Business Organisations Notes (Australian Catholic University) PDF

lOMoARcPSD|41847248 All Weeks (1-6) Business Organisations (Australian Catholic University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Download...

lOMoARcPSD|41847248 All Weeks (1-6) Business Organisations (Australian Catholic University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Week One Outline: Introduction Nature and Functions of Companies Origins of Company Law Australian Regulatory Framework Corporate Law Theories INTRODUCTION Laws200 Business Organisations The unit deals with law relating to various structures used in conducting business activities. Examination of the merits and limitations of the principal options available with a focus on company law. Company law is the branch of the law governing the creation, operation and regulation of companies and those who operate or deal with them. Topics covered in the course: 1. The nature of companies and the Australian regulatory framework and corporate law theories 2. Partnerships 3. The separate legal entity doctrine, setting up a company and types of companies 4. Corporate governance rules and bodies 5. Corporate finance 1 and 2 (shares, share capital, dividends and fundraising). 6. Directors duties and insolvent trading 7. Members’ roles, rights and remedies 8. Companies in financial difficulties 1 and 2 (receivership, voluntary administration, winding up and liquidation). Business Organisations  Multiple forms of business organisations, including:  Sole Proprietorship o An individual person conducting their own business (also known as a sole trader)  Trading Trust o A trust exists where a party/parties (trustee) hold property on behalf of another party/parties (beneficiary) o Businesses can be conducted using unit trusts o Beneficial ownership in the property of the business (legally held by the trustee) is divided into units and each beneficiary holds several units o Members of the public can be invited to invest in units.  Partnership (General and Limited) Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks o The relation which subsists between persons carrying on a business in common with a view of profit – partnership acts and Pooley v Driver 5 Ch D 458.  Joint venture o Parties participating in a single project together o These are used in the mining and petroleum industry when companies work together in the operation of a mine or a well o There is a risk that a joint venture may be held to be a partnership and so sometimes a company is used as a joint venture vehicle.  Non-Profit Organisations o People associate for reasons other than conducting a business e.g., social and sporting clubs o Many of these associations are unincorporated o Associations incorporation legislation in each of the States and Territories allows non-profit organisations to limit the liability of their members by incorporation.  Companies o This is the focus of the unit. THE NATURE AND FUNCTIONS OF COMPANIES What is a company?  A company is a corporation, using that work in the common law sense, and a corporation (or body corporation) in the common law sense is a legal device by which: o Legal rights, powers, privileges, immunities; and o Duties, liabilities and disabilities; may be attributed to a fictional entity equated for many purposes to a natural person.  It comes into existence when its approved by the Australian Securities and Investments Commission (ASIC) – s.119 and remains in existence until it is deregistered – Chapter 5A. Nature of companies – association.  A company is generally a type of voluntary association of individuals or corporations for a common purpose. (cf. single member companies and corporations sole).  Reasons for such association including: economic, social, cultural and moral reasons.  Provided that their association is for a lawful purpose, the Corporations Act facilitates this association using a company.  Members of a company have mutual rights and obligations. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Other terms  Generally, when used in the Corporations Act, the term company means a company registered under the Act – s 9.  Entity – which generally includes a natural person, a body corporate (other than an exempt public authority), a partnership or a trust.  Body – a body corporate or an unincorporated body and includes, for example, a society or association.  Body corporate – vehicles to which the legal system, by the process of incorporation, has given the capacity to have legal rights and duties as a fiction legal person. o A company is a type of body corporate.  Corporation – includes: o a company; and o anybody corporate (whether incorporated in this jurisdiction or elsewhere); and o an unincorporated body that under the law of its place of origin, may sue or be sued, or may hold property o s 57A.  Neither of the following is a corporation: o An exempt public authority o A corporation sole – s57A. Functions of companies.  Companies can be used to conduct various types of lawful activity  Limiting the liability of members  Co-ordinating participants in a large enterprise o The original reason for incorporating companies was to assist group commercial activity with many members pooling capital.  A nominee to hold legal title to assets o Companies can function as trustees for family or trading trusts  A structure for a joint venture  A structure for a fund management  A structure for a corporatized government enterprise  Providing a regime for the co-ownership of property THE ORGINS OF COMPANY LAW Statutory corporations.  England, at least from the 1500’s, parliament could create a corporation.  Commercial developments in the 1700’s made it necessary to raise large sums of capital from the public  This was achieved through Partnerships (Deed of Settlement)  Large quasi-partnerships known as joint stock companies were formed where parties could not obtain a Royal Charter or Act of Parliament. Deed of settlement companies Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  Deed of settlement companies are (partnerships) where partners agree by deed to conduct the business of the association on trust for the other partners.  Partners agree/sign to be bound by the deed.  Partners are liable only to the extent of their contributed capital  In the 1800’s, the trustee-partners attained a form of limited liability and stipulated in each contract that the other party would only look to the partnership property for recovery and not the personal assets of stockholders.  The Joint Stock Companies Registration and Regulation Act 1844 (UK) took over the deed-of-settlement company. Limitation of Liability  The 1844 Act did not exclude the personal liability of members for company debts, but creditors had to exhaust their remedies against the company first.  The Limited Liability Act 1855 (UK) gave persons forming a company the option of forming it on the principle that the liability of the members would be limited to what they agreed to contribute to the company.  The financing of the new railways with their needs for large amounts of capital helped to produce a climate of thought accepting limited liability. Evolution of the modern company  Following almost 20 years of reform since the 1844 Act the ultimate outcome was the consolidation of English company law in the Companies Act 1862 (UK).  Australian companies legislation descends from that Act  Interestingly, the influence on company law has not all bee on way  The Australian Corporations Act influence parts of the Companies Act 2006 (UK). Evolution of Australian Company Law  Before Federation each Australian colony had companies legislation based on the Companies Act 1862 (UK).  The commonwealth did not take over after Federation as it was not given plenary power to legislate with respect to corporations  In 1961 the Australian states first enacted uniform companies legislation which came into effect in 1962.  In 1981 the 1961-62 regime was replaced when the Commonwealth passed the Companies Act 1981 and each state passed a Companies Code which was broadly in line with the Commonwealth Act.  In 1989 the Commonwealth legislated independently of the States to introduce a national scheme of regulation in the Corporations Act 1989 (Cth).  However, the commonwealth’s power was not as wide as it believed.  In NSW v Commonwealth (1990) 169 CLR 482, the High Court held that: o S 51(xx) of the Constitution did not allow the Commonwealth to make a law for the incorporation of trading or financial corporations o As distinct from regulating the activities of such corporations once they were created Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  The Commonwealth, the States and the Northern Territory enacted new co-operative legislation known as the Corporations Law.  Jurisdiction in corporations law matters was also cross vested in the Federal Court and the state Supreme Courts.  In 1999, however, the High Court held that the cross – vesting arrangement was unconstitutional to the extent that is purported to confer jurisdiction on the Federal Court of Australia and other federal courts with respect to matters under the Corporations Law of a state – Re Wakim; Ex parte McNally (1999) 198 CLR 511.  Following that, the High Court’s decision in R v Hughes (2000) 202 CLR 535 appeared to cast doubt on the constitutional validity of the scheme insofar as States purported to confer powers on Commonwealth officers.  