Module 2 - Contract Law PDF

**[Module 2 - Contract Law]** - A valid contract is a legally binding agreement and it is regulated by statute especially if the bargaining parties are of unequal bargaining strengths. - Parties are judged by what they have said, written or done rather than by what they were thinki...

**[Module 2 - Contract Law]** - A valid contract is a legally binding agreement and it is regulated by statute especially if the bargaining parties are of unequal bargaining strengths. - Parties are judged by what they have said, written or done rather than by what they were thinking of. - The law will intervene only if one of the contract parties are using unfair advantage of their position. - Standard form contract is used by large corporate like electricity companies and it cannot be changed unless by big consumers like factories. - Australian consumer law (ACL) replaced 13 separate consumer regimes and it is implemented by Federal. - Valid contract has three elements: Offer and acceptance, Consideration & intention to enter into a legal relation. - The contract is considered incomplete because parties have failed to reach agreement. - The contract is considered uncertain because the terms are vague or unclear. - The validity of contract may be affected by: Capacity, Form, Content, Genuine consent, Legality. - principle of **[\"Pacta Sunt Servanda\"]** is **[\"agreement must be kept\"]**. - Void contract is not a contract at all and any property that was transferred due to the contract can be recovered. - Voidable contract is a contract that be set aside by one party and usually the properties that was transferred cannot be recovered. - Unenforceable contract is a valid contract that is not enforceable to the bargaining parties. the properties transferred based on contract cannot be recovered. The contract is unenforceable when there is no evidence to its terms. - Quasi contract is not an actual contract but a remedy that is determined by the court to compensate the injured party for damages. - As a general rule, contract may be made in any form ( does not have to be in writing at all). - If the contract is in writing then, communication of the contracts terms and negotiations can be done through writing or electronically (Like e-commerce contracts and purchases). - The contracts must be in written format in the following cases: - Contracts by deed which must be written and signed by both parties like the lease contract, power of attorney, the contract to donate to charity, legal transfer of assets like mortgage. Contract by deed is usually referred to as a specialty contract. - Contract that must be written is the contract that is written and signed by at least on party like cheques & shares transfer contract. - Contract that is evidenced by writing is a contract that can be made orally but is enforceable only if it is evidenced in written format like Guarantee. - The contract is valid until it is discharged and this can be done through agreement to discharge, performance of the contract obligation, breach of contract terms, frustration where the obligations cannot be done due to specific circumstances. - Offer is a promise to bound on a specific terms. It can be addressed to one person or group or to the whole world. However, one person or more can accept the offer. - Offer must be distinguished from a statement that supplies information. - A vague offer is considered a void offer like \"if the horse is lucky\". - A statement which sets out possible terms of a contract (not a specific term) is considered a supply of information not an offer. However, if the vendor clearly states the intention to sell in this statement it is considered to be an offer. - Statement of intention is not an offer as it is just showing the intention to sell like an advertisment of an auction. The auction can be called off. - An invitation to a treat is an invitation to initiate a negotiation (not an offer) like auction, exhibition and tenders. The intention of it is recieve offers to reach a binding contract - In auction sales, the bid is an offer that can be accepted by the auctioneer. - Advertisments are a way to induce offers. - Circulation of a price list is also considered as an invitation to treat as the merchant may not have enough stock to meet the required sales. - Displaying goods on shop\'s windows or shelves is considered as a invitation to treat unless the good is picked up by the customer and commenced to buy it. - Invitation for tenders is not an offer. - Offer termination can be done through - Rejection of the offer - Counter offer is changing the terms and condition of the original offer which terminates the original offer (Original offer is no longer available for acceptance). - Lapse of time can terminate an offer as the offer is valid only for a specific time or for a reasonable time. - Revocation of an offer means to withdraw or remove an offer at any time before acceptance. revocation cannot take place unless the buyer recieve a revocation letter before he post the acceptance letter. revocation can occur through an authorized third party. - Failure of a condition. - Termination by death unless the buyer accepted the offer with ignorance of death and the object is not a personal object. - Request of further information is not considered as a counter offer and it does not terminate an offer. - Acceptance is the positive unqualified (unconditional) act by the person to whom offer made to that brings a binding contract (No withdrawal at this point). - Acceptance is generally not effective untill communicated to offerer. it may be by express words or action or inferred from conduct. - Postal rule is acceptance is considered effective once posted through post. - Silence is considered acceptance if there is an act stating that in the contract. - \"Acceptance subject to contract\" means that the parties agreed to write a provisional agreement or preliminary contract that accept the agreed terms until a formal contract is signed. - In tenders to supply a series of things, Acceptance is considered effective by placing order. Every order is considered a contract. - A tender to perform one task is considered an offer that can be accepted. - Acceptance must be communicated to the offeror in order for a contract to take place. However, this rule does not apply to all cases like waiver of communication. - acceptance through email is considered effective once the acknowledgment of receipt is recieved on email. - Acceptance is like offer that can be done in person or through authorized party. - Cross-offers is two offers that are identical in terms and cross in post so there is no contract in this case. For example, if \"A\" offered to buy \"B\'s\" car for 1000 and \"B\" offered to sell his car to \"A\" for 1000 so there is no contract in this case as there is no acceptance in this case. - Person cannot accept an offer that he/she not aware of. For instance, a person who reports a criminal, after that he knew that there is a prize, he cannot redeem the prize as he didn\'t accept the offer at the first place due to ignorance of it. - Consideration is simply \"what every party brings to the contract\" or \"each party must exchange something in the contract\". - The requirements for consideration can be avoided in drafted contracts & civil law legal systems. - \"Executed\" consideration is an act in return for a promise that is done in the present time. For example, when a customer pay for the goods now and receive the god now. - \"Executory\" consideration is a promise in return of a promise. The acts are done in the future time. For instance, the merchandiser promised to deliver goods sometime in the future and the buyer promised to pay later in that time. - Valid consideration must be: - Performance must be in return for legal acts. - Performance must be possible. - Consideration must be sufficient (something in return) but not necessarily adequate (The law does not protect poor bargainer). - Past consideration is something that has already been done at the time the promise is made. For example, a promise to pay the plumber a \$100 for work already carried out 2 weeks ago. - Past consideration is not enforceable by law. - Any promise done after the formation of the contract is considered past consideration. - If a request for a service does imply a promise to pay, then it is a binding contract. - A promise to pay in return for an action that is imposed by statute is not considered as valid consideration. For instance, paying for a person to show up in the court. - If an extra work