LBL200 Learning Guide Sem 1 2012

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Company Law

LBL200

Michael Psaltis


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Swinburne University of Technology, Lilydale 3LBL200 Company LawSemester 1, 2012

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


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4 Swinburne University of Technology, Lilydale4LBL200 Company LawSemester 1, 2012

UNIT INFORMATION

Introduction

LBL 200 Company Law is a compulsory unit for students completingan Accounting major and requiring entry into the membership of theAustralian Society of Certified Practicing Accountants or the Instituteof Chartered Accountants in Australia. The unit however may also beof interest to students studying majors other than Accounting, or aBusiness Law Minor. It provides an insight into the choice ofbusiness structure, but particularly focuses on the regulation ofcompanies in Australia.

The aim of this unit is to introduce you to the different forms ofbusiness structure available and the legal regulation of each. Thecorporate form of structure is the primary focus due to its increasing

use and the particular legal personality that it possesses. Wherepossible throughout the unit, practical application of the issues willbe emphasised and you will be encouraged to find examples ofcorporate law issues in the media. It is important that you understandthat company law is undergoing a period of change and that thesechanges are reported differently by different media of which there aremany, 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 thereasons behind these difficulties are many and varied. Most problemstend to stem from students failing to understand that the study of lawbased units requires a different approach to most other units. The areaof company law provides even more problems for students due to therapid changes in the commercial environment and a major reformprogram in recent years in the area of corporate law.

When involved in the study of many units, students tend to find amethod of studying that suits them best. However many students failto realise that a single study method may not be the most suitable forall 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 findlegal units difficult. In law based units, it is not as easy to clearlydefine topic areas. This is because a number of topics often impact oneach other and legal problems may cover a number of topic areas.

2. Answering a Legal ProblemPerhaps the most crucial issue that students need to address early intheir legal study is how to answer legal problems. When a lecturerasks 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", butrather on whether the student can understand the application of thelaw given certain facts or possible scenarios. The conclusion is not asignificant part of the answer. This is often quite a foreign concept tostudents studying law for the first time.

When answering legal problems it is essential that studentsunderstand that most problems arise out of a dispute between twoparties, both of who believe that they are right. It is thereforeimportant to discuss the positions of both parties and how the lawwould be applied given the views of the respective parties. Even ifone party appears to obviously be wrong, students must considertheir position and the possible arguments that may be put forward bythat party.

A suggested approach to legal problem solving is outlined below.


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Suggested structure for legal answers

There are numerous methods that students can use to assist theiranswering legal problems. However it is essential that every studentfind the technique that suits them best. Whatever technique is used,

an answer to a situation based legal problem should contain:

(a) Issue(b) Law(c) Discussion/analysis and application(d) Conclusion(a) Legal Issue: An answer must first identify the legal issue at thecentre of the question. In some cases there may be more than oneissue. However in most instances there will be one major issue withpotentially a number of smaller but related issues. It is essential thatthe issue is clearly identified and that all further discussion in the

answer relates to the fact situation and its impact on the issue. Byidentifying at the beginning the issue being discussed, then the rest ofthe answer should stay focused and be less likely to stray on to pointsthat are not relevant to the problem.

(b) Law: Any answer to a legal problem must be based on theappropriate legal principle. This may come from either statute orcommon law, and often a case may need to be cited to explain thecourt's interpretation of the statutory provisions. This is particularlyessential in Company Law as the judicial interpretation of theCorporations Act provisions often shed light on the reasons behindthe statute.

(c) Discussion/Analysis and application: The most essentialelement of an answer to a legal problem is the linkage of the issueand the law. This should form the major part of any answer. Thediscussion of the application of the legal principles to the situation athand is the part of the answer that shows the level of a student'sunderstanding of the underlying issues and the foundations uponwhich the law is based. It is therefore this part of any answer thatdistinguishes a good answer from an average answer.

If the question requires you to advise one of the parties, it isimportant to anticipate the other partys arguments and responses.Such an approach is logical. Whenever a case proceeds to court, abarrister (a lawyer specialising in court work) will not simply rely onthe argument that he/she considers is most likely to succeed. He/shewill put forward all arguments that have some potential to succeed.

What is most importantis that you indicate that you are able to applyprinciples of law to the facts of the given problem and to drawconclusions on the issues raised. In other words, you need to explainwhy the law applies to the facts.

In addition to advising about both partys legal arguments, you might

also be able to includepractical advice; for example, the person may


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need to immediately remove a particular director by following the appropriateprocess to limit liability of other directors.

(d) Conclusion: A conclusion rounds out an answer, but it should not beany more than a collation of the points discussed and summary of the likelyoutcome - which is merely your opinion. The conclusion is not as importantas the discussion and analysis.

Note:If the question raises several legal issues, you can divide the issuesand go through (a),(b) and (c) for each issue before repeating the processuntil all legal issues are dealt with. Continue until you have covered all thelegal issues you can identify. Then, and only then, should you present yourfinal 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 inturn.

It is not compulsory for you to use the suggested structure but thestructure that you do use must be logical and well-structured.

DO NOT write long introductions and conclusions. You may wish tohighlight in your answer important aspects of the facts, but there is noneed to repeat all the facts of the problem.

DO NOT use legalese or overly complicated language; for example,aforementioned, thereafter, whereupon and moreover shouldbe avoided.

You must refer to the law (that is legislation and/or precedent) in youranswer, otherwise it is difficult to pass.

