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Company Law

LBL200

Michael Psaltis

Swinburne University of Technology Swinburne, Lilydale Unit Name: Company Law Unit Code: LBL200

Learning and Teaching Support Development Team: Jenny Austen Copyright 2012 These materials are copyright by various authors. Full details of all copyright inclusions may be obtained from Swinburne University of Technology at the address given below. Published by: Swinburne University of Technology, Lilydale, Melba Avenue, Lilydale Victoria 3140, Australia.

TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................................. 3 UNIT INFORMATION ................................................................................................................... 4


GUIDE TO STUDYING LAW ...................................................................................................... 5 WEEKLY SCHEDULE ............................................................................................................. 11

MODULE 1 - BUSINESS ORGANISATIONS ................................................................................. 12 Topic 1.1 - Business Organisations ......................................................................................... 14 Topic 1.2 - Partnerships ........................................................................................................... 29 MODULE 2 - CORPORATIONS LAW ........................................................................................... 41 Topic 2.1 - Corporate Characteristics ...................................................................................... 44 Topic 2.2 - Company Constitution........................................................................................... 48 Topic 2.3 - Directors and Corporate Governance .................................................................... 51 Topic 2.4 - Contractual Capacity ............................................................................................. 56 Topic 2.5 - Company in Distress ............................................................................................. 59

Swinburne University of Technology, Lilydale LBL200 Company Law Semester 1, 2012

UNIT INFORMATION
Introduction
LBL 200 Company Law is a compulsory unit for students completing an Accounting major and requiring entry into the membership of the Australian Society of Certified Practicing Accountants or the Institute of Chartered Accountants in Australia. The unit however may also be of interest to students studying majors other than Accounting, or a Business Law Minor. It provides an insight into the choice of business structure, but particularly focuses on the regulation of companies in Australia. The aim of this unit is to introduce you to the different forms of business structure available and the legal regulation of each. The corporate form of structure is the primary focus due to its increasing use and the particular legal personality that it possesses. Where possible throughout the unit, practical application of the issues will be emphasised and you will be encouraged to find examples of corporate law issues in the media. It is important that you understand that company law is undergoing a period of change and that these changes are reported differently by different media of which there are many, particularly in the business sections of the daily newspaper.

Content
Module 1 - Business Organisations Topic 1.1 - Business Organisations Topic 1.2 - Partnerships Module 2 - Corporations Law Topic 2.1 - Corporate Characteristics Topic 2.2 - Company Constitution Topic 2.3 - Directors and Corporate Governance Topic 2.4 - Contractual Capacity Topic 2.5 - Company in Distress

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Guide to Studying Law


1. Introduction
Students can sometimes find the study of law difficult. However the reasons behind these difficulties are many and varied. Most problems tend to stem from students failing to understand that the study of law based units requires a different approach to most other units. The area of company law provides even more problems for students due to the rapid changes in the commercial environment and a major reform program in recent years in the area of corporate law. When involved in the study of many units, students tend to find a method of studying that suits them best. However many students fail to realise that a single study method may not be the most suitable for all units. Units that are clearly organised into topics are usually the easiest to study and students that are used to this type of unit can find legal units difficult. In law based units, it is not as easy to clearly define topic areas. This is because a number of topics often impact on each other and legal problems may cover a number of topic areas.

2.

Answering a Legal Problem


Perhaps the most crucial issue that students need to address early in their legal study is how to answer legal problems. When a lecturer asks a problem-based question, their aim is to identify whether or not the student understands how the law relates to factual situations. Thus the emphasis is not so much on being "right" or "wrong", but rather on whether the student can understand the application of the law given certain facts or possible scenarios. The conclusion is not a significant part of the answer. This is often quite a foreign concept to students studying law for the first time. When answering legal problems it is essential that students understand that most problems arise out of a dispute between two parties, both of who believe that they are right. It is therefore important to discuss the positions of both parties and how the law would be applied given the views of the respective parties. Even if one party appears to obviously be wrong, students must consider their position and the possible arguments that may be put forward by that party. A suggested approach to legal problem solving is outlined below.

Swinburne University of Technology, Lilydale LBL200 Company Law Semester 1, 2012

Suggested structure for legal answers


There are numerous methods that students can use to assist their answering legal problems. However it is essential that every student find the technique that suits them best. Whatever technique is used, an answer to a situation based legal problem should contain: (a) (b) (c) (d) Issue Law Discussion/analysis and application Conclusion

(a) Legal Issue: An answer must first identify the legal issue at the centre of the question. In some cases there may be more than one issue. However in most instances there will be one major issue with potentially a number of smaller but related issues. It is essential that the issue is clearly identified and that all further discussion in the answer relates to the fact situation and its impact on the issue. By identifying at the beginning the issue being discussed, then the rest of the answer should stay focused and be less likely to stray on to points that are not relevant to the problem. (b) Law: Any answer to a legal problem must be based on the appropriate legal principle. This may come from either statute or common law, and often a case may need to be cited to explain the court's interpretation of the statutory provisions. This is particularly essential in Company Law as the judicial interpretation of the Corporations Act provisions often shed light on the reasons behind the statute. (c) Discussion/Analysis and application: The most essential element of an answer to a legal problem is the linkage of the issue and the law. This should form the major part of any answer. The discussion of the application of the legal principles to the situation at hand is the part of the answer that shows the level of a student's understanding of the underlying issues and the foundations upon which the law is based. It is therefore this part of any answer that distinguishes a good answer from an average answer. If the question requires you to advise one of the parties, it is important to anticipate the other partys arguments and responses. Such an approach is logical. Whenever a case proceeds to court, a barrister (a lawyer specialising in court work) will not simply rely on the argument that he/she considers is most likely to succeed. He/she will put forward all arguments that have some potential to succeed. What is most important is that you indicate that you are able to apply principles of law to the facts of the given problem and to draw conclusions on the issues raised. In other words, you need to explain why the law applies to the facts. In addition to advising about both partys legal arguments, you might also be able to include practical advice; for example, the person may

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need to immediately remove a particular director by following the appropriate process to limit liability of other directors. (d) Conclusion: A conclusion rounds out an answer, but it should not be any more than a collation of the points discussed and summary of the likely outcome - which is merely your opinion. The conclusion is not as important as the discussion and analysis.
Note: If the question raises several legal issues, you can divide the issues and go through (a),(b) and (c) for each issue before repeating the process until all legal issues are dealt with. Continue until you have covered all the legal issues you can identify. Then, and only then, should you present your final conclusion.

Some essential points to remember when answering a legal question: Read the question carefully. Answer the question asked (you will not get marks for answering a question that was not asked). Plan your answer and make sure that you deal with each issue raised in turn. It is not compulsory for you to use the suggested structure but the structure that you do use must be logical and well-structured. DO NOT write long introductions and conclusions. You may wish to highlight in your answer important aspects of the facts, but there is no need to repeat all the facts of the problem. DO NOT use legalese or overly complicated language; for example, aforementioned, thereafter, whereupon and moreover should be avoided. You must refer to the law (that is legislation and/or precedent) in your answer, otherwise it is difficult to pass.

See para 2-400 of the textbook How to use company law to answer a legal question (p 39) and the following example:-

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3.

Example Legal Problem 3.1 Question


Bill the Bear-hunter owned a business that he sold to a company registered by him for the purpose of carrying on that business. When the company was formed Bill, his wife and five children all received one share each. Bill received additional 20,000 shares and $10,000 in debentures in consideration for the bear hunting business. Bill was also appointed the managing director and had effective control of the company as he could out vote all other members. Bear Hunting Pty Ltd suffered severe financial difficulties and a liquidator was appointed to wind up its affairs. The liquidator determined that there were funds available to pay Bill the amount owing on the debentures, however there would be insufficient funds to pay the debts owing to the unsecured creditors. The liquidator sought a court order to avoid payment to Bill on the basis that the company was merely a sham and that the business was in reality Bill's. Advise Bill of his legal position.

3.2

Things to Avoid
The most obvious point to be aware of about this question is that it is based on the previous case of Salomon v Salomon and Co Ltd [1897] AC 22. However, the worst thing that a student can do is to make the assumption that the answer will be identical to the previous case. The following needs to be considered: Are there any differences between the facts that may lead to a different conclusion? Are then any statutory provisions that exist now that may modify a court's decision to the situation? Are there any recent cases that highlight the same issues or have given a different interpretation of the original case? The other important thing that must be avoided when writing an answer to the question is not to conclude the answer before discussing the issues. This is sometimes difficult when the question is so obviously based on a previous case situation. It is essential that students don't start their answers with a sentence such as; "Bill should sue because he will win". Starting any answer in this way precludes legal argument and locks the student in to trying to justify their conclusion for the remainder of their answer.

3.3

Things to Do
The most essential requirement when answering legal questions is to do just that - answer the question. In the question above the answer

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required is to advise Bill of his legal position. That does not mean that the arguments of the liquidator should be ignored

3.4

Example Answer
Issue This question deals with Corporations Act, in particular the issue of a company being a separate legal entity from its owners. In this problem the issue is whether Bill the individual who owns the majority of shares in the company is in fact separate to the company, Bear Hunting Ltd.

Law In the case of Salomon v Salomon and Co Ltd the court determined that a company is a separate legal entity to that of the shareholders (owners). Under the Corporations Act, a company once it is registered (s. 119) is given the legal capacity and powers of an individual (s. 124). These powers may be restricted by the company's constitution, but otherwise is broad (s. 124). Discussion Bill would argue that he has complied with the requirements for registering a company and therefore a body corporate has come into existence from the date of registration (s119). He would also argue that Bear is able to purchase his business as a company has the power of an individual (s124). Further, Bear can enter into a loan agreement with Bill and owe him $10,000. This is supported by Lees case. Finally he would argue that the legal principle from Salomon v Salomon effectively means that Bill, the individual, and the company, Bear Hunting Ltd have two separate legal identities. Each person is able to contract, sue and be sued, and acquire, hold and sell property. The liquidator would try to argue that Bill and Bear are not separate entities and that Bear is effectively a one-man company. He would also try to distinguish Salomons case in order for the corporate veil to be lifted. Bill would counter by arguing that even if he formed the company to take advantage of the limited liability of its members, this is permitted by the law (as evidenced by Salomons case). Conclusion Therefore, given the decision from Salomon's case and the Corporations Act, the company is able to enter into a contract with Bill to purchase his business and issue Bill a debenture, regardless of the fact that Bill is also the majority shareholder. As such, the liquidator must follow the normal winding up procedure, and has no basis for seeking a court order to avoid payment to Bill (the secured creditor) in favour of the other creditors.

