Corporate LAW [drafting] PDF

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CORPORATE LAW Business Structures Federal Business names system ASIC; National names Index, covers all companies and business names; sole traders, partnerships, 1. Sole traders  An individual, natural person, who owns a business enterprise and its principle  Business Names Registration Act 2011 Cth  Advantages; simple, inexpensive, few formalities, can employ people  Disadvantages; no separate legal entity, lack of shared expertise, unlimited liability, no pooled resources 2. Associations  A body of 2 or more people who form an organisation, whether profit or non profit  Incorporated; is incorporated under legislation which provides for the establishment of clubs and societies. Governed in SA by the Associations Incorporation Act 1985 (SA)  RAA (return profits to their members by service), hockey club, not automatically liable for debts, don’t share profits as money  Separate legal entity status; liability of committee members  Unincorporated; group of individuals from group for common objective, club or society but not under legislation, unlimited liability 3. Joint ventures (more than 1 person; no mutuality; no shared profits)  An arrangement where separate business enterprises conduct a project or venture in combination.  Applications of JV; used when an alliance beneficial, eg industrial research and development, mining operations, the entertainment industry, one off venture.  Advantages; a person can sell their interest to another, liability is individual, if problem with financing; not sharing with overall enterprise, taking own profits, no fiduciary obligations, unregulated, contract arrangement, private,  Disadvantages; risk of been seeing a partnership, if not incorporated, no separation of assets exposed to debtors  Distinguishing JV from partnership; United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 11; 3 joined a shopping centre development venture; fiduciary obligation for A to disclose anything that might go against the common interests such as, granting of a mortgage over joint venture land, or granting security by way of a charge on the assess of the JV. A owned JV land and mortgaged it to U with a collateralisation clause which charged the land with As debts. B was left with nothing, U took shopping centre, Dawson J; product and profit distinction. Didn’t matter that one off business. Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321; this was a partnership; P1 contracted Cilia Black and Elton John to tour AU, P1 then contracted P2 (financier) that in consideration of advance from P2, P1 agreed to assign P2 ½ interest in contract and to carry them out as a JV and was repayable before distribution of profit at end of contract. P2 had equitable interest. If the contract failed, the advance was to be repaid without deductions, ie losses were not shared, like profits were.

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P1 then secured more finance through TP who then defaulted, P2 sued TP to recover box office receipts that TP had collected. Held the JV was a partnership because the profits were to be shared. 1. The parties became joint venturers in a commercial enterprise with view to profit 2. Profits were to be shared 3. The parties were concerned with financial stability of one another in a way common with partners 4. A single commercial venture could be a business as satisfied in partnership Act 4. Partnership; mutuality; integrated; 2 or more; maximum 20 a)Is there a partnership Can be large or small, some business requires, as members are liable, no single entity, Clients must draft up contract; cf to United Dominions  S1(1) Partnership Act 1891 (SA); must meet all 3 elements; 2 or more peoples + United Dominions Corp Ltd v Brian Pty Ltd 1985 60 ALR 741; inappropriately defined as JV but seen as partnership  Elements of the definition; steps in determining existence 1. ‘carrying on a business’ Sequence of transactions Griffen; ex parte Board of Trade (1890) 60 LJQB 235 at 237; G bought land with intention to build cottages and selling them, but had money and had also taken contract to build roads but had no money to but material. Did G enter into business as a builder? Held no evidence that this was one of more intended series of transactions, ie must be a series of acts, not just an isolated transaction United Dominions Corporation v Brian (1985) 59 ALJR 676; sequence of transactions= significant Business or hobby; Ferguson v FCT 1979; in the navy, keen go into primary production, leased 5 cattle for breeding purposes, entered into agreement for pasture to manage his cattle, claimed business expenses as a company, ie losses from income, tax office losses not incurred during carrying on a business ie was a hobby, Held; it was a business with commercial intention to make profit, systematic record keeping Evans v FCT 1989; E one $800k on gambling, tax said it was a business of ‘professional gambling’. Held; not a business, no record keeping or any business structure; was hobby Preparation of business Goudberg v Herniman Associates Pty Ltd 2007; no corporate structure, A and B discussed ideas about restaurant franchise, but no finance had been sought, B engaged architect, C, project collapsed, C sued A + B for un oaid debts, held A was not a partner; was not carrying on a business, not liable 2. ‘in common’; must be involved in activity, part of business Degiorgio v Dunn [2004] NSWSC 767; acdc tribute band, drummer formed new business, the guitarist claimed shared in profits, but court held; that guitarist was not willing to share financial risk, such not in common. Re Ruddock 1879; A owned a business and debt to B, A and B agreed that B would acquire ¼ share in return for discharging debt, and no responsibility for business losses and would not be partner, B played no role in business, bit A obtained consent for new employee. A became insolvent, B sought to claim for her debt. Held mutuality of rights and not by words; partners

