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Chapter 4 Corporate Liability Chapter Summary 1
REGISTRATION OF OF A CO COMPANY The application (Form 201 or under electronic company compan y registrations scheme) must be lodged at ASIC (s 117(1)) and must include (s 117(2)): the type of company (eg, a proprietary company or a public company) the class of company (eg, a company limited by shares, or guarantee, or both, or an unlimited company or a no-liability company) the company’s proposed name (unless the Australian Company Number (ACN) is to be used) whether the company has a company constitution or will rely entirely on replaceable rules name & address of each person who consents to become a member, director or secretary the address of the company’s proposed registered office and principal place of business details of each member’s shareholdings, including whether the shares are fully paid details of the applicant for registration the State or Territory in which the company is taken to be registered whether, on registration, the company will have an ultimate holding company (defined (defined in s 9) payment of the prescribed fee. • •
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ASIC may then give the company an ACN, register the company and issue a certificate of registration: s 118(1). The certificate states the company’s name, ACN, type and date of registration, and State or Territory in which the company is taken to be registered.
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COMPANY NAMES
2.1 2.1 Prot Protec ecti tion on of name names s Protection of company, business and domain names is available through registration of the name as a trademark under the Trade Marks Act 1995 (Cth). Protection may also be available through the common law tort of passing off and the misleading or deceptive conduct provisions of the Trade Practices Act 1974 (Cth) and the various State and Territory Fair Trading Acts.
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LEGAL CA CAPACITY OF OF A COMPANY
3.1 3.1 Lega Legall capa capaci city ty and and powe powers rs A company has the legal capacity and powers of an individual as well as specific power to (s 124(1)): issue and cancel shares issue debentures grant options over unissued shares in the company distribute any of the company’s property to the members give security by charging uncalled capital • • • • •
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grant a floating charge over the company’s property.
(The powers over shares do not apply to companies limited by guarantee because a company limited by guarantee cannot issue shares). Section 124(2) provides that the legal capacity of a company to do something such as entering a contract or selling company property is not affected in anyway whatsoever by the fact that doing the particular thing is not in the best interests of the company. (The directors may still have breached their duties, and the conduct might breach other sections of the Corporations Act, eg s 232).
3.2 Limit to compa company ny powers powers by the constitutio constitution n A constitution may: restrict or prohibit the use of any of the above powers: s 125(1); and may also set out the objects of a company: s 125(2). Where a company acts beyond its powers or objects, the act is not invalid: ss 125(1), (2). • •
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EXECUTION OF DOCUMENTS
4.1 4.1 Com ompa pan ny Sea Seall Prior to 1 July 1998, the Corporations Act required Act required every company have a common seal to be fixed to each document evidencing a transaction with the company. The company’s seal would be fixed to the document in the presence of authorised company officers. It is now optional for a company to have a company seal. Where a company has a common seal, under s 127(2) the company may execute a document if the seal is fixed to the document and the fixing is witnessed by two directors of the company or by a director and a company secretary. Where a company with a common seal is a proprietary company with a sole director who is also the sole shareholder, the company may execute a document by that sole director witnessing the fixing of the seal: s 127(2). If a company document is executed in accordance with s 127(2), people can rely upon the assumptions set out in s 129(6) for dealings in relation to the company.
4.2 4.2 With Withou outt a com compa pany ny sea seall Under s 127(1), a company with or without a common seal may execute a document without using a common seal if the document is signed by two directors of the company or by a director and company secretary of the company. A proprietary company with a sole director who is also the sole shareholder may execute a document if the director signs it: s 127(1). If a company executes a document in this way, the assumptions set out in s 129(5) for dealings in relation to the company can be relied upon. Section 127(3) provides that a document may be executed by a company as a deed if the document is expressed to be a deed and it is executed in accordance with ss 127(1) or (2).
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CORPORATE MI MIND AN AND WI WILL
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The company’s directors and executive officers in relation to management and the company secretary in relation to administration constitute its directing mind and will. The directors may be under the instructions of the shareholders in general meeting. The directors and executive officers are the very personality of the company and are acting, not as agents, but as the company itself. Examples are: Lennard’s Carrying Co Ltd v Asiatic Petroleum Company Ltd [1915] AC 705; [191415] ALL ER REP 280 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 The actions of several company officers may constitute the directing mind and will of a company. For example: Brambles Holdings Ltd v Carey (1976) Carey (1976) 15 SASR 270; (1976) 2 ACLR 176
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CONTRACTUAL LI LIABILITY
6.1 Agency Where a company director, senior executive or company secretary act as the directing mind and will of the company, the person is acting not on behalf of the company, rather, the person is acting as the company itself. The issue of agency does not arise. Section 126(1) provides that an individual acting on behalf of and with the express or implied authority of the company may exercise a company’s power to make, vary, ratify or discharge a contract. (It does not not apply to, but also does does not exclude, the general law relating to apparent authority (also known as ostensible authority). Under the general law, an agent has the following duties to the principal (that is, the company): to act in the principal’s best interests to obey the lawful instructions of the principal to act in person and not delegate responsibility (unless otherwise agreed) to exercise reasonable care, skill and diligence to not accept any secret profits or secret commissions to keep the principal’s money and property separate from the agent’s to not disclose confidential information arising out of the agency to account for money or property received as a result of the agency. • • • • • • • •
6.2 6.2 Actu Actual al or imp impli lied ed aut autho hori rity ty At common law, an agent may be appointed by express agreement between the agent and the principal – either orally, in writing or under seal. The implied authority of an agent may arise where the agent is appointed appointe d by express agreement. Actual implied authority can only arise where there is some express authority given a person to act as an agent. For example, ANZ Bank Ltd v Ateliers de Constructions Electriques El ectriques de Charleroi Charler oi (1967) 1 AC 86.
