you are appointed manager of your business
(i.e. your employer) for the day
Anyone dealing with you might reasonably suppose you are
actually the manager
Of course you are only the manager for the day
But does anyone dealing with you necessarily know that?
Because people may not know you are only manager for
the day, then anything you do whilst holding that position
may still bind the company as if you had really been the
manager full time
This is the essence of ostensible authority

Assistance from the Corporations Act

In addition to the foregoing principles of common law
regarding ostensible authority there are provisions in the
Corporations Act
In particular the act makes clear that people dealing with a
company are entitled to make certain assumptions about
the company and its officers
This is found in s129 Corporations Act
S128 of Corporations Act makes clear that people are
entitled to make these assumptions unless they know that
they do not apply
Discuss: Make sure you are clear about what we mean by
the word assumptions

s.129 Assumptions: s129(1)

This states:
A person may assume that the companys constitution
(if any), and any provisions of this Law that apply to the
company as replaceable rules, have been complied
with
Discuss: What practical effect does this have? Give an
example

18/09/2015

S.129 Assumptions: s129 (2)

This section states:
A person may assume that anyone who appears, from
information provided by the company that is available
to the public from ASIC, to be a director or company
secretary of the company: (a) has been duly appointed;
and (b) has the authority to exercise the powers and
perform the duties customarily exercised or performed
by a director of company secretary of a similar
company
Discuss: What practical effect has this section? Give an
example.

S.129 Assumptions: S129(3)

This section says:
A person may assume that anyone who is held out
by the company to be an officer or agent of the
company: (a) has been duly appointed; and (b) has
the authority to exercise the powers and perform the
duties customarily exercised or performed by that
kind of officer or agent of a similar company
Discuss: What practical effect has this section? Give
an example.

S129 Assumptions: S129(4)

This section states
A person may assume that the officers and agents of
the company properly perform their duties to the
company

Discuss: What practical effect has this section? Give an

example.

10

18/09/2015

Effect of statutory assumptions

Under s129 (1) a person dealing with a company may
assume that the company constitution (or replaceable
rules) have been complied with

Discuss: Consider in class an example of this rules

application

Effect of statutory assumptions

The effect of s129 (2) is that anyone dealing with the
company are entitled to assume that ASIC records of
who is a director and company officer are correct

Discuss: Consider in class an example of this rules

application

Effect of statutory assumptions

Under s129 (3) a person is entitled to assume that
anyone who is held out by the company to be an officer
or agent of the company has been duly appointed and
has the authority normally associated with such a
position in a company of that type
Discuss: Consider in class an example of this rules
application. What does holding out actually mean?
Consider case examples.

11