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Checker Taxicab Co Ltd Stone 1930; must be engaged in same business; B hired taxi from A to drive and agreed to pay percentage in exchange for hire. B was to pay all his costs and control over the use of car during hire. B crashed, was A responsible? Held B was not employee or partner; both carrying on separate business 3. ‘with a view to profit’ Plummer v Thomas 2002; arrangement of 50/50 profits for joint business venture. B arranged the lease, bond, in his name, paid all debts, hired fired, A made the ceramics. Held; no partnership; B had not agreed to share losses. A and B entered into partnership manufacture and sale of ceramics Generally, only a problem with tax avoid issues B)If section 1 has not been met;  Further rules; situations which are not the cause of partnerships alone; 1. Rule 1; Co-ownership Eg; joint tenancy, TIC, common property; do not share any profits made by the use of property Except where property used for business; Jeffreys v Smith (1820) 1 Jac & W 298 2. Rule 2; sharing of gross returns; eg investment returns from property 3. Rule 3; sharing of profits and losses; all involved C) if partnership; Next step; Relationship of partners to outsiders;  Power to bind the firm; S5 Partnership Act 1891(SA) Business of the kind carried on by the firm; Mercantile Credit Co Ltd v Garrod [1962] 3AllER 1103; P1 & P2 leased out garages, in their partnership agreement, both prohibited from selling vehicles, but P1 sold a car to P3 in fact which P1 did not own, and had done so previously as well. P3 sued P1 and P2 for damages. Held the transaction was in usual course of business. Ratify actions Re Oppenheimer 1872; A imported goods from Paris to Au and B sold them in Melb. B however, bought goods from Melb (contrary to agreement) and was unable to pay for them. A sought to wind up partnership, took possession of stock and arranged to sell it and paid some debts incurred by B but refused others. Held; B buying goods in Melb was NOT within the usual way of doing business, BUT held liable because he had ratified B’s actions.  Unless unauthorised Construction Engineering v Hexyl Pty Ltd; A and B partners in land development, A also acquired land in own name and hired C for construction; the contract made no reference to B, C believed sole principle and not an agent. C claimed A and B liable. Held; A had no authority to make contracts on behalf of partnership, and that C was unaware of B  Extent of liability; (contractual; s9 joint liability) vs severally liability  If negligence= tort/crime liability s10; joint and several Walker v European Electronics Pty Ltd 1990; charted accounts; 3 partners; independent operators. A misappropriated large money from trust account, B and C unaware. Held all 3 jointly and severally liable as was within usual course of business  Misapplication of money or property of 3rd parties; S11  Partnership by estoppel; S14; if you hold someone out as a partner, and someone provides credit on this basis, then you are liable as a partner,

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Tower Cabinet Co Ltd v Ingram [1949] 2 KB 397; letter head continued to use with associates names, former partner kept using, the innocent ex-partner did not know, held not liable. Duke Group Limited (in liq) v Pilmer & Ors [1999] SASC 97; accounting firm, SA, given carless advice, who can be sued? National accounting network or accountants? AU network gave advice to one agency, were they all in partnership? No mutuality, no partnership 