This prompted moves for the States to refer legislative powers in this area to the Commonwealth as contemplated by s 51 (xxxvii) of the Constitution. The Corporations Act 2001 (Cth)  As from 15 July 2001 the Corporations Act 2001 (cth) and the Australian Securities and Investments Commission Act 2001 (Cth) became the legislation governing corporations and securities in Australia  The provisions of the old Corporations Law of the 1991 scheme were re-enacted in the Corporations Act but with such changes as were needed to reflect the fact that there would longer be a separate Corporations Law for each State and the Northern Territory. AUSTRALIAN REGULATORY FRAMEWORK What is involved in regulating companies?  The main features of regulation of companies in Australia are: o Uniform legislation on formation, operation and winding up of companies o Registration of companies by ASIC o Maintenance by ASIC of registers open to the public containing significant information about companies and persons connected with them. o Policing by ASIC of the legislative prescriptions o Exercise by ASIC of discretions conferred on it by the legislature to grant exemptions from prescriptions or to vary them. o Publication by ASIC of information about the exercise of its discretions and its policies and procedures o Supervision of the winding up on companies by the superior courts. Why regulate companies?  To provide information  To set standards for corporate governance  To regulate capital markets Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  To regulate the market for corporate control  To regulate the securities industry. Who regulates companies?  The participants in the Australian system of corporate regulation are: o The commonwealth and state parliaments o The Executive acting through a Commonwealth Minister and regulatory authorities e.g., the Australian Securities and Investments Commission (ASIC) o The judiciary o The Australian Stock Exchange (ASX) o The Financial Reporting Council o The Australian Accounting Standards Board and o The Auditing and Assurance Standards Board o The Governance Institute of Australian and o The Australian Institute of Company Directors. WHAT IS ASIC? Australian Securities and Investments Commission  ASIC is set up under and administers the ASIC Act. Most of its work is carried out under the Corporations Act.  Australia’s corporate, markets and financial services regulator  It is an Independent Commonwealth Government body but accountable to Parliament  5 full-time Commissioners, each with separate areas of responsibility  Almost 1,800 staff work at ASIC  Offices in 9 locations covering each State and Territory What is ASIC ’s role?  ASIC contributes to Australia’s economic reputation and wellbeing by ensuring that Australia’s financial markets are: o Fair and transparent; and o Supported by confident and informed investors and consumers  ASIC currently comes under the portfolio responsibilities of the Treasure, the Hon Jim Chalmers MP. The current chairman is Joe Longo.  Under s 1(2) of the ASIC Act, in performing its functions and exercising its powers, ASIC must strive to: a) Maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and b) Promote the confident and informed participation of investors and consumers in the financial system; and c) Administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks d) Receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it; and e) Ensure that information is available as soon as practicable for access by the public; and f) Take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it. ASIC ’s Regulatory Remit  ASIC’s regulatory remit is broad and includes: o Companies and businesses o Financial markets o Financial services organisations o Professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit o External administrators e.g., liquidators. Laws administered by ASIC ASIC is responsible for administering the following laws:  Corporations Act 2001  Australian Securities and Investments Commission Act 2001 (ASIC Act)  Business Names Registration Act 2011  Business Names Registration (Transitional and Consequential Provisions) Act 2011  Insurance Contracts Act 1984  Life Insurance Act 1995  Medical Indemnity (Prudential Supervision and Product Standards) Act 2003  National Consumer Credit Protection Act 2009 (National Credit Act)  Superannuation (Resolution of Complaints) Act 1993  Superannuation Industry (Supervision) Act 1993  Retirement Savings Accounts Act 1997 Other regulators also administer some parts of these Acts, Other Regulators  APRA (Australian Prudential Regulation Authority) aims to ensure that, under all reasonable circumstances, financial promises made by financial institutions it supervises (e.g., banks and insurance companies) are met within a stable, efficient and competitive financial system.  RBA (Reserve Bank of Australia) is responsible for stability of the economic system through monetary policy  ACCC (Australian Competition and Consumer Commission) regulates anti-competitive behaviour and consumer protection other than in financial markets  ASIC, rather than the ACCC, protects consumers in financial markets Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks ASIC ’s Strategic Priorities  Promoting investor and financial consumer trust and confidence o Education – investors responsibility for investment decisions remains core to ASIC’s system. ASIC empowers investors and financial consumers through its financial literacy work o Gatekeepers – ASIC holds gatekeepers to account o Consumer behaviour – ASIC recognises how investors and consumers make decisions  Ensuring fair, orderly and transparent markets o Achieved through ASIC’s role in market supervision and competition, and corporate governance  Providing efficient and accessible registration o With a focus on small business and deregulation. ASIC  Until June 1998 the Commission was called “the Australian Securities Commission” or “the ASC”  To reflect its broader responsibility for consumers (investor) protection in the financial sector, the Commission was renamed the “Australian Securities and Investments Commission”  ASIC was given the power (civil and criminal) to regulate financial services in 1998 provide protections in relation to financial services like those now found for consumers in the Competition and Consumer Act 2010 (cth). Corporate Law Theories.  Importance: They help shape how we think about the way we think and make decisions on company related issues.  Concession Theory: Corporations exist because they are concessions from the state  Aggregate Theory: Corporations are a nexus of contract. They presume that the law has no greater role to play in regulating corporations that it has for other contract- based forms of enterprise such as partnership.  Economic Theory: It pays attention to the relations between the individuals players with the corporation  Team Production Theory: It sees the corporation as a privately constructed team where participants contribute towards the production of the groups output.  Natural Theory: Like the aggregates’ they see the corporation as a private initiative which the law should facilitate rather than regulate. Unlike aggregate, they view corporations as a social construct, not merely a collection of individuals.  Feminist Perspective: This looks at the prospect of gender equality  Corporate Social Responsibility: Is the corporation an entity focused on profit making for shareholders, or is it an entity with extended social responsibilities to others outside the shareholders, that is, stakeholders and the wider community? Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Week Two: Partnership PARTNERSHIP Statutory Definition - Carrying on a business - In common - With a view of profit Includes an incorporated limited partnership.  However, a partnership does not include the relation between members of any company or association: o Incorporated under the Corporations Act o Formed or incorporated by or in pursuance of any Act or letters patent or Royal Charter. Limits on the Size of Partnerships  Generally, a partnership should not have more than 20 members s115(1) Corporations Act 2001.  certain types of partnerships may however be above 20. See s115(2) and Corporations Regulation 2A 1 01: o 50 for actuaries, medical practitioners, patent attorneys, sharebrokers, stockbrokers or trademark attorneys o 50 for collaborative scientific research partnerships that include at least 1 university and at least 1 private sector participant o 100 for architects, pharmaceutical chemists or veterinary surgeons o 400 for legal practitioners o 1,000 for accountants. What is a Firm?  Persons who have entered 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 s 8.  If the partnership is to carry on its business under the firm-name, the firm-name needs to be registered under the Business Names Registration Act 2011 (Cth). ESTABLISHING THE EXISTENCE OF A PARTNERSHIP Overview  3 elements must be satisfied to establish the existence of a partnership: (1) The carrying on of a business (2) In common Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks (3) With a view to a profit s5 “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit” – s5(1).  There are also various statutory rules which assist with determining whether a partnership exists. S6 Rules for deciding existence of partnership.  