Company Law For Corporate Governance In Australia

The nature of a company

Discuss about the Company Law for Corporate Governance in Australia.

The facts of this scenario relate to the principles of corporation law and more specifically to corporate governance.[1] In advising the employee associations on the appropriate action to take, this paper shall first examine the actions of the directors in trying to impose a 25% pay cut agreement which the employees rejected and its implications under the corporation’s act. The formation of PNGair and its purpose shall also be examined.

The paper shall further discuss the redundancy decision on pilots and senior managers of Aussieair and their subsequent employment at PNGair at the rate that Aussieair had sought to impose. The options available to the employees will then be examined and a determination whether they can enforce the salaries that they were entitled to initially at Aussieair. The paper shall conclude by restating the position of the employees and the likelihood of succeeding in the action. The legal status of PNGair and Aussieair shall also be restated and whether the directors breached the provisions stipulated under the Corporations Act 2001.

A company is a legal entity regarded in the eyes of the law as an artificial person with liabilities and rights. The shareholders own the company and are regarded as the real owners of the company.[2] The company directors are the ones with the power to control and manage the business of the company. Under section 124 of the Corporations Act, a company has powers of an individual and a legal capacity.[3]

are viewed as separate legal identities. It can be sued or sue on its behalf, can own property, it has separate liabilities, and certain companies have limited liability. Where Companies have limited liability, it is either by guarantee or shares. A corporation has perpetual succession; the death of a shareholder does not affect its existence and continuity of carrying out its business.[4] A company as a separate legal entity was outlined in the famous case of Salomon v Salomon & Co Ltd (1897). Mr. Salomon who had been a sole trade operating a boot business in the 1890s in London. He sold the boot business to the company to Salomon & Co Ltd for a sum amounting to 39 thousand Euros. The company paid Salomon by issuing shares worth twenty thousand euros; it also issued debentures worth ten thousand euros and the balance paid in the form of cash to Mr. Salomon. The company struggled in the business leading to numerous unpaid debts. Mr. Salomon, however, paid himself the money that the company owed him ahead of all the other creditors. The issue was whether the company was separate and independent or whether the said company had been a sham meant to defeat creditors. It was held that the company and any other company is separate from its members or managers; it is a separate legal entity.[5]

Director’s decision to reduce salaries of employees

A company is flexible. It is capable of conducting any form of business from time to time. A company has a great capacity and scope of raising capital. It raises capital from members through the issuance of a prospectus which invites persons desirous of investing to subscribe for shares in the company. The shareholders have a right and say over the management of companies. They have the right to vote on certain issues except for management decisions.[6]

The action of directors to reduce by 25% the salaries of senior managers and pilots first was contrary to the employment laws. A decision touching on the wages and salaries cannot be decided unilaterally in a meeting of the board of directors without consulting the representatives of the said employees. The employees were therefore right in refusing the pay cut because the decision was arrived at illegally without following the relevant laws and the applicable labor practices that should be incorporated and employed in such situations.

Employees are the driving force in any company. Organizations which motivate their employees through the provision of fringe benefits and other allowances have greater performance since the employees become motivated and give their all in the performance of their duties. Deciding in a boardroom to reduce their salaries was against their rights and has the right to claim for reinstatement of their initial and former salaries and benefits. The manner in which the employees were made redundant was un procedural and could sustain a claim for wrongful dismissal even if they were paid all their terminal dues by the company.[7] The payment of the redundancy entitlements notwithstanding, the employees could still maintain an action for wrongful dismissal based on the refusal to take a pay cut which was in the first place contrary to employment and labor laws. A company is guided by rules and procedures to avoid disputes and give certainty. Section 140(1) of the corporation’s act creates the statutory contract between the company and shareholders, the company and directors and the company and its employees. Breach of such contract is a breach of the statutory provisions of the corporation’s act. The rules of the company can only be changed according to the provisions contained under section 136 of the Corporations Act 2001.

After the refusal by the employees to take a pay cut, the board of directors of Aussair decided to form another company in Papua Guinea. The management of the company was still directly controlled by directors of Aussair. The question to ask is whether PNGair was formed as a subsidiary of Aussair or as a totally different company separate from Aussair. A subsidiary company is that company which has a voting stock which is greater than 50% which is under the control and direction of another company which is usually known as a parent or a holding company. Subsidiary companies are partially or wholly owned by the parent company, which enjoys a controlling interest in the said subsidiary company.[8]

The formation of PNGair and its Legal Status

In the case of Peate v Federal Commissioner of Taxation (1964) 111 CLR 443, it was sufficiently stated that a company is a new legal entity which is considered in the eyes of the law as a person. The affairs of a company at times and strictly in certain circumstances, a court can investigate and enquire into the management of the company operations and affairs.This is called the indoor management rule. The rule is to the effect that outsiders are not required to enquire into the affairs and the regularity of a company’s internal proceedings. The proceedings in this case of Aussair can be said to be the decision to reduce the salaries of senior managers and pilots and the subsequent formation of another company, PNGair. The rule was stated in the famous case of Royal British Bank v Turquand. The rule, however, has exceptions: first, the exception is to the effect that the rule shall only be used by the company directors if outsiders who deal with the company irregularly had the actual knowledge of the irregularity.