See para 2-400 of the textbookHow 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 companyregistered by him for the purpose of carrying on that business. Whenthe company was formed Bill, his wife and five children all receivedone share each. Bill received additional 20,000 shares and $10,000 indebentures in consideration for the bear hunting business. Bill wasalso appointed the managing director and had effective control of thecompany as he could out vote all other members.

Bear Hunting Pty Ltd suffered severe financial difficulties and aliquidator was appointed to wind up its affairs. The liquidatordetermined that there were funds available to pay Bill the amountowing on the debentures, however there would be insufficient funds

to pay the debts owing to the unsecured creditors. The liquidatorsought a court order to avoid payment to Bill on the basis that thecompany was merely a sham and that the business was in realityBill's.

Advise Bill of his legal position.

3.2 Things to AvoidThe most obvious point to be aware of about this question is that it isbased on the previous case ofSalomon v Salomon and Co Ltd[1897]AC 22. However, the worst thing that a student can do is to make theassumption that the answer will be identical to the previous case. Thefollowing needs to be considered:

Are there any differences between the facts that may lead to adifferent conclusion?

Are then any statutory provisions that exist now that may modifya court's decision to the situation?

Are there any recent cases that highlight the same issues or havegiven 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 beforediscussing the issues. This is sometimes difficult when the question isso obviously based on a previous case situation. It is essential thatstudents don't start their answers with a sentence such as; "Billshould sue because he will win". Starting any answer in this wayprecludes legal argument and locks the student in to trying to justifytheir conclusion for the remainder of their answer.

3.3 Things to DoThe 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 meanthat the arguments of the liquidator should be ignored

3.4 Example AnswerIssue This question deals with Corporations Act, in particular the issue

of a company being a separate legal entity from its owners. In thisproblem the issue is whether Bill the individual who owns themajority of shares in the company is in fact separate to thecompany, Bear Hunting Ltd.

Law In the case of Salomon v Salomon and Co Ltd the courtdetermined that a company is a separate legal entity to that of theshareholders (owners). Under the Corporations Act, a companyonce it is registered (s. 119) is given the legal capacity and powers

of an individual (s. 124). These powers may be restricted by thecompany's constitution, but otherwise is broad (s. 124).

Discussion

Conclusion

Bill would argue that he has complied with the requirements forregistering a company and therefore a body corporate has comeinto existence from the date of registration (s119). He would alsoargue that Bear is able to purchase his business as a company hasthe power of an individual (s124). Further, Bear can enter into aloan agreement with Bill and owe him $10,000. This is supportedby Lees case.

Finally he would argue that the legal principle from Salomon vSalomon effectively means that Bill, the individual, and thecompany, Bear Hunting Ltd have two separate legal identities.Each person is able to contract, sue and be sued, and acquire, holdand sell property.

The liquidator would try to argue that Bill and Bear are notseparate entities and that Bear is effectively a one-mancompany. He would also try to distinguish Salomons case inorder for the corporate veil to be lifted. Bill would counter byarguing that even if he formed the company to take advantage ofthe limited liability of its members, this is permitted by the law (as

evidenced by Salomons case).

Therefore, given the decision from Salomon's case and theCorporations Act, the company is able to enter into a contract withBill to purchase his business and issue Bill a debenture, regardlessof the fact that Bill is also the majority shareholder. As such, theliquidator must follow the normal winding up procedure, and hasno basis for seeking a court order to avoid payment to Bill (thesecured creditor) in favour of the other creditors.


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Reading List

There are numerous texts that provide information on how to studylaw; 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 businessorganisations.

Explain the respective advantages and disadvantages of differenttypes 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 rightsand duties of partners.

Demonstrate knowledge of the issues in practical situations.

Content

1. Alternative Structures1.1. Sole Trader1.2. Partnership1.3. Joint Venture1.4. Trust1.5. Company1.6. Other types of businessesBusiness name, licensing and other regulatory requirements.

2. Partnerships2.1. Definition2.2. Liability in Contract and Tort2.3. Rights and Liabilities of Partners2.4. 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 tofail; they fail to plan' holds true and many people discover at a laterstage that their business would have been better suited to a differentbusiness structure. Financial loss and heartache can often be avoidedwith a little planning and forethought.

In this module we compare different types of business structures andreview each given a set basis for comparison. After looking briefly ata number of business structures we then look in detail at the lawrelating to partnerships. Although there is not a set text for this unit,you will need to familiarise yourself with the provisions of thePartnership 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 onlymajor change in this area of law over recent years has been theintroduction of a limited partnership, which is not covered in detail inthis unit. As such you should not be concerned about using a text thatis 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, 3rdEd, 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, ThompsonReuter, Sydney.

Vermeesh, R.B. & Lindgren, K.E., Business Law of Australia, 11th

Ed, Butterworths, Sydney.


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Topic 1.1 - Business OrganisationsAlternative

Structures

Objectives


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 Trader2.2. Partnership2.3. Joint Venture2.4. Trust2.5. Company2.6. Other types of businesses

3. Business name, licensing and other regulatory requirements.


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1. Introduction

1.1Why 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 relationsthrough a company will not suit everyones business, financial and family needs.

One of the most common issues which clients of legal and accounting advisors willseek 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 andlegal 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 businessstructures, it is essential that we compare like with like. To assist this, each of thebusiness organisation alternatives should be reviewed on the basis of the same pointsof comparison. When comparing alternative forms of business organisations we willreview them on the basis of:

1. Nature of Structure2. Governing Law3. Establishment4. Continuity of Existence5. Limitation of Liability6. Control7. Formalities8. Admission of New Investors9. Ability to Sell the Business10.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 withcomplete control and ownership of the business organisation. Thereare very few formal requirements for the operation of a business as asole trader. However the limitations faced are often difficult toovercome.