Swinburne University of Technology, Lilydale LBL200 Company Law Semester 1, 2012

Reading List
There are numerous texts that provide information on how to study law; for example:Barron, M.L. 2008, Fundamentals of Business Law, 6th Ed, McGraw-Hill, Sydney. Crosling, G. M. & Murphy, H. M. 2000, How to Study Business Law, 3rd Ed, Butterworths, Sydney. Frazer, S. How to Study Law, 4nd Ed, 2009 Lexis Nexis, Sydney. Gillies, P. 2004, Business Law, 12th Ed, Federation Press, Sydney. Latimer, P. Australian Business Law, 30th Ed, 2011 CCH, Sydney. Lipton, P. & Herzberg, A. Understanding Company Law, 15th Ed, 2009 Thompson Reuters LBC

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MODULE 1 - BUSINESS ORGANISATIONS

Objectives
At the end of this module you should be able to: Discuss the reasons behind different types of business organisations. Explain the respective advantages and disadvantages of different types of business organisations. Discuss in detail the important issues when determining the existence of a partnership. Determine the liability of parties to a partnership and the rights and duties of partners. Demonstrate knowledge of the issues in practical situations.

Content
1. Alternative Structures 1.1. Sole Trader 1.2. Partnership 1.3. Joint Venture 1.4. Trust 1.5. Company 1.6. Other types of businesses Business name, licensing and other regulatory requirements. 2. Partnerships 2.1. Definition 2.2. Liability in Contract and Tort 2.3. Rights and Liabilities of Partners 2.4. Dissolution

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Introduction to the Module


The selection of the right form of business structure is essential when starting a business. The old adage that 'most businesses don't plan to fail; they fail to plan' holds true and many people discover at a later stage that their business would have been better suited to a different business structure. Financial loss and heartache can often be avoided with a little planning and forethought. In this module we compare different types of business structures and review each given a set basis for comparison. After looking briefly at a number of business structures we then look in detail at the law relating to partnerships. Although there is not a set text for this unit, you will need to familiarise yourself with the provisions of the Partnership Act, and it is suggested that you review the actual wording of the Act and not just the discussion from other texts. The set textbook does not cover this module in much detail. The only major change in this area of law over recent years has been the introduction of a limited partnership, which is not covered in detail in this unit. As such you should not be concerned about using a text that is a few years old.

Reading List
Barron, M.L. 2008, Fundamentals of Business Law, 6th Ed, McGraw-Hill, Sydney. Cassidy, J. 2010, Corporations Law: Text and Essential Cases, 3rd Ed, Federation Press, Sydney. Gillies, P. 2004, Business Law, 12th Ed, Federation Press, Sydney. Latimer, P. 2011, Australian Business Law, 30th Ed, CCH, Sydney. Turner, C. 2010, Australian Commercial Law, 28th Ed, Thompson Reuter, Sydney. Vermeesh, R.B. & Lindgren, K.E., Business Law of Australia, 11th Ed, Butterworths, Sydney.

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Topic 1.1 - Business Organisations Alternative Structures


Objectives
At the end of this module you should be able to: Discuss why different business structures exist. Compare the effectiveness of different structures in relation to: Number of owners Liability Contractual capacity Costs Demonstrate knowledge of the issues in practical situations.

Content
1. Introduction 1.1 Why learn about different business entities? 1.2 A Legal basis for Comparison 2. Comparison of 2.1. Sole Trader 2.2. Partnership 2.3. Joint Venture 2.4. Trust 2.5. Company 2.6. Other types of businesses 3. Business name, licensing and other regulatory requirements.

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1.

Introduction
1.1 Why learn about business entities?
The primary focus of our study in this Unit is on corporate or company structures (which are regulated by the Corporations Act), but conducting commercial relations through a company will not suit everyones business, financial and family needs. One of the most common issues which clients of legal and accounting advisors will seek is advice as to the best structure for their particular business venture.

1.2

A legal basis for comparison of different legal structures

There are taxation and legal issues relevant to this inquiry. In this Unit, we will only focus on relevant legal issues. When evaluating the legal implications of the various different type of business structures, it is essential that we compare like with like. To assist this, each of the business organisation alternatives should be reviewed on the basis of the same points of comparison. When comparing alternative forms of business organisations we will review them on the basis of: 1. Nature of Structure 2. Governing Law 3. Establishment 4. Continuity of Existence 5. Limitation of Liability 6. Control 7. Formalities 8. Admission of New Investors 9. Ability to Sell the Business 10. Cessation of Business and Winding Up

2.1

Sole Trader 2.1.1 Nature of Structure


A sole trader is simply, as the name describes, one person with complete control and ownership of the business organisation. There are very few formal requirements for the operation of a business as a sole trader. However the limitations faced are often difficult to overcome.

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2.1.2

Governing Law
There are no specific statutes that regulate the way in which a sole trader operates. However there may be industry or vocation specific legislation that must be taken into account. The Business Names Act 1962 (Vic) does require a sole trader to register the business name if it is different from the name of the owner (see discussion on business name and other regulatory licence requirement p 26 below). Other legal regulations that must be considered include taxation, trade practices, industrial relations and workers' compensation legislation.

2.1.3

Establishment
As there are no specific regulatory requirements, the establishment of a sole trader business may involve no more than setting up a stall at a local market. Establishment costs are relatively low and no formal requirements, except for those noted (above), exist.

2.1.4

Continuity of Existence
The business of a sole trader has a limited life. If the trader dies, then the business will come to an end. Expansion of the business enterprise can also be difficult and lead to a shorter life. Sole traders have limited time, funds and expertise, and as such the business may remain small and become uncompetitive against others with greater resources available to them.

2.1.5

Limitation of Liability
Liability of a sole trader is unlimited and creditors will have access to personal assets to settle business debts. Insurance may be used as a buffer against this. However it is often expensive and sometimes not seen as being cost effective.

2.1.6

Control
Control is not an issue to the sole trader. Whilst the individual can employ staff, he or she owns and normally manages the business. Outside influences will not in general effect the internal operations of the business and future directions. However the problem then exists that there is also no assistance available with business decision making, limitations on expertise and the inability to share responsibility for the organisation.

2.1.7

Formalities
As noted above, there are few formalities for the sole trader. The main issue facing the sole trader is the registration of a business name if the business is to be conducted under a name other than that of the owner's. Under taxation legislation, sole traders are likely to be required to pay Pay As You Go (PAYG) tax on the basis of expected income. This may affect cash flow and hinder the business. Refer back to the

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discussion in 1.3 for further formalities required for a sole trading business, which depend on the type of business being conducted.

2.1.8

Admission of New Investors


The change from a sole trader to a partnership or other form of business ownership is limited only by industry or vocation regulations; there are no specific restrictions. Finance from external sources is, in theory, not limited However raising finance is sometimes difficult due to lenders concerns regarding repayment (as, indeed, would be the case regardless of the particular business structure). If the sole trader introduces new parties, this will dissolve the initial structure and undermine the continuity of business relations. If the business goodwill is personal, attaching to the sole trader, the introduction of new parties will also be difficult.

2.1.9

Ability to Sell the Business


There are no specific restrictions on the sale of a business by a sole trader. However, again industry and vocational regulations may apply. The main factor determining the ability to sell the business is in fact the attractiveness of the business to other parties. This would clearly be the case regardless of the type of business structure chosen.

2.1.10 Cessation of Business


The cessation of business of a sole trader is entirely up to the owner. Remember that the business also ceases upon the death or incapacity of the sole trader (unlike a company which has perpetual succession in that it exists until deregistration). Whilst the goodwill and business name can be passed on to a spouse or other beneficiary on the death of the sole trader, there may be taxation consequences attaching to the transfers (e.g. stamp duty and capital gains tax) and contractual relations will also have be renegotiated in the new traders name.

2.2

Partnership
As partnerships are covered in detail in Topic 1.2, only a broad discussion will be dealt with here.

2.2.1

Nature of Structure
A partnership can be a formal or informal structure created when two or more people are "carrying on a business in common with a view to profit": Partnership Act 1958 (Vic), s.5. The statutory definition therefore precludes associations formed without the profit motive.

2.2.2

Governing Law
The governing law in relation to partnerships is the Partnership Act 1958 (Vic). As with the sole trader, partnerships must register a business name if it is different from the names of the owners and legal regulation in the areas of, amongst others, taxation, trade

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practices, industrial relations and workers' compensation must be taken into consideration (as, indeed, does any business structure chosen).

2.2.3

Establishment
As noted above a partnership may be created via a formal agreement or even an informal agreement. Importantly, the Act may deem a partnership to exist even when the persons involved do not believe that they are in partnership. As such, partners should be aware of the provisions of the Act and where possible ensure that the partners enter into a formal agreement.

2.2.4

Continuity of Existence
A partnership ceases to exist if any of the partners leaves or dies. When such a situation occurs, the remaining partners may wish to continue the business, but will need to do so under a new partnership. The Partnership Act details the responsibility of partners after the dissolution of a partnership.

2.2.5

Limitation of Liability
Like the sole trader, the liability of a partnership is unlimited. This means that creditors will have access of each of the partner's personal assets to settle outstanding business debts.

2.2.6

Control
Unlike a sole trader, a partnership means that each of the partners has a say in the running of the business (unless there is agreement between the partners to the contrary). In some cases unanimous decisions are required under the Act and this may lead to friction and dissent between the partners. It is therefore best if a partnership agreement sets out the process for resolving disputes.