Liabilities of incoming and outgoing partners; S17; not liable pre and post departure of business Tower Cabinet Co Ltd v Ingram; A and B partner dissolved, B bought A out, A gave notice to bank but not publish in gazette, but agreed that B would give notice to all customers, B had new letter head made. After dissolve, B bought furniture from C, with the old letter head with both A and B. Held; A had not held himself out to be partner, debt incurred after; A not liable Relationship between partners  Variation of the Acts rules by consent of the partners; S19 Public Trustee v Schulz (1964) 111 CLR 482  The duty of utmost good faith; fiduciary duties Chan v Zacharia 1984; A and B doctors wanted to dissolve partnership, but just prior A without B knowledge renewed the lease to work for himself. B argued A could not keep lease for himself because still partners at the time. Held A held the lease on trust for Both and have to account to B for the benefit of the lease  S20(1); partnership property; only for partnership business; if make profit; need to account to partner Harvey v Harvey 1970; A owed land was ill, agreed (oral) to let B manage the farm fir B;s son to gain pastoral experience in exchange for the land been preserved for A’s son when older A provided stock and implements. All expenses and profits shared equally, both knew work needed done to improve property, at cost, which increased land value. Ran for 20 yrs without any express agreement as to whether the land would be a partnership asset. Held; partnership existed, but no intention of property as was meant for son, otherwise the land would have to be sold upon termination, and that A under no obligation to pay compensation for improvements to land  S28; duty to render accounts Law v Law [1905] 1 Ch 140  S29; duty to account for private profits;  S30; duty not to compete with the firm Dissolution of a partnership and its consequences  Dissolution without a court order  Dissolution with a court order; S35 Jenkins & Joaquim v Bennett [1965] WAR 42  Consequences of dissolution; assets distributed, debts paid off Advantages of partnership Pooled finances, lack of complexity, no registration, in expensive, standard agreement, tax advantages, income split, management strength, skills and expertise with little overheads, inexpensive to set up, limited reporting requirements Disadvantages of partnership Cannot make individual decisions

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Responsible for actions of other partners Joint liability for all debts, unlimited liability Fiduciary relationship Value of share, arrangement of transfer, everyone has to sign documents Limited to 20 partners Limited partnerships Modify partnerships that can contribute capital with no liability 4. Trusts; income split; tax avoid  Definition; obligation on trustee to deal with the property for the beneficiary  Elements; trustee; beneficiary; appointer  Trust property; COI. COS, eg income  The parties to the trust; COO;  Obligation to use trust property for the beneficiary; eg multiple investments  Features of the fiduciary relationship; returning interest to members  Duties of the fiduciary; extensive;  Types of express trusts; discretionary (tax avoid) and fixed; documented Trustees duties to the beneficiary 1. To comply with and efficiently manage the trust to preserve trust property 2. Duty of undivided loyalty 3. To keep and render accounts 4. Duty to consider 5. Duty to act personally Powers of the trustee Rights of the trustee 1. Right to commission 2. Reimbursement 3. Indemnity 4. Seek advice from the court 5. Prevent a breach of trust 6. Pay money into court 7. Obtain a discharge of liability          

Liabilities under the trust; trading trust/business choose a company to be trustee, issues of creditors, Liabilities of the trustee; Limitations; Creditors access to trust assets; commercially a critical consideration S197 Corporations Act 2001 (Cth) directors are personally liable Liability of beneficiaries; they should not be liable; choose discretionary; zero If fixed; they are liable, able to trace benefits Rights of beneficiaries Altering a trust; involved in alterations; all must consent Winding up a trust; normal commercial context

6. Franchises; modern; simpler than trusts; contractual base, paying a fee  Types; many household names  Advantages; lack of knowledge, buy well developed model, all info

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Disadvantages; price, less money, tied down with franchise controls.

7. Company History Own corporate personality and separate legal entity, distinct from shareholders, directors, management, officers and employee’s The company may enter into contracts, own property, sue and be sued Unlimited lifespan, directs and shareholders may change, but company remains Limited liability; shareholders not liable for debts eg super members (originated in UK) Encourage people to develop and expand entities (1854 England; moral hazard, no incentive to do the right thing; controversial; but successful; economic development) So Corporate Act encourages a balance between moral and business. Heavy statutory authority Public companies listed in the ASX (Ltd cf propriety companies=private Pty Ltd) Single most effective way to run a business Disadvantage; ongoing reporting requirements to ASIC; expensive to set up, corporations Act to abide, Constitutional problem Every colony had own companies Act; at federation companies left out of constitution except 51(xx) with respect to foreign corporations and…… Huddart Parker v Moorehead 1909; states’ rights court; limits of the Cth; creation of companies left to the states; effective control Since this, need an organized Act of, increased regulations, standardization Eg Unifrom Act 1978 1991; Corporations Law; Keating Govn; floating dollar This Act was challenged by most states; as revenue stream; Huddart v Moorehead applied Several other challenges as unconstitutional; Re Wakim, ex parte McNally 1999 Bond v R 2000; jailed under Act R v Hughes; Solution; Power to legislate re matters referred by states parliament s51(xxxvii) Regulatory System Corporations Act 2001(Cth); still states based =ASIC Act 2001 (Cth) which gave ASIC as authority of corporate watchdog; companies report; ASIC penalise asic.gov.au +  ASX Ltd; Australian Stock Exchange; list company if want shares to be public traded  Takeovers Panel (specialist topic); Australian Pipeline Limited v Alinta Ltd 2007  Financial Reporting Council FRC (specialist)  Australian Accounting Standards Board AASB; company tells truth on profits  Auditing and Assurance Standards Board AuASB  Companies Auditors and Liquidators Disciplinary Board; honest wind up 6