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2.1.2 Governing Law

There are no specific statutes that regulate the way in which a soletrader operates. However there may be industry or vocation specificlegislation that must be taken into account.

The Business Names Act 1962 (Vic) does require a sole trader toregister the business name if it is different from the name of theowner (see discussion on business name and other regulatory licencerequirement p 26 below). Other legal regulations that must beconsidered include taxation, trade practices, industrial relations andworkers' compensation legislation.

2.1.3 Establishment

As there are no specific regulatory requirements, the establishment ofa sole trader business may involve no more than setting up a stall at alocal 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, thenthe business will come to an end. Expansion of the businessenterprise can also be difficult and lead to a shorter life. Sole tradershave limited time, funds and expertise, and as such the business mayremain small and become uncompetitive against others with greaterresources available to them.

2.1.5 Limitation of Liability

Liability of a sole trader isunlimited and creditors will have accessto personal assets to settle business debts. Insurance may be used asa buffer against this. However it is often expensive and sometimesnot seen as being cost effective.

2.1.6 Control

Control is not an issue to the sole trader. Whilst the individual canemploy staff, he or she owns and normally manages the business.Outside influences will not in general effect the internal operations ofthe business and future directions. However the problem then exists

that there is also no assistance available with business decisionmaking, limitations on expertise and the inability to shareresponsibility for the organisation.

2.1.7 Formalities

As noted above, there are few formalities for the sole trader. Themain issue facing the sole trader is the registration of a business nameif the business is to be conducted under a name other than that of theowner'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 tradingbusiness, 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 vocationregulations; there are no specific restrictions. Finance from externalsources is, in theory, not limited However raising finance issometimes difficult due to lenders concerns regarding repayment(as, indeed, would be the case regardless of the particular businessstructure).

If the sole trader introduces new parties, this will dissolve the initialstructure and undermine the continuity of business relations. If thebusiness goodwill is personal, attaching to the sole trader, theintroduction 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 soletrader. However, again industry and vocational regulations mayapply. The main factor determining the ability to sell the business isin fact the attractiveness of the business to other parties. This wouldclearly 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 incapacityof the sole trader (unlike a company which has perpetual successionin that it exists until deregistration). Whilst the goodwill andbusiness name can be passed on to a spouse or other beneficiary onthe death of the sole trader, there may be taxation consequencesattaching to the transfers (e.g. stamp duty and capital gains tax) andcontractual relations will also have be renegotiated in the newtraders name.

2.2 Partnership

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


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

2.2.2 Governing Law

The governing law in relation to partnerships is the Partnership Act1958 (Vic). As with the sole trader, partnerships must register a

business name if it is different from the names of the owners andlegal regulation in the areas of, amongst others, taxation, trade


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practices, industrial relations and workers' compensation must betaken into consideration (as, indeed, does any business structurechosen).

2.2.3 Establishment

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


A partnership ceases to exist if any of the partners leaves or dies.When such a situation occurs, the remaining partners may wish tocontinue the business, but will need to do so under a new partnership.

The Partnership Act details the responsibility of partners after thedissolution of a partnership.


Like the sole trader, the liability of a partnership is unlimited. Thismeans that creditors will have access of each of the partner'spersonal 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 agreementbetween the partners to the contrary). In some cases unanimousdecisions are required under the Act and this may lead to friction anddissent between the partners. It is therefore best if a partnershipagreement sets out the process for resolving disputes.

2.2.7 Formalities

As noted previously, a partnership may be formed by formal orinformal means. It is best if the partners document an agreementregarding 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 abusiness name if the business is to be conducted under a name otherthan that of the owner's.Under the taxation legislation, persons carrying on a partnership arerequired to submit a partnership taxation return. Partnerships arehowever not taxed but each partners share of the partnership earningis included in their taxation return. The partners are likely to berequired to pay (PAYG) tax on the basis of expected income.


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A change in the membership of a partnership effectively means thedissolution 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 alimitation on the size of a partnership to 20 people. There arehowever some exceptions.

Finance from external sources is in general not limited (subject tolenders normal prudential requirements regarding security andcapacity to repay).


Whilst there are no specific restrictions on the sale of a business by apartnership, the terms of the partnership agreement will need to be

considered. Industry and vocational regulations may apply in somecases.


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

2.3 Joint Venture


A joint venture has been described as a commercial combination incommon by way of contract for the individual gain of the partiesgenerally confined to a particular undertaking. In other words, a jointventure is where people agree to complete a task by combining theirresources. However they do not form a partnership and the gain is forthe individual party. The participants in a joint venture usually ownthe assets individually and the costs are born by the participantsseparately. A joint venture is based merely on the parties contractualrelations. 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 andsometimes in property development, entertainment and broadcasting.

2.3.2 Governing Law

No specific law applies in relation to joint ventures. However if thejoint 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 partiesdescription 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 courta partnership

Again in the case of joint ventures, the individual participants in theventure will need to be aware of legal regulation in various areas thatimpact on most businesses regardless of the structure chosen.

2.3.3 Establishment

There are no formal requirements for the establishment of a jointventure. However it is advisable that the participants document theiragreement. Generally speaking, joint ventures are inexpensive tocreate, maintain and dissolve. The individualization of profits andlosses also provides joint venture parties with the benefit of offsettingjoint venture losses against their personal income from other sources,including from other joint ventures. If a venture (such as a longerterm mining venture) is likely to incur losses in its earlier years, thisaspect of the taxation of joint venture income makes it a suitablebusiness vehicle.


