COML204: Law of Organisations PDF

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Summary

S O L E T R A D E RSole Trader (Proprietor)Proprietor (one person): Assumes full business risk as business is not a separate entity. They are personally liable for the debts of the business and personal assets may be sued to satisfy these debts. Insurance may be required to protect against claims f...

Description

COML204 Notes SOLE TRADER Sole Trader (Proprietor) Proprietor (one person): 

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Assumes full business risk as business is not a separate entity. They are personally liable for the debts of the business and personal assets may be sued to satisfy these debts. Insurance may be required to protect against claims for negligence or damage arising from faulty work, public liability and professional negligence. Receives the profits of the business, but is taxed as an individual. Legally owns the assets of the business. Has the freedom of managing their own business, but still have to comply with tax, GST returns, etc. They also have a heavier administrative demands as a sole trader. There are no governing legislation and internal governance rules.

Disadvantages   

When obtaining finance, lenders will require security over the proprietor’s personal assets – e.g. house. Heavier administrative demands. Profits are dependent on the success/skills of the proprietor.

Advantages   

Avoid expense of incorporating a company. No legal formalities involved and so there are limited legal expenses. Whole business can be transferred, may sell the business as a going concern to a purchaser who is attracted to the established customer base and willing to pay for the goodwill that is attached to it.

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COML204 Notes SME Choosing the type of business for small or medium entities (SMEs) 

SMEs typically consist of >20 employees and >5 shareholders. Type of business depends on the circumstances; but usually, SMEs chooses company for prestige. Sole Trader No distinction between individual and business – income is taxed directly. Losses can be set against other income.

Income Tax

Privacy

Partnership Doesn’t exist in law as not a person. Income and losses flow through to the partners – avoids double taxation as only the partners and not the entity itself is taxed. Losses are treated as if they were incurred by the partner in deriving their income, so can be offset against that partner’s other income. Very high – Very high – no nobody needs registration to know about needed the business. Low

Limited P. Income and losses flow through as foreign investors do not want their income taxed in New Zealand.

If flow through is important, then this is not for SME.

High – some info is needed to be given

Low

Variable – can Medium – High be created anywhere and anytime but if parties are sensible, would require a written contract. Variable Medium

Low

Low – Medium

Legal Comple xity

Formati on Difficult y Ongoing Admin

Company Imputation method – company income and distribution are both taxed and does not flow through.

Medium

Low – many info is given and company is displayed on the registrar. High

Low – can be formed online easily, but can have many consequence after. High

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COML204 Notes High

High

None

Low

Risk

Share Transfer s

Low

Low – if managed properly, liabilities are stopped at the company. Medium – High – key limited market feature, why exists. stock exchange exists.

PARTNERSHIP Characteristics A partnership is an arrangement or a relationship of mutual trust and confidence.    

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Partnership has no legal personality which means it is not a separate entity from the partners. Partners has unlimited liability. They share risks which means they are jointly liable for the business’ debts and creditors can go after their their personal assets. Partners has mutual fiduciary duties. Every partner owes each other duties of good faith. If one partner is presented with an opportunity, then he should take it up with the other partner. Partners has mutual agency. They bind each other in: contract (s 8, s 12) and tort (s 13), which means that if one partner disappears, the remaining partner is responsible for what the other one did. This is why before entering a partnership; parties must be certain that they can trust each other. Partnership is dissolved by one partner’s exit – through transfer of shares (as non-transferable shares), death, retirement, or bankruptcy of the one.

Why law professionals choose partnership over a company?  

Professionals trade on their reputation and it is expected for them to be personally liable for the advices they give and not hide on behind a company. Professionals automatically property in trust which means that although they are exposed, creditors can’t get to their personal assets.

Framework: Firm shortcut for partnership 

PA 1908 s 4(1): The relationship between 2 or more persons carrying on a business in common, with a view to profit. o Making of profit ≠ carrying on a business. To constitute a business, a repetition of acts is required; however, an isolated transaction that is repeated and is intended to be the first transaction in an existing business would constitute a business. o In common means there must some mutuality of rights, interests and obligations.