is requested which is in the scope of the original contract, then a consideration is not necessary. However, if it is hard to apply then a consideration shall be paid. For example, if a job that can be done by 10 workers, but done with 9 workers, then no extra consideration is binding, But if the job is requested to be done by 5 workers then extra consideration is binding. - After forming a contract, additional consideration need additional contract or it will be not binding. - Waiver of existing rights shall be supported by consideration. For example, a waiver of debt shall be supported by giving the debtor a good in return. - Intention to create legal relationship is presumed in case of business or commercial or commercial agreements but not in social, domestic and family arrangements **[(except in some cases)]**. - Privity of contract is the relation between two parties to a contract. - Courts may consider a valid intention to create legal relationship between relatives or husband and wife if the case is about **[property but it is subject to documentation]**. - When people enter into commercial agreements, it is presumed that an intention for legal relation exist unless this is explicitly disclaimed or the circumstances shows otherwise. - The burden of proof is on the party seeking to escape liability. - If a transaction is binding in honour only, then it is not meant to create legal relationship between the contract parties. - Representation is something that is said during negotiation of the contract but it is not a term of a contract as it is not written in the contract. As a result, representation cannot be sued, on the contrary is the term can be sued under the contract law. - A representation is considered as a term of contract in case of special knowledge of the person stating it. For example, if a car seller is stating that the car millage is 20K miles only, while it is revealed that the actual millage is 80K, then the 20K miles is considered a term of the contract. - Unfair contract term is the term that allow one party to overrule another party. Unfair contract terms are regulated by the Australian Consumer Law (ACL). The final decision of unfair terms is ultimatley decided by the court. - Standard consumer contracts are regulated under ACL to protect consumer from unfair terms. - Unfair contract term (regulated by ACL) does not cover price, supplied product specs. & terms required by another laws. - Freedom of contract is the inclusion of whatever terms in the contract. - Express terms are terms that are expressly included in the contract. Courts firstly look and search for this terms. - Contract that does not include terms is considered vague, void and incomplete. - When a term is inappropriate or irrelevant, such term is disregarded by court. - Implied terms is the term implied by statute, courts, customs & laws. They may override the express terms in certain circumstances like terms implied by statutes. - Express terms override implied terms by trade customs. - Terms implied by court is the terms that court concludes that parties intended those terms to apply to the contract or things that goes without saying or terms that deemed necessary for this type of contract. - Unconscionable conduct is a business conduct which is unfair, unreasonable, harsh in business transaction that goes against good conscience. - Anti-competetive conduct interact with contract law by prohibiting any contract that will lead to lessening the competition. - Anti-competitive conducts like: - Cartels: Making agreements to fix prices, market share - Collective bargaining and boycotts: The business are not allowed to fix prices, allocate customers, ristrict outputs. - Exclusive dealing is the restriction of dealing with other customers or vendors. - Imposing minimum resale price. - Misuse of market power is the misuse of power to eliminate competitors. - Predatory pricing is setting low prices with the intent to eliminate competition. - Price signaling is for banking sector in relation to taking deposits and issuing loans. - Refusal to supply goods or services. - Shopping center leases exlusiveness, like allowing only one supermarket in the shopping center. - Market sharing agreements are agreements betwen competitors to divide customers, territories, sales or market. - Conditions & Warranties are considered terms of contract where conditions are a vital term of a contract that are going to the roots of the contract and its breach may cause a breach & discharge of the contract. On the other hand, warranty is a term subsidiary to the main purpose of a contract and its breach may lead to a remedy to the injured party & the injured party must continue to perform. - Some terms are unclassified (Conditions or warranties) until the consequences of its breach is clear. - Statute (ACL) & Case law imply conditions and warranties. - An \"exclusion clause\" or \"exemption clause\" is a clause in the contract that exclude liability or restrict it by limiting damages or by imposing other onerous conditions. - **[\"Contra proferentem rule\"]** is when the court interpret any ambiguity against a person at fault who relies on the exclusion clause. - Australian court system has developed various case laws regarding the exclusion clauses to restrain its effect. - Courts generally seek to protect consumers from exclusion clause in two ways: - Exclusion clause must be incorporated in the contract. - Exclusion clause must by discussed clearly in the contract (not strictly or narrowly interpreted). - Exclusion clause is considered incorporated in a contract in following cases: - Integral part of the contract. - Signed by the parties. - Put forward before the contract is made. - Parties\' Awareness of the clause. - Exclusion clauses shall be incorporated in the relevant document that is expected to contain terms. For example, Contract but not receipt. - A person agrees on term by signing on the document **[\"even if not read\".]** But if a misleading explanation was given for him before signature, the term is not binding. - Exclusion clause shall be presented before the contract is made. - Consistent dealing between parties may overrule the prior notice or presentation of exclusion clause. - Onerous term is an unusual term and it should be highlighted clearly. - In interpreting exclusion clause, the court interpret any ambiguity against the person who relies on the exclusion and it is called \"Contra proferentem rule\". - The \"main purpose rule\" is that the exclusion clause is not preventing the main purpose of the contract. - Breach of a contract is the inability to perform the contract obligations without a lawful excuse. - A lawful excuse for not performing the contract\'s obligation are: - Performance is impossible. - Performance was tendered by one party and rejected by the other one. - The contract was discharged for frustration which is the inability to perform for specific circumstances. - Other party made it impossible for them to perform. - There is an agreement that permits the non-performance. - Repudiation can be defined as breach of contract which entitles the injured party to end the contract **[if they choose]** unless they choose to continue and claim for damages caused. - Repudiatory breach does not discharge the contract automatically (Either to continue or terminate). The innocent party must inform the other party with their decision. - Breach of a condition will cause a repudiatory breach, although a breach of warranty does not. - Refusal to perform, Failure to perform & Incapacitation(seller prevent themselves from selling the product) are considered a repudiatory breach. - Anticipatory breach occurs when a party declares in advance that he/she will be unable to perform his obligations. - In anticipatory breach, the innocent party may discharge the contract or may continue the contract until actual breach happens and claim for actual losses. - **[Anticipatory breach happens before the time that performance is due, while repudiatory breach happens at the time of performance.]