A joint venture only exists as long as the venture continues and assuch has a limited life (it does not have perpetual succession like acompany).


In contrast to partnerships, a joint venture also provides the benefit ofindividualising obligations and liabilities. This is particularlysuitable when the parties provide different degrees of financial input.The independence of the joint venture has the advantage of enablingone party to distance him or herself from the others contractualand/or legal obligations. Members of a joint venture are severallyliable for the debts of the venture unless they have made anagreement to the contrary, unlike a partnership where the parties arejointly and severally liable for the debts of the partnership.

But remember, where a joint venture is deemed to be a partnershipthen the Partnership Actprovisions apply - see Canny Gabriel case .

2.3.6 Control

A joint venture agreement (contract) should contain the details of theway in which the venture is controlled. In most cases a managementcommittee will be appointed and will effectively control theoperations of the venture.

2.3.7 Formalities

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


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


This is often difficult in the case of joint ventures However theagreement between the participants should cover this situation. Asthe 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 theothers.


As noted above, joint ventures are usually entered into for a specificperiod of time or with a specific desired result of the venture. As

debts are separate and in most cases property is held separately, thendissolution of the joint venture is not difficult.

2.4 Trust


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

The most essential element of a trust is that of the fiduciaryrelationship between the trustee and the beneficiary where theformer is bound to act in good faith and in the interests of thebeneficiary. The trustee has legal ownership of trust property,whereas the beneficial title, the right to enjoy the property (or theproceeds which arise), rests with the beneficiary.

The trust itself cannot hold property or enter into contracts (unlike acompany). The trustee must undertake these legal relations on behalfof the beneficiary.

There are many forms of trust. For example they can be express orimplied, constructive, fixed (where the beneficiaries interests arefixed) or discretionary (where the trustee has a discretion as to whowill receive income/capital and/or the amount of that distribution).

Sometimes companies and trust structures can be combined byappointing a company as trustee (this is also known as a corporatetrustee).

Settlor Trustee Beneficiarytransfers property for the benefit of


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There is no separate legal entity in a trust. Unlike a company, a trustcannot 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 thatdocument 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 inwriting and payment of stamp duty. A discretionary trust may beestablished in a number of ways, but does require a deed ofsettlement 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 taxationobligations by income splitting or dividing trust income betweenthe beneficiaries. Generally speaking this is no longer permitted as itcontrary to anti-tax avoidance provisions contained in Part IVA ofthe Income Tax Assessment Act 1936 (Cth). Further taxationimplications of trusts will not be explored in this Unit.


The death or disability of an individual beneficiary will have noimpact on the continuity of the trust - unlike a partnership which isdissolved upon the death of a partner. The trust deed may include thepower to re-allocate the deceased beneficiary's share or alternativelythe deed may allow for transfer of the deceasedbeneficiarys interestunder his or her estate.

However the death of the trustee does cause some problems. As atrust is based on the fiduciary duty of the trustee, the administrator ofthe trustee's affairs has no power to take on the duty unless the trustdeed 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 thecompany would not impact at all on the trust as a company isseparate legal entity that exists irrespective of the officers ofshareholders of the company.


The trustee is normally personally liable for liabilities associated withthe trust as the trust is not a separate legal entity. However, liabilitymay 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 mustact within the boundaries of the trust deed, and can be liable if theybreach the duty of good faith owed to the beneficiaries. Thebeneficiaries are not entitled to direct the trustee in the exercise of

their duties.

Effectively the beneficiaries of a trust are literally powerless. Whilstthe trustee is subject to fiduciary duties and any directions in the trustdeed, trustees are not subject to the beneficiarys instructions. Thebeneficiaries have no right to partake in the day-to-dayadministration of trust property. In order to ensure that a personalmay participate in management of the affairs, it may be preferable toform 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 andliabilities of the trustee and will in most cases give discretion to thetrustee as to the application of income earned by the trust.


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


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


A trust may be wound up either by the distribution of trust assets tothe beneficiaries, release of trust obligations by court order, or sale ofthe trust property.

Unlike a company which remains in existence for perpetuity (or untilit is deregistered), a trust cannot continue indefinitely. Under

common law, the rule of perpetuities provided that trust propertymust vest absolutely to the beneficiaries within the life of anominated person plus 21 years. For example, a trust may appoint anamed beneficiary or the settlors last living child as the nominatedperson. Common law has been legislatively modified differently ineach 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 onlygain a broad overview here.

A company is a registered legal entity with the right to trade in itsown right. Upon registration, the company becomes a separate legal


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entity. It has powers of an individual It can hold property, contractand 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 andInvestments Commission (ASIC). All companies are regulated bythe Corporations Act.

There are public (Ltd.) and proprietary companies (Pty. Ltd.).Liability of shareholders of a company will be dictated by the natureof the company; for example, a company can be limited or unlimitedand there are also no-liability companies.

2.6 Other types of businesses

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

Limited PartnershipsIn some States, partnerships may be registered as limitedpartnerships. See Part 3 of the Partnership Act1958 (Vic). Inlimited partnerships, the partners are divided into two groups; generalpartners and limited partners. General partners have the same rightsand liabilities as a normal partnership. Limited partners have no rightto participate in the managements of the partnership and may limitedtheir liability to a certain amount.