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COML204 Notes 

PA 1908, s 5: Rules to assist when problems arise in deciding whether a particular relationship is indeed a partnership. Was the intention to form partnership or something else (e.g. for one person to consult or be an employee? Sharing net profits (or the intention to) is prima facie (disprovable) evidence or indicator of a partnership. But NOT: joint ownership or sharing of property, land or equipment and selling separately or dividing the net profits; and sharing gross returns.

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Use application of the law to the facts to determine parties’ intention and agreement’s substance – surrounding facts. PARTNERSHIP

Whywait Pty Ltd v Davison [1997] 1 Qd R 225 (Qd CA) Background. Davison entered a “Partnership Agreement” (but was also referred as “joint venture” in some clauses) with Cheers to build and sell four town houses on a land of which Davison would buy and pay. Cheers was responsible for managing the site, supervising construction work and hiring builders. Davison was to receive 20% interest. Both parties were to share the net profits equally from the sale of each unit once costs are deducted and Davison received 20% on funds they’ve invested. After the agreement, Cheers hired a plumbing contractor (Whywait) for two of the sites. Subsequently, Cheers disappeared and Whywait claimed against Davison $45,000 worth of work done and materials supplied. I1. Was the true nature of the agreement a partnership? L1. PA 1908, s 4 and s 5. A1. Both parties agreed to conduct a business of building for profit:  

A single venture enterprise was incapable of constituting a ‘business’; however, the parties carried the enterprise beyond the original venture by building a house at other locations. Therefore, a business was being carried on in common. Although they took on different responsibilities, they agreed to share net profits on equal basis and not simply share gross returns. Although the profits were not realised, it was enough that they had profits in view – strong indicator that a partnership exists.

The issue of the existence of a partnership is not to be decided merely by what the parties called each other or how they referred to their relationship; rather, it should be decided based on the nature of the relation:   

The mere use of the expression “joint venture” was essentially neutral. It did not exclude a partnership in the sense of the Partnership Act, as every such partnership involved a joint venture. A relation of mutual confidence existed between Cheers and Davison, even if for the latter, it was a confidence that as events turned out, was thoroughly abused by Cheers. A joint venture does not ordinarily exhibit that element of mutual confidence that the partners will engage in a particular kind of activity for the joint advantage only.

C1. As per PA 1908 ss4-5, the requirements of the statutory definition were satisfied and therefore, Davison and Cheers’ agreement is, in substance, a partnership.

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COML204 Notes

I2. Were Davison liable in contract to Whywait? L2. Partners are mutual agents: PA 1908, ss 8 and 12; and joint ventures are responsible for their own debts. A2. As the agreement, in substance, is a partnership, as per section 8, each partner became the agent of the firm for acts done for the purpose of the partnership business. Cheers, therefore, had authority conferred by section 8 to bind Davison. As per section 12, … C2. Davison is liable to Whywait for Cheers’ acts as partners. Whywait relied on Cheers’ authority as a partner. PARTNERSHIP Normal Consequences of Partnership 

Contracts (voluntary obligations). Read PA 1908 s 8 and s 12 together. A, B and C are partners; D contracts with the firm. o A, B and C are agents of each other in the firm’s business. o A binds B and C in usual course of firm’s business unless: a) A has in fact no authority to act for the firm in the particular business; and b) D either knows this or doesn’t think A is a partner.

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Torts (involuntary obligations). Read PA 1908 s 13. A, B and C are partners; D is an outsider. o If A’s tort is done in the firm’s ordinary course of business or with B’s and C’s authority and causes loss or injury to D, then B and C are equally liable as A.

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Crime (intentional obligation). PA 1908, s 13 also applies “if any penalty is incurred”. Many crimes need a criminal intention (mens rea). Agent’s criminal intention not imputed to principal.

S 39: Liability of Apparent Partners Where A deals with a firm after a change in its membership (e.g. one partner retires): 

A can treat all apparent partners of the old firm as still being partners until A has a notice of the change – actual notice of the change should be given to all people who had dealings with the previous partner. Public notice is not good enough. A notice sent directly through face-toface interaction or official mail should be sent. Firm will be liable for the actions of all apparent partners (appears to be a partner) of the firm if a proper notice is not delivered.