The criteria should be viewed objectively and how the parties describe themselves is not conclusive – Adam v Newbigging 13 App Cas 308, 316  A partnership can be created verbally or in writing or inferred from conduct  The meaning of the contractual agreement is to be determined objectively – Equuscorp Pty Ltd v Glengallan Investments Pty Ltd 211 ALR 101. Carrying on a Business  A business includes every trade, occupation or profession s 3  Business involves commercial enterprises – Hope v Bathurst City Council 144 CLR 1, 8  Initially, an isolated/one-off transaction was not considered to constitute carrying on a business (Smith v Anderson 15 Chd 247, Ballatyne v Raphael 15 VLR 538) unless it was proven to have been undertaken with the intention that it should be the first of several transactions – Re Griffin (1890) 60 LJQB 235.  However, the courts have acknowledged that a single commercial venture could be a business for the purpose of deciding whether there was a partnership – Playfair Development Corporation Pty Ltd v Ryan 2 NSWLR 661, Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 (e.g., managing a concert tour)  A single venture (being the development and sale of a shopping centre) was held to be a partnership in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1. In Common  The business must be carried on, by or on behalf of, all the partners, however all the partners need not take an active role in the management of the business. Re Ruddock 5 VLR (IP and M) 51.  Must be a mutuality of rights and obligations between the persons on whose behalf the business is carried on: Smith v Anderson 15 Ch D 247 (CA), 275, Re Ruddock 5 VLR (IP and M) 51, 58, R v Willis, Ex parte Martin 5 VLR (L) 149, 151.  Can be a difficult question of fact as merely having rights against one another does not make people partners. The person managing the business must be doing so as agent for all the other, otherwise there is merely a joint venture. Land v James Morrision and Co Ltd 13 CLR 1, 11. With a View to a Profit  The intention to make a profit is said to lie “at the very heart” of the partnership relationship…’ Salib v Gakas, Newport Pacific Pty Ltd v Salib NSWSC 505 Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  The sharing of profits per se does not give rise to a partnership, the sharing of profits is only prima facie evidence of a partnership – Salib v Gakas, Newport Pacific Pty Ltd v Salib NSWSC 505.  However, a person may still be a partner if they do not share and are not liable for losses – Re Ruddock (1879) 5 VLR (IP and M) 51. Statutory Rules  The statutory rules for determining the existence of a partnership cover: o Co-ownership of property (not definitive) o Sharing of gross returns (not definitive) o Sharing profits (presumption subject to 5 exceptions)  Exceptions derive from earlier case law PARTNERS’ RELATIONSHIP WITH OUTSIDERS Power of Partner to Bind the Firm s 9  Each partner acts as a principal as well as an agent of each other  Principal’ means that the partner arranging the contract, is doing so for him or herself  Agent’ means the partner acts as an agent to bind all the other partners – the partnership – at least concerning matters that are normally within the business of the partnership: PA s9 Partners Bound by Acts on behalf of firm.  All partners are bound where a partner has acted: o Within their actual authority (expressly or impliedly given to them) o Within their apparent authority (what they appear to have from viewpoint of outsider they are dealing with) Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd 155 CLR 541. Requirements to Bind Partnership  The four requirements for the partnership to be bound under s9 are: o Transaction must be entered into by a partner  Otherwise, normal rules of agency apply o Transaction must be within the scope of the kind of business carried on by the firm o Transaction must be affected in the usual way o Other party either:  Know or believe person acting is a partner  Not know a partner’s lack of authority. Knowledge of Outsider  A partnership will not be bound by the actions of a partner unless they have actual ostensible authority Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd 155 CLR 541. o Tambel entered into a partnership agreement with Hexyl o Construction engineering (CE) entered into a contract with Tambel but did not know it was a partner of Hexyl o The partnership agreement negated any authority that Tambel had to enter the contract with CE o As Tambel had no actual authority to bind Hexyl and CE did not know or believe Tambel was a partner of Hexyl, the contract was not binding on Hexyl. Partners Bound by Acts on Behalf of Firm s9  Acts relating to the business of the firm and done or executed in the firm-name is binding on the firm and all the partners.  Acts done with an intention of binding the firm will bind the firm Lysaght Bros v Falk 2 CLR 421.  However, it must be done for the firm and not privately Partner Using Credit of Firm for Private Purposes s10.  The firm is not liable where one partner pledges the credit of the firm for a purpose apparently not connected with the firms ordinary course of business.  If a person had reasonable grounds to suppose that there was authority (Kendal v Wood (1870) LR 6 Ex 253) or a representation or some form of acquiescence (London Chartered Bank of Australia v Kerr (1878) 4 VLR (L) 330) existed s11 (s 7 NSW) may be satisfied. Consider whether Actions are in Course of Business  In National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 Batty was held not to be liable for the conversion of cheques by his former partner Davis, as it was held that Davis was not acting in the ordinary course of business in depositing the cheques as the cheques were: o Not made out to the partnership o Payable to a third party o Substantially larger than others that had been paid not the partnership trust account o Not deposited by the secretary who usually carried out the banking or through the usual deposit book Effect of Notice of Restriction on Power  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.  If a party knows of restrictions on a partner’s authority to bind the firm, the firm will not be bound by transactions with that party exceeding those restrictions. Liability in Contract, Tort and Crime Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  The partnership acts also specifically deals with partners o Liability for debts and other obligations o Liability for wrongs o Liability for misapplication of money or property o Joint and several liability for wrong and misapplication of money or property o Admissions and representations Liability for Debts and Other Obligations  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 by subject to the prior payment of his separate debts. Liability for Wrongs  Subject to [certain exemptions for when a partner commits a wrong as a director of a body corporate] o Whereby 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/her co-partners o Loss or injury is caused to any person not being a partner in the firm or any penalty is incurred o The firm is liable therefore to the same extend as the partner so acting or omitting to act. Liability for Misapplication of Money or Property s14  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 b) Where a firm during 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 – the firm is liable to make good the loss. Joint and Several Liability  Every partner is liable jointly with his co-partners and severally for everything for which the firm while he is a partner therein becomes liable under either of the last two preceding section. o Liability for wrongs o Liability for misapplication of money or property.  Audine Bartlett provides a summary of the difference between o Joint liability o Several liability o Joint and several liability  Joint liability arises when two or more persons jointly promise to another person to do the same thing Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks o Here, there is only one obligation and the performance by one party to the contract will discharge the others o An example would be where a husband and wife enter a contract to buy a house jointly  Until the settlement price is paid, both are liable for the full price and the vendor can sure either or both for the full amount  Once the price is paid by one of them, the other no longer has an obligation to the vendor to pay.  Several liability arises when two or more persons make separate promise to another, whether under the same contract or different contracts. The promises are cumulative and payment by one person does not discharge the other. o An example would be a joint venture where the participants have agreed to pay a contractor for work to be performed for the joint venture (and it is agreed that this obligation to pay is several)  Each joint venture participant will be liable for its percentage of the fee to be paid and not for the total fee.  Joint and several liability arises where two or more persons under the same contract jointly promise to do the same thing, and severally make separate promises to do the same thing, and severally make separate promises to do the same thing. o This type of liability gives rise to one joint obligation and to as many several obligations as there are joint and several promisors. Like joint liability, the co- promisors are not cumulatively liable, so that performance by one discharge all the remaining promisors. o However, each co-promisor is liable for the entire obligation until it is performed by one (or more) of the promisors. o When the obligation is joint and several, the claimant can sue all the promisors together or choose to sue each separately (if this is more appropriate). Admissions and Representations by Partners  An admission or representation made by any partner concerning the partnership affairs and in the ordinary course of its business is evidence against the firm.  