FranchisesA franchise is a contract where expertise, knowledge, method ofoperation, and/or intellectual property rights are granted by afranchisor to a franchisee for a period of time. A franchise involvesa working, ongoing, long term relationship with mutual obligations,co-operation and teamwork to ensure benefit to both parties. Thefranchisee sells the products or services under the control and in thename of the franchisor. A franchise is one way for small businessesto compete effectively against larger corporations.

There are approximately 700 different franchise systems andapproximately 50,000 franchisees in Australia, with turnoverestimated in excess of $82b (Latimer, P, Australian Business Law,28th ed p 751).

Incorporated and Unincorporated AssociationsAn association is a group of people with a common interest orpurpose, with a degree of organisation and continuity with some clearcriteria or method to identify its members. Making a profit must notbe an object of an association, but if profit is made incidentally that is

permitted. An association may be incorporated or unincorporatedand there are differences between the liabilities of membersdepending 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 tradesin 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 anyvariation such as Joe Blow and Sons or Blows Accountants willrequire 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 businessname in this situation.

If it is required, a business name must be registered in each state in which itoperates and there should be an address for service within each state that itoperates. Registration of a business name does not prevent someone elseregistering the name in another state (where the name is not registered) -unlike the registration of a company name or trade mark which apply acrossAustralia once registered.

Further information about business name registration in Victoria can beobtained from Consumer Affairs Victoria athttp://www.consumer.vic.gov.au .

This website also has links to other government registration bodies aroundAustralia.

Regardless of the type of legal entity that is used (a sole trader, partnership,company etc.), most businesses require some form of licensing fromCommonwealth, State and/or local governments. The type of licensingrequired depends on what type of business is being conducted.

For example, operating a restaurant might require the followinglicences:-

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, taxationand superannuation)

pavement seating (local council permission) etc. etc.Operating a newsagent, supermarket or a used car yard would have verydifferent regulatory and licensing requirements.

The Australian Business Licence Information Service website at

(www.business.channel.vic.gov.au/BLIS ) and the Business in Victoria
http://www.consumer.vic.gov.au/http://www.consumer.vic.gov.au/http://www.consumer.vic.gov.au/http://www.business.channel.vic.gov.au/BLIShttp://www.business.channel.vic.gov.au/BLIShttp://www.business.channel.vic.gov.au/BLIShttp://www.business.channel.vic.gov.au/BLIShttp://www.consumer.vic.gov.au/


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website (www.business.vic.gov.au) is also able to provide information as toformal requirements at the various government levels.

There may also be practising certificate or other type of industry membershiprequirements. For example; Practising accountants and solicitors mustcomply with requirements of CPA Australia (seehttp://www.cpaonline.com.au ) and the Law Institute of Victoria (seehttp://www.liv.asn.au) respectively. Accountants and lawyers must alsoobtain an appropriate level of professional indemnity insurance before theyare able to obtain a practising certificate or licence to operate.

Issues such as intellectual property rights might also be relevant. If there isan identifying feature of the property or service; for example, a name orlogo, then the issue of trade marks, designs, patents etc. should be considered(see IP Australia athttp://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 ordeposits of waste to the atmosphere, land or water, where noise is

omitted or if it handles ozone depleting substances - seeEnvironmentProtection Authority atwww.epa.vic.gov.au

ii. if the business has employees, issues such as Workcover,superannuation, fringe benefits tax, payroll tax and/or PAYG tax, andGST may be relevant- see Australian Taxation Office and

Department of Employment and Workplace Relations for moreinformation. 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 preferableover others?
http://www.business.vic.gov.au/http://www.business.vic.gov.au/http://www.business.vic.gov.au/http://www.cpaonline.com.au/http://www.cpaonline.com.au/http://www.liv.com.au/http://www.liv.com.au/http://www.ipaustralia.gov.au/http://www.ipaustralia.gov.au/http://www.ipaustralia.gov.au/http://www.epa.vic.gov.au/http://www.epa.vic.gov.au/http://www.epa.vic.gov.au/http://www.epa.vic.gov.au/http://www.ipaustralia.gov.au/http://www.liv.com.au/http://www.cpaonline.com.au/http://www.business.vic.gov.au/


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Remember, it is not unusual for businesses to change structures as the businessevolves. 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 canraise finance from the public.

The public company is then listed on the stock exchange and share issues ordebentures are made.

If successful, the public company might then go global and develop into agroup of companies having subsidiaries locally and overseas.

As we have seen, there are many different types of business organisations and eachhas 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 thefollowing business structures:

Sole trader Partnership Joint Venture Trust Corporation

1.1.2 What factors need to be considered when determiningwhich business structure best suits a particular business

venture?

1.1.3 What are the risks, if any, facing a sole trader?

1.1.4 Why is a partnership often said to be a simple extensionof the sole trader form of business ownership?

1.1.5 What is the essential difference between a trust and apartnership?

1.1.6 How do joint ventures and partnerships differ?


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Topic 1.2 - Partnerships

Objectives


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. Definition2. Limitations on partnerships3. Liability to Outsiders in Contract and Tort4. Rights and Liabilities of Partners to Each Other5. Dissolution of a Partnership

Topic Outline

In this topic outline reference will be made to various sections of thePartnership Act. The relevant sections have been reproduced in thesematerials and can be found commencing at p.36. For example, a

reference to s.5 means Section 5 of the Partnership Act. Further, areference to the Act means the Partnership Act

1. Definition

A partnership is determined to exist where "two or more personscarry on a business in common with a view to profit" (s.5). It istherefore essential that the following three elements exist for there tobe a partnership:

1. carrying on a business2. in common3.

view to profit

Once these three elements are shown, then a partnership exists underthe Act and the provisions of the Act apply.