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Gazette advert notice to A if she did not deal with the firm before the change. Firm will not be liable for the actions of apparent partners because of the Gazette notice.

Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488

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COML204 Notes Background. Ogge retired from firm of solicitors called Hargrave Ogge. Letterhead changed but not name. Sloane a long-term client of the firm. Sloane’s money was lost by the firm. Sloane sought compensation from Ogge. Decision. S (an elderly farmer) under no obligation to scrutinise the letterhead. S had not received sufficient notice. O remained liable (as far as S was concerned) for the debts of the partnership because he still appeared as a partner.

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COML204 Notes PARTNERSHIP Joint Venture  

Joint venture. A business association that isn’t a partnership – “Where an element of partnership is absent, it is a joint venture” – take on different and separate responsibilities. Importance. Joint ventures are not mutual agents and can contractually exclude fiduciary duties (otherwise similar duties to partners apply).

Rule Source Name given does not determine substance – by looking at the intention – or bringing Case law: Whywait separate skills together in order to pursue a particular deal Intention (indicated by the surrounding Case law: Commerce Commission v Fletcher circumstances) determines substance. Challenge Ltd [1989] 2 NZLR 554 Agreeing to share a product or gross returns Case law: UDC Corp Ltd v Brian Pty Ltd [1985] indicates a JV. 60 ALR 741 JVers normally owe each fiduciary duties.

Case law: Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433

Unlike partnership, fiduciary duties can be Case law: Noranda Australia Ltd v Lachlan contractually excluded from a JV. Resources NL (1988) 14 NSWLR 1 Partnership responsible for each other, JV not. P owe fiduciary duties, JV is the same but can contract out of it (meaning when opportunity comes along, JV can take it). The most obvious way not to form a partnership is not to share net profits but rather to take individual responsibility for their own costs and to take their own receipts. A joint venture is an arrangement which does not have all the elements of a partnership – so Zak and Amy could decide not to share net profits but to take individual responsibility for their own costs and take their own receipts. Note: Amy employing Zak wouldn’t be a joint venture or a partnership.

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COML204 Notes LIMITED PARTNERSHIP & BUSINESS TRUST Limited Partnership • • • • • •

An entity (legal person) Limited Partnerships Act 2008 applies Written partnership agreement governs internal matters Name must end with ‘limited partnership’ or ‘LP’ General partner assumes business risk and manages; general and limited partners share profits Transfer of interests possible

Business Trust • • • • •

A way of holding property (the trustee) for the benefit of another (third party) Trustee Act 1956 and equity apply Trust deed governs internal matters Trustees assume business risk (indemnified against trust assets) and manage; beneficiaries share profits Transfer of interests problematic

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COML204 Notes COMPANY Characteristics A corporation (or company) has a:       

Legal personality. It is an entity or a person separate from the investors and the management. Limited investor liability. This allows people to invest without risking their personal wealth – e.g. a shareholder is only responsible or liable for the shares he invested. Transferable shares. Delegated management (board of directors). Investor ownership (of shares in the company). Shareholders own shares in the company. Board of directors owe shareholders a duty of faith. Shareholders to shareholders doesn’t need to show good faith to another. Perpetual existence

Company A company is not a creature of common law, unlike a partnership. It is a creature of statute and must be registered under CA 1993. 

S 2: Company means a company registered under Part 2.

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S 10: For a company to be registered means to satisfy all essential requirements: a name; and at least one share, shareholder and director living in New Zealand or an enforcement country (Australia).

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S 13: Registration is mandatory. Once required forms and fees are given, registrar must register application and issue certificate of incorporation.

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S 14: Certificate of incorporation proves that registration requirements of CA 1993 are met and that company exists from the date on the certificate.

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S 15: Separate Legal Personality. A company is a legal entity separate from its shareholders; and continues to exist until removed from the New Zealand register.