The firm will be responsible for statements made by a partner acting within the scope of their actual or apparent authority. PARTNERS’ RELATIONSHIP WITH EACH OTHER Fiduciary Obligations  The relationship between partners is a fiduciary relationship and it has been said that a stronger case of fiduciary relationship cannot be conceived than that which exists between partners’. Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  There is between existing partners, and between surviving partners and the estate of a deceased former partner, a general duty of utmost good faith – Cameron v Murdoch 63 ALR 575, 587 (Privy Council). Partnership Act Rights and Duties  Variation by consent of terms of partnerships  Partnership property must be held and applied by the partners exclusively for the partnership.  Property bought with firms money is deemed to belong to the firm  To render accounts and full information of all things affecting the partnership  To account for private profit  Duty of partner not to compete with firm. Management  Management of the partnership is determined subject to any express or implied agreement between the partners.  No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners  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 all the other partners. DISSOLUTION OF A PARTNERSHIP Overview :  A partnership may be dissolved in the ways set out in the Partnership Acts which include: o By expiration of a term or by notice o By death, bankruptcy or charge o By illegality o By court order in certain circumstances  Mental illness or permanent incapacity  Prejudicial conduct  Wilful or persistent breach of agreement  Business running at a loss  Just and equitable grounds. LIMITED LIABILITY PARTNERSHIPS Composition of Limited Partnerships Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks 1) A limited partnership is a partnership consisting of – a. At least one general partner b. At least one limited partner 2) A body corporate (corporation) may be a general partner or a limited partner. Limited v General Partners  Limited partners: o Contribute to capital of the partnership o Do not take part in management o Cannot bind the firm o Have their liability to contribute to the liabilities of the partnership limited.  General partners have obligations like those of partners in an ordinary partnership and unlimited liability. Size of Limited Partnerships  Limited partnerships must have at least one general partner and at least one limited partner  S.A limited partnership may have any number of limited partners, but the number of general partners must not exceed 20 or the higher number allowed under s 115 and Corporations Regulation. Formation  A limited partnership is formed on the registration of the partnership, as a limited partnership.  A register of all limited partnerships is kept and available for public inspection  An application for the registration as a limited partnership of a partnership is made by lodging with the Director (Registrar) in accordance with “a statement signed by each partner or proposed partner.” Other Requirements  Any document issued on behalf of a limited partnership in connection with the conduct of the partnership’s business must contain in legible letters the words “A Limited Partnership” immediately adjacent to its firm-name (failure to comply is an offence)  A limited partnership must maintain a registered office.  The certificate of registration of a limited partnership must be always displayed in a conspicuous position at the registered office of the partnership. Failure to do so renders each general partner guilty of an offence.  If a limited partnership carries on business outside its jurisdiction of formation, it will be required to be registered under the Corporations Act. Limited Liability  Provides that the liability of limited partners is limited to the amount shown in the Register. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  Provides for changes in liability of limited partners  Provides for changes in the status of partners  Provides that a limited partner must not take part in the management of the partnership  Provides for dissolution. Cessation  Provides that a partnership ceases to be a limited partnership if: o None of the partners is a limited partner o The partners agree that they will carry on the business of the partnership otherwise than as a limited partnership.  Provides that if a limited partnership o Is dissolved o Ceases to carry on business  The general partners who were registered immediately before the dissolution or cessation must, as soon as practicable, lodge with the Director (Registrar) a notice of the dissolution or cessation, specifying the date on which it took effect.  Failure to do so is an offence. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Week 3 1. Separate Legal Entity Doctrine 2. Limited Liability 3. Types of companies 4. Registration and setting up a company SEPARATE LEGAL ENTITY DOCTRINE Separate legal entity doctrine (SLED)  A company is a legal entity with rights and duties separate from that of its members or directors. It is as if there is a screen around the company’s members and its directors – this screen is known as the corporate veil.  R v Arnaud 9 QB 806 o An English chartered corporation applied for the registration of a ship owned by it o Registration was refused on the ground that the shipping registration legislation excluded foreigners from the privileges of British shipowners (several of the company’s members were foreigners) o The court ordered the registering authority to grant the application o The owner of the ship was the corporation and not the members. Salomon v Salomon and Co Ltd AC 22: Facts  Under the Companies Act 1862 (UK) seven members were required to register a new company  Aron Salomon (s), with his wife and 5 children registered a limited company under the Companies Act 1862 (UK)  S sold his business to the company for 38,782 pounds in exchange for shares and a debt due from the company  S took security over the assets of the company for the debt  S was appointed managing director and controlled the company because his wife and children were committed to voting at company meetings as he directed.  The company failed with debts owing to outsiders  In the winding up, the assets were insufficient to meet S’s secured debt and the claims of the unsecured creditors  The liquidator acting for the unsecured creditors tried to have S’s secured debt postponed to the claims of unsecured creditors Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  The liquidated acting for the unsecured creditors tried to have S’s secured debt postponed to the claims on unsecured creditors.  The liquidator argued that the company was really S’s agent and therefore S had to indemnify it against its business liabilities. Vaughan Williams J held that company conducted the business as S’s agent because of the high degree of control that S exercised over its affairs. Court of Appeal  Held that the company could be considered S’s agent without denying that the business had been sold to it  An allegation that the sale was affected by fraud was not proven and so the sale could not be ignored  Held that the company was conducting the business as trustee for S  It was therefore entitled to an indemnity for S under the law of trusts for debts incurred as trustee  S was liable to pay the unsecured debts House of Lords  Lord Haldane noted that the lower courts reached their decision on the basis that it was assumed that the Legislature did not intend to allow S to create what was in effect a one-man company.  Lord Haldane stated that he “must decline to interest into {the Companies Act 1862 (UK)] limitations which are not to be found there”  The house of lords unanimously held against the liquidator  It held that the company had conducted the business in its own right, not as agent or trustee  The 7 persons required for the formation of a company did not have to be independent of each other  S was not liable to indemnify the company and his secured debt had priority over the unsecured creditors’ claims. CONSEQUENCES OF THE SEPARATE LEGAL ENTITY DOCTRINE Limited Liability  The definition of a company limited by shares in s 9 is: o A company formed on the principle o Of having the liability of its members limited o To the amount (if any) unpaid on the shares respectively held by them  The SLED does not automatically give rise to limited liability. Companies may also be registered as an unlimited company, however, most companies are companies limited by shares in which each shareholder’s liability is limited under ss 514-529 to the amount (if any) unpaid on shares held by the shareholder. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  The company’s separate entity status allows society to give members the privilege of limited liability on contracts.  