6.3 Apparen Apparentt or ostens ostensibl ible e autho authority rity A principal is prevented prevented from denying the existence of an agency relationship relationship if a person is put into the position of an agent and it appears that they have the authority of that position. Agency by estoppel only arises where the agent acts acts within the usual capacity of an agent of the type in question and the principal holds out that the agent had authority in excess of the usual capacity. Apparent authority will not arise where a particular transaction is so unreasonable that a reasonable person would be put on notice to inquire about the agent’s authority. A
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person with actual actual authority may also have apparent authority in respect of actions that go beyond any express or implied authority. In Australia, for apparent authority to arise, the holding out must be by a person who has actual authority: Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Addr essing Company Pty Ltd (1975) 133 CLR 72. Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd & Kapoor [1964] Kapoor [1964] 2 QB 480 is an example of apparent authority. Only the company, or an actually authorized agent, can bind the company in relation to a representation grounding ostensible authority: Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Aaddressing Co. Pty Ltd (1975) 33 CLR 72; 50 A.L.J.R 203. In Pacific Carriers Ltd [2004] HCA 35; (2004) 78 ALJR 1045, Ms D signed and affixed the bank’s stamp (not seal) in purported verification of another party’s signature, but actually binding the bank without authority. The High Court made the following statements about apparent authority: “the only evidence of any representation by BNP to [Pacific] has to be found in Ms Dhiri’s signature … the argument has to be that Ms Dhiri by herself signing the document represented that she had authority to and did bind BNP to a contract to indemnify.’” ‘A kind of representation is one which flows from equipping an officer with a certain title, status and facilities. Pacific’s reliance was based upon the form and contents the letters, the signature of a person who appeared to be (and was) an officer of the bank, the stamp and the fact that Pacific was sent copies of the documents, directly or indirectly, by BNP. The stamp allowed the person who was authorised to use it to give an appearance of authenticity. ‘The importance to a third party of the difference between a bank’s signature in the capacity of an indemnifying party, and by way of verification of the signature of another party, should have been, and was, obvious to all concerned. If bank was to merely authenticate Ms Dhiri was also the appropriate person to sign and stamp the documents on behalf of the bank. If the bank were an indemnifying party, she was not the appropriate person. There were procedures under which she was to seek legal advice, however, she was placed in a position to sign and stamp the documents, and send them to NEAT and Pacific, without any internal check upon their final form and, in particular, without any qualification or limitation of the capacity in which the bank was participating in the transaction.’ •
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STATUTORY AS ASSUMPTIONS
7.1 7.1 The The indoo indoor r manag managem emen entt rule rule Prior to the commencement of the Company Law Review Act 1998 on 1 July 1998, the common law indoor management rule provided that persons dealing with a company in good faith could assume the dealings were in compliance with the company’s constitution and powers. powers. The rule arose arose in the the decision in Royal British Bank v Turquand (1856) 119 ER 886 where it was held that a party to a deed could assume that a resolution had been passed authorizing its execution on behalf of the company.
7.2 7.2 Secti ection on 129 129 The indoor management manage ment rule no longer applies. applie s. The assumptions contained in the rule can now be found in s 129 of the Corporations Act. Sections 128 to 130 deal with the assumptions that people are entitled to make when dealing with a company (in addition to the law of agency).
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A person can still make the assumptions in dealings with the company when an officer or agent of the company acts fraudulently or forges a document in relation to the dealings (s 128(3)) unless the person knows or suspects, at the time of the dealings, that the assumptions in s 129 are incorrect. An objective test is applied in s 128(4) to determine whether a person knew or suspected that the assumptions were incorrect. Persons dealing with the company may assume that: the company’s constitution (if any) and any replaceable rules that apply to the company have been complied with: s 129(1); anyone who appears to be a director of the company or a company secretary of the company, from information available to the public from ASIC, has been properly appointed and has authority to exercise the powers and duties of a director or secretary of of a company: s 129(2). 129(2). This includes in relation to execution of documents under s 127); anyone who is held out to be an officer or agent of the company has been properly appointed and has the necessary authority to carry out the duties of that type of officer or agent: s 129(3); •
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A person is said to have constructive notice if a particular fact ought to have come to their attention if they had made reasonable inquiries regarding the matter. Under s 130(1), a person isnot taken to have constructive notice regarding particular information merely because it is available to the public from ASIC: s 130(1).