** - Damage is a common law remedy for a contract breach. - Two test are applied to claim dmages: - Remoteness of damage which is the cause and effect of the breach. - Measure of the damage which is the quantification of the damage. - A loss that arise outside the natural course of events will only be compensated if the exceptional circumstances are within the defendant\'s knowledge when they made the contract. - As a general rule, the amount awarded as damages is what is needed to put the plaintiff in the position they would have achieved if the contract had been performed (called Expectation interest). - Damages can be awarded for financial and non financial losses. - Nominal damages is awarded when the plaintiff does not incur any loss. - Liquidated damages are calculated damages by using a pre-set formula in the contract to determine damages payable in case of breach. - Liquidated damages avoid later disputes over damages. - Penalty clause is a clause to claim damages done by breach and it is considered as a onerous term. If the intention of the clause is to deter a potential difficulty, then the court will dismiss this clause and calculate liquidated damages. - Other remedies are available: - Action for the price is the agreement to recover of the agreed sum (equitable right). - Quantum meruit is that when the injured party claim the value of their work (Common Law right) - Specific performance is when the party is obliged to perform their side of the contract (equitable right). - Mareva Injunction is the restriction of the use, transport, dealing with the disputed assets (equitable right). - Rescission means that the contract parties are restored to their pre-contract conditions (equitable right). **[Module 3 - Torts]** - Tort is a civil wrong and the person wronged will make a civil claim for compensation. - In torts, No contractual relation or present or current transaction between the parties need to be exist. - The claim in torts is based on the common law of duties & rights. - Torts is distinguished from other wrongs by: - It is not a breach of contract - It is not a crime. **[Types of Torts:]** - Trespass to land involves one of the following acts without lawful justification: - Entering land - Remaining on the land - placing an object - Liability of trespassing to land is strict even if it is accidental due to the privacy of home. - Continuing trespass is where object remains on the property of the plaintiff. - Trespass to land is acceptable if consent is given, license to enter (like electric meter reader), in case of emergency & landlord only to make repairs after obtaining consent. - Trespass to goods is taking or destroying the goods in possession of other party. - Trespass to person involves the act of Battery, Assault, False imprisonment. - Battery involves intentional bringing of a material object into contact with other person like tone rinse زعيق. - Assault involves intentional act of putting the other person in reasonable fear يعنى طلعت مسدس مثلاor apprehension of immediate battery يعنى زعقتله و هو خاف منى. - In Australia, Beating or restraining someone (Unintentionally) is considered a trespass to person tort. - Nuisance occurs when the use of land cause a damage to the neighboring land. - Nuisance is concerned with damage while trespass to land is concerned with the trespass (existence on land). - if a damage occur during trespass to land, it is a nuisance tort. - Private nuisance is damage to private property. Landlord only can sue for this nuisance. - Public nuisance is affecting comfort of a class of people. The plaintiff is not required to have interest in land (not a landlord) to sue for public nuisance. - Public nuisance is a criminal offence that is created by statute. - Defamation is the expression or publication of false or defamatory statements that is not lawfully justified. For example, ridicule of an individual - Libel (Visible) & Slander (Spoken) are used to describe the defamation torts. - Libel is a criminal act while slander is civil injury. - Companies can\'t sue for defamation. - Deceit is a wrong where the plaintiff is misled to taking action that are to defendant\'s detriment. - Injurious falsehood involves making false statement that cause damage to plaintiff. For example, Passing-off which is use of a trademark name of logo to sell falsified product. - Tort of negligence is caused by carelessly carrying out an act and breaking **[legal duty of care owed]** to others causing them loss or damage. - For a **plaintiff to succeed in a tort of negligence**, he **must prove** that: - The defendant had the **duty of care** to avoid causing damage or injury. - There was a **breach** of that duty of care. - Financial or non financial **damage or loss** has been caused. - The legal remedy is the payment of monetary damages (Financial or non) in a form of compensation to restore the defendants position before the tort occurrence. **[Duty Of Care:]** - The duty of care exists in any situation is generally decided by the courts on a case by case basis with every case\'s own particular facts. - The general principle is that every person owes a duty of care to his neighbors or person closely affected by his acts. - In order to be charged for negligence, the defendant must owe a duty of care to other. - Case law developed salient features to establish the existence of a duty of care. - Duty of care applies in context of professional relationships like accountants & clients. - A professional advisor (has knowledge & skills) can be liable for negligence due to misleading advise, irrespective of whether there is a contract or fiduciary relationship or not. **[Breach of duty Of Care:]** - In order to prove a negligence claim, a breach of the duty of care need to be proven. - The standard reasonable care is concerned by what a reasonable person shall do, so it is a objective test rather than subjective test. - The factors that shall be considered when deciding a breach in duty of care are: - Probability of injury: It presumes that a reasonable man shall take greater precautions when the risk of injury is higher. - Seriousness of the risk: Where the risk to vulnerable people (Like disabled) is high, the level of care required is raised. The egg-shell skull rule means that you need to take your victim as they are. - Practicality & Cost: The defendant will not be in breach if the cost of preventing the risk is higher than the risk of occurring. - When the action is within the common practice or custom, it is likely that no breach of duty of care, unless the common practice is found to be negligent itself. - When an action is of social benefits, defendants may be protected from liability even if their actions create risk, like fire trucks accidents due to speeding. - People who possess a special skill or profession shall be judged on what a reasonable person who possess the same skill shall do not an ordinary one. \"Res Ipsa Loqitur\" means that things speaks for itself, The court may infer negligence from proof of facts that happened. - The plaintiff must demonstrate that the loss is due to the breach in duty of care. - The damage due to negligence can be **[determined & limited]** through (cause & effect): - The \"But For Test\" is the plaintiffs are unable to claim for losses occurred due to other\'s actions irrespective to the defendants actions. For example, the plaintiff became addicted to heroine (that is offered by a friend) while hospitalized after an accident. - When there are several causes of loss, the court shall decide, based on facts, if the negligent act is the main cause of loss. - Defendant is not liable for damages due to unreasonable acts of the plaintiff. - Defendant is not liable for damages due to unforeseeable natural events. - Defendant is not liable for damages due to acts of third parties that happened after the proved act of negligence. - Defendant is not liable for damages due to unforeseeable events that is can be predicted by a reasonable person. - The remedy objective of tort law is to compensate the defendant in order to restore his original position before that act occurrence. - The remedy amount can be reduce if it is shown that the plaintiff has contributed to his injury (called Contributory negligence). - The defendant cannot pay the remedy if he can prove that the plaintiff consent (agree) to the risk (Called volenti non fit injuria or voluntary acceptance to risk of injury). - An awareness to the risk is not sufficient to establish consent (agreement). - There is validity time limits for negligence claims which is 3 to 6 years based on jurisdiction. - Statutory compensation schemes are designed to limit civil claims for certain actions. For example, in Australia, the car drivers pay registration fees to use the roads and the government pay part of this fees to insurance companies to cover the claims or damages caused during car accidents irrespective of who was the fault. This lead to a decrease in the number of car accidents cases before the courts. - ACL contains a range of both civil & criminal consumer protection provisions - Manufacturer is defined as the party that makes or put the goods together or has his name on it. In case of imported goods, The importer is considered the manufacturer. - Liability for damage due to defective products cannot be excluded by any exclusion clause. - Under ACL, Manufacturers are not responsible for issues that are beyond their control Like, Something done by other person to the product, adjustments that were done to the product after goods have left the manufacturer control & suppliers charging higher prices to presume a higher quality of the product. - **\"Lemon Law\"** protect consumers against the delivery of defective goods. - Under lemon law, if a defect occurs within 6 months of purchase then it is assumed that the defect exist at the time of purchase, however, if reported after this period, the consumer has to prove that the defect existed at the time of sale. - Unconscionable conduct is defined as unfair, unreasonable & unjst actions by company. **[Module 4 - Non-Corporate Business structures]** - Sole trader is natural person and there no distinction between him and his business entity. - Sole trader has unlimited personal liability that applies to personal & business assets. - Advantages are responsibility for business decisions, cheap & simple to establish. - Disadvantages are limited access to finance raising methods (methods used by individuals only), business ceases on the death of trader, unlimited personal liability. - There is no governing law for sole traders (subject to individuals governing law). - Although no establishments cost, registration for Australian business number and registration for goods and services Tax with Australian Tax Office is required. - Business name registration is required if the used name is different than name of trader. - Cessation of business does not limit personal liability. - Partnership is a relationship between **at least** two individuals, it starts by agreeing to conduct business (not necessarily by starting to trade but may be by opening bank account for business). It ends by the death of one partner so the business turns to be sole trader. - No formal agreement (written) is required for partnership to exist. - Registration for Australian business number and registration for goods and services Tax with Australian Tax Office is required. - Partnership does not pay taxes, however taxes are paid by individual partners in their own income tax. - Business name registration is required if the used name is different than name of trader. - Every state in Australia has its own partnership act that governs partnerships. - Agency relationship means that one partner acts as agent for another partner (on behalf). Advantages For partnership ---------------------------------------------------------------- ------------------------------------------------------------------------------------------ Easy to establish & no cost Access to individuals Finance. Access to combined financial resources Agency relationship which makes partners responsible for bad decisions of other partners Finance assessment is based on combined resources of partners. Unlimited personal liability Decision making power Leaving a partnership is difficult. - Partnerships are secretive entities as their operations results are not published. - Maximum numbers of partners in partnerships are 20, except in legal practice entities it is 400 partners and in accounting firm 1000 partners.. - Limited liability partnerships are entities where partners liability is limited to their capital contribution. - Quasi partnership company is a small, generally private and often family-owned business where essentially the relationship between the directors and members is equivalent to partners in a partnership. - Joint Venture is an agreement of partnership for a specific project. - Joint venture has: - limited liability to the individual liability only. - Held for only specific project. - Each member receive a predetermined share of profit. - members can sell their share in Joint Venture. - Not regulated under partnerships State Act. - Associations are mostly run as not for profit except in some cases it is held for profits. However, this profits must **not be distributed between members** but put back into the association. - Not for profits associations can make incidental profits. - Associations must be held for purpose & establishment agreement shall be written. - Two types of associations: **Unincorporated association** **Incorporated association** ------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- Not separate legal entity Separate legal entity Member have Unlimited liability Member have limited liability Not governed by any legislation Governed by state association incorporation act Must be not for profit May be held for profit or not for profit Incidental profits may occur but not distributed to members but reinvested in association activities. Profits generated not distributed to members but reinvested in association activities. Cannot enter contract or own property Can enter contract or own property Easy to establish Have all advantages of a company - Association that include more than 20 members must be incorporated under corporation act. - If an association main purpose is for personal profits of its members, it is considered a company. **[Trusts:]** - A trust is an enforceable arrangement where a property is transferred to another one to be managed by called \"Trustee\" for the benefit of someone called \"Beneficiary\". - The \"Settlor\" is the person who transferred the property. - Trusts are governed by equity Law & Common law. - **Trust is not a separate legal entity.** - A trust can engage in actions like a normal person. For example, Contracts - Trustee is the legal owner of the transferred assets while the beneficiary is the owner. - Fiduciary duty of the trustee is the duty imposed by accepting the trust like not to personally profit from the transferred assets. - Trust can be established to safeguard an asset after the death of the original owner. - Trust can be used to pass on assets to persons while the settlor is alive. - Private trusts can be established for business & taxation planning purposes. - Express trust is the one created through intentional declaration of the settlor and made through a trust deed or a will. - The types of express trust are: - **[Inter vivos:]** Trust created between two living persons. In this type of trust, the settlor allocate amount of money to the trustee to be managed by, and the trustee is responsible for allocating income or capital to beneficiaries. This process is called \"Trust Settlement\". The trustee also has Exhaustive power which means that all trust income must be distributed on the beneficiaries & the Non-Exhaustive power means that the trustee has the power to choose whether or not to distribute the trust income. There are three types of Inter Vivos: - **[Fixed Trust:]** The trustee has to stick to the predetermined ratios/shares mentioned in the trust deed during the profits distributions. - **[Discretionary Trust:]** The trustee is flexible to deal with the profits distribution between the beneficiaries, usually used in family tax arrangements trust. - **[Units Trust:]** The beneficiaries holds units in the trust, same as shares in a corporation, and the income is distributed based on shares. - **[Trusts created by will:]** Trust created on death of person. - **[Trustee companies:]** Governed by Corporations act like superannuation funds. - Non-Express trust(Implied Trust) is the one created without express intention of the settlor. in other words, it is created when the law finds an implied presumption on the part of the settlor to create trust. - Types of implied trusts are, Constructive trust when it is deemed inequitable and unfair(unconscionable) for the holder of property to be permitted to hold the property for their own. For example, when two partners pay to purchase a property but the property is registered under the name of one of them. **[Parties of a Trust:]** - The settlor may be referred to as creator or donor in inter vivos, and testator in trust under will. There may be no settlor in some cases like in non-express trusts. - The settled funds are the transferred funds or properties in order to initiate trust. - Trust property consists of the transferred properties/assets to the trustee. - The beneficiaries has the following rights: - Right to sue the trustee. - Right to end the trust under specific circumstances. - Right to inspect the trust accounts. - Right to force performance of