Limited liability reduces members exposure to vicarious liability for torts committed by the company’s employees and reduces the amount of insurance and that would otherwise be necessary. Company peculiarities  Power to sue and be sued  Ownership of property  Perpetual succession: the company is a continuing entity in law with its own identity regardless of changes in its membership. The death of some members or sale of their shares does not affect the identity of the company or its rights. See Re Noel Tedman Holdings Qd R 561 where the only shareholders and directors in a company were husband and wife, who both died in an accident. The court ordered a meeting to allow the executors appoint a new director and shareholder. The company as a person  We tend to think of the company as another human person, but it does not have all the rights that humans do  At common law a person is entitled to refuse to provide information that could tend to expose that person to a criminal charge or to a civil penalty (this is known as the privilege against self-incrimination)  The HC held by a majority of 4:3 in EPA v Caltex Refining Co (1993) 178 CLR 477 that a corporation is not entitled to the privilege against self-incrimination. Property belongs to the company  A registered company’s property belongs to it, not to its members  The use of a company can therefore be a double-edged sword if parties do not remember which party is the owner of the assets in question Macaura v Northern Assurance Co Ltd AC 619  M sold timber to a company owned by him and his nominees, but he had the timber insured in his own name  The timber was destroyed by fire, but the insurance company refused to pay on the basis that the timber was owned by the company  The house of lords upheld the insurance company’s refusal to pay. Contracts  If a company enters a contract, it is the party to the contract, not its directors or members  If a company commits a breach of a contract made with third persons who knew that they were negotiating with agents acting for a company, it is the company that is liable to the other parties for the breach rather than any agent or director or member acting in good faither to perform the contract Ferguson v Wilson LR 2 Ch App 77, 89.  Companies can contract with their members, even their controlling members Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Lee v Lee’s Air Farming Ltd AC 12  L formed a company to conduct a business  L was the sole beneficial shareholder and sale governing director for like (though the directorship could be vacated)  L contracted with the company to work as chief pilot and was killed in circumstances giving rise to a claim against the company for workers compensation if he was a worker. Contracts NZ Court of Appeal  Held that L was not a worker, because as governing director he could not give directions to himself as pilot Privy Council  Reversed that decision because under Salomon’s case it was possible for L to act in two capacities: as the director of the company and as an employee  If he ceased to be director (e.g., by retiring as director) he would still be subject to the employment contract. Directors can function in dual roles  Lee’s case has been applied in Australian Hamilton v Whitehead 166 CLR 121 (Mason CJ, Wilson and Toohey JJ)  Franklyn J thought that it was “wrong and oppressive” to prosecute the respondent for the identical acts and decisions as were relied on as the acts of the company”  There is nothing conceptually wrong in such a course since “it is a logical consequence of the decision in Salomon’s case AC 22 that one person may function in dual capacities”: Lee v Lee’s Air Farming Ltd AC 12, 26.  A person managing a company can act as an organ of the company so that if it commits a crime, the manager can be the same act be an accomplice with the company.  The company can be convicted as the principal offender and the manager can be convicted as an accessory Hamilton v Whitehead 166 CLR 121. Company as Debtor or Creditor  Companies can owe money (be debtors) to their members e.g., Salomon v Salomon and Co Ltd AC 22.  Companies can also loan money to (be creditors of) their members e.g., Repatriation Commission v Harrison 78 FCR 442. Liability in Tort  A company can commit a tort as a principal tortfeasor, as where it publishes a libel. A company can also commit the tort of deceit – Standard Chartered Bank v Pakistan National Shipping Corporation 1 AC 959.  A company can be liable to its injured controlling director where the company is in breach of a non-delegable duty. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  In Nicol v Allyacht Spars Pty Ltd 163 CLR 611, N and B were 2 of the 3 directors of a company and were employed by it. They agreed to check the fixing of a banner to a flagpole supplied by the company. They adopted a clearly unsafe system of doing so and used an extension ladder fixed to a trestle placed on the tray of a utility. N fell from the ladder and sustained injuries.  HELD: that if N had alone devised the system, he could have recovered nothing (cf strict liability in Lee v Lee’s Air Farmining Ltd).  The evidence showed that N was not solely responsible for devising the system.  He was entitled to recover damages, but the amount was reduced to take account of his own fault having been partly the cause of his injuries. Liability in Criminal Law  A company can commit a crime. The question is how the requirement of mens is rea established.  Under common law: The “organic theory” is relied upon. In HL Bolton (Engineering) Co Ltd v TJ Graham and Sons Ltd, Lord Denning’s likened the company to a human being and noted that Directors and Managers are the controlling mind and will of a company and therefore their actions are the actions of the company. A company can be liable to its injured controlling director where the company is in breach of a non- delegable duty.  In Tesco Supermarkets Ltd v Nattrass AC 153  FACT: Washing powder was advertised on sale. When the item on sale sold out, a store employee put out the same product at the normal price. The next day, a customer was unable to purchase the product at the reduced price and was told the discount was no longer available. Tesco was charged under the Trade Descriptions Act 1968 (UK) for falsely advertising the price of the product. Tesco argued that it had taken all reasonable precaution and exercised all due diligence to avoid committing the offence and that the conduct of the store manager was not the conduct of the company.  HELD: The store manager was not the directing mind and will of the company and therefore his conduct was not attribute to the company. For liability to attach to an individual’s action, they must be acting as the company. DEPARTURE FROM THE SEPARATE LEGAL ENTITY DOCTRINE Qualifications to the doctrine  The separate legal entity doctrine requires that rights, privileges, duties and liabilities ascribed by law to the company are not ordinarily ascribed to its directors or members by reason only of their being directors or members.  However, there are time where it is deemed necessary to depart from the doctrine Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Evasion of a legal obligation  Where a company is established to avoid an existing obligation or to carry out illegal activities, the court may be willing to disregard the SLED and lift the veil of incorporation.  In Gilford Motors Co Ltd v Horne Ch 935. The veil was lifted because it was established that the company was registered to avoid a legal obligation. However, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254, the court refused to ignore the sled because it was convinced the company was set up to evade legal obligations. Fraud  A court, in exceptional circumstances, may consider that there should be mitigation of the separate entity doctrine as a matter of common law.  A court cannot usually just ignore the existence of a company, but it can where the company is an element in a series of transactions which constitute a fraud.  In Re Darby 1 KB 95 the court looked behind a Channel Islands company and treated Darby and Gyde as being the true promoters of an English company that failed after buying assets from Darby and Gyde at an inflated price. Agency  Agency was argued in Salomon v Salomon at the court of first instance  In disregarding the SLED, Lord Atkinson J in Smith, Stone and Knight Ltd v Birmingham Corporations 4 All ER 116 accepted the argument that Birmingham waste was in law an agent carrying on Smith, Stone and Knight Ltd’s business.  Note: Atkinson J’s approach has been largely criticised, and the agency argument has rarely been successful in avoiding the SLED but it is still the law. Departure required by statute  Sometimes the legislature requires that persons behind the corporate entity by subject to rights or duties that arise out of acts or omissions of the company.  For example, under the Corporations Act an act of the company, the incurring of a debt in certain circumstances, can lead to the imposition of liability on a director behind the corporate veil. Insolvent trading  Under s 588G directors are under a duty to stop a company incurring debts when it becomes insolvent  Under s 95A(2) a company is insolvent when it is unable to pay its debts as and when they become due and payable  If directors fail in that duty and the company is wound up in insolvency, they can be made personally liable for company debts incurred after the company becomes insolvent or debts the incurring of which pushes the company into insolvency. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  Directors can be personally liable under s 588G where their action in returning share capital to shareholders leaves the company insolvent  They can be liable for the amount improperly returned COMPANY RELATED MATTERS Corporate Groups  Holding company, means a body corporate of which the first body corporate is a subsidiary s 9.  