Carrying on a business

'Business' is described by the Act as including "every tradeoccupation and profession". However the courts have needed todecide whether carrying on a business includes hobbies and singleventures.

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 businessrequired a succession of acts and did not apply in the case of a lone


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venture. However, a single venture may create a partnership incircumstances where the facts of the case show that was the intentionof the parties. This would normally require joint views on share ofprofits, joint decision making and joint responsibility for thecontracts and arrangements entered into.

Smith v Anderson (1880) 15 Ch D 247A trust was set up to buy shares in various companies tobe held for investors with the funds they deposited. Theinvestors were issued with certificates in the trust (likeunits in a modern unit trust) which gave them certainlegal rights including the right to interest. One investorapplied to have the trust wound up alleging that becausethere were more than 20 investors, the trust was anillegal partnership.

Court held: Carrying on a business implies repetition ofacts and excludes an association set up to do one act which isnever to be repeated. In this case, the investors claimfailed. The one act was to buy the shares on trust. Eventhough the investors in the trust had a common interest, therewere no mutual rights or obligations between them as therewould be with partners and they were not carrying onbusiness 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 theparties must be involved in the same business. Section 6 gives someindication of how to determine whether a business is being carried onin 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 itmust make a profit, but merely that the parties to the partnership musthave the profit motive as the original purpose for forming thepartnership.

2. Limitations on a partnershipLegislation imposes certain limitations on a partnership. Under the Corporations Act2001 (Cth) s 115, the size of partnerships that can be formed for profit-makingpurposes is restricted to 20 persons, with the following exceptions:-

(a) An accounting practice must have not more than 1,000 partners, a legalpractice may have 400 partners;

(b) Architects, pharmaceutical chemists and veterinary surgeons may havepartnerships of no more than 100 people;


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(c) Actuaries, medical practitioners, patent and trade mark attorneys, andstockbrokers may form partnerships of not more than 50 partners.

3. Liability to Outsiders in Contract and TortThe relationship between the partners is one based on contract. Theterms of the contract may be expressly created, implied by actions oralternatively created by the provisions of the Act.

As noted above the partnership is not a separate legal entity to thepartners themselves. As such, the partnership cannot contract, butrather under partnership law an act of one partner can amount to anact of the partnership.The liability of the partnership (ie all the partners) for a contractentered into by one of them with a third party on behalf of thepartnership is primarily determined by s.9 (agency by estoppel)

The liability of the partnership (ie all the partners) for the wrongfulacts (eg negligence, misappropriation of money etc) of one of them isdetermined by the principles of vicarious liability (see s.14 and 15)

The nature of that liability of the partners to outsiders dealing withthe partnership is determined by the Act. In general terms the liabilityis 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 primarilybased on contract and therefore the rights liabilities of partners toeach other is usually determined in the first instance by referring tothe partnership agreement (whether oral or in writing).

However, in the absence of an agreement between the partners on aparticular 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 inDivision 4 of the Act. Due to the partnership not being a legal entity,any change in the composition of the partnership leads to dissolutionof 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 2Latimer, Ch 10.Vermeesh & Lindgren, Ch 21.

Tutorial Questions - Week 3

1.2.1 June and Jenny have become increasingly concerned about the number of peoplebegging 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 hungrypeople in the inner city.A friend of June and Jenny has told them to be careful because they might be classed as apartnership 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 aweekly wage, plus commission of 20% of the profits. After the business failed, one of thecreditors 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 inteaching classical music. John orders in writing, using the firms letterhead, $100,000 ofexpensive musical equipment. Because of previous experiences, he has been forbidden by hispartners to make any orders for the firm. But this time John thinks he is on a winner andbelieves his partners will ratify his actions. When the equipment is delivered, the otherpartners threaten to expel John from the partnership and immediately send the equipmentback to the manufacturer with a covering letter advising that as John had no authority to buythe 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 formodern music but not for classical music?c. Would it make any difference if the equipment was IT equipment, ata bargain but not useful for music?d. Assume that the supplier can sue. Assume that the partnershipproperty 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 whatamount?

1.2.4 John, Paul, George and Ringo decide to form a partnership to carry on a business inteaching classical music. John wants to expand into teaching some new classical musicinstruments 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 statuterequire to occur when a partner leaves the partnership?

Review Questions

What factors are important when determining whether a particular business isstructured 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 partnershipagreement in relation to the splitting of profits, sharing of losses, and interest onadvances.


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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 RoyalCharter

is not a partnership within the meaning of this Act.

6.Rules for determining existence of partnershipIn determining whether a partnership does or does not exist regard shall be had to thefollowing rules

(1) Joint tenancy tenancy in common joint property common property or partownership does not of itself create a partnership as to anything so held or ownedwhether the tenants or owners do or do not share any profits made by the usethereof.

(2) The sharing of gross returns does not of itself create a partnership whether thepersons sharing such returns have or have not a joint or common right or interestin 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 facieevidence that that person is a partner in the business, but the receipt of such ashare or of a payment contingent on or varying with the profits of a businessdoes 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 instalmentsor otherwise out of the accruing profits of a business does not of itselfmake 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 engagedin a business by a share of the profits of the business does not of itselfmake 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 byway 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 apartner in the business or liable as such;

(d) the advance of money by way of loan to a person engaged or about toengage in any business on a contract with that person that the lender shallreceive a rate of interest varying with the profits or shall receive a share ofthe profits arising from carrying on the business does not of itself makethe lender a partner with the person or persons carrying on the business orliable as such: Provided that the contract is in writing and signed by or onbehalf of all the parties thereto;

(e) a person receiving by way of annuity or otherwise a portion of the profitsof a business in consideration of the sale by that person of the goodwill ofthe 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 thisAct called collectively a firm and the name under which their business is carried on iscalled the firm-name.