trust or changing the trustee. - Right to recover trust properties. - Right to sue a third person if the trustee failed to do so. - Right to apply to court for guidance on question of law. - Trust deed is the written document that governs the operation of the trust. It includes the following: - The beneficiaries. - Duties, powers & liabilities of the trustee. - Removal & appointment of the trustee. - How trust income is distributed. - details of vesting. - The Guardian is the person that need to referred to before the change in the trust deed. - The appointor is the person who appoints or change the Trustee. - Trustee are personally liable for the trust activities. in some cases to limit these liabilities, the trustee establish a limited liabilities company and appoint himself as the director of the company & manage the trust through this company. Trustee also can be a bank or approved financial institution or a professional trust company. - There may be more than one trustee for a trust. - The duties of a trustee are as follows: - Duty to obey terms of trust - Duty of care - Duty of loyalty - Duty of fairness among the beneficiaries. - Duty to keep accounts and provide information to beneficiaries. - Duty to administer the trust personally (no delegation is authorized) - Duty to pay monies only to correct beneficiaries. - Duty to invest trust funds as a reasonable person. - The Trustee has rights as follows: - Right to remuneration - Right to receive expenses spent during the performance of duties. - Right to apply for court advice. - Right to pay trust monies through court. - Right to discharge by the beneficiaries. - In order to establish an express trust, three certainties must exist which are: - Certainty of beneficiaries. - Certainty of trust property - Certainty of intention - The trust deed must expressly state a vesting date - The transfer of trust property marks the acceptance of the trustee for the trust. - The trust deed should be submitted to the relevant jurisdiction revenue authority - The settlor may transfer the property either by **[\"gift or sale\".]** However, in case of sale, the trustee may have no money to pay for the trust property, so a formal loan agreement is commenced at this case. - The death of the beneficiary does not end the trust, but the trustee may have the power (Based on the trust deed) to reallocate the trust property to the beneficiaries. - Death of the trustee does not end the trust, but the trustee position is vacant. The appointment of a trustee is made by: - The appointer - Surviving trustee - Personal representative of last surviving trustee - The beneficiaries. - The court. - Trust terms is binding once the trust property is transferred. However, trust terms may be varied by the following mechanisms: - When it is allowable through the trust deed. - When all parties agree to the terms variation (Trustee, beneficiaries, settlor). - When the court approves it. - Trust terms may be varied by court in case of child\'s interest protection or emergency. - Vesting date is the date that the trustee transfer the trust property to the beneficiaries. - The trust is Wound up (terminated) through either of the following: Vesting, Variation of trust deed, Revocation, Court order. - Trust deeds usually contain a discretion that enables the trustee to determine the vesting date. - Vesting date cannot breach the **[\"rule against perpetuities\"]** which is that the property must vest within legal period of 80 years (in most states) to prevent indefinite lock of property. - Trading trust is a type of discretionary trust or unit trust. It means that the main purpose of trust is profits from trading. - Trading trust structure should includes two positions (mandatory): The Guardian & The appointer. - Advantages of trading trusts are Tax efficiency & ultimate assets protection. **[Module 5 - Incorporation and its effects]** - A company limited by shares are more formal company than partnerships & sole traderships with separate legal personality (artificial person). - There are substantial legislations that regulate the formation & operations. - The main advantage of a company is that the company\' members have limited liability - Companies are governed by the corporations act 2001 in Australia which is based on the concepts developed in the English company law system. - **[\"Perpetual succession\"]** is that the company continues to exist despite the death, insolvency of shareholders or directors. It continues Until it wounds up or liquidated. - **[\"Veil of Incorporation\"]** means the identity of the shareholders are hidden. - Wrongful trading is where the company is in insolvency proceedings and continue to trade which lead to insolvency liquidation. This is a civil wrong. - Fraudulent trading is trading with the intent to defraud creditors. - Veil of incorporation may be lifted in case the court found that the company was conducting fraudulent trading or wrongful trading & directors are then personally liable. - **[2.3.2 Disqualified directors till 4.7.7 disclosure requirements are missing.]** - Table below shows the differences between proprietary & public companies: +-----------------------+-----------------------+-----------------------+ | **[Title] | **[Proprietary | **[Public]{.underline | | ** | (Private)]{.underline | }** | | | }** | | +=======================+=======================+=======================+ | **Capital** | No minimum capital | No minimum capital | +-----------------------+-----------------------+-----------------------+ | **Dealing in shares** | Cannot list its | Can list its shares | | | shares | | +-----------------------+-----------------------+-----------------------+ | Accounts | -Small ones are not | -Must prepare | | | required to keep | **audited** annual | | | financial records, | financial report and | | | while large private | submit it to the ASIC | | | companies shall keep | (3 months after | | | records. | financial year). | | | | | | | \- Not required to | -Publish the annual | | | lay there accounts | report on website. | | | and reports before | | | | general meeting. | \- Must lay there | | | | accounts and reports | | | | before general | | | | meeting. | +-----------------------+-----------------------+-----------------------+ | Commencement of | Commence business on | Commence business on | | business | the registration day | the registration day | +-----------------------+-----------------------+-----------------------+ | General meetings | General meeting is | General meeting is | | | not required | required | +-----------------------+-----------------------+-----------------------+ | Names & | \"Pty ltd\" or | Limited or ltd. in | | identifications | \"proprietary | name is a must | | | limited\" | | +-----------------------+-----------------------+-----------------------+ | Disclosure | No special disclosure | Special disclosure | | requirements | requirements | requirements | +-----------------------+-----------------------+-----------------------+ **[Promoters:]** - a promoter is a person that acts like an agent who undertakes the formation of a company. - Promoters shall exercise a reasonable skill and care. - A promoter can be the owner of the business without a conflict of interest. - A promoter must retain a fiduciary duties like maintaining accounts for any benefits gained, no conflict of interest, provide full information for any transaction. - A promoter may make a legitimate profit from their position if they are **[already owner]** of a property that a company is acquiring. While a wrongful profit is when he profits from a contract that a company is making. - In case of fiduciary duties breach, companies can rescind a contract and recover its money. in case of inability to recover property, the wrongful profits is recovered from promoter. - The promoter has statutory liability for selling shares under a wrongful statements or condition, he/she must compensate the buyer for their losses. - Pre-registration expenses incurred by promoters are not automatically reimbursed. - Pre-registration contracts are contracts made before the formation of a company. - A company may make a pre-registration contract but must register it within reasonable time frame after company\'s formation. - Promoters will be held liable for pre-registration contract if the company is not subsequently registered or if the contract does not become effective. **[Company formation procedures:]** - First the promoters must submit documents to the ASIC (hard copy or electronically). - The documents & forms must contain proposed