2.2.7

Formalities
As noted previously, a partnership may be formed by formal or informal means. It is best if the partners document an agreement regarding decision making, capital contributions and profit sharing. However the Act provides general rules in the event of no agreement. The other main issue facing a partnership is the registration of a business name if the business is to be conducted under a name other than that of the owner's. Under the taxation legislation, persons carrying on a partnership are required to submit a partnership taxation return. Partnerships are however not taxed but each partners share of the partnership earning is included in their taxation return. The partners are likely to be required to pay (PAYG) tax on the basis of expected income.

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2.2.8

Admission of New Investors


A change in the membership of a partnership effectively means the dissolution of one partnership and the creation of a new partnership. Partners need to be aware that a new partnership agreement should be made and documented. Under the Corporations Act there is a limitation on the size of a partnership to 20 people. There are however some exceptions. Finance from external sources is in general not limited (subject to lenders normal prudential requirements regarding security and capacity to repay).

2.2.9

Ability to Sell the Business


Whilst there are no specific restrictions on the sale of a business by a partnership, the terms of the partnership agreement will need to be considered. Industry and vocational regulations may apply in some cases.

2.2.10 Cessation of Business


The statutory requirements for dissolving a partnership are quite detailed and problems may exist when one partner wishes to dissolve the partnership and the other partners do not. In some instances the duration of the partnership will be written into the agreement and the partnership will dissolve at an agreed point in time.

2.3

Joint Venture 2.3.1 Nature of Structure


A joint venture has been described as a commercial combination in common by way of contract for the individual gain of the parties generally confined to a particular undertaking. In other words, a joint venture is where people agree to complete a task by combining their resources. However they do not form a partnership and the gain is for the individual party. The participants in a joint venture usually own the assets individually and the costs are born by the participants separately. A joint venture is based merely on the parties contractual relations. The intention is to make a profit, but the relationship is not a business in common within the definition of a partnership. The parties entitlement in a joint venture may be a share of product, rather than profit. Joint ventures are primarily used in the mining industry and sometimes in property development, entertainment and broadcasting.

2.3.2

Governing Law
No specific law applies in relation to joint ventures. However if the joint venture constitutes a partnership under the Partnership Act, then those provisions will apply. This is an important consideration. While the parties intent is a key factor in classifying a partnership or

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a joint venture, the courts have not always accepted the parties description of the arrangement as a joint venture. For example see:Canny Cabriel Castle Jackson Advedrtising Pty Ltd v Volume Sales (Finance)Pty Ltd (1974) 131 CLR 321 (High Court). In that case, despite the label of a joint venture, the business was held by the court a partnership Again in the case of joint ventures, the individual participants in the venture will need to be aware of legal regulation in various areas that impact on most businesses regardless of the structure chosen.

2.3.3

Establishment
There are no formal requirements for the establishment of a joint venture. However it is advisable that the participants document their agreement. Generally speaking, joint ventures are inexpensive to create, maintain and dissolve. The individualization of profits and losses also provides joint venture parties with the benefit of offsetting joint venture losses against their personal income from other sources, including from other joint ventures. If a venture (such as a longer term mining venture) is likely to incur losses in its earlier years, this aspect of the taxation of joint venture income makes it a suitable business vehicle.

2.3.4

Continuity of Existence
A joint venture only exists as long as the venture continues and as such has a limited life (it does not have perpetual succession like a company).

2.3.5

Limitation of Liability
In contrast to partnerships, a joint venture also provides the benefit of individualising obligations and liabilities. This is particularly suitable when the parties provide different degrees of financial input. The independence of the joint venture has the advantage of enabling one party to distance him or herself from the others contractual and/or legal obligations. Members of a joint venture are severally liable for the debts of the venture unless they have made an agreement to the contrary, unlike a partnership where the parties are jointly and severally liable for the debts of the partnership. But remember, where a joint venture is deemed to be a partnership then the Partnership Act provisions apply - see Canny Gabriel case .

2.3.6

Control
A joint venture agreement (contract) should contain the details of the way in which the venture is controlled. In most cases a management committee will be appointed and will effectively control the operations of the venture.

2.3.7

Formalities
There are few formalities for joint ventures the main issue being the registration of a business name if required.

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2.3.8

Admission of New Investors


The admission of new participants rests entirely on the agreement between the parties to the joint venture.

2.3.9

Ability to Sell the Business


This is often difficult in the case of joint ventures However the agreement between the participants should cover this situation. As the parties are separate, it may be possible (subject to the agreement) for one party to sell its part of the business without the consent of the others.

2.3.10 Cessation of Business


As noted above, joint ventures are usually entered into for a specific period of time or with a specific desired result of the venture. As debts are separate and in most cases property is held separately, then dissolution of the joint venture is not difficult.

2.4

Trust 2.4.1 Nature of Structure


A trust exists where a person (the trustee) holds property transferred by another person (the settlor) for the benefit of the beneficiary. This legal obligation is best seen by use of a diagram.

Settlor transfers property

Trustee for the benefit of

Beneficiary

The most essential element of a trust is that of the fiduciary relationship between the trustee and the beneficiary where the former is bound to act in good faith and in the interests of the beneficiary. The trustee has legal ownership of trust property, whereas the beneficial title, the right to enjoy the property (or the proceeds which arise), rests with the beneficiary. The trust itself cannot hold property or enter into contracts (unlike a company). The trustee must undertake these legal relations on behalf of the beneficiary. There are many forms of trust. For example they can be express or implied, constructive, fixed (where the beneficiaries interests are fixed) or discretionary (where the trustee has a discretion as to who will receive income/capital and/or the amount of that distribution). Sometimes companies and trust structures can be combined by appointing a company as trustee (this is also known as a corporate trustee).

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There is no separate legal entity in a trust. Unlike a company, a trust cannot hold property, contract, sue or be sued.

2.4.2

Governing Law
Each state of Australia has a Trustee Act which regulates, in particular, the duties of a trustee. If the trust has been created by a Deed of Trust, the terms of that document regulate the operation of the trust.

2.4.3

Establishment
Some trusts can be created without great expense or formality. However, the transfers of some forms of property (such as land) require compliance with formalities such as being evidenced in writing and payment of stamp duty. A discretionary trust may be established in a number of ways, but does require a deed of settlement to be prepared and executed by both the settlor and trustee. The trust deed should also detail, amongst other things, the powers and duties of the trustee. Trusts used to be a common vehicle for minimizing taxation obligations by income splitting or dividing trust income between the beneficiaries. Generally speaking this is no longer permitted as it contrary to anti-tax avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (Cth). Further taxation implications of trusts will not be explored in this Unit.

2.4.4

Continuity of Existence
The death or disability of an individual beneficiary will have no impact on the continuity of the trust - unlike a partnership which is dissolved upon the death of a partner. The trust deed may include the power to re-allocate the deceased beneficiary's share or alternatively the deed may allow for transfer of the deceased beneficiarys interest under his or her estate. However the death of the trustee does cause some problems. As a trust is based on the fiduciary duty of the trustee, the administrator of the trustee's affairs has no power to take on the duty unless the trust deed allows this to occur. Where no person is nominated in the deed, the beneficiaries can make the appointment of a new trustee. In the case of a corporate trustee, the death of a director of the company would not impact at all on the trust as a company is separate legal entity that exists irrespective of the officers of shareholders of the company.

2.4.5

Limitation of Liability
The trustee is normally personally liable for liabilities associated with the trust as the trust is not a separate legal entity. However, liability may be limited by the use of a limited liability company as trustee or, if the trustee expressly stipulates in any agreement that they do not accept personal liability as they are acting as trustee.

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2.4.6

Control
The trust is controlled by the terms of the trust deed. The trustee must act within the boundaries of the trust deed, and can be liable if they breach the duty of good faith owed to the beneficiaries. The beneficiaries are not entitled to direct the trustee in the exercise of their duties. Effectively the beneficiaries of a trust are literally powerless. Whilst the trustee is subject to fiduciary duties and any directions in the trust deed, trustees are not subject to the beneficiarys instructions. The beneficiaries have no right to partake in the day-to-day administration of trust property. In order to ensure that a personal may participate in management of the affairs, it may be preferable to form a partnership instead of a trust in some cases.

2.4.7

Formalities
The main formality is the trust deed which sets out the powers and liabilities of the trustee and will in most cases give discretion to the trustee as to the application of income earned by the trust.

2.4.8

Admission of New Investors


The trust deed will be the determining factor on the admission of others within the trust structure. The trustee will normally have the power to use the expertise of others if required.

2.4.9

Ability to Sell the Business


The trustee can usually sell assets if the deed allows. However, the trustee has no power unless expressly permitted as their role is to preserve the assets for the benefit of the beneficiaries.

2.4.10 Cessation of Business


A trust may be wound up either by the distribution of trust assets to the beneficiaries, release of trust obligations by court order, or sale of the trust property. Unlike a company which remains in existence for perpetuity (or until it is deregistered), a trust cannot continue indefinitely. Under common law, the rule of perpetuities provided that trust property must vest absolutely to the beneficiaries within the life of a nominated person plus 21 years. For example, a trust may appoint a named beneficiary or the settlors last living child as the nominated person. Common law has been legislatively modified differently in each state, but the general limit of the life of a trust is 80 years.

2.5

Company
As companies are covered in detail in Module 2, you should only gain a broad overview here. A company is a registered legal entity with the right to trade in its own right. Upon registration, the company becomes a separate legal

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Swinburne University of Technology, Lilydale22 LBL200 Company Law Semester 1, 2012

entity. It has powers of an individual It can hold property, contract and sue and be sued in its own name. A company is owned by its shareholders and run by its directors. Companies must be registered by the Australian Securities and Investments Commission (ASIC). All companies are regulated by the Corporations Act. There are public (Ltd.) and proprietary companies (Pty. Ltd.). Liability of shareholders of a company will be dictated by the nature of the company; for example, a company can be limited or unlimited and there are also no-liability companies.

2.6

Other types of businesses


These types of entities will not be examined in any detail.

Limited Partnerships
In some States, partnerships may be registered as limited partnerships. See Part 3 of the Partnership Act 1958 (Vic). In limited partnerships, the partners are divided into two groups; general partners and limited partners. General partners have the same rights and liabilities as a normal partnership. Limited partners have no right to participate in the managements of the partnership and may limited their liability to a certain amount.