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S 16(1): A company has (a) full capacity to carry on or undertake any business or activity and do any act, or enter into any transaction; and (b) full rights, powers, and privileges. – just like a human being even though it does not exist physically. Based on New Zealand Bill of Rights Act 1990, s 29, a company has human rights: “the provisions of this Bill of Rights apply, so far as practicable, for the benefit of all legal persons as well as for the benefit of all natural persons”.

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S 97(1): Shareholders’ limited liability (almost always). A shareholder is not liable for the company’s obligations, unless the company’s constitution provides otherwise.

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COML204 Notes COMPANY Types of Company – go back to this video 3. • • •

Companies not governed by CA 1993, e.g. cooperative companies. Overseas companies: CA 1993, part 18. Holding, subsidiary and related companies. Subsidiary. A company controlled by another company. S is a subsidiary of H (a holding company), if H: decides who is on S’s board; or can exercise more than half the votes at a S shareholders’ meeting; or holds more than half of S’s shares; or has a right to more than half of dividends declared by S. Holding Company. A company is a holding company if it has one or more subsidiaries: CA 1993, s 5. Related Company. A company is related to another if they are in a subsidiary-holding company relationship and both companies are related to another company.

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Why does being related matter? o A subsidiary must not hold shares in its holding company: CA 1993, s82 o Reporting purposes: Financial Reporting Act 2013 o The assets of related companies may be pooled when one becomes insolvent if it just and equitable: CA 1993, ss271 and 272. Group assets may be pooled in the event of insolvency of one group company.

Incorporation Process: S12 → S13 → S14 CA 1993 S 10: For a company to be registered means to satisfy all essential requirements: 

Company Names. o S 20: Names must be reserved before a company is registered. This cannot be a name that has been previously registered. o S 21: If shareholders’ liability is limited, the last word of the name must be “Limited” or “Tāpui (Limited)” unless constitution states that shareholders have unlimited liability. The exact word “Limited” must be used and not “Ltd” when applying; otherwise, the company will be recorded as an unlimited liability company. After the registration, “Ltd” can be used.

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COML204 Notes COMPANY o S 22(2): The Registrar must not reserve a name that: (a) The name is checked against the Companies Register to see that it does not contravene any of the restrictions on certain names. Company names that include words or phrases protected by: (1) Flags, Emblems and Names Protection Act 1981 – e.g. names having royal, national, international or commercial significance; (2) Reserve Bank of NZ Act 1989; and (3) Co-operative Companies Act 1996. Theoretically, there should be no discriminatory names – Human Rights Act 1993. It is also up to the person to check whether a name could breach any other Acts. (b) Certain words that can be disregarded when determining whether names are identical or almost identical: (1) as a 1st word: ‘the’; (2) last word: ‘Limited’, Tapui (Limited), & ‘Unlimited’; and (3) abbreviations: ‘&’ for ‘and’, ‘no’ for ‘number’, ‘co’ or ‘coy’ for ‘company’, ‘N.Z.’ or ‘NZ’ for ‘New Zealand’ and ‘Bros’ for ‘Brothers’. -

Identical means exactly the same. Search the Companies Register to check.

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Almost identical means a name in which the key words and/or the order in which they appear make that name virtually indistinguishable from another. Year ‘(2015)’, numeric ‘No. 1’, or geographic markers ‘(Nelson)’ are sufficient to distinguish one name from another. For the purpose of determining whether two names are almost identical, names containing a marker will not be almost identical to those without – ‘Alpha Limited’ and ‘Alpha (2015) Limited’ are not almost identical. Plurals (adding letter ‘s’) is not enough to make a name significantly different.

Registrar does not follow the case law because it will open the floodgates (many companies would have had their names wrongly registered) – ‘Stanley-Hunt Earthmovers’ v. ‘Stanley-Hunt Earthmovers (1996)’ where it was held that both names are almost identical because the names are so distinctive even with the year marker. (c) Whether a name is offensive is at the Registrar’s discretion. A name is offensive if it is: obscene; contrary to public policy; or likely to offend any particular section of the community/religion. o S 25: Once registered, comp...