name, liability of the members, type of the company (public or private), address, directors names, company\'s share structure details. - Then a certificate of registration is issue by ASIC if documents are approved. This certificate demonstrates the existence of the company, directors become effective. - Also it demonstrates that all requirements under corporations Act 2001 have been followed and successfully registered. - \"Off the shelf companies\" is the company that is already registered and established by someone and it is ready to be bought by an investor. the purchase is done through the transfer of shares from one to another. The main advantages of this type of company is low cost, fast to commence operations, no risk of potential liability arising from pre-registration contracts. The main disadvantage is that the new owners may need to adjust the company to meet their own requirements like changing the name. - A public company may re-register as a proprietary company and vice versa. **[Company\'s Constitution:]** - A company\'s constitution comprises the articles of association & any resolutions and agreements it makes which affects the constitution. - Most Australian companies (Public or private) do not have constitution. However, it operates using a constitution or replaceable rules from corporation act 2001 or a mix of both. - replaceable rules do not apply to the sole trader company. - No liability companies must adopt a constitution and provide to ASIC upon registration. - Public company & private companies may choose to adopt constitution, if so, pubic company must provide it to ASIC but private ones shall not do so. - Article of association consists of **[internal rules]** that relate to the management and administration of the company. - A standard article of association is called \"Model article\" which allow companies to setup quickly and easily. - Alteration of article of association is only considered in the case of benefiting the company. - Expulsion of minorities is the alteration of the article of association in order to remove the director from office or to acquire or transfer the minorities\' ownership to the majority. - Expulsion of minorities is considered valid if it is deemed beneficial to the company (Bona Fide rule). - Alteration of an article must be delivered to the relevant authorities. - Corporation Act 2001 overrule any rules set by the article of association. - Shareholder agreement is the agreement that shows the rights & obligations of shareholders. - Shareholder agreements effectively give **\"Veto power\"** to the members over any proposal which in contrary to the terms of the agreement. - Company\'s object is the main purpose or aim of the company. - Contracts made between company & directors are voidable if the director acts outside their capacity. - Constitution only creates contractual right and obligations in relation to rights as a member. - A company\'s constitution binds: - Company to members. - Members to company. - members to members. - Company & directors & secretaries. - Company\'s constitution does not binds company to third party. **[Module 6 - Management of companies]** - Agency is a relationship between the principle & agent where the agent acts on behalf of the principle. For example the agent may negotiate with third party to form a contract however the contract is signed by the principle. - Promoters, company directors, partners are example of agency theory. - Company directors must promote the company\'s interest not their own interest. - Corporate governance is how the company is directed & managed. - Company\'s directors are bind with agency theory & fiduciary duties (act with trust). - The company\'s daily management is delegated to the senior executive team (CEO) by the company\'s board of directors. - The board is ultimately responsible for all the actions of the executives team. - Agency agreement **[does not have to be formal or written]**. - Agency agreement may be express or implied from actions. - A principle may subsequently ratify (formal consent) an act of an agent retrospectively. For example, an agency relationship may be created after the agent has already formed a contract on behalf of the principle. - Implied agency can be done when a principle holds out an agent responsible in front of a third party. - A major disadvantage of implied agency is that it may result in giving the agent more implied authority than the ones that were targeted by the principle. - Any contract done by the agent is binding for the principle & third party only if the agent was acting within the limits of their agency authorities. - Authorities limits may be written or oral. - There are three distinct limits of agent\'s authority: - **[Actual authority:]** Authority to perform specific tasks. if the agent performed a task outside their actual authority, then he is liable for a breach of warranty of authority. - **[Implied authority:]** Authority implied from the nature of the agent\'s activities or position or what is usual in this situations. - **[Apparent or Ostensible authority:]** The authority that the principle holds out or give to an agent in front of third party. Ostensible authority may be done by current or previous representation of authority (delegation) to agent in front of third party. The representation must be made by the principle himself or an agent (on his behalf) but an agent cannot make representation for himself to third party. - The main difference between actual authority and ostensible authority is that in actual authority, the third party need to know nothing about agent\'s authority. - Principle must inform the third party with revocation of agent\'s authority and it is held liable for anything that happens before informing the third party. - Agency is terminated by agreement or operation of law (death, insane, bankruptcy). - The agent is not liable for the contracts conducted on behalf of the principle except in some cases like undertaking personal liabilities, or being a part of the contract (personally) or a trade custom or part of collateral contract. - An agent who exceeds their authority is not liable for this action to the principle (or vice versa) but he is liable for the third party as this action is a breach of warranty of authority. - The director function is to attend board of directors meetings and take part of the decision making process who ever do this is called a director. - Given titles like sales director are not considered as directors in company law as they are not a board member. - Minimum number of directors in private companies is 1 director and in public companies is 3 directors. In Australia, the director must be natural person. In UK, The director may be a company. - The company constitution impose a limit to the number of directors in a company. - board meeting is the place where the director exercise power. - board of directors power is a collective power where no director can act individually. **[Types of Directors:]** - **Shadow directors** are directors who avoid legal responsibility by avoiding appointment to the board of directors. however they use their power to affect the decisions **[like de facto directors]**. Professional advisors are not considered shadow directors. - **Alternate directors** are directors that attend board meeting on behalf of absent board member and have the same voting and decision making power. - **Executive director** is a director that is employed by the company, perform daily activities in the company under a service contract, and involved in the management. but also a board member. Statues prohibits those member from voting on the terms of their own employment. They cannot enter into a contract on behalf of the company unless authorized to do so. - **Independent non-executive directors** are non employed director in the company and not a substantial shareholder. A board of directors must include both types of directors, Executive and independent non-executive ones. Their main role is to ensure the effectiveness of leadership and company view and financial position. - **A managing director** is an executive director who is managing the company\'s day to day activities. He has special position and power than any other direct. He can enter contracts on behalf of the company. - **Company secretary** is the person who minute board meeting, file returns with authorities, maintaining statutory register, ensure accounting records meet requirements. He may be a director too. if the company has only one director then he is a company secretary