Franchises
A franchise is a contract where expertise, knowledge, method of operation, and/or intellectual property rights are granted by a franchisor to a franchisee for a period of time. A franchise involves a working, ongoing, long term relationship with mutual obligations, co-operation and teamwork to ensure benefit to both parties. The franchisee sells the products or services under the control and in the name of the franchisor. A franchise is one way for small businesses to compete effectively against larger corporations. There are approximately 700 different franchise systems and approximately 50,000 franchisees in Australia, with turnover estimated in excess of $82b (Latimer, P, Australian Business Law, 28th ed p 751).

Incorporated and Unincorporated Associations


An association is a group of people with a common interest or purpose, with a degree of organisation and continuity with some clear criteria or method to identify its members. Making a profit must not be an object of an association, but if profit is made incidentally that is permitted. An association may be incorporated or unincorporated and there are differences between the liabilities of members depending on its status. Associations may be formed to cover many

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activities such as social, sporting, recreation clubs and societies, trade, professional, industry and alumni associations, political parties, environmental protection and historical or heritage organisations etc. etc..

3. Business name, licensing, and other regulatory requirements. A business name must be registered if an individual or business entity trades in a name other than its own. For example, Joe Blow who is an accountant can trade as Joe Blow, Accountant without having to apply for a business name but any variation such as Joe Blow and Sons or Blows Accountants will require registration of a Business Name. Likewise, a company ABC Pty Ltd can trade as Joe Blow Accountant, but the company would be required to register a business name in this situation. If it is required, a business name must be registered in each state in which it operates and there should be an address for service within each state that it operates. Registration of a business name does not prevent someone else registering the name in another state (where the name is not registered) unlike the registration of a company name or trade mark which apply across Australia once registered. Further information about business name registration in Victoria can be obtained from Consumer Affairs Victoria at http://www.consumer.vic.gov.au. This website also has links to other government registration bodies around Australia. Regardless of the type of legal entity that is used (a sole trader, partnership, company etc.), most businesses require some form of licensing from Commonwealth, State and/or local governments. The type of licensing required depends on what type of business is being conducted. For example, operating a restaurant might require the following licences: Preparing and serving meals (food premise registration) selling alcohol (liquor licensing) playing must in the shop front for customers (APRA copyright licensing) employing staff (many licences including Workcover, taxation and superannuation) pavement seating (local council permission) etc. etc.

Operating a newsagent, supermarket or a used car yard would have very different regulatory and licensing requirements. The Australian Business Licence Information Service website at (www.business.channel.vic.gov.au/BLIS) and the Business in Victoria

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website (www.business.vic.gov.au) is also able to provide information as to formal requirements at the various government levels. There may also be practising certificate or other type of industry membership requirements. For example; Practising accountants and solicitors must comply with requirements of CPA Australia (see http://www.cpaonline.com.au ) and the Law Institute of Victoria (see http://www.liv.asn.au) respectively. Accountants and lawyers must also obtain an appropriate level of professional indemnity insurance before they are able to obtain a practising certificate or licence to operate. Issues such as intellectual property rights might also be relevant. If there is an identifying feature of the property or service; for example, a name or logo, then the issue of trade marks, designs, patents etc. should be considered (see IP Australia at http://www.ipaustralia.gov.au ) Depending on the type of business, the following issues may be relevant:i. Environmental protection laws if the business is causes discharge or deposits of waste to the atmosphere, land or water, where noise is omitted or if it handles ozone depleting substances - see Environment Protection Authority at www.epa.vic.gov.au ii. if the business has employees, issues such as Workcover, superannuation, fringe benefits tax, payroll tax and/or PAYG tax, and GST may be relevant- see Australian Taxation Office and Department of Employment and Workplace Relations for more information. A business may also be required to have an Australian Business Number (ABN) or an Australian Company Number (ACN).

Conclusion

Two questions must be addressed when considering this advice:(b) What business structures are available? and (c) What factors, possibly peculiar to the client, suggest one structure is preferable over others?

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Remember, it is not unusual for businesses to change structures as the business evolves. For example: The founder begins as a sole trader or partnership. The trader then converts the business into a proprietary company and expands it. The proprietary company transforms into a public company so that it can raise finance from the public. The public company is then listed on the stock exchange and share issues or debentures are made. If successful, the public company might then go global and develop into a group of companies having subsidiaries locally and overseas.

As we have seen, there are many different types of business organisations and each has advantages and disadvantages.

Reading
Cassidy, Ch 2 Latimer, Ch 9, 10. Vermeesh & Lindgren, Ch 21, 22, 31.

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Tutorial Questions - Week 2


1.1.1 List the respective advantages and disadvantages of the following business structures: 1.1.2 Sole trader Partnership Joint Venture Trust Corporation

What factors need to be considered when determining which business structure best suits a particular business venture? What are the risks, if any, facing a sole trader? Why is a partnership often said to be a simple extension of the sole trader form of business ownership? What is the essential difference between a trust and a partnership? How do joint ventures and partnerships differ?

1.1.3 1.1.4

1.1.5

1.1.6

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Topic 1.2 - Partnerships


Objectives
At the end of this module you should be able to: Explain the three essential elements for a partnership to exist. Discuss the liability of a partnership in both contract and tort. Determine the rights and liabilities of parties in a partnership. Explain the process by which a partnership may be dissolved. Demonstrate knowledge of the issues in practical situations.

Content
1. Definition 2. Limitations on partnerships 3. Liability to Outsiders in Contract and Tort 4. Rights and Liabilities of Partners to Each Other 5. Dissolution of a Partnership

Topic Outline
In this topic outline reference will be made to various sections of the Partnership Act. The relevant sections have been reproduced in these materials and can be found commencing at p.36. For example, a reference to s.5 means Section 5 of the Partnership Act. Further, a reference to the Act means the Partnership Act

1.

Definition
A partnership is determined to exist where "two or more persons carry on a business in common with a view to profit" (s.5). It is therefore essential that the following three elements exist for there to be a partnership: 1. carrying on a business 2. in common 3. view to profit Once these three elements are shown, then a partnership exists under the Act and the provisions of the Act apply.

Carrying on a business
'Business' is described by the Act as including "every trade occupation and profession". However the courts have needed to decide whether carrying on a business includes hobbies and single ventures. In the case of a single venture, the court in Smith v Anderson (1880) 15 Ch D 247 (see below), determined that carrying on a business required a succession of acts and did not apply in the case of a lone
28 Swinburne University of Technology, Lilydale28 LBL200 Company Law Semester 1, 2012

venture. However, a single venture may create a partnership in circumstances where the facts of the case show that was the intention of the parties. This would normally require joint views on share of profits, joint decision making and joint responsibility for the contracts and arrangements entered into.

Smith v Anderson (1880) 15 Ch D 247 A trust was set up to buy shares in various companies to be held for investors with the funds they deposited. The investors were issued with certificates in the trust (like units in a modern unit trust) which gave them certain legal rights including the right to interest. One investor applied to have the trust wound up alleging that because there were more than 20 investors, the trust was an illegal partnership.
Court held: Carrying on a business implies repetition of acts and excludes an association set up to do one act which is never to be repeated. In this case, the investors claim failed. The one act was to buy the shares on trust. Even though the investors in the trust had a common interest, there were no mutual rights or obligations between them as there would be with partners and they were not carrying on business in common.

Carrying on a business in common


For a partnership to exist the business must be carried on in common. That is, there should be mutuality of rights and obligations, and the parties must be involved in the same business. Section 6 gives some indication of how to determine whether a business is being carried on in common.

Carrying on a business in common with a view to profit


A partnership must have the view to profit. This does not mean that it must make a profit, but merely that the parties to the partnership must have the profit motive as the original purpose for forming the partnership.

2.

Limitations on a partnership
Legislation imposes certain limitations on a partnership. Under the Corporations Act 2001 (Cth) s 115, the size of partnerships that can be formed for profit-making purposes is restricted to 20 persons, with the following exceptions:(a) An accounting practice must have not more than 1,000 partners, a legal practice may have 400 partners; Architects, pharmaceutical chemists and veterinary surgeons may have partnerships of no more than 100 people;

(b)

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(c)

Actuaries, medical practitioners, patent and trade mark attorneys, and stockbrokers may form partnerships of not more than 50 partners.

3.

Liability to Outsiders in Contract and Tort


The relationship between the partners is one based on contract. The terms of the contract may be expressly created, implied by actions or alternatively created by the provisions of the Act. As noted above the partnership is not a separate legal entity to the partners themselves. As such, the partnership cannot contract, but rather under partnership law an act of one partner can amount to an act of the partnership. The liability of the partnership (ie all the partners) for a contract entered into by one of them with a third party on behalf of the partnership is primarily determined by s.9 (agency by estoppel) The liability of the partnership (ie all the partners) for the wrongful acts (eg negligence, misappropriation of money etc) of one of them is determined by the principles of vicarious liability (see s.14 and 15) The nature of that liability of the partners to outsiders dealing with the partnership is determined by the Act. In general terms the liability is joint in the case of debts and obligations (s.13) joint and several in the case of wrongful acts, (s.16) and joint and several in the case of misappropriation of money or property (s.16).

3.

Rights and Liabilities of Partners to Each Other


As noted above the relationship between the partners is primarily based on contract and therefore the rights liabilities of partners to each other is usually determined in the first instance by referring to the partnership agreement (whether oral or in writing). However, in the absence of an agreement between the partners on a particular matter, s28 in the Act may set out the rights of the partners.

4.

Dissolution of a Partnership
A partnership may be dissolved under any of the methods outlined in Division 4 of the Act. Due to the partnership not being a legal entity, any change in the composition of the partnership leads to dissolution of the partnership and subsequent creation of another. Generally a partnership will be dissolved: by expiration of a fixed term, by termination of the adventure or undertaking, by notice by any partner, by death or bankruptcy of a partner, or by a decree of the court.

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Reading
Cassidy, Ch 2 Latimer, Ch 10. Vermeesh & Lindgren, Ch 21.