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PROMOTERS A promoter is a person who is involved in starting up a company.
8.1 8.1 Acti Active ve pro promo mote ters rs Those involved in making an application ap plication to ASIC to register a company under s 117 of the Corporations Act are Act are promoters. Professional persons who are engaged to assist in the formation of a company are not regarded as promoters. A person who is a party to a pre-registration contract entered into on behalf of and for the benefit of a company not yet registered is also a promoter.
8.2 8.2 Pass Passiv ive e promo promote ters rs A person may be a promoter a company even though or if they do not actively participate in its formation, but eg leaves the starting up of a company to others but still expects to profit from the formation of the company and its activities is a promoter: eg Tracy v Mandalay Pty Ltd (1952-1953) 88 CLR 215.
8.3 8.3 Duti Duties es of promo promote ters rs Promoters owe a fiduciary duty to a company to not have any conflict of interest arising out of their active or passive involvement in the starting up of a company. (or otherwise make full disclosure of any personal interests in contracts entered into with the company being started up). For an example, see Australian see Australian Breeders Breeder s Co-Operative Society Ltd v Jones (1998) 16 ACLC 100. A person involved in the preparation of a disclosure document such as a prospectus to raise money for a company from the public is a promoter. Sections 711(2) and (3) require that a prospectus set out the nature and extent of the interests a promoter held in a company at any time within the last two years in: the formation or promotion of the company; or property acquired or proposed to be acquired by the company in connection with its formation or promotion or the offer of securities; or the offer of securities; and • •
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the amount paid or the nature and value of any benefit received.
REMEDIES
9.1 9.1 Resc escissi ission on The court can order that the contract be rescinded, eg Tracy v Mandalay. Rescission is not available where: it is no longer possible to return the parties to their original position; the company affirms the contract or does not rescind the contract within a reasonable time; an innocent third party has acquired rights in the subject matter of the contract. • •
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9.2 9.2 Secr Secret et prof profit its s The company can seek the return of any profit received by a promoter in breach of their fiduciary duty.
9.3 9.3 Fun Fundra draisin ising g A person who suffers a loss as a consequence of a contravention of s 711 may recover damages from the promoter: s 729(1).
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PREPRE-RE REGI GIST STRA RATI TION ON CONT CONTRA RACT CTS S Under s 131, as explained below, a company may ratify a pre-registration contract (in contrast to common law, where a company could not ratify contracts entered into on its behalf before registration). Subsection 131(1) provides that where a person enters into a contract on behalf of or for the benefit of the company prior to it being registered, the company subsequently becomes bound by the contract and is entitled to its benefit if that company or one which is reasonably identifiable with it is registered and ratifies the contract. The registration and ratification must occur either within the time specified by the parties or, where there is no agreed time, within a reasonable time after the contract is entered into. Under s 131(2), the person who entered into the contract on behalf of the company is liable to pay damages to each other party to the pre-registration contract if the company is not registered or is registered but does not ratify the contract either within the specified time or within a reasonable time. Section 131(2) also provides that the amount the person is liable to pay is equal to the amount the company would have to pay if the company had ratified the contract but then did not perform the contract. If an action is commenced to recover damages under s 131(2) where a company is registered but fails to ratify a pre-registration contract, the court hearing the matter may make any order it considers appropriate, including making an order that the company do any of the following under s 131(3): pay all or part of the damages that the person who entered into the contract on behalf of the company is liable to pay transfer property that the company received because of the contract to a party to the contract pay an amount to a party to the contract. •
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Section 131(2) only applies to the person or persons who execute a preregistration contract.
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If the company ratifies the pre-registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay: s 131(4). Further, a party to a preregistration contract may release the person who entered into the contract on behalf of the company from their liability under s 131 by signing a release: s 132(1).
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TOR ORTI TIOU OUS S LIABI IABILI LITY TY
11.1Vicarious liability A company is vicariously liable for the tortious conduct of its employees and agents (if within the scope of their employment / agency). Generally, a company is not liable for tortious conduct of independent contractors engaged by the company: Lloyd v Grace, Smith & Co [1912] AC 716.