too. Public companies must have a secretary while the private one must not have a secretary. Company\'s secretary may act as an agent and may enter into administrative contracts. - Company secretary must be over 18 years old, no previous dishonor records, resident. **[Powers of directors]** - Directors have the power to make any decision related to the company management unless this decision shall be taken to the general meeting (based on company article). - Restrictions to the directors\' powers are imposed by statues or company articles. - Company members (shareholders) cannot give orders to directors as the director is a company\'s agent who acts in the company\'s interest. - Managing director and CEO titles may be held by the same person. - Managing director\'s authority is whatever authority given by board of directors. - Managing directors may be terminated as per the standard employee procedures and after that he become an ordinary director of the company and the general meeting can remove him from office of directors. - Duties of directors are regulated under corporations act 2001. the act only put a framework for the duties and considered as a code of conduct for the directors. However, company\'s article may provide onerous regulations than statues. so if a director acts in accordance to the article, there will be no breach of duties. For example, permissible conflict of interest in some cases, authorizing things that would be otherwise a breach of duty. - Directors must be honest and act on the interest of the company only and must not have a conflict of interest. - Past directors are liable for their duties when they were in office (before resignation). - Directors cannot break law. - Director may be held negligent under tort law. - Duties of directors under corporations act 2001 are: 1. Utilize power to a standard of reasonableness. 2. Manage company in the best interest of the company. 3. Act with loyalty and good faith. 4. Not to improperly use the position of director. 5. Not to improperly use the information obtained through his position. 6. Avoid conflict of interest. 7. Prevent insolvent trading that will lead to lifting the veil of corporation and will be held personally liable for the company\'s debts. - Some breaches of duties are considered criminal offences and these breaches is also liable for civil liability. For instance, reckless or intentional dishonest, use of insider information, gaining individual advantage. - The director must declare any direct interest in an existing transaction entered by the company by written notice, or general notice or verbally on board meeting. - A declaration is not required in the following cases: 8. a previous declaration was made. 9. The director was not aware of their interest in the transaction or the transaction itself. 10. The interest is not reasonably seen as a conflict. 11. The other directors are aware of the situation. 12. the interest concerns the director\'s service contract and it has been considered by a board meeting or special board committee. - If a declaration is considered void or inaccurate, a further declaration is required. - A director is liable for remedies of their action like 13. Damages caused by their actions. 14. Restoration of company properties. 15. Repayment of any profits gained due to the transactions. 16. Rescission of the contract where the director did not disclose interest in. - Directors are not liable for the breach of duties of other directors **[except]** they become aware of them and did not declare them. Eventually, they become liable for their own negligence (not declare). - In general, directors have no personal liabilities except in the following cases: 17. Lifting the veil of corporation. 18. Limited companies. 19. Insolvent trading. **[Remuneration of directors:]** - Directors are entitled for remuneration based on company\'s article & constitution. However, if not included, the replaceable rules prevail. - Directors are entitled to reimburse their expenses that was incurred during conducting company\'s business. - Compensation for loss of office may be considered non-contractual or contractual payment that is paid voluntarily to the director for leaving the office. However, if these payment are non contractual it must be approved by general meeting. if it is contractual payment, it must not be approved by general meeting as it is include in the service contract. - Remuneration report must be prepared by public companies and audited by the company\'s auditor. Directors are required to provide personal information that helps in the report\'s preparation. - In listed companies, member voting is required on the remuneration report but this vote is merely advisory, to show the satisfaction level of the members. - In Australia, directors are not required to make their service contract available for inspection by members. However, members can still request information about director\'s remuneration. In UK, directors are required to present their service contract for inspection by members. **[Appointment, removal, and disqualification of directors]** - A director may be appointed expressly (De jure director) or act as director without actually being appointed (De facto or shadow director) - On company formation, the director that initially exists is called the First director. - Directors are appointed based on company articles that is done through: 1. By resolution of the shareholder 2. By decision of directors. - Australian companies must inform ASIC within 28 days about changes among directors. - There is no maximum age limit but the minimum age for director is 18 year old in Australia and 16 years old in UK. - Director vacation of office can be in the following ways: 3. Resignation 4. Not offering re-election 5. Death 6. Dissolution of the company 7. being removed from office 8. Being disqualified - Directors for listed companies in Australian Securities Exchange (ASX) must not hold office for more than 3 years without re-election. - Every half a year (6 months) directors (who were appointed during the year)must retire (except the MD) and be re-elected. - Directors who are at the office the longest shall retire by rotation. - Director removal can be done through ordinary resolution but with a special notice of 2 months for public companies, but no special notice for private companies. - Shareholders that hold 5% of capital can call for a removal of director. - 100 shareholder that holds collectively 5% of capital can call for director removal. - A director that also a shareholder can use his voting power to help in staying in office. - A director cannot remove other directors. - A director become **[(Must)]** disqualified in the following cases: 9. Disqualified by statues 10. Bankrupt or insolvent 11. Unsound mind 12. Unfit to manage business. 13. resign by written notice. 14. Absent without obtaining a leave from the board. 15. Insider trading 16. Failure to keep proper accounting records 17. Loans to companies that are unable to repay the debt. - Disqualification may be reconsidered if: 18. Lack of dishonesty displayed in the situation. 19. Loss of director\'s own money 20. absence of personal gain 21. efforts to mitigate the situation 22. unlikelihood of re-offending 23. Proceeding hanging over director for long time. - Directors **[may]** be disqualified in the following cases: 24. Convicted with indictable offence. 25. Guilty of fraudulent trading, wrongful trading, competition violation. 26. Government applies for a release of directors for public interest. 