Tutorial Questions - Week 3


1.2.1 June and Jenny have become increasingly concerned about the number of people begging in the Bourke Street Mall. After careful consideration they embark on a project to raise corporate sponsorship and with this financial aid provide low cost meals to hungry people in the inner city. A friend of June and Jenny has told them to be careful because they might be classed as a partnership and end up having to complete partnership taxation returns. Do you agree with the friend's assessment of the situation? Why? 1.2.2 John decides to set up a business teaching classical music. He employs Paul on a weekly wage, plus commission of 20% of the profits. After the business failed, one of the creditors tried to sue Paul, claiming that he was a partner. Advise Paul of his liability. 1.2.3 John, Paul, George and Ringo decide to form a partnership to carry on a business in teaching classical music. John orders in writing, using the firms letterhead, $100,000 of expensive musical equipment. Because of previous experiences, he has been forbidden by his partners to make any orders for the firm. But this time John thinks he is on a winner and believes his partners will ratify his actions. When the equipment is delivered, the other partners threaten to expel John from the partnership and immediately send the equipment back to the manufacturer with a covering letter advising that as John had no authority to buy the equipment, the firm refuses to accept them. a. Do you think the suppliers could successfully sue the partnership for $100,000? b. Would it make any difference if the equipment was suitable for modern music but not for classical music? c. Would it make any difference if the equipment was IT equipment, at a bargain but not useful for music? d. Assume that the supplier can sue. Assume that the partnership property is worth $20,000. John has assets of $10,000. George has assets of $5 million. The other two partners have no assets. Who will pay and what amount? 1.2.4 John, Paul, George and Ringo decide to form a partnership to carry on a business in teaching classical music. John wants to expand into teaching some new classical music instruments which the partnership previously has not taught. George does not agree. a. Can John introduce the new instruments since there is a majority of three partners to one? b. What if John had wanted to expand into making music videos?
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1.2.5 Explain the ways in which a partnership may be dissolved. What does the statute require to occur when a partner leaves the partnership?

Review Questions
What factors are important when determining whether a particular business is structured as a joint venture or a partnership? What are the statutory limitations on the size of a partnership? Why do these restrictions exist? Explain the difference between the liability of a partnership in tort and the liability in contract. Explain what is meant by the term 'fiduciary relationship'. Explain the statutory provisions that exist in the event of there being no partnership agreement in relation to the splitting of profits, sharing of losses, and interest on advances.

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Partnership Act 1958

5. Definition of partnership
(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. (2) But the relation between members of any company or association which is (a) registered as a company under any Act for the time being in force and relating to the registration constitution or incorporation of companies; or (b) formed or incorporated by or in pursuance of any Act or letters patent or Royal Charter is not a partnership within the meaning of this Act.

6. Rules for determining existence of partnership


In determining whether a partnership does or does not exist regard shall be had to the following rules (1) Joint tenancy tenancy in common joint property common property or part ownership does not of itself create a partnership as to anything so held or owned whether the tenants or owners do or do not share any profits made by the use thereof. (2) The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. (3) The receipt by a person of a share of the profits of a business is prima facie evidence that that person is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make that person a partner in the business and in particular (a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make that person a partner in the business or liable as such; (b) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such; (c) a person being the spouse or child of a deceased partner and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner is not by reason only of such receipt a partner in the business or liable as such; (d) the advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the business does not of itself make the lender a partner with the person or persons carrying on the business or liable as such: Provided that the contract is in writing and signed by or on behalf of all the parties thereto; (e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by that person of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.

8. Meaning of firm
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Persons who have entered into partnership with one another are for the purposes of this Act called collectively a firm and the name under which their business is carried on is called the firm-name.

9. Power of partner to bind the firm


Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

10. Partners bound by acts on behalf of firm


An act or instrument relating to the business of the firm and done or executed in the firm-name or in any other manner showing an intention to bind the firm by any person thereto authorized whether a partner or not is binding on the firm and all the partners. This section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments.

12. Effect of notice that firm will not be bound by acts of partner
If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.

13. Liability of partners


Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner, and after his death his estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied but subject to the prior payment of his separate debts.

14. Liability of the firm for wrongs


(1) Subject to sub-section (2), where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her copartners loss or injury is caused to any person not being a partner in the firm or any penalty is incurred the firm is liable therefor to the same extent as the partner so acting or omitting to act. (2) For the purposes of sub-section (1), a partner who commits a wrongful act or omission as a director of a body corporate, within the meaning of the Corporations Law, is not to be taken to be acting in the ordinary course of the business of the firm or with the authority of his or her co-partners only because (a) the partner obtained the agreement or authority of his or her co-partners, or some of them, to be appointed or to act as a director; or (b) remuneration that the partner receives for acting as a director of a body corporate forms part of the income of the firm; or (c) any co-partner is also a director of that or any other body corporate.

15. Misapplication of money or property


In the following cases, namely (a) where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it; and (b) where a firm in the course of its business receives money or property of a third person and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm

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the firm is liable to make good the loss.

16. Liability for wrongs joint and several


Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the last two preceding sections.

18. Persons liable by "holding out"


(1) Every one who by words spoken or written or by conduct represents himself or who knowingly suffers himself to be represented as a partner in a particular firm is liable as a partner to any one who has on the faith of any such representation given credit to the firm whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made. (2) Where after a partner's death the partnership business is continued in the old firm-name the continued use of that name or of the deceased partner's name as part thereof shall not of itself make his executors or administrators estate or effects liable for any partnership debts contracted after his death.

21. Liabilities of incoming and outgoing partners


(1) A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner. (2) A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement. (3) A retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.

23. Variation by consent of terms of partnership


The mutual rights and duties of partners whether ascertained by agreement or defined by this Act may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing.

24. Partnership property


(1) All property and rights and interests in property originally brought into the partnership stock or acquired whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business are called in this Act partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement. (2) The legal estate or interest in any land which belongs to the partnership shall devolve according to the nature and tenure thereof and the general rules of law thereto applicable but in trust so far as necessary for the persons beneficially interested in the land under this section. (3) Where co-owners of an estate or interest in any land not being itself partnership property are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them in the absence of an agreement to the contrary not as partners but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase.

25. Property bought with partnership money


Unless the contrary intention appears property bought with money belonging to the firm is deemed to have been bought on the account of the firm.

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28. Rules etc. of partners when not subject to special agreement


The interest of partners in the partnership property and their rights and duties in relation to the partnership shall be determined subject to any agreement express or implied between the partners by the following rules: (1) All the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses whether of capital or otherwise sustained by the firm. (2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him (a) in the ordinary and proper conduct of the business of the firm; or (b) in or about anything necessarily done for the preservation of the business or property of the firm. (3) A partner making for the purpose of the partnership any actual payment or advance beyond the amount of capital which he has agreed to subscribe is entitled to interest at the rate of Seven per centum per annum from the date of the payment or advance. (4) A partner is not entitled before the ascertainment of profits to interest on the capital subscribed by him. (5) Every partner may take part in the management of the partnership business. (6) No partner shall be entitled to remuneration for acting in the partnership business. (7) No person may be introduced as a partner without the consent of all existing partners. (8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners but no change may be made in the nature of the partnership business without the consent of all existing partners. (9) The partnership books are to be kept at the place of business of the partnership (or the principal place if there is more than one) and every partner may when he thinks fit have access to and inspect and copy any of them.

29. Expulsion of partner


No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.

30. Retirement from partnership at will


(1) Where no fixed term has been agreed upon for the duration of the partnership any partner may determine the partnership at any time on giving notice of his intention so to do to all the other partners. (2) Where the partnership has originally been constituted by deed a notice in writing signed by the partner giving it shall be sufficient for this purpose.

32. Duty of partners to render accounts etc.


Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representative.

33. Accountability of partners for private profits


(1) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from any use by him of the partnership property name or business connexion. (2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner and before the affairs thereof have been completely

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wound up either by any surviving partner or by the representatives of the deceased partner.

34. Duty of partner not to compete with firm


If a partner without the consent of the other partners carries on any business of the same nature as and competing with that of the firm he must account for and pay over to the firm all profits made by him in that business.

36. Dissolution by expiration or notice


Subject to any agreement between the partners a partnership is dissolved (a) if entered into for a fixed term by the expiration of that term; (b) if entered into for a single adventure or undertaking by the termination of that adventure or undertaking; (c) if entered into for an undefined time by any partner giving notice to the other or others of his intention to dissolve the partnership. In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution or if no date is so mentioned as from the date of the communication of the notice.

37. Dissolution by death or bankruptcy or chargei


(1) Subject to any agreement between the partners every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner. (2) A partnership may at the option of the other partners be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt.

38. Dissolution by illegality of partnership


A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership.

39. Dissolution by the court


On application by a partner the court may decree a dissolution of the partnership in any of the following cases (a) when a partner is found to be mentally ill, in which case the application may be made as well on behalf of that partner by his or her guardian or administrator if appointed under the Guardianship and Administration Act 1986 or other person having title to intervene as by any other partner; (b) when a partner other than the partner suing becomes in any other way permanently incapable of performing his part of the partnership contract; (c) when a partner other than the partner suing has been guilty of such conduct as in the opinion of the court regard being had to the nature of the business is calculated to prejudicially affect the carrying on of the business; (d) when a partner other than the partner suing wilfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him; (e) when the business of the partnership can only be carried on at a loss; (f) whenever in any case circumstances have arisen which in the opinion of the court render it just and equitable that the partnership be dissolved.

40. Rights of persons dealing with firm against apparent members of firm

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(1) Where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change. (2) An advertisement in the Government Gazette and in at least one newspaper circulating in each district in which the firm carries on business as to a firm whose principal place of business is in Victoria shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised. (3) The estate of a partner who dies or who becomes bankrupt or of a partner who not having been known to the person dealing with the firm to be a partner retires from the firm is not liable for partnership debts contracted after the date of the death bankruptcy or retirement respectively.

41. Right of partners to notify dissolution


On the dissolution of a partnership or retirement of a partner any partner may but one of such partners shall publicly notify the same in the Government Gazette and in at least one newspaper circulating in each district in which the firm carries on business and may require the other partner or partners to concur for that purpose in all necessary or proper acts (if any) which cannot be done without his or their concurrence.