Under s 46, a body corporate is a subsidiary of another body corporate if, and only if: (a) The other body i. Controls the composition of the first body’s board, ii. is in position to cast, or control the casting of, more than one half of the maximum number of votes that might be cast at a general meeting of the first body iii. holds more than one half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital) (b) the body is a subsidiary of a subsidiary of the other body. Company Groups  Under s 50 where a body corporate is: a) A holding company of another body corporate b) A subsidiary of another body corporate c) A subsidiary of a holding company of another body corporate The first mentioned body and the other body are relayed to each other. Subsidiaries v Group Companies  The HC held (in the context of ascertaining whether a company has distributable profits) that each company in a corporate group must be treated as a separate entity – Industrial Equity Ltd v Blackburn 137 CLR 567.  In Walker v Wimborne 137 CLR 1, 6-7, the courts confirmed that the interest of the corporate entity was paramount, and the directors owed duties to each individual corporate entity above the group. Under resource subsidiaries may be treated as agents  However, a company may be treated as agent of its controller if: o It has not been provided by its controller with resources necessary to perform its function independently o It relies on the resources of its controller as a result  The most likely scenario in this case is where the controller is a parent company of a wholly owned subsidiary. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  In Smith, Stone and Knight Ltd v Birmingham Corp a All ER 116 Atkinson J said that the issue is whether the subsidiary was carrying on the business as the parent company’s business or as its own.  Atkinson J posed 6 questions to determine the issue: 1. Were the profits of the business treated as profits of the parent? 2. Did the parent appoint the persons carrying on the business? 3. Was the parent the head and brain of the trading venture? 4. Did the parent govern the adventure, decided what should be done and determine what capital should be embarked on the venture? 5. Did the parent make the profits by its skill and direction? 6. Was the parent in effectual and constant control?  Atkinson J held that the parent company’s business was really being conducted and as such it was entitled to compensation. TYPES OF COMPANY Types of company s 112(2) Proprietary Companies - Limited by shares - Unlimited by share capital Public Companies - Limited by shares - Limited by guarantee - Unlimited by share capital - No liability company. Proprietary Companies  A company limited by shares, or an unlimited company may be formed as a proprietary company  A proprietary company is a private company designed for a relatively small group of persons who do not wish the company to be able to invite the public to subscribe for its share capital or to lend money to it.  S113 identifies the requirements for proprietary companies  A proprietary company must not have more than 50 non-employee shareholders.  It must not engage in any activity that would require disclosure to investors under Chapter 6D, except in the limited circumstances. Proprietary Companies (small and large)  The act makes a distinction between large and small proprietary companies as provided in s 45A(2)and(3).  A large proprietary company as per s45A(3) is required within a financial year to meet at least two out of three criteria: o It has a consolidated revenue of $50m or more o The value of its consolidated gross assets is $25m or more o It has at least 100 or more employees Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  A small proprietary company as per s45A(2) is one which falls below any two of the above criteria. Public Company  If a company is not a proprietary company, it is known as a public company s9. Classification according to liability limit  If the company is to be able to engage in any kind of business or activity, three types are available: o Company limited by shares o Company limited by guarantee o Unlimited company  If the company is to be solely a mining company, the applicants have an option to form it as a no liability company s 112 (2). Company Limited by Shares  A company limited by shares is funded by each member contributing or promising to contribute, when called upon to do so, a certain amount of money for shares (known as share capital)  The claim of a member to be repaid the contribution in a winding up is not met until all the company’s debts have been paid  The money contributed is not to be repaid before the company winds up except under certain conditions. Company Limited by Guarantee  Guarantee companies cannot increase or reduce the amount of the guarantee either by amendment or by agreement with the members, and this inflexibility makes them unsuitable for any venture whose capital needs are likely to change Hennessy v National Agricultural and Industrial Development Assn IR 159.  There is no legal bar to a company limited by guarantee earning profits. However, there is a bar on a company limited by guarantee distributing profits as a dividend to members – s254SA. Unlimited Company  An unlimited company is a company where in the event of winding up members liability are unlimited. Such companies may be proprietary or public companies s 112.  Unlimited companies are not normally used by trading ventures. They are encountered in professions in which practitioners are expected to remain liable without limit and yet be permitted to operate in a corporate form for taxation or other reasons  The liability of each member is several and a single member could be liable to contribute the full amount needed Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  It is oldest type of company dating back to the Joint Stock Companies Registration and Regulations Act 1844 (UK) which had no provision for limited liability. That came later in 1855. No liability company (mining ventures)  Although a no liability company must have a share capital and members may agree to take shares, their membership does not carry any liability under pt 5.6 div 2 to pay any calls of share capital either while the company is a going concern or in its winding up – s254M(2).  A member can choose whether to pay a call but if they choose not to, the shares will be forfeited – ss254M, 254Q.  To registered as a no liability company, a company: a) Must have a share capital b) Must have adopted a constitution stating that its sole objects are mining purpose c) Must have no contractual right under its constitution to recover calls made on its shares from a share-holder who fails to pay them – s112(2). Nature of company to be Indicated  Where the liability of the members is limited, in companies other than a no liability company, the end of the company’s name must be the word “Limited” or the abbreviation “Ltd” to give warning to potential creditors – ss 148, 149.  The end of the name of a no liability company must be the words “No liability” or the abbreviation “NL” – ss148, 149.  Companies may not be required to have the word limited in certain circumstances s 150.  A proprietary company is required to have the word “Proprietary” or the abbreviation “Pty”, as part of its name, inserted immediately before the word “limited” or the abbreviation “Ltd” or, in the case of an unlimited company, at the end of its name – ss148, 149. INCORPORATION CORPORATE PERSONALITY THE REGISTRATION PROCESS Incorporation  To register a company, a person must lodge an application with ASIC, s117, and the company comes into existence on the day it is registered, s 119. Note the company’s name is the name specified in the certificate of registration s 119.  If an application is lodged under s 117, ASIC may: a) Give the company an CAN b) Register the company c) Issue a certificate that states: Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks i. The company’s name, CAN and type ii. That the company is registered as a company under this act iii. The state or territory in this jurisdiction in which the company is taken to be registered iv. The date of registration s 118. Corporate Personality  A company has the legal capacity and powers of an individual s 124(1).  A company also has all the powers of a body corporate, including (among other things) the power to: o Issue and cancel shares in the company o Issue debentures o Grant options over unissued shares in the company o Distribute any of the company’s property among the members, in kind or otherwise ss 124(1)(a)-(d).  A company limited by guarantee does not have the power to issues shares s 124(1). The registration processes  ASIC is responsible for company registration  An application may be lodged by a person who will be a member of the proposed company. Persons who seek in-corporation are commonly called ‘corporators’.  The proposed company may be formed for any lawful purpose. It is therefore implicit that it could not be formed for an un-lawful purpose.  Exceptionally, a trade union cannot be registered under the Corporations Act s 116. Process  The application must be in the prescribed form s117(4) an ASIC Form 201.  Section 117(2) sets out what the application must contain and includes: o The type of company that is proposed to be registered under this Act o The company’s proposed name (unless the CAN is to be used in its name) o The name and address of each person who consents to become a member o The present given and family name, all former given and family names and the date and place of birth of each person who consents in writing to become a director.  Section 117(2) sets out what the application must contain and includes: o The present given and family name, all former given and family names and the date and place of birth of each person who consents in writing to become a company secretary o The address of each person who consents in writing to become a director or company secretary o The address of the company’s proposed registered office o The address of the company’s proposed principal place of business (if it is not the address of the proposed registered office).  