AYB230 · Corporations Law
Company Fundamentals
This Topic 1 chapter answers the foundational question "what is a company, and who is liable for its debts?" — a company is a type of corporation registered under the Corporations Act 2001 (Cth) and regulated by ASIC, and on registration it becomes a separate legal entity (Salomon v Salomon; s124) with its members' liability limited. It is examined as an ILAC problem: state the SLE rule, then check whether any veil-lifting exception applies before deciding the owner is protected, citing the section or case each time.
What this chapter covers
- 01What a company is: a corporation registered under the Corporations Act 2001 (Cth), regulated by ASIC
- 02The three elements of a company: members (owners) · operators (managers) · third parties
- 03Separate legal entity: Salomon v A Salomon & Co Ltd; the company's powers (s124)
- 04Limited liability: a member's exposure capped at the unpaid amount on their shares (s516)
- 05Lifting the corporate veil under statute: insolvent trading (s588G), employee entitlements, subsidiary insolvent trading
- 06Lifting the veil at common law: fraud, or avoiding an existing legal obligation
- 07Corporate groups: the s46 holding–subsidiary control tests
- 08Advantages and disadvantages of the company form
Separate legal entity & the corporate veil (ILAC)
- +1Issue: Is Mara personally liable for the $80,000 debt of Skyline Logistics Pty Ltd, or does the corporate form shield her?
- +2Law: A registered company is a separate legal entity, distinct from its members — Salomon v A Salomon & Co Ltd [1897] AC 22; s124. The veil is lifted only in limited cases: common law (fraud or avoiding an existing legal obligation) or statute (insolvent trading s588G), and a member can also voluntarily give up the shield via a personal guarantee.
- +1Application: Skyline's debts are its own, so Mara is prima facie shielded by the veil. There is no evidence of fraud or a sham. However, if she let Skyline incur the debt while it was insolvent, s588G could make her personally liable, and any personal guarantee she signed would bind her under contract law.
- +1Conclusion: On these facts the supplier cannot pierce the veil and sue Mara personally — unless it can prove insolvent trading (s588G) or that she gave a personal guarantee.
Key terms
- Separate legal entity (SLE)
- The principle that on registration a company becomes a legal 'person' distinct from its members and managers, with most of the legal capacities of a natural person (s124) — it can own property, contract and sue or be sued in its own name. Authority: Salomon v A Salomon & Co Ltd [1897] AC 22.
- Limited liability
- A member's exposure to the company's debts is restricted to the amount unpaid on their shares (s516). Fully-paid shares mean no further liability; partly-paid shares mean the member still owes the unpaid amount. It can be voluntarily waived by giving a personal guarantee to a creditor.
- Lifting (piercing) the corporate veil
- Looking past the SLE to hold the people behind the company liable. Statutory grounds include insolvent trading (s588G), defeating employee entitlements, and a holding company's liability for a subsidiary's insolvent trading; common-law grounds are using the company to perpetrate a fraud or to avoid an existing legal obligation.
- ASIC
- The Australian Securities and Investments Commission — the national regulator that administers the Corporations Act 2001, registers companies, and enforces directors' duties through civil penalties, disqualification and (where dishonesty is involved) criminal proceedings.
- Corporate group (s46)
- A holding–subsidiary relationship. Company A is a subsidiary of company B if B satisfies any ONE of the s46 tests: it controls the composition of A's board, controls more than 50% of A's votes, holds more than 50% of A's issued shares, or A is a subsidiary of a subsidiary of B.
- Perpetual succession
- A company's existence continues regardless of changes in, or the death of, its members — a consequence of separate legal personality, and one of the headline advantages of the company form over a sole trader or partnership.
Company Fundamentals FAQ
What does "separate legal entity" actually mean for a company owner?
It means the company is a distinct legal 'person' that owns its own debts, property and contracts (s124). The owner's personal assets sit behind the corporate veil, so a shareholder's exposure is capped at any amount unpaid on their shares. This is the result confirmed in Salomon v A Salomon & Co Ltd — even a one-person company is legally separate from its single owner.
When can a court lift the corporate veil?
Rarely. Limited liability is the default. The veil can be lifted under statute — most importantly insolvent trading (s588G), but also defeating employee entitlements, certain voided security interests, and a holding company liable for a subsidiary's insolvent trading (s46) — and at common law where the company is used to perpetrate a fraud or to avoid an existing legal obligation. Always treat these as exceptions to argue, not the rule.
Is limited liability absolute?
No. It is the default but it has built-in qualifications: a director can be personally liable for insolvent trading (s588G), a member or director who signs a personal guarantee voluntarily waives the shield (and is then governed by contract law), and various statutory veil-lifting grounds apply. In an exam, conclude the owner is protected unless one of these flags is on the facts.
How do I tell whether two companies form a corporate group?
Apply the s46 control tests. Company A is a subsidiary of B if B does any ONE of the following: controls the composition of A's board, controls more than 50% of the votes at A's general meeting, holds more than 50% of A's issued share capital, or A is a subsidiary of another of B's subsidiaries. Only one limb needs to be satisfied for the holding–subsidiary relationship to exist.
Exam move
Anchor the whole topic on one idea: the company is a separate legal entity (Salomon; s124), and everything else either flows from it or is an exception to it. Build a two-step ILAC rail — (1) state the SLE rule and that members enjoy limited liability, then (2) run the veil-lifting checklist before concluding the owner is safe: statutory grounds (insolvent trading s588G, employee entitlements, subsidiary insolvent trading), common-law grounds (fraud, avoiding an existing obligation), and a personal guarantee. Memorise the s46 subsidiary tests as a list (board control / >50% votes / >50% shares / sub-of-sub — any one). Always cite the section or case, and reach a clear conclusion on whose assets are actually at risk.