42. Continuing authority of partners for purposes of winding up


After the dissolution of a partnership the authority of each partner to bind the firm and the other rights and obligations of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution but not otherwise: Provided that the firm is in no case bound by the acts of a partner who has become bankrupt but this proviso does not affect the liability of any person who has after the bankruptcy represented himself or knowingly suffered himself to be represented as a partner of the bankrupt.

43. Rights of partners as to application of partnership property


On the dissolution of a partnership every partner is entitled as against the other partners in the firm and all persons claiming through them in respect of their interests as partners to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm, and for that purpose any partner or his representatives may on the termination of the partnership apply to the court to wind up the business and affairs of the firm.

46. Share of profits made after dissolution


Where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate then in the absence of any agreement to the contrary the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the court may find to be attributable to the use of his share of the partnership assets or to interest at the rate of seven per centum per annum on the amount of his share of the partnership assets: Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner and that option is duly exercised the estate of the deceased partner or the outgoing partner or his estate as the case may be is not entitled to any further or other share of profits, but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof he is liable to account under the foregoing provisions of this section.

48. Rule for distribution of assets on final settlement of accounts

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In settling accounts between the partners after a dissolution of partnership the following rules shall subject to any agreement be observed (a) losses including losses and deficiencies of capital shall be paid first out of profits next out of capital and lastly if necessary by the partners individually in the proportion in which they were entitled to share profits; (b) the assets of the firm including the sums (if any) contributed by the partners to make up losses or deficiencies of capital shall be applied in the following manner and order (i) in paying the debts and liabilities of the firm to persons who are not partners therein; (ii) in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital; (iii) in paying to each partner rateably what is due from the firm to him in respect of capital; the ultimate residue (if any) shall be divided among the partners in the proportion in which profits are divisible.

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Module 2 - Corporations Law


Objectives
At the end of this module you should be able to: Demonstrate an understanding of the current status of company law in Australia Discuss the legal implications of incorporation and the advantages and disadvantages of incorporating as a company Discuss the regulations governing internal management and explain the implications on the corporation Discuss the contractual capacity of a corporation and explain the effect of this on a company promoter Discuss the various ways of raising capital and explain the essential differences between share and loan capital Discuss the role of directors and explain their duties to the corporation and minority shareholders Discuss the options available when a company suffers financial difficulties and explain the process of winding up.

Content
1. Introduction 2. Corporate Characteristics 3. Company Constitution 4. Contractual Capacity 5. Directors and Corporate Governance 6. Company in Distress

Introduction to the Module (Chapters 1 - 3) *


* All chapters refer to the textbook.

1.

History 1.1 Introduction


Company law in Australia has slowly developed over time to the situation we find today. In the 1860's most Australian colonies passed legislation based on the English Companies Act 1862. Upon federation in 1901, each state continued to have its own laws in relation to companies and although originally based on the English act, there was no uniformity across the country. In 1961-62, the states developed uniform company acts. However uniformity was not maintained as there was no mechanism implemented to achieve this. Until 1974, a company formed under Victorian legislation was viewed in New South Wales as a foreign company and as such was

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required to comply with the foreign company provisions of the New South Wales act. This situation was found by many companies to be absurd and it became clear with the increasing nationalisation of corporations that changes were needed. Around this time a network was formed between the states and under the Interstate Corporate Affairs Agreement, and the idea of recognised companies were developed. Further development occurred in 1978 when an agreement by the states enabled a Commonwealth act to be applied in each state via a Companies (Application of Laws) Act. This "Companies Code" as it became known was further strengthened by the establishment of the National Companies and Securities Commission (NCSC) which was given responsibility for the development of policy and administration of company law and the securities industry. The Code wasn't however without it's problems; uniformity was diluted over time and there were interpretation differences between the NCSC and the state Corporate Affairs Offices who were responsible for the day to day administration of the scheme.

1.2

Section 51 of the Constitution


Section 51(xx) of the Constitution empowers the Commonwealth Parliament to make laws with respect to "foreign corporations, and trading and financial corporations formed within the limits of the Commonwealth". The problem with this section is the definition of the word 'formed' - is it past or future tense. If taken to mean the past tense, has been formed, then the Commonwealth only has power to make laws in relation to companies already in existence, thereby each state has the power to make their own laws in relation to the formation of companies. However, if it is taken to mean the future tense, to be formed, then the Commonwealth has power to make laws in relation to the formation of companies. In Huddart Parker & Co Pty Ltd v Moorehead (1908) 8 CLR 330, the court took the view that the word meant already in existence and therefore the Commonwealth had no power to legislate over the way in which corporations could be incorporated. This view was confirmed in 1990 when the constitutional validity of the Corporations Act 1989 (Cwlth) was challenged by a number of states.

1.3

The Corporations Law


In 1990 after the challenge in the High Court to the 1989 Commonwealth legislation, agreement was reached which provided for a national scheme entitled the Corporations Law. The major benefit of this agreement was that administration was solely placed with the Australian Securities Commission (ASC) which replaced the NCSC and each state's Corporate Affairs Office. The Corporations Law also allowed for uniform citation, cross vesting of court jurisdiction, national discharge of obligations and the federalisation of prosecution and investigation of breaches.

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1.4

Recent Developments
During the 1990's the Corporations Law has undergone a number of changes, most notably a process to simplify the law and make the regulatory requirements on small business less onerous. The most encompassing change was brought about by the Company Law Review Act 1998, which aimed to streamline the provisions relating to: registration of companies, share capital, meetings, financial reports, annual returns and audit, deregistration, and company names. The Corporate Law Economic Reform Program (CLERP) commenced in 1997 and was facilitated by the transfer of responsibility for the Corporations Law from the Attorney General to the Treasurer. The focus of corporations' regulation has now been widened to promote more informed security investment and standards of corporate governance. Along with this change, the ASC has become the Australian Securities and Investments Commission (ASIC). Further reforms were contained in the Corporate Law Economic Reform Bill introduced into parliament in 1998 and passed in 1999. This Act includes provisions in relation to fundraising, director's duties, accounting standards and takeovers.

2.

Corporations Act
The constitutional validity of the Corporations Law was brought into consideration in a number of High Court cases heard in 1999 and 2000. The decisions in Re Wakim, Bond v R and R v Hughes, brought into question the powers of Commonwealth bodies to deal with the issues arising out of the Corporations Law. In response to these cases, the state Attorney's-General agreed to refer the power to amend the corporations' legislation to the Commonwealth. The referral has a 'sunset clause' to allow a state to terminate it, but not until after 2011. The result is the Commonwealth passing the Corporations Act 2001 and the ASIC Act 2001 which replace the previous legislation.

Reading List
Hanrahan, P., Ramsay, I. and Stapledon, G. 2011, Commercial Applications of Company Law, 12th ed, CCH, Sydney Note: Corporate law in Australia has undergone many changes recently and as such students must be cautious when using older texts. Many of the fundamental principles underpinning the law remain the same; however, the provisions of the Corporations Act are constantly changing. Students must ensure that any Corporations Act provisions cited are current.

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Topic 2.1 - Corporate Characteristics Objectives


At the end of this module you should be able to: Discuss the concept of a company and explain the characteristics gained upon incorporation. Discuss the concept of the corporate veil and explain when the courts or statute may lift the corporate veil. Explain the types of companies that may be incorporated under the Corporations Act. Explain the registration requirements to incorporate a company. Demonstrate knowledge of the issues in practical situations.

Content
1. Concept of a Company 2. Corporate Veil 3. Types of Companies 4. Registration Requirements

Topic Outline - Chapters 1 - 3


1. Concept of a Company
In Topic 1.1 we dealt briefly with a comparison of a company with other business structures. A company differs from most other forms in that the registration process gives a company a separate legal identity to that of its owners. This feature has certain advantages over other structures. Incorporation and the separate legal identity also allows a company to buy and sell property, contract, and sue and be sued in its own name (see s.124). Unlike many other forms, a company has perpetual succession and remains the same regardless of ownership changes. The separate legal personality can be best shown in the following cases: Salomon v Salomon & Co Ltd (1897) AC 22 Lee v Lee's Air Farming Ltd (1961) AC 12 Macaura v Nothern Assurance Co Ltd (1925) AC 619

2.

Corporate Veil
The separate legal personality noted above has led to what is called the "corporate veil". In other words the owners and managers were protected from personal liability by a veil created by the incorporation of the company. This situation can be seen in the cases noted previously and was originally aimed at encouraging entrepreneurship. However opponents argue that it can be used purely as a means of limiting personal liability for actions taken.

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Due to the increasing criticism of the corporate veil, both courts and parliament have provided, in some cases, for the lifting of the corporate veil.

2.1

Courts
Courts have pierced the corporate veil in a number of instances, for example: where a company is formed for improper purposes as in Gilford Motor Co v Horne (1933) All ER Rep 109 where a company was used for a fraudulent purpose as in Re Darby [1911] 1 KB 95

2.2

Statute
Legislation allows for the lifting of the corporate veil in a number of instances, for example: where directors fail to prevent insolvent trading, Corporations Act (s.588G). where company officers secure their loans to the company by a charge, Corporations Act (s.267)

3.

Types of Companies
Companies are classified under s.112 of the Corporations Act according to the liability of their members: company limited by shares company limited by guarantee unlimited company with share capital, and no liability company. The Corporations Act also allows for a distinction between public companies and proprietary companies. A proprietary company has a share capital, no more than 50 non-employee shareholders and is not allowed to engage in raising funds from the public (ss.45A & 113). Proprietary companies are given a number of advantages over public companies and under the law are defined as either being "large" or "small". A large proprietary company has more onerous regulatory requirements than a small proprietary company, and is deemed to be large if it meets two of the following three tests: consolidated annual gross operating revenue of at least $25 million end of financial year consolidated gross assets of at least $12.5 million the company has 50 or more equivalent full-time employees at the end of the financial year.

4.

Registration Requirements
The registration requirements are found in s.117 and when a company is registered a certificate of registration is issued (s.119). Once registered, a company is given the powers outlined in s.124.

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Reading

Hanrahan, Ramsay & Stapledon, Chs. 1 - 3.

