Corporations Law

 

Corporations Law 

(Company Law)

 

 


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Corporation Law: Separate Legal Pesonality


What are the competing interests that create this ‘double-edged sword’?

 

The doctrine of separate legal personality is a progressive concept where there is a conflict of interest. The double-edged sword concept rises in the doctrine of separate legal personalities in the sense that, where natural personal has been strongly distinguished from an artificial personal, the separate legal personality has created a haven of corruption.[1] This is based on the concession theory that is also called "privilege theory" which regards the corporation as an artificial entity created by the state. According to the concession theory, the separate legal status of the company is treated as a concession or privilege granted by the state.[2] There are different versions of this theory; the strong version[3] and the weaker version.

The leading conflict of interest in the doctrine of separate legal personality is an opportunity for corruption. Giving too much benefit or privilege to the private entrepreneur of corporation has become a modern cash cow as people charged with the duty of registering such corporations engage in corruption before making the corporation existent in the market. According to a research by the Australian Bureau of Statistics, there are more male entrepreneurs than female entrepreneurs in Australia. Although the amount of female representation steadily increases, the ratio of female entrepreneurs is only 12.3% in 2012. This means that men are more likely to be involved in the corruption.[4] Peta Spender said that:

"When one begins to explore the issue of gender and corporations law, one’s immediate impression is that women are invisible. The protagonists in both corporate activity and corporations law always seem to be men."[5]

Once the corporation is operational, instead of pursuing ethical business principles, they seek to compensate their cost in registration by burdening the consumers of their services and products. The possibility of a corporation engaging in fraud to gain mileage in terms of beating its competition and winning all significant contracts creates an unjust business ethic that hurts the consumer and the producers of equipment.[6]

In Re Darby, ex parte Brougham,[7] Darby and Gyde were undercharged bankruptcies and convicted for fraud. They had a registered company, City of London Investment Corporation Ltd ('LIC'), in Guernsey. Darby and Gyde were the only directors and there were seven other shareholders, issued £11 of its nominal capital of £100,000. The company bought a quarrying licence and plant for £3,500 and sold this to Welsh Slate Quarries Ltd ('WSQ') for £18,000. Eventually, WSQ went into liquidation. The liquidator claimed Darby’s secret profit, which he made as a promoter, yet Darby objected that the LIC and not him was the promoter.

 


[1] Alice De Jonge, Transnational Corporations and International Law: Accountability in the Global Business Environme (Edward Elgar Publishing, 2011) 136-137.

[2] Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (Federation Press, 2002) 53.

[3] Cooke J of  the New Zealand Court of Appeal said that limited liability is a privilege.

[4] Austarlian Breau of Statistic, Australian Social Trends, 2012 (18 March 2014) <http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features30Dec+2012>.

[5] Spender Peta,  'Women and the Epistemology of Corporations Law' [1995] LegEdRev 12; (1995) 6(2) Legal Education Review 195.

[6] Gonzalo Villalta Puig, 'Two-Edged Sword: Salmon & the Separate Legal Entity Doctrine'  (2000) 7(3), Journal of Law 10-25.

[7] Re Darby, ex parte Brougham [1911] 1 KB 95.


Corporations Law Moot Script

 

Corporation Law: Moot Court Script


  1. Statutory Derivative Action

 

Mathias Furniture Wholesalers Ltd ('MFW') appointed the Flashy and Associates Solicitors to review three new lease agreements for their new warehouse space on the Gold Coast. MFW entered into a lease agreement in accordance with the legal advice given by the Flashy and Associates Solicitors. Due to the negligent legal advice given by the Flashy and Associates Solicitors, MFW suffered considerable losses because of outrageously high fixed rentals for twelve months.

In Foss v Harbottle (1843) 2 Hare 461, the court held that the plaintiff were minority shareholders thus they did not have a right to control the meeting. This case protected the company from legal action that may potentially be brought by multiple shareholders in the name of the company.

However, Common Law Derivative Action was abolished  and is now replaced by section 236 and 237 of the Corporations Act 2001 (Cth) ('Corporations Act'). Section 236(1) of the Corporation Act states that a person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party, for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings if the person is a member, former member, the person is entitled to be registered as a member, of the company or of a related body corporate, an officer or a former officer of the company.

In Parke v Daily News [1962] Ch 927, minority shareholders sought to prevent this happening on the ground that such a payment went beyond the articles of association of the company, and such payment to ex-employees was not reasonably incidental to the carrying on of the business of the company.  In Menier v Hopper's Telegraph Works (1894) 9 Ch App 350, Menier was a minority  shareholder of the European Telegraphy Company brought proceeding to recover the concession against Hopper's which was a majority shareholder of the European Telegraphy Company . The court concluded that a minority shareholder of a company was eligible to bring the application.