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Parliamentary Joint Committee on Corporations and Financial Services; check on ASIC Eg Nick Xenophon; enquiry into whistle blower protection, good research body

Issues on regulatory scheme 1500 sections in Act; complex; plus, regulations; schedules; entire ASIC Act and regulations Company law portfolio; now Treasury (cf AG) Registration and its effects   

Effect of registration; the doctrine of ‘separate legal entity’ or ‘corporate veil’ Limited liability; each director and shareholder separate identity Shareholders; capital appreciation or dividends as income; if pay full $1 per share and company in debt; don’t pay, if partly paid share; liability for unpaid share

Separate legal entities; Key principle; Salomon v Salomon 1897; shoe manufacturer, sold to a company, who paid him more than what company what worth, by shares, cash and I Owe Yous, business name same as own name, initially sole trader, turned into a company (with his family) S was only director, shareholder, and creditor; when into debt; other, borrowed money from B. Company owed money to B and S. B could only get $ if S didn’t (ie B should be paid before S) Held; separate legal entity; even as a creditor; if formalities of corporation observed, ie he did the right thing setting it up, not contrary to the intention of the company, S did not have to stand in que, Lee v Lee’s Air farming Ltd ; L ran crop dusted business had all but 1 share; pilot; the 1 share other his solicitor; pilot run all company; was killed; worker comp covers employee; insurance said no; pilot not an employee; as controlled and owned the company; cant employ yourself. Held; one person can function as a company; contractual relationship between yourself Macaura v Northern Assurance Co Ltd; owned forest; timber; incorporated company only shareholder; transferred all trees to company; so company asset, so insured the timber under his own name; forest burnt down; insurance refused. Held; cant claim for asset doesn’t own; the insurance should have been in company name Lifting or piercing the veil of incorporation; CL Fraud; (cf with Solomon) Re Darby 1911; company A and B both shareholders; then buy 2 nd company and post on public to buy shares; company A investment in quarry license on basis of company worth nothing, company B went B; shareholders demand refund. Held company B set up as dummy company Avoidance of legal obligations; Gilford Motor Co Ltd v Horne 1933; rival company contrary to agreement; and relied on company to avoid legal obligations; held fraud Co knowingly participates in directors breach;

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Green v Bestobell Industries Pty Ltd; G director of A, set up B as rival; out competed, knowingly benefited, company knew about it, breached A; lift or pierce veil At statutory provisions Insolvent trading; s588G; if company incurs debt at time of which director knew or ought to have known could not pay debts; had made inquiries at bank, not enough assets; will be personally liable, creditor can sue directly, lift the veil of corporation (cf with Salomon) Oher insolvents transactions; s588FB, FP; undue transactions, other minor provisions Case of corporate groups; complex areas; controls other subsidiaries  Insolvent trading by subsidiary; ss588V-X; liability a parent may have by trading by subsidiaries; may be looked at as whole group  Consolidated financials  Taxation consolidation  Group benefit; ought to count as benefit adequate to support the decision of one particular company Equiticorp Finance Ltd (in liq) v Bank of New Zealand; if director of subsidiary decides on decision for one holding company but not for another; generally no.  Effects of liquidation  Agency and partnership  Liability in tort (human rights potential);massive developing area in corp law Briggs v James Hardie & Co Pty Ltd; actions of subsidiaries; asbestos litigation If parent company controls subsidiaries= direct tort relationship to parent (UK authority); ignores separate legal entity; human rights abuses Types of companies  Corporations ...