Review Questions
2.1.1 2.1.2 What are the main features and characteristics of a company? Explain the facts and the basis for the court's decision in Salomon v Salomon & Co Ltd Lee v Lee's Air Farming Macaura's case What is meant by the expression "lifting the corporate veil"? Why do you believe that the courts have been reluctant to lift the corporate veil? John Smith is currently running his milk bar business as a sole trader. He comes to you for advice as a friend of his has suggested that he should form a company to run the business. Advise John of the advantages and disadvantages of this suggestion as well as concluding what he should do. Bill the Bear-hunter owned a business that he sold to a company incorporated by him for the purpose of carrying on that business. When the company was formed Bill, his wife and five children all received one share each. Bill received additional 20,000 shares and $10,000 in debentures in consideration for the bear hunting business. Bill was also appointed the managing director and had effective control of the company as he could out vote all other members. Bear Hunting Ltd suffered severe financial difficulties and a liquidator appointed to wind up its affairs. The liquidator determined that there were funds available to pay Bill the amount owing on the debentures, however there would be insufficient funds to pay the debts owing to the unsecured creditors. The liquidator sought a court order to avoid payment to Bill on the basis that the company was merely a sham and that the business was in reality Bill's. Advise Bill of his legal position 2.1.6 2.1.7 Explain the reasons for the court's decision in Gilford Motors Co Ltd v Horne. Explain the difference between each of the following types of companies and when each can be used: Company limited by shares Company limited by guarantee Unlimited company No liability company How is a large proprietary company distinguished from a small proprietary company? Are there any potential problems that may exist with this type of method to distinguish the two? What are the essential differences between public companies and proprietary companies? Why do the two types of companies exist?

2.1.3

2.1.4

2.1.5

2.1.8

2.1.9

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2.1.10

Bristow is a substantial shareholder in Chester-Perry Industries Ltd. A business competitor, Gun and Fames Pty Ltd, is selling in great volume a cookbook similar to one in respect of which Chester-Perry Industries holds the copyright. Bristow believes his company has incurred a substantial loss and his own shares have been reduced in value by $150,000. His solicitors believe an infringement of copyright has occurred. Eccles and Pollock are the directors of Chester-Perry Industries Ltd. They state that they have decided not to litigate because they believe that to take legal action for infringement of copyright is too expensive and risky. Bristow is unsure whether the directors of Chester-Perry Industries have any interest in Gun and Fames Pty Ltd. On the general principles laid down Salomons case, can Bristow sue Gun & Fames? (NB we will return to this Bristow problem in Topic 2.3 re Directors Duties and also Members Remedies)

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Topic 2.2 - Company Constitution


Objectives
At the end of this module you should be able to: Explain what is meant by 'replaceable rules' and how a company may use these to determine their constitution. Explain how a company may change their constitution. Explain the position of companies with Memorandum and Articles of Association. Demonstrate knowledge of the issues in practical situations.

Content
1. Introduction 2. Previous Legislation 3. The Replaceable Rules 4. Changes to Company Constitution

Topic Outline - Chapter 4 - 7


1. Introduction
Every business organisation requires an internal set of rules in relation to the running of the organisation. This is particularly important in the case of large companies where there is a distinct separation between management and ownership. The rules governing the internal running of the company is called the company constitution and the regulations in relation to this area of corporate law changed in 1998.

2.

Previous Legislation
Prior to 1 July 1998, each company was required to have a constitution that consisted of a Memorandum of Association (memorandum) and Articles of Association (articles). The memorandum was required to include details about the company's share capital and the liability of its members. The articles provided the rules for the internal organisation of the company including the appointment of directors, meeting procedures and declaration of dividends. However the memorandum and articles have now been abolished in favour of the generic term 'constitution'. Section 1415 determines that the memorandum and articles of a company prior to the 1 July, 1998 changes will become the companys constitution after the commencement of the Company Law Review Act 1998. Alternatively, the memorandum and articles may be repealed and replaced with a constitution that alters or supplements the replaceable rules (s. 135(1)).

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3.

The Replaceable Rules


Since July 1998, the Corporations Act has contained a list of replaceable rules governing the internal management of companies. These have effectively taken over the role fulfilled previously by a company's articles of association. A companys internal management may be governed by either the replaceable rules, a written constitution, or both (s.134). It is important to note that the rules may be replaced or modified by a company's constitution if it is deemed appropriate to the particular company's situation (s.135). The rules are replaceable for all proprietary companies, but some of the rules are mandatory (and cannot be modified) for public companies.

4.

Effect of the Constitution


Under s.140, the constitution and the replaceable rules have the effect of a contract; (a) between the company and each member, and (b) between the company and each director and company secretary, and (c) between a member and each other member. Each of the parties must observe the constitution and rules so far as they apply in each case. However, not all rights granted are necessarily enforceable.

5.

Changes to Company Constitution


The constitution of a company is alterable provided that the correct procedure is followed. This procedure is outlined in section 136 of the Corporations Act and requires a special resolution to be passed. Alterations to the constitution that have the effect of altering the rights of the members of the company must also comply with section 140(2).

Reading
Hanrahan, Ramsay & Stapledon, Chs. 4 - 7

Review Questions
2.2.1 Explain the position of companies in existence prior to the changes to the legislation. What alternatives are available to them?

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2.2.2

Why are the replaceable rules included as part of the legislation? Do you believe this to be a better system than previous? Why? How may a company alter its constitution? What factors should be considered when a corporation alters their constitution? What is the position of a company if a director was to breach one of the replaceable rules?

2.2.3

2.2.4

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Topic 2.3 - Directors and Corporate Governance


Objectives
At the end of this module you should be able to: Explain the process for appointing and removing directors. Explain the impact of director's duties on corporate governance. Discuss the duties owed by directors to the company and its shareholders. Discuss the position of minority shareholders and the problems that they may face in bringing action against the company. Demonstrate knowledge of the issues in practical situations

Content
1. Directors - Appointment and Removal 2. Directors Duties 3. Members Remedies

Topic Outline - Chapters 9 15


This topic is the largest topic in the unit, spanning 3 weeks of study. Within it, the issues of corporate governance and directors duties are frequently covered in the business sections of daily newspapers, and many of these real world examples will be discussed in lectures and tutes.

1.

Directors - Appointment and Removal


The management of companies rests with the board of directors. In the case of proprietary companies, there needs to be at least one director who must reside in Australia. Public companies must have at least three directors, however only two are required to reside in Australia (s. 201A). Under the replaceable rule, s.226A, the business of the company is to be managed by or under the direction of the directors. In the case of Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34 the court held that unless there is a provision in the company's constitution, the general meeting cannot usurp the powers of the board of directors. The Corporations Act defines a director under section 9 as including: a person who: is appointed to the position of a director; or is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is give to their position; and unless the contrary intention appears, a person who is not validly appointed as a director if: they act in the position of a director; or
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the directors of the company or body are accustomed to act in accordance with a person's instructions or wishes.

Thus the provision includes directors regardless of their title or how they have been appointed, these are usually known as "defacto directors". A defacto director's actions will not be invalid simply because they have not been validly appointed. (Refer to the indoor management rule and s.129) Directors must: have written, signed consent to be appointed (s.201D) be at least 18 years of age (s.201B) Although there is no statutory requirement for a director to hold shares in the company, the constitution may require the director to hold a prescribed amount. The appointment of directors is usually via a general meeting. However the replaceable rules or, alternatively, the company constitution will govern the specific process (see also s.201E). A director may resign (s.203A). In a public company a director may be removed by the members (s.203D), notwithstanding anything in the constitution (or any contact with the company). Directors cannot remove a fellow director notwithstanding anything in the constitution (s.203E). In a proprietary company, the provisions of the constitution (if any) would determine the issue of removal.

2. Directors Duties
The issue of corporate governance (and, in particular, directors duties) is of great importance to the many people involved in the management of companies. The examination of it will form a major part of this topic. The director under common law owes a fiduciary duty to the company due to the relationship that the director has with the company. This broad duty includes such duties as the duty to act bona fide in the interests of the company and the duty to exercise powers for proper purpose. The courts have had difficulty determining what is in fact in the best interests of the company. In Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154, the court determined that at times it is not unreasonable to also take regard to the interests of the shareholders or even the creditors or future members of the company. The Corporations Act also imposes duties on the company director. In many cases these reflect a codification of the common law duties. However in other instances, such as s.588G, the legislation places additional duties on the directors.

3.

Members Remedies
At common law the power to take action against directors or majority shareholders is limited by what is called the "proper plaintiff rule"

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which allows only the company itself to commence action against those who breach duties owed to the company. The proper plaintiff rule that came about through Foss v Harbottle (1843) 67 ER 189, means that a breach of a director's fiduciary duty is only actionable by the company itself. Thus if the board of directors is tightly knit, it is likely that breaches may not be commence. It should be noted that the proper plaintiff rule compliments the internal management rule discussed earlier. The legislation has however, since 2000 allowed members to take action in certain circumstances with the permission of the court (see ss.236 and 237). This is called a statutory derivative action. Section 232 of the Act was introduced to allow shareholders to bring action where the affairs of the company are being conducted in a manner that is oppressive, unfairly prejudicial or unfairly discriminatory against, members of the company. Where such an act has occurred, courts are given a broad power to make such orders as it thinks fit to remedy the situation (see s.233). The section allows for the ASIC, or a member of the company to apply to the courts for relief and it is interesting to note that the person need not be a member at the time of the conduct, rather only at the time of the action. The test to be applied when looking at s. 232 is an objective one and is to be determined from the basis of a reasonable person or director. Other members remedies include: winding up the company (s.461); enforcement of members personal rights; and inspection of the companys books (s.247A).