If the company is to be a public company and is to have a constitution on registration, a copy of the constitution must be lodged with the application s 117(3). Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  An applicant must have the consents and agreements referred to in subsection (2) when the application is lodged s 177(5)  After the company is registered, the applicant must give the consents and agreements to the company. The company must keep the consents and agreements s 117(5) ASIC INFORMATION SHEET: 7 STEPS INVOLVED IN STARTING A COMPANY  ASIC information sheet sets out 7 steps involved in starting a company: 1. Confirm a company structure is required 2. Choose a company name 3. Decide how the company will operate 4. Understand officeholder obligations 5. Obtain relevant consents 6. Register the company with ASIC 7. Understand the legal obligations Step 1 – Confirm Company Required  Applicants must consider if a company or other types of business structure is required  Registration of a business name does not: o Create a separate legal identity o Bring about privileges to which a company is entitled, such as a corporate tax rate or limited liability  There are different types of company: o Proprietary companies (Corporations Act s 45A) o Public companies (Corporations Act s 9)  There are different classes of company o Limited by shares o Limited by guarantee o Limited by shares and guarantee o Unlimited o No liability (mining ventures)  Not all classes of company have limited liability. Step 2 – Choose Company Name  A company name must: o Show the company’s legal status (e.g., Pty, Ltd) o Be unique (check name availability available) o Not contain certain words or phrases (misleading, offensive, etc) e.g., Sir Donald Bradman unless there is a connection.  Name reservation is available Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  A company’s Australian Company Number can be used as its name. Step 3 – Decided how company operates  Section 140 of the Corporations Act provides that a company’s internal governance can operate under: o The replaceable rules o Its own constitution o A combination of both Step 4 – Understand Officer Holder Obligations  Company officeholders are ultimately responsible for the company’s compliance with the Corporations Act.  They must ensure that: o The company pays its debts on time o The company keeps proper financial records o They act honestly, carefully and in the best interests of the company.  Directors have duties to the company which can be split into three categories: o General duties  Exercise care and diligence  Exercise good faith  Not to improperly use position to gain advantages  Not to improperly use information o Duty to not trade while insolvent o Duty to keep books and records. Step 5 – Obtain Relevant Consents  Written consent must be obtained from all who agree to fill the roles of: o Director o Secretary o Member  Directors and secretaries must be over 18yrs old  Written consent from the occupier of the registered office is also required. Step 6 – ASIC Registration  Application for registration must be lodged with ASIC. A non-refundable application fee must be paid.  Majority of applications for registration are received via an ASIC registered agent but may also be lodged via Form 201. ‘Application for registration as an Australian company’.  A certificate of registration is issued by ASIC at the point of registration displaying details such as the company name, it’s unique Australian Company Number (ACN) and the date of registration  It is conclusive evidence that a company has met relevant requirements and was registered (however, a current company search is most reliable for comply status). Step 7 – Understand Legal Obligations Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  There are many legal obligations arising on incorporation of a company such as  The company name must be displayed prominently at all places of public business  Company name and CAN/ABN must appear on public documents, negotiable instruments and documents lodged with ASIC  The company may, but is not required to, have a company seal  To undertake the annual review process  To notify ASIC of changes to company information such as officeholder details, addresses, company name and share details  To pay fees that are incurred by some document lodgements, and in some cases, lodge financial reports. o The majority of changes are notified electronically. Company Deregistration  A company may be deregistered and removed from ASIC’s register in one of the following ways: o Voluntary deregistration o ASIC initiated deregistration o Winding up of a solvent company o Winding up of an insolvent company o Names of companies ASIC intends to deregister are published on ASIC’s notices website o Once published, ASIC will deregister (usually within 2 months). Company registration summary  ASIC is responsible for the regulation of companies  Companies must be registered with ASIC in order to operate  There are 7 key steps to company registration  Companies have a number of obligations  Registered agents can act as intermediary between ASIC and a company  If a company is no longer operating, it may be deregistered. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Week 4: Internal Rules of a company and corporate contracting Contents 1. What is corporate governance? 2. The company constitution 3. Corporate capacity 4. Corporate assent to transactions 5. Authority to act for a company 6. Indoor management rule (Common Law and Statutory) 7. The board of directors 8. The general meeting WHAT IS CORPORATE GOVERNANCE? Corporate governance is:  The management of business enterprises and the mechanisms by which managers are supervised  It covers all aspects of the relationships involving shareholders, customers, creditors, managers and auditors of a company  It deals with duties managers owe to the company and, in certain circumstances, to other stakeholders Source: Section 134 of the Corporations Act deals with the internal management of companies. It states that a company’s internal management may be governed by: Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks - Replaceable rules - By a constitution - By a combination of both COMPANY CONSTITUTION A company’s constitution is a document containing the rules governing its internal management. - Until 1 July 1998, companies used memorandum and articles of association. Older companies may still be governed by a memorandum and articles of association. Adopting a Constitution  Section 136(1) provides that a company adopts a constitution: a) On registration – if each specified in the application for the company’s registration as a person who consents to become a member agrees in writing to the terms of a constitution before the application is lodged b) After registration – if the company passes a special resolution adopting a constitution or a court order is made under s233 that requires the company to adopt the constitution.  Public companies that wish to be listed on the ASX must have a constitution ASX Listing Rule 15.11  A no liability company must adopt a constitution as in order to be registered as a no liability company its constitution must state that its sole objects are mining purposes s112(2)(b). What are the REPLACEABLE RULES?  The replaceable rules are a series of provisions in the Corporations Act (identified as such) which relate to the management of corporations  A replaceable rule may be mandatory for a public company and if so, it cannot be changed or excluded by a public company s135(1)(b).  At the moment there is only one such replaceable rule, s249X relating to the appointment of a proxy. List of the Replaceable Rules Section 141 contains a table setting out the 42 provisions of the Corporations Act that apply as replaceable rules. They are grouped into the following categories:  Officers and employees  Inspection of books  Directors’ meetings  Meetings of members  Shares  Transfer of shares Governance Rules as a Statutory Contract Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks  Section 140(1) provides that a company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract: a) Between the company and each member b) Between the company and each director and company secretary c) Between a member and each other member  Under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.  