27. Persistent default in relation to company legislations. - Absent directors for more than 3 months (start to calculate the period from the last attended board meeting) will disqualify the director automatically. - In case of foreseen absent period, the director obtain the board\'s approval on the absent period. - If the director offered a reasonable reason for being absent, the other directors may let the matter drop. - When a director resolve that he will not attend a board meeting again, he will become disqualified after 3 months of not attending the board meetings. - The general intention of the absent rule is to avoid the directors\' slackness. - Administrators, liquidators & receivers have statutory duty to report disqualified directors. Then, the government ,through the ASIC, decides. - A director is automatically disqualified by ASIC if he has been an officer for two failed companies in the past seven years. **[Company Auditors:]** - In public companies, auditor must be appointed within one month of the registration. In the next assembly general meeting, the auditor may continue or released from duty. - In private companies, directors may appoint auditor if the general meeting didn\'t do. - Auditors must be registered at the ASIC. - Auditor is considered eligible if, independent, hold proper qualification, proper skill, capable, registered, and fit. - Auditor that lack independence shall resign immediately to avoid being liable for fines. - Fines can be mitigated if the auditor proved their ignorance of independence breach. - Based on legislations, auditors can audit limited companies even if: - Being a shareholder of the company. - Being a debtor for the company for not more than \$5000. - Being a close relative of an officer or employee. - Despite of the above legislations exceptions , audit firms impose more strict rules. - All companies are subject to audit except small private companies & small companies limited by guarantee unless requested by the ASIC or managed by foreign company. **[Module 7 - Membership & dividends]** - Securities is an investment, debt or legal right to sell or buy an ownership of company. - Securities can be invested directly (through stock exchange) or indirectly (through managed funds). - Securities can be high or low risk & can be short or long term. - Types of securities are debt, equity and derivatives. - The value of the derivative is derived from the value of the underlying assets. - Shares are traded in the primary market, but derivatives are traded in the secondary markets. - A share is a form of liability and interest in ownership. - In Australia, the share has no nominal or par value and the share price is determined by its terms of the issue. However, in UK, the share have par value and no shares can be issue with a price below the nominal value. - A member is the owner of the company (shareholder or partner or sole trader). - Information about member rights are presented in: - The articles provided the ASIC. - A resolution incidental to the creation of new class of shares. - A return of allotment (تخصيص). - Two types of shares: - Ordinary shares which has right to vote, Receive dividends, receive surplus assets in liquidation. - Preference shares which has no right to vote, shall receive dividends before the ordinary shares, cannot receive surplus in assets in case of liquidation (only the invested capital). Companies may have the right of shares buy-back these shares. - Cumulative preference shares allow shareholder to receive pre-determined fixed annual dividend. If the company couldn\'t pay in a year, the remaining amount is paid the next year with the new year dividends. - Participating preference shares allow shareholder to receive pre-determined dividend that shall be paid ahead of the dividends of the ordinary shareholder. The participating preference share is different from prefernece share in that they receive extra dividends. - Companies can issue shares initially through initial public offering (IPO) and the investors can buy shares through brokers or through the company directly. - After IPO, companies may issue shares through - Bonus issues which is offering bonus shares for the existing shareholders probably instead of dividends (no dilution of the percentage of ownership). - A rights issue which is a form of capital raising where company give the existing shareholders right to purchase extra shares at a price lower than the market. - Transfer of shares must be done through licensed broker and it is marked completed after the register of members is updated. - A member must not be a shareholder like in partnerships. - In General meetings, to pass an ordinary resolution, 50% or above is required. Although, to pass special resolutions, 75% or above is required. - Public or private companies shall have a minimum of one member. - In public companies, there is no maximum number of members. - In private companies, in Australia, the maximum number of members are 50 members. In UK, No maximum number of members. - General meeting is mandatory annually for public companies. - Private companies are not required to hold a general meeting. - Directors, court and auditors have the right to call for a general meeting. - For listed companies, a minimum notice of 28 days must be given before the general meeting. other companies must give a minimum of 21 days notice. - The general meeting notice must state time, date and place of meeting. - The general meeting is binding if the following conditions are met: - A quorum is present (اكتمال النصاب). - Chairperson is elected. - Business is properly transacted and voted on. - During general meeting, poll may be needed if the show of hands is not suitable way of voting. - There are three types of resolutions: - Ordinary resolution: used for most business and require 50% or more to pass. - Special resolution: used for major changes like change of name, alteration of company articles, and reduction of share capital. it requires 75% or more to pass. - Written resolution: used by private companies to pass ordinary and special resolutions except the auditor change or election. A written resolution is passed by signing it from all the company members (Principle of unanimity). - A sole member can pass a resolution by recording and signing their decision. - The company\'s members have the following rights: - Appoint auditors. - Appoint & removal of directors - Inspection of company register - receipt of annual financial statements but not the company\'s books. - Company may grant the members a right to inspect company\'s books through the company article. - The minority have a protection against unfair actions that may be done by the majority, this actions are regulated by Corporation Act 2001. For example, referring to the court, claim against director, application for company winding up, lodging a complaint, calling for examination. - Based on shareholder agreement, minority have the power to reject any decision that is in contrary to the shareholder agreement terms through the \"Veto Power\". This is a technique that is used to protect against decisions done by majority of shareholders. - Examples of unfair actions (Unfair prejudice): - Exclusion of director from management of quasi-partnership. - Discrimination against a minority. - Derivative claim is an action on behalf of the company to enforce company\'s rights or to recover company\'s property. This action can be done by directors or shareholders (if the directors are acting for their personal benefits). **[Dividends Distributions:]** - Australia use the liquidity test basis to assess the company\'s capability to pay dividends while UK, Singapore, Malaysia use the distributable profits model. - The conditions that must be met in the liquidity test model are as follows: - Company\'s assets must exceed the company\'s liabilities before the dividends payment. - The excess is sufficient to pay the dividends. - The dividends is fair and reasonable for all shareholders. - The dividends does not lead to insolvency or inability to pay creditors. - The distributable profits model is based on profits available for distribution that is calculated based on accounting standards. the distributable profits must include losses of previous years. - Listed comapnies generally pay dividends twice a year (interim dividends & final dividends). Final dividends are approved by annual general meeting. - A dividend become a debt once declared payable. - Company article may use different terms for dividends payments: - \"Payment\" means dividends is paid in cash. - \"Specie\" means dividend is paid in any form otherwise than cash. - \"Scrip\" means dividends paid by issuing additional shares. - Dividends are non interest bearing. - Directors & members are responsible & liable for unlawful dividends. - If an unlawful dividend is paid by the reason of error in accounts, the company have to claim the auditor for the undiscovered mistake in accounts (not the directors & members). - Directors are liable for unlawful dividends if: - Dividends is paid out of capital due to insufficient preparation of accounts that prove the payment. - Dividends is paid based on mistake in law or constitution interpretation. However in some cases, he is relief if performed with \"Honesty and Reasonability\". - The company can recover unlawful dividends from members if the members knew that the dividends is unlawful at payment time. - Members cannot bring a legal claim against directors after accepting unlawful dividends. - Members cannot authorize unlawful dividends and may have injunctions to stop it.