Reading
Hanrahan, Ramsay & Stapledon, Ch. 9 - 15

Tutorial Questions
2.3.1 Eden Developments Pty Ltd is a property development company. The Board of Directors consists of six directors. Three of the directors, including Peter, are in favour of selling the Eden Gates, an area of land ripe for redevelopment. One of the directors, John, is a powerful voice opposed to the proposed sale of the land. The Chairman of Directors, Gabriel, does not have a strong opinion. (a) Only three directors attend the meeting of Eden Developments Pty Ltd. Is it a valid meeting? Explain with a citation of the section (b) Two of the three directors who attend the meeting of Eden Developments Pty Ltd vote in favour of the motion to sell the Eden Gates. Is the resolution passed? Explain with a citation of the section (c) Can Peter call a directors meeting of Eden Developments Pty Ltd without the approval of Chairman Gabriel? Explain with a citation of the section

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(d) Can a meeting of the directors of Eden Developments Pty Ltd be held without giving notice to John? Explain with a citation of the section (e) John has attended the Annual General Meeting of Eden Developments Pty Ltd. The shareholders pass a resolution instructing the directors not to sell the Eden Gates. Is the resolution effective? Explain with a citation of a relevant case (f) The Constitution of Eden Developments Pty Ltd provides that Gabriel and Peter are to be directors for life. Can they be removed and, if so, how? (g) Would the position be different in the question above if Eden Developments were a public company? Explain with a citation of the section (h) John has discovered that Peter has three times been the director of companies which have failed. What action, if any, can John take?

Review Questions
2.3.1 With reference to the article "Issues Facing Directors in Corporate Groups" (25 Aust Bus Law Review 436), answer the following questions: (a) Describe the potential conflicts that may occur when a director has a number of roles in a corporate group. Referring to the case Equitycorp Finance Ltd (in liq) v Bank of New Zealand, what are the issues that courts face when looking at directors duties under common law in the current corporate environment? What does the article conclude is the situation regarding director's duties in a corporate group?

(b)

(c)

2.3.2

Directors owe a duty of care under s. 180. What is the standard of care required of a director so they do not breach this duty? Is this different to the common law duty? Why do you think that the duty to prevent insolvent trading under s. 588G was introduced into the legislation? Do you think that it is fair to place this burden on directors? What is the "Business Judgement Rule" that is proposed under the Company Law Economic Reform Bill 1998 (Cwlth)? What impact will this have on directors if adopted? Do you agree with this proposal? The Corporations Act often uses the term "officer" rather than "director". Why do you believe this is the case? Is it possible for a creditor to sue a director of a company for breach of the duty to act bona fide in the interests of the company?

2.3.3

2.3.4

2.3.5

2.3.6

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2.3.7

What is the rule in Foss v Harbottle? How does it impact on minority members of a corporation? What are the statutory remedies available under the Corporations Act for aggrieved shareholders? What is the effect of ratification of a breach of director's duties? Is ratification effected if the majority shareholders that control the company are also directors?

2.3.8

2.3.9

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Topic 2.4 - Contractual Capacity


Objectives
At the end of this module you should be able to: Explain the contractual capacity of a company. Explain the assumptions that are entitled to be made under s. 128 and understand the reasoning behind these assumptions.

Content
1. Relations with Outsiders

Topic Outline - Chapters 22 - 23


1. Relations with Outsiders
Under section 124 a company has the power to enter contracts upon its registration. However, because a company is not a natural person, it can only enter into contracts through the actions of humans. At common law a company could only contract on the basis of its common seal. Under the Corporations Act, contracts may either be made directly by the company under section 127 or via an agent. Section 126 allows a company to contract with others through an agent and the company will be bound where the agency is created by actual authority or by apparent (ostensible) authority.

1.1

Actual Authority
Actual authority can be either express or implied. Express authority is where the company has expressly given authority to an individual. The company is bound when the act is within the scope of that authority. Implied authority arises out of statements and conduct by the principal It can occur when a person is appointed to a particular position where there is an implied grant of authority to do whatever is usual to the duties of that position. For example, the managing director may have authority to enter into contracts necessary to carry on the companys business and the company secretary may make contracts connected with the administrative side of a companys affairs. In general terms company executives will usually have implied authority to bind the company in transactions usual to the function of their office.

1.2

Ostensible Authority
Ostensible or apparent authority arises when a company has not given express authority, but has acted in such a way that has lead outsiders to the reasonable belief that the person had been given express authority. The common law doctrine of ostensible authority is now included in section 129(3) of the Corporations Act.

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1.3

Indoor Management Rule


The rule from Turquand's case under common law allowed that even if the internal proceedings of a company had not been properly carried out, the outsider was entitled to assume that they had been. This principle has been codified under section 128 and 129 under which an outsider contracting with a company is entitled to rely on a number of assumptions. The assumptions are of course not available if the person knew or suspected that the assumption was incorrect at the time of the dealings with the party representing the company (s. 128(4)).

2. Promoters and Pre-Registration Contracts (Not covered in the lecture and tute) 2.1 Promoters
A promoter is the person involved in the starting of a company and their role has been defined under the common law. In Tracey v Mandalay Pty Ltd (1953) 33 CLR 215, the High Court noted that the term promoter includes both those who actively take part in the promotion of a company as well as those who take a less active role. It is important to note that the Corporations Act definition in section 9 is not specifically related to promoters of companies, but rather promoters of a prospectus, who may or may not be a promoter under the common law definition. Promoters have a fiduciary duty that is owed to the potential investors of the company being formed. This duty requires disclosure of personal interests and profits to the company and potential investors. In the case of a company that is being floated, the disclosure should take place in the prospectus.

2.2

Pre-Registration Contracts
Whilst a company gains the ability to contract on registration, contracts may need to be made before this occurs. Under common law a contract made on behalf of a company before registration was not binding on the company once formed. As the company was not in existence, the promoter could not act as an agent for a non-existent corporation. Under this situation the promoter would be personally liable if the company did not cover their expenses at a later stage. The Corporations Act has superseded the common law and allows for the ratification of a pre-registration contract by the newly formed company. Under section 131, once a pre-registration contract is ratified, the contract becomes binding on the company or on the person who executed the contract if it is not ratified. Ratification must occur within a reasonable time of the registration of the company.

Reading
Hanrahan, Ramsay & Stapledon, Chs. 22, 23.

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Swinburne University of Technology, Lilydale56 LBL200 Company Law Semester 1, 2012

Review Questions
2.4.1 What is the common law duty placed on a promoter? What is the effect of this duty? What is a pre-registration contract? Who is responsible for a pre-registration contract under common law? What is the position under the Corporations Act? Prior to the formation of Penton Ltd, Jenny, who was to be one of the directors, entered into a contract with a printing company for the production of company stationery including letterhead, envelopes and 'with compliments' slips. After the registration of the company, Penton Ltd received an invoice from the printing company for the stationery. A meeting of the board of directors concluded that the style of the stationery was not suitable and they voted not to pay the invoice. a) Advise Jenny of her position. b) Advise the printing company of their position. 2.4.4 What was the situation in Bay v Illawarra Stationery Supplies Pty Ltd [1986] 4 ACLC 429? What is the position of a promoter in relation to a preincorporation contract if the company is never incorporated? What was the difference between the case of Kelner v Baxter and the case of Black v Smallwood?

2.4.2

2.4.3

2.4.5

2.4.6

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Topic 2.5 - Company in Distress


Objectives
At the end of this module you should be able to: Discuss the options available to a company in financial distress. Explain the difference between receivership, administration and liquidation. Explain process of winding up. Demonstrate knowledge of the issues in practical situations.

Content
1. Schemes of Arrangement 2. Receivership 3. Administration 4. Winding Up

Topic Outline - Chapters 24 - 26


1. Schemes of Arrangement
In circumstances where the directors of a company recognise that a company is experiencing financial difficulties, the company may wish to enter into a scheme of arrangement under Part 5.1 of the Corporations Act. In essence a scheme of arrangement is designed to bring about a compromise between the conflicting claims against the business. Thus under s.413 a scheme of arrangement may include reconstructing the company or amalgamating the company with another. There are however some limitations to when these arrangements can be made.

2.

Receivership
Receivers are appointed to protect creditors' interests by taking control of the property of the company and assuming responsibility for incoming profits and the payment of outgoings. The appointment of a receiver does not of itself replace the board of directors. However the receiver usually enjoys broad powers that may be exercised in relation to the property of the company.

3.

Administration
Under Part 5.3A, an administrator may be appointed to take responsibility of the affairs of a company. The appointment is designed to stabilise the company's position and aims to maximise the chances of continuing or alternatively entering into a deed of arrangement. If the administrator concludes that the company's position is beyond the point of no return, then the administrator's task is to ensure a better return for the creditors than an immediate winding up of the company.

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Swinburne University of Technology, Lilydale58 LBL200 Company Law Semester 1, 2012

4.

Winding Up
Winding up is the process by which the company is dissolved by law. In summary, the process is to appoint a liquidator, realise the company's assets, pay the corporate debts and then distribution of the surplus amongst the members. Winding up is either: by order of a court, "compulsory winding up", or by a "voluntary winding up". Compulsory winding up most commonly occurs when a company is deemed to be insolvent and an application to have the company wound up is made under s.459P. Proving that the company failed to comply with a statutory demand or a receiver was appointed can show insolvency. Voluntary winding up may occur on the application of either the members or the creditors. If the company is solvent then the members may resolve by special resolution to wind the company up. For voluntary winding up to occur via this method, the directors are required to make a declaration of solvency and a statement of company affairs. If the company is insolvent, the directors may call a general meeting at which the shareholders may resolve that the company should be wound up. After this, a meeting of creditors must occur and a full statement of the company's affairs be put to the meeting. At the meeting the creditors may nominate a liquidator.

Reading
Hanrahan, Ramsay & Stapledon, Chs. 24-26.

Review Questions
2.5.1 2.5.2 Who has the power to appoint an administrator? What is the difference between an administrator and a receiver? What are the three things that can happen when a voluntary administration ends? What is voluntary winding up? In what sense is it voluntary when compared to compulsory winding up? Explain the two kinds of voluntary winding up. What is the essential difference between the two?

2.5.3

2.5.4

2.5.5

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2.5.6

What are voidable transactions? Why is a liquidator interested in such transactions? Under what circumstances would the members of a company prefer voluntary administration rather than winding up? What benefits are there to the members and the public available due to the voluntary winding up provisions of the Corporations Act?

2.5.7

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Swinburne University of Technology, Lilydale60 LBL200 Company Law Semester 1, 2012