However, s 140(2) provides that unless a member agrees to be bound in writing, they are not bound by changes made to the constitution after they become a member that: a) Require them take up additional shares b) Increase their liability to contribute to the share capital of, or otherwise to pay money to, the company c) Impose or increase restrictions on their right to transfer the shares subject to certain exceptions relating to: i. A change from a public to a proprietary company ii. The insertion of proportional takeover provisions Outsiders and the Statutory Contract  Outsiders cannot enforce the statutory contract regarding a company’s governance Eley v Positive Government Security Life Assurance Co Ltd 1 Ex D 88. FACTS - Under the company’s articles of association Eley was to be its solicitor and conduct all its legal business. Eley could only be removed for misconduct - The company ceased to employ Eley and started employing other solicitors to do its work - Eley was not appointed solicitor to the company by any resolution of the directors, nor by any instrument bearing the corporate seal of the company - Eley sued for breach of contract based on articles. HELD - The articles of association where a contract between the shareholders inter se, and did not create any contract between the plaintiff, who was not a party to them, and the company. - The fact that Eley later became a member of the company did not change the outcome. Members Rights under the Statutory Contract must be in their capacity as a member Hickman v Kent or Romney Marsh Sheepbreeders’ Association 1 Ch 881  Astbury J o No article can constitute a contract between the company and a third person o No right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter…can be enforced against the company Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks o Articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company. CORPORATE CAPACITY AND CORPORATE ASSENT AND TRANSACTIONS A company has the powers of an individual and a body corporate 124 Legal capacity and powers of a company 1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to: a. Issue and cancel shares in the company b. Issue debentures [including types that were restricted under common law or equitable rules] c. Grant options over unissued shares in the company d. Distribute any of the company’s property among the members, in kind or otherwise e. Grant a security interest in uncalled capital f. Grant a circulating security interest over the company’s property g. Arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction h. Do anything that it is authorised to do by any other law (including a law of a foreign country). How does a company enter a contract? A company can enter a contract either directly or through an Agent. Directly  By method authorised in its constitution  By signature s127(1) with authority  By seal s127(2) with authority Through an Agent  With actual authority o Express actual authority o Implied actual authority  With apparent authority o Representation of person with actual authority Directly s127  Section 127(1) provides that a company may execute a document without using a common seal if the document is signed by: Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks a) 2 directors of the company b) A director and a company secretary of the company c) For a proprietary company that has a sole director who is also the sole company secretary – that director  Note for s127(1)(c) to apply the sole director must also be the sole company secretary.  Section 127(2) provides that a company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: a) 2 directors of the company b) A director and a company secretary of the company c) For a proprietary company that has a sole director who is also the sole company secretary – the director  Note for s127(2)(c) to apply the sole director must also be the sole company secretary. Direct entry into a contract s127.  Section 127 also provides that: (3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2). (4) This section does not limit the ways in which a company may execute a document (including a deed)  Section 127(4) allows a company to execute a document by any other method prescribed by its constitution e.g., signature of the managing director. Through an Agent  As it has all the powers of an individual under s124, a company may appoint an agent to act on its behalf.  Section 126 provides that: 1) A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal. 2) This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract Authorisation of an Agent  There are two types of authority of an agent: o Actual authority o Apparent (or Ostensible) authority  Actual authority may be broken down further into: o Express actual authority o Implied actual authority  Express actual authority can arise in two ways: o Pursuant to a provision in the corporations act or the company’s constitution (assuming it has one) Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks o By delegation of the board or another company agent having actual authority  Express actual authority may be delegated by the board of directors o To a managing director s 198C (replaceable rule) o To a committee of directors, a director, employee or any other person s198D (for example a CEO) Implied Actual Authority  Implied actual authority can arise in two ways: o Appointing a person to a certain position o Acquiescing to give a person authority to do things not explicitly authorised o Acquiesce: to knowingly stand by without objecting to a wrong done  Actual implied authority by appointment to a position o Managing director: to person appointed as a managing director will have power to ‘do all the things as fall within the usual scope of that office’ Hely- Hutchinson v Brayhead Ltd 1 QB 549, 583, Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd 133 CLR 72. o Individual director: not usually able to bind the company. Directors must collectively make a resolution as the board of directors to bind it. Northside Developments Pty Ltd v Registrar-General 170 CLR 146, 205.  Actual implied authority by appointment to a position o Chairperson: chairperson does not usually have power to bind the company. However, sometimes the chairperson may be acting in the position of managing director. o Company secretary: has power to enter into contracts connected with the administrative side of the company’s affairs, e.g., employing staff. A secretary does not have implied authority to manage the company: Grimaldi v Chameleon Mining NL (No 2) FCAFC 6, 76. Actual implied authority by acquiescence: See Hely-Hutchinson v Brayhead Ltd 1 QB 549. See also Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd 2 VR 279. FACTS - Richards was a chairman of Brayhead and would commit Brayhead to various contracts and inform the board afterwards - Richards purported to bind Brayhead in giving an indemnity against any losses of a company known as Perdio Electronics Ltd, which was in financial difficulty. - Perdio Electronics later went into liquidation - Brayhead denied liability under the indemnity on the basis that Richards as a mere director had no power to bind the company. HELD - Richards had implied actual authority arising from acquiescence of the board in allowing Richards to bind Brayhead to various contacts without prior board approval. Apparent (Ostensible Authority)  For an agent to have apparent (or ostensible) authority the following three requirements must be satisfied: Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks 1. A representation was made that the agent had authority 2. By someone with actual authority 3. The person relied on that representation See Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd 2 VR 279 FACTS - The company seal of Brick and Pipe Industries was affixed to a guarantee. The affixing was witnessed by Goldberg as (director) and Furst (purportedly as company secretary). - The board had given Mr Goldberg actual authority to act generally for it, however, Furst was never appointed by the board as company secretary. - If the application of the common seal was attested by a director and a secretary, Brick and Pipe would be bound. HELD - Brick and Pipe was bound to the guarantee - Goldberg had implied actual authority to make representations on behalf of Brick and Pipe and was taken to have represented that Furst was the company secretary - Furst therefore had apparent authority to act as such. If the person making the representation has only apparent authority, the representation of authority will not be binding on the company Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd 133 CLR 72. Apparent (Ostensible) Authority Person with actual authority + representation = confers apparent authority Person with only apparent authority + representation = confers no power INDOOR MANAGEMENT RULE Indoor Management Rule (Common Law)  The common law indoor management rule (also known as the rule in Turquand’s case) provides that: “persons dealing with a company in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of the internal management have been regular” (see Northside Developments Pty Ltd v Registrar-General 170 CLR 146).  It allows a person to assume that all procedural steps necessary for a company to appoint an agent have been taken (e.g., a full quorum of validity appointed and properly informed directors passing a resolution at a meeting)  There is a narrower statutory equivalent in ss128-129.  In Royal British Bank v Turquand 6 El and Bl 327 a company was held to be bound to a bond signed and sealed by two of its directors despite the fact that a resolution of the general meeting required by the deed of settlement (constitution) had not been passed.  The Court of Exchequer Chamber held that the bank was entitled to infer that the necessary ordinary resolution had been passed. Downloaded by Jemilla Lister ([email protected])  lOMoARcPSD|41847248 LAWS200 Business Organisations ALL Weeks Limitations on the Indoor Management Rule (Common Law)  The indoor management did not apply in cases where: o Acts were ultra vires o No actual appointment has been made o The company tries to rely on the rule o A person had knowledge of, or was out on inquiry as to, irregularities.  The indoor management rule does not entitle an outsider to assume that a person has been appointed, only that there are no procedural irregularities in the appointment; Northside Developments Pty Ltd v Registrar-General 170 CLR 146, 198 (Dawson J).  If a person represents that he/she has been appointed as managing director, when he/she has not, an outsider cannot rely on the representations of that person.  A co