9.Power of partner to bind the firmEvery 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 carryingon in the usual way business of the kind carried on by the firm of which he is amember bind the firm and his partners, unless the partner so acting has in fact noauthority to act for the firm in the particular matter and the person with whom he isdealing either knows that he has no authority or does not know or believe him to be apartner.

10.Partners bound by acts on behalf of firmAn act or instrument relating to the business of the firm and done or executed in thefirm-name or in any other manner showing an intention to bind the firm by any personthereto 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 partnerIf it has been agreed between the partners that any restriction shall be placed on thepower of any one or more of them to bind the firm no act done in contravention of theagreement is binding on the firm with respect to persons having notice of theagreement.

13.Liability of partnersEvery partner in a firm is liable jointly with the other partners for all debts andobligations of the firm incurred while he is a partner, and after his death his estate isalso severally liable in a due course of administration for such debts and obligations sofar 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 co-partners loss or injury is caused to any person not being a partner in the firm or anypenalty is incurred the firm is liable therefor to the same extent as the partner so actingor omitting to act.

(2) For the purposes of sub-section (1), a partner who commits a wrongful act or omissionas a director of a body corporate, within the meaning of the Corporations Law, is not tobe taken to be acting in the ordinary course of the business of the firm or with theauthority of his or her co-partners only because

(a)

the partner obtained the agreement or authority of his or her co-partners, or someof 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 corporateforms 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 themoney 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 thirdperson and the money or property so received is misapplied by one or more ofthe 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 severalEvery partner is liable jointly with his co-partners and also severally for everything forwhich the firm while he is a partner therein becomes liable under either of the last twopreceding 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 asa partner to any one who has on the faith of any such representation given credit to thefirm whether the representation has or has not been made or communicated to theperson so giving credit by or with the knowledge of the apparent partner making therepresentation or suffering it to be made.

(2) Where after a partner's death the partnership business is continued in the old firm-namethe continued use of that name or of the deceased partner's name as part thereof shallnot of itself make his executors or administrators estate or effects liable for anypartnership 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 partnershipdebts or obligations incurred before his retirement.

(3) A retiring partner may be discharged from any existing liabilities by an agreement tothat effect between himself and the members of the firm as newly constituted and thecreditors and this agreement may be either express or inferred as a fact from the courseof dealing between the creditors and the firm as newly constituted.

23. Variation by consent of terms of partnershipThe mutual rights and duties of partners whether ascertained by agreement or definedby this Act may be varied by the consent of all the partners, and such consent may beeither 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 thepurposes and in the course of the partnership business are called in this Act partnershipproperty and must be held and applied by the partners exclusively for the purposes ofthe partnership and in accordance with the partnership agreement.

(2) The legal estate or interest in any land which belongs to the partnership shall devolveaccording 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 theland under this section.

(3) Where co-owners of an estate or interest in any land not being itself partnershipproperty are partners as to profits made by the use of that land or estate, and purchaseother land or estate out of the profits to be used in like manner, the land or estate sopurchased belongs to them in the absence of an agreement to the contrary not aspartners but as co-owners for the same respective estates and interests as are held bythem in the land or estate first mentioned at the date of the purchase.

25.Property bought with partnership moneyUnless the contrary intention appears property bought with money belonging to thefirm 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 agreementThe interest of partners in the partnership property and their rights and duties inrelation to the partnership shall be determined subject to any agreement express orimplied between the partners by the following rules:

(1) All the partners are entitled to share equally in the capital and profits of thebusiness and must contribute equally towards the losses whether of capital orotherwise sustained by the firm.

(2) The firm must indemnify every partner in respect of payments made andpersonal 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 oradvance beyond the amount of capital which he has agreed to subscribe isentitled to interest at the rate of Seven per centum per annum from the date ofthe payment or advance.

(4) A partner is not entitled before the ascertainment of profits to interest on thecapital 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 existingpartners.

(8) Any difference arising as to ordinary matters connected with the partnershipbusiness may be decided by a majority of the partners but no change may bemade 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 hethinks fit have access to and inspect and copy any of them.

29.Expulsion of partnerNo majority of the partners can expel any partner unless a power to do so has beenconferred 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 writingsigned 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 affectingthe 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 fromany use by him of the partnership property name or business connexion.

(2) This section applies also to transactions undertaken after a partnership has beendissolved 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 deceasedpartner.

34.Duty of partner not to compete with firmIf a partner without the consent of the other partners carries on any business of thesame 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 noticeSubject 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 orothers of his intention to dissolve the partnership.

In the last-mentioned case the partnership is dissolved as from the date mentioned inthe 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 suffershis share of the partnership property to be charged under this Act for his separate debt.

38.Dissolution by illegality of partnershipA partnership is in every case dissolved by the happening of any event which makes itunlawful for the business of the firm to be carried on or for the members of the firm tocarry it on in partnership.