In this case, although the plaintiff only owns 5% shares, he had a sufficient title to bring the application to the court, and the plaintiff was a registered member of the company of MFW and he was qualified under section 236(1)(a)(i). Therefore, the plaintiff is eligible to bring the proceeding against the Flash and Associates Solicitors for their negligence under section 236 of the Corporation Act.

To proceed the legal action in the name of MFW, the plaintiff must obtain court approval under section 237. Section 237 of the Corporation Act states that the court must grant the application if all of the criteria are satisfied. First, it is probable that the company will not bring the proceedings itself, properly take responsibility for them, for the steps in them. In Cassegrain v Gerard Cassegrain & Co Pty Ltd (2008) 68 ACSR 132, Claude Cassegrain was a director of the Gerard Cassegrain & Co Pty Ltd which owned the "Dairy Farm". He fraudulently transferred the title of the Dairy Farm to himself and his wife, Felicity, who was a joint tenants however, she was not aware of the fraud. Because the company did not bring the proceeding against Claude Cassegrain, shareholders  of the Gerard Cassegrain & Co Pty Ltd brought the application seeking leave under section 236 and 237 to commence legal action in the name of the company against Claude and Felicity. In this case, the MFW directors refused to pursue legal action against the Flash and Associates Solicitors since one of the partners at Flash and Associates Solicitors is Matilda's brother.

Second, the applicant is acting in good faith. In Chahwan v Euphoric Pty Ltd t/as Clay & Michel (2008) 65 ACSR 661, Tobias JA summarised the good faith test from Swansson:[1]

 … as a current or former shareholder or director of the company, [the applicant] would suffer a real and substantive injury if a derivative action were not permitted provided that that injury was dependant upon or connected with the applicant’s status as such shareholder or director.

In Swansson, Mr. Swansson was a director of RA Pratt and wanted to sue her ex-husband, Mr. Highland, who was also a director of RA Pratt for the breach of his duties to RA Pratt. The court ruled that her acting was not in good faith as she was seeking a double recovery through these proceedings. Here, it may be arguable that the plaintiff was disappointed because the company does not pay a dividend to its shareholders not acting in  good faith. However, this was not the main reason for the plaintiff to bring the proceeding. Max confided in the other directors after the meeting and said it would break Matilda's heart to take legal action against her brother's firm. One of directors of MFW explained to the plaintiff what had happened and why the company was not taking legal action at a BBQ. This would not be difficult for the plaintiff, as a member of MFW, to establish, given he is concerned with a desire to recover all of the loss caused by the poor legal advice from a Flashy and Associates Solicitors.

In Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859,  David John Maher, the first plaintiff,  and Mark William Honeysett, the second defendant, began trading in partnership as electrical contractors in 1989. In 1994, they established the Honeysett & Maher Electrical Contractors Pty Ltd (‘HME’) becoming equal shareholders and the only directors of that company. The business  ceased on December 19, 2003 because there was a substantial dispute between the parties in relation to termination of HME's business and division of its assets. Mr Honeysett sought leave of the court, under s237 of the Corporations Act, to defend the proceedings on behalf of the company that Mr. Maher has acted in breach of fiduciary duty in relation to HME. HME was entitled to the declaratory relief sought from Mr Maher on the company’s behalf by Mr Honeysett on the grounds of laches and acquiescence that the applicant was not acting in good faith.

Third, it is in the best interest of the company that the applicant be granted leave. The directors of the MFW assumed that the reason to not pursue legal action against Flashy and Associates Solicitors was that the litigation might cost more than any amount recoverable against the Flashy and Associates Solicitors. However, the board was not aware of the firm's arrangements with respect to the professional indemnity insurance by the time they had a board meeting. Therefore, the decision made by the board was not in the best interest of the company.

In Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, Ms Swansson and Mr Highland were divorced in May 1997. Ms Swansson was a director and shareholder of the RA Pratt Properties Pty Ltd ('RAPP'). Mr Highland was a director of the RA Pratt Properties Pty Ltd between in 1992 and in 1997. The plaintiff alleged contraventions by Mr. Highland regarding his duties to RAPP as a director under sections 180, 181 and 182  of the Corporations Act 2001 (Cth) as well as under the general law. Ms Swansson brought the application pursuant to section 237(1) of the Corporations Act against Mr Highland in the name of RAPP. The court concluded that Ms Swansson was not acting  in the best interests of the company  therefore the application would not be granted. Here, if the plaintiff, John Carlton, wins the case, the company will not need to pay litigation cost and will receive the damages or compensation which will cover all the loss. As the Flashy and Associates Solicitors arranged in relation to professional indemnity insurance, it would not cause serious damages to the firm. Therefore, the plaintiff made a decision in the best interest of the company.


[1] Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313.

 

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