11.2Primary liability The directors and senior executive officers of a company constitute its corporate mind and will in respect of management decisions. A company may therefore be primarily liable for the tortious conduct of its directors, senior management and company secretary. For example, the Lennard’s case. case. In Daniels vAnderson (1995) 37 NSWLR 438; (1995) 118 FLR 248; (1995) 13 ACLC 614; (1995) 16 ACSR 607 the New South Wales Court of Appeal confirmed that decisions that the acts of AWA’s senior management constituted the acts of the company itself.
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CRIMIN IMINAL AL LIA LIABILI BILIT TY
12.1Primary criminal liability A company may also be strictly liable for offences which do not require proof of an intention to commit the offence. The directing mind and will of the company is relevant here. Universal Telecasters (Qld) Ltd v Guthrie (1978) 32 FLR 360; (1978) 18 ALR 531 is an example. In Environment Protection Authority v Caltex Refining Co Pty Ltd (1992-1993) 178 CLR 477; (1993) 118 ALR 392; (1993) 12 ACSR 452, the High Hig h Court held that the privilege against self-incrimination is not available to corporations. Under s 1316A(1), in a criminal proceedings arising under the Act, a company is not entitled to refuse or fail to comply with a requirement: to answer a question or give information; or to produce a book or any other thing; or to do any other act whatever; on the grounds that the answer or information, production of the book or thing, or doing that other act might tend to incriminate the company or to make the company liable for a penalty. • • •
12.2The Criminal Code Act 1995 (Cth) The purpose of the Criminal Code Act 1995 (Cth) is to codify the general principles of criminal responsibility under the laws of the Commonwealth. It contains all the general principles of criminal responsibility that apply to any offence, irrespective of how the offence is created. The Code applies to criminal offences committed by both individuals and corporations, corporations, including under the Corporations Act . Section 12.1 states the general principles of the Code and provides that it applies to bodies corporate in the same way that it applies to individuals (subject to any necessary modifications). For example, s 4B of the Crimes Act 1914 (Cth) enables a
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fine to be imposed on corporations for offences that only specify imprisonment as a penalty). Section 12.2 provides that if a physical element of an offence is committed by an employee, agent or officer of a body corporate, acting within the actual or apparent scope of their employment, or within their actual or apparent authority, the physical element must also be attributed to the body corporate. Section 3.1(1) states that an offence consists of either physical elements or fault elements. Section 4.1(1) defines ‘a physical element of an offence’ as either conduct, or a circumstance in which the conduct occurs, or a result of the conduct. Section 4.2(1) defines ‘conduct’ widely to include an act, an omission to perform an act or a state of affairs. Section 12.3 provides that a ‘fault element’ for a particular physical element may be intention, knowledge, recklessness or negligence. Under s 12.3(1), if intention, knowledge or recklessness is a fault element in relation to a physical element of an offence, that fault element must be attributed to a body corporate that expressly or impliedly authorised or permitted the commission of the offence. Section 12.3(2) provides that the body corporate’s authorisation or permission may be established by proving that: the body corporate’s board of directors – intent intentiona ionally, lly, know knowingly ingly or or reckl reckless essly ly carrie carried d out the conduct conduct – expres expressly sly or or impliedl impliedly y authori authorised sed or or permit permitted ted the the comm commissio ission n of the the offence a high managerial agent of the body corporate – intent intentiona ionally, lly, know knowingly ingly or or reckl reckless essly ly carrie carried d out the conduct conduct – expres expressly sly or or impliedl impliedly y authori authorised sed or or permit permitted ted the the comm commissio ission n of the the offence a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision. •
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‘Corporate culture’ is defined as an attitude, policy, rule, course of conduct or practice existing within the body corporate: s 12.3(6). ‘High managerial agent’ is defined as an employee, agent or officer of the body corporate with duties of such responsibility that their conduct may be assumed to represent the body corporate’s policy: s 12.3(6).
12.3Negligence Section 5.5 provides that a person’s conduct merits criminal punishment for an offence if their conduct, which is negligent with respect to the physical element of the offence, involves: such a great falling short of the standard of care that a reasonable person would exercise in the circumstances; and such a high risk that the physical element exists or will exist. •
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Section 12.4(2) sets out the liability of a body corporate in relation to negligence. It provides that if negligence is a fault element of an offence and no employee, agent or officer of the body corporate is negligent, then the body corporate is only criminally responsible if the body corporate’s conduct is negligent when viewed as a whole by aggregating the conduct of any number of its employees, agents or officers. Evidence of negligence may be proved by the fact that the prohibited conduct was substantially attributable to:
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inadequate corporate management, control or supervision of the conduct of one or more of its employees, agents or officers failure to provide adequate systems for conveying relevant information to relevant persons in the body corporate.
A person is not is not criminally responsible for a strict liability offence (that is, where fault is not an element), if the physical element of the offence is brought about by another person: s 10.1. However, a body corporate cannot rely upon the defence in s 10.1 if the other person is an employee, agent or officer of the body corporate: s 12.6.
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