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4. Personality & Insolvent Trading.docx

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Corporate Personality The Corporate Veil ← company is a separate legal entity from members and directors  Even if operating in substantially the same way as before incorporation  Has been criticised as o abusing limited liability of members: Gordon v FCT o Treating related companies as separate when in reality directors act in interests of the group, and common directors & shareholders: Qintex Australia Finance v Schroeders  Company not a sham merely because taking advantage of this: Sharrment v Official Trustee Practical effect  Corporation has capacity & powers of an individual: s124(1)  Liability of members is limited: Saloman v Saloman & Co Ltd o Limited liability company → only bound to pay amount unpaid on the share price: s516 o Company limited by guarantee → only bound to pay only what they have agreed to guarantee to contribute: s517 o No liability company → not bound to pay any contribution, but failure to pay can result in forfeiting share in company  No right to recover calls from shareholder who fails to pay them: s112(2)(c)  Acceptance by a person of a share in a no liability company does not constitute a contract by the person to pay calls in respect of the shares or any contribution to the debt of the company: s254M(2) Saloman v Saloman & Co Ltd (1897)  S=leather merchant operated for 30 years—then incorporated  essentially the same operation: 7 subscribers required by act = S, wife & 5 chn | business sold to company for 20,000 shares | unpaid portion treated as loan from company to S=secured creditor | S held all but 6 shares | wife & chn voted as S wanted them to  company in liq—company‘s assets insufficient to pay unsecured creditors  company a separate legal entity—not an agent or trustee for members → even though S the ‗controlling mind‘, not liable to pay company debts → mortgage not invalid → S retained priority as secured creditor over unsecured creditors NB Now charge to office or associate void: s267(7)  Company holds its property separately from its members: Macaura v Northern Assurance Co Ltd (1925) (timber sold to M—business incorporated—destroyed by fire  insurance policy in M‘s name—property owned by business—could not claim on insurance)  Company can contract with its members: Lee v Lee’s Air Farming Ltd (1961) (L incorporated company— company contracted with L=pilot—L died while flying  contract valid → L could claim workers compensation as employee) o Can contract with controlling shareholders: Saloman (company had mortgage to S  valid → S had preference over unsecured creditors on insolvency)  Company can commit an offence: Hamilton v Whitehead Corporate Groups All companies are separate—  each company responsible for own liabilities: Qintex Case  Director only owes duties to the company of which it is a director: Industrial Equity Ltd v Blackburn (1977); Walker v Wimborne (1976) o Corporations with same directors and shareholders: Walker v Wimborne (1976) (companies had policy of shifting money between companies as required—one company in liq—directors sued for breach of duty  directors only owed duties to companies of which they were directors) o Subsidiary & holding company: Industrial Equity Ltd v Blackburn (1977)  Cannot treat profits of one company as profits of another: Industrial Equity Ltd v Blackburn (1977) (profits of subsidiary—holding company trying to use to pay dividends  not allowed) Andrew Trotter LWB334 Corporate Law Insolvent Trading—piercing the corporate veil = make an act or omission of the company an act of its members = make members responsible  Trustee companies—liable for debts incurred where no indemnity from trust assets: s197  Directors—liable for insolvent trading: s588G  Holding company—liable for allowing a subsidiary to trade while insolvent: s588V [→incorporation] Kenna & Brown Pty Ltd & Cvitavonic (Liquidator) v Kenna & Brown (1999) (B left financial management to K—K falsifying books | diverting money to own real estate—external accountant noted that lack of funds—noted that given undertaking to advance cash to company to allow to continue operations—stopped paying accounts but continued trading, incurring debts  K obviously liable | B was aware of need for further funding—did not consult K or accountant → B also liable) Elements Insolvent trading—  Object—to ensure directors are attentive & protect creditors who are trading with the company: Woodgate v Davis (2002) per Barrett J  Is a civil penalty provision: s1317E(1)  With dishonesty, is an offence: s588G(3)(d) 1. Company incurs debt after 23 June 1993: s588G(1)(a) (civil penalty) | s588G(3)(a) (offence)  Must be after commencement (23 June 1993): s588G(1)(d)  Debt o = Obligation by one person to pay a sum of money to another: Powell v Fryer; Jelin Pty Ltd v Johnson  Tax liability  Wages