Company Law: Formation, Governance and Directors' Duties
Formation and personality
A company is a separate legal entity with perpetual succession and limited liability. Registration creates the company; the constitution and replaceable rules govern internal management. Know the types: proprietary and public companies, and the distinction between shares and debentures.
Corporate governance
Directors and officers owe duties under the Corporations Act: care and diligence, good faith, proper purpose, avoiding conflicts, and not misusing position or information. Business judgment is protected where directors act in good faith, on an informed basis, and for a proper purpose. Insolvent trading is a key director duty.
Members and remedies
Members have rights to vote, receive dividends, and receive information. Remedies include the statutory derivative action, oppression proceedings, and winding up. The company's constitution and the replaceable rules allocate power between the board and members.
Traps
- Confusing the company's separate personality with the liability of directors.
- Forgetting that directors' duties are owed to the company, not shareholders individually.
- Missing the insolvent trading defence.
- Treating the replaceable rules as mandatory in all companies.
Worked example
A director causes the company to enter a contract with a related entity on favourable terms without disclosure. The director may breach the conflict rule and the duty to act in good faith. The company may recover the profit or seek compensation. The business judgment rule will not protect a director who failed to disclose the conflict.