This principle of company law refers to the exception that is imposed by the court on the principle of the separate legal entity. Piercing the incorporation veil is therefore where courts disregard the separate nature of corporations and can hold a shareholder or a director responsible for all actions of the corporation as if it was the shareholder. Courts pierce the veil of incorporation where a request has been brought before it by the company itself or by shareholders in the company so that a remedy that could be open to them could be afforded or enforced, to create a right that is enforceable or in other words lessen a penalty.[9]

The veil of incorporation can be lifted in the following grounds:

Fraud occurs where directors who act as the controlling mind of a company use the fact it is separate from its members or directors to avoid a fiduciary or a legal duty. In Re Edelsten ex parte Donnelly (1992), a trustee in bankruptcy had brought an action claiming that some property that was owned by the VIP group of companies was obtained by Edelstein before the discharge of bankruptcy. The trustee stated that the corporations had been incorporated to evade a legal obligation and to perpetrate a fraud.

The corporate veil can also be lifted where it is believed that the company was formed under suspicious circumstances and is, therefore, a sham or façade. The company was formed or used as a mask in hiding the real reason and purpose of the controller of the company. In Re Neo (1997), Immigration Review Tribunal had been asked to conduct a review of the decision to deny the application for a visa in a case where a company had organized a sponsorship, and the said company had been formed on the day that such application was lodged. The company was not in any form of business at the time. The tribunal held that the said company was just machinery employed in circumventing Australian migration law.[10] The company was a façade, its purpose being the act of allowing the applicants to remain in the country.

Lifting the veil of incorporation

Therefore, in consideration as to the manner in which PNGair was formed and the intended purpose, it can only be concluded that it was a sham that was formed to hide and perpetrate the mistreatment of employees of Aussair and not for a proper purpose. The company, therefore, cannot be classified as a subsidiary of Aussair but a sham formed to conceal the fraud by Aussair.

The senior managers and pilots that formerly worked for Aussair before being made redundant have several options to advance their claims. First, the decision to reduce their salaries and allowances by 25% was not only illegal but also contrary to best labor practices that require consultation with employees or their representatives.[11] In the absence of such laid down procedures as well section 140 of the Corporations Act, the directors of the company acted ultra vires and therefore their decision including declaring the employees who refused to take a pay cut redundant null and void the payment of the redundancy entitlements notwithstanding.

Secondly, the employee representatives can advance the argument that PNGair Company formed in Papua Guinea was a sham that Aussair was intending to use in effecting the salary reductions that had been their main agenda. One should ask the question why they offered to employ the employees they had made redundant in Aussair in the new company.[12] It is best to conclude that PNGair was neither a subsidiary nor a separate legal entity in the eyes of the law but an extension of Aussair and therefore the employees were entitled to their former and initial salaries.

Conclusion

A company is a separate legal entity which has the directors as the controlling mind of the company. The management of a company is delegated to directors who are required to act in the best interest of the shareholders. Directors are required by statute to follow the constitution of the company in making management decisions and in the absence of such constitution; they are guided by the replaceable rules in the Corporations Act.

The actions of the directors in declaring senior managers redundant and consequently offering to employ them is a sham company formed for the sole purpose of implementing the reduced salaries is in itself very illegal. PNGair is neither a company in the eyes of the law nor a subsidiary of Aussair. Therefore, the employees that PNGair purported to employ and pay salaries set by Aussair in null and void. The employee representatives, therefore, have a higher chance of succeeding in court to reinstate the salaries that Aussair used to pay and not the 25% reduction that the directors of Aussair had sought to implement. PNGair is not a different company or a subsidiary of Aussair but a sham intended to be used in perpetrating an illegality.

References

Corporations Act, 2001 (CA)

Hanrahan, Pamela F., Ian Ramsay, and Geoffrey P. Stapledon “Commercial applications of company law” (2013)

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Paterson, William Everard, and Howard Heywood Ednie Australian Company law (Butterworths, 1992)

Farrar, John Hynes. Corporate Governance in Australia and New Zealand (Oxford University Press, USA, 2001)

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McKinnon, Jill L., and Lian Dalimunthe “Voluntary disclosure of segment information by Australian diversified companies.” Accounting & Finance 33, no. 1 (1993): 33-50.

McQueen, Rob. A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920. (Routledge, 2016)

Tomasic, Roman, Stephen Bottomley, and Rob McQueen Corporations law in Australia. (Federation Press, 2002)

Kaye, Bruce N. “Codes of ethics in Australian business corporations.” Journal of Business Ethics 11, no. 11 (1992): 857-862.

Bottomley, Stephen. “Taking Corporations Seriously: Some Considerations for Corporate Regulation.” Fed. L. Rev. 19 (1990): 203.

Shailer, Gregory EP. Introduction to Corporate Governance in Australia (Pearson Education Australia, 2004)

Stapledon, Geof P., and G. P. Stapledon Institutional shareholders and corporate governance (Oxford University Press, 1997)

Farrar, John. Corporate governance: Theories, principles, and practice. (Oxford University Press, 2008)

La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny. “Investor protection and corporate governance” Journal of financial economics 58, no. 1 (2000): 3-27.

Ramsay, Ian M., and David B. Noakes “Piercing the Corporate Veil in Australia’ (2001).” Company and Securities Law Journal 19: 250.

Anderson, Helen. “Piercing the veil on corporate groups in Australia: the case for reform” Melbourne UL Rev. 33 (2009): 333.

Hadden, Tom. “The regulation of corporate groups in Australia” UNSWLJ 15 (1992): 61