39.Dissolution by the courtOn application by a partner the court may decree a dissolution of the partnership in anyof the following cases

(a) when a partner is found to be mentally ill, in which case the application may bemade as well on behalf of that partner by his or her guardian or administrator ifappointed under the Guardianship and Administration Act 1986 or other personhaving title to intervene as by any other partner;

(b) when a partner other than the partner suing becomes in any other waypermanently 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 inthe opinion of the court regard being had to the nature of the business iscalculated to prejudicially affect the carrying on of the business;

(d) when a partner other than the partner suing wilfully or persistently commits abreach of the partnership agreement or otherwise so conducts himself in mattersrelating to the partnership business that it is not reasonably practicable for theother 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 treatall apparent members of the old firm as still being members of the firm until he hasnotice of the change.

(2) An advertisement in the Government Gazette and in at least one newspaper circulatingin each district in which the firm carries on business as to a firm whose principal placeof business is in Victoria shall be notice as to persons who had not dealings with thefirm 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 nothaving been known to the person dealing with the firm to be a partner retires from thefirm is not liable for partnership debts contracted after the date of the death bankruptcyor retirement respectively.

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

42. Continuing authority of partners for purposes of winding upAfter the dissolution of a partnership the authority of each partner to bind the firm andthe other rights and obligations of the partners continue notwithstanding the dissolutionso far as may be necessary to wind up the affairs of the partnership and to completetransactions 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 becomebankrupt but this proviso does not affect the liability of any person who has after thebankruptcy represented himself or knowingly suffered himself to be represented as apartner of the bankrupt.

43.Rights of partners as to application of partnership propertyOn the dissolution of a partnership every partner is entitled as against the other partnersin the firm and all persons claiming through them in respect of their interests aspartners to have the property of the partnership applied in payment of the debts andliabilities of the firm and to have the surplus assets after such payment applied inpayment of what may be due to the partners respectively after deducting what may bedue from them as partners to the firm, and for that purpose any partner or hisrepresentatives may on the termination of the partnership apply to the court to wind upthe business and affairs of the firm.

46. Share of profits made after dissolutionWhere any member of a firm has died or otherwise ceased to be a partner and thesurviving or continuing partners carry on the business of the firm with its capital orassets without any final settlement of accounts as between the firm and the outgoingpartner or his estate then in the absence of any agreement to the contrary the outgoingpartner or his estate is entitled at the option of himself or his representatives to suchshare of the profits made since the dissolution as the court may find to be attributableto the use of his share of the partnership assets or to interest at the rate of seven percentum 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 orcontinuing partners to purchase the interest of a deceased or outgoing partner and thatoption is duly exercised the estate of the deceased partner or the outgoing partner or hisestate as the case may be is not entitled to any further or other share of profits, but ifany partner assuming to act in exercise of the option does not in all material respectscomply with the terms thereof he is liable to account under the foregoing provisions ofthis 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 thefollowing rules shall subject to any agreement be observed

(a) losses including losses and deficiencies of capital shall be paidfirst out of profits next out of capital and lastly if necessary by the partnersindividually 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 tomake up losses or deficiencies of capital shall be applied in the followingmanner and order

(i) in paying the debts and liabilities of the firm to persons who are notpartners therein;

(ii) in paying to each partner rateably what is due from the firm to him foradvances as distinguished from capital;

(iii) in paying to each partner rateably what is due from the firm to him inrespect of capital;the ultimate residue (if any) shall be divided among the partners in

the proportionin which profits are divisible.


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Module 2 - Corporations Law

Objectives


Demonstrate an understanding of the current status of companylaw in Australia

Discuss the legal implications of incorporation and theadvantages and disadvantages of incorporating as a company

Discuss the regulations governing internal management andexplain the implications on the corporation

Discuss the contractual capacity of a corporation and explain theeffect of this on a company promoter

Discuss the various ways of raising capital and explain theessential differences between share and loan capital

Discuss the role of directors and explain their duties to thecorporation and minority shareholders

Discuss the options available when a company suffers financialdifficulties and explain the process of winding up.

Content

1. Introduction2. Corporate Characteristics3.

Company Constitution

4. Contractual Capacity5. Directors and Corporate Governance6. 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 thesituation we find today. In the 1860's most Australian colonies passedlegislation based on the English Companies Act 1862. Uponfederation in 1901, each state continued to have its own laws inrelation to companies and although originally based on the Englishact, there was no uniformity across the country. In 1961-62, the statesdeveloped uniform company acts. However uniformity was notmaintained as there was no mechanism implemented to achieve this.

Until 1974, a company formed under Victorian legislation wasviewed 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 NewSouth Wales act. This situation was found by many companies to beabsurd and it became clear with the increasing nationalisation ofcorporations that changes were needed. Around this time a networkwas formed between the states and under the Interstate CorporateAffairs Agreement, and the idea of recognised companies weredeveloped. Further development occurred in 1978 when anagreement by the states enabled a Commonwealth act to be applied ineach state via a Companies (Application of Laws) Act. This"Companies Code" as it became known was further strengthened bythe establishment of the National Companies and SecuritiesCommission (NCSC) which was given responsibility for thedevelopment of policy and administration of company law and thesecurities industry. The Code wasn't however without it's problems;uniformity was diluted over time and there were interpretationdifferences between the NCSC and the state Corporate AffairsOffices 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 CommonwealthParliament to make laws with respect to "foreign corporations, andtrading and financial corporations formed within the limits of theCommonwealth". The problem with this section is the definition ofthe word 'formed' - is it past or future tense. If taken to mean the pasttense, has been formed, then the Commonwealth only has power tomake laws in relation to companie

Documents

LBL200 Learning Guide Sem 1 2012