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Business Law
David Sim

Blaw211 S1 2013  Elizabeth, Queen of Nz  Governor General Systems of Law Nz was a colony – now a constitutional  Moral rules monarchy  Legal rules  Laws = enforceable rules 930’s Statute of Westminster Legal Systems  Allow dominions of the UK to basically become independent, not affected by  Public Law statutes and legislations in the UK  Constitutional Law  NZ will become a colony if UK  Administrative law – ministerial law supreme court over rules statute of  International law – created by Westminster agreements between countries. (Nz must have legislation to make it 1986: NZ independence, the constitution Act legally enforceable) was passed. UK has no power over NZ. Creation of NZ parliament  Criminal Law – criminal cases (to punish people by the state for breaking state rules) Legislative Council: (was a house of 102) – 1950’s  Civil Law  Contract law  Houses of parliament  Tort  Chambers  Family (closed to public)  Now NZ only has one house/one  Property chamber. NZ abolished the council as  Equity they did nothing. Criminal Proceeding – crown vs individual NZ separation from the UK (1986) Civil proceeding – one individual vs another Constitutional