to employees  Contract on credit o must be a liquidated or fixed amount capable of positive calculation: Jelin Pty Ltd v Johnson; Commonwealth Bank of Australia v Friedrich  ―Incurs a debt‖ o = date of contract if money borrowed: Hawkins v Bank of China o Commercial reality test—when in substance the coy is exposed to a liability to pay: ASIC v Plymin o Examples— (s588G(1A))  Paying a dividend—debt incurred when dividend is paid, or when dividend is declared;  Reduction of share capital—when reduction takes back  Buying back shares—when agreement entered into  Redeeming redeemable preference shares—when company exercises option;  Issuing redeemable preference shares, redeemable other than by option – when shares issued;  Financial assistance for a person to acquire shares in itself or holding company—when agreement is entered into, or where no agreement – when assistance is provided  Uncommercial transaction—when transaction is entered into 2. Person was a director at time debt was incurred: s588G(1)(a) (civil penalty) | s588G(3)(aa) (offence)  Director where— (s9) o Appointed as director or alternate director acting in that capacity: s9(a) o Not appointed but acts in position of director or accustomed to act in accordance with instructions or wishes: s9(b) Andrew Trotter LWB334 Corporate Law  Includes— o de facto directors: s9(b)(i) (act in the position of a director) DCT v Austin o shadow directors—holding company being shadow director of subsidiary: s9(b)(ii) (the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes); Standard Chartered Bank of Australia Ltd v Antico o eg—former director who continues to exercise top level management functions: DCT v Austin 3. Company insolvent: s588G(1)(b) (civil penalty) | s588G(3)(b) (offence) Where company—  is insolvent; or  becomes insolvent by virtue of the debt; or  becomes insolvent where group of debts, of which it is one. Insolvency Generally—if unable to pay all debts as and when they become payable: s95A(1)&(2)  Balance sheet test—where liabilities exceed the assets of the corporations o Equation of assets & liabilities not conclusive either way: Re Tweeds Garage  Cash flow test (preferred)—Q of fact consider as a whole: Sandell v Porter (1966) per Barwick CJ o Temporary lack of liquidity therefore does not exclude the corporation‘s ability to pay its debts: Sandell v Porter (1966) (time allowed to organise finance, realise assets etc) o ―Debts due‖ does not mean legally due—consider if indulgent creditors: Re Newark Pty Ltd (in liq) o Considerations— (Sandell v Porter)  If company can get the money from a third party: Lewis v Doran; Duncan v FCT  Money obtainable by unsecured borrowing: Lewis v Doran  Whether property can be readily realised  Resources other than cash are realisable by borrowing upon security or sale: Standard Chartered Bank of Australia Ltd v Antico & Ors  Ready realisation = selling or mortgaging but not ceasing business: Re Timbatec Pty Ltd  nature of the business and assets: Rees v Bank of NSW per Barwick CJ  Anticipated debts: Duncan v FCT (2006) (Company operating at loss since 1999 | operating revenue not meeting costs | net asset deficiency of >$1M—argued that another company in group would pay debts—cited agreement showing would not assume debts til 2002  insolvent since 1999 → payments to Cmmr Tax after 1999 were unfair preferences)  Contingent & Prospective liabilities: s459D o Generally insolvent if operating funds not sufficient to meet business costs: Duncan v FCT (2006) Presumptions of Insolvency: s588E  Being wound up & was insolvent at some time in 12mths preceding application for winding up → presumption of continuing insolvency where: s588E(3)  Failure to keep financial records → presumed to be insolvent for— o Time required to explain transactions & prepare true & fair statements under s286(1): s588E(4)(a); or  ← correctly record & explain transactions, financial position and performance to create records which could be audited: s286(1) o If unable—7 years (time financial records have to be kept for under s286(2)): s588E(4)(b).  Rebuttable with evidence to contrary: s588E(9) Indicators of insolvency: ASIC v Plymin @ [383]  Continuing losses. *  Liquidity ratios below 1.  Overdue Commonwealth and State taxes *  Poor relationship with present Bank, including inability to borrow further funds.* Andrew Trotter LWB334 Corporate Law  No access to alternative finance.  Inability to raise further equity capital.  Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.  Creditors unpaid outside trading terms.  Issuing of post-dated cheques *  Dishonoured cheques.*  Special arrangements with selected creditors.  Solicitors' letters, summons[es], judgments or warrants issued against the company. *  Payments to creditors of rounded sums which are not reconcilable to specific invoices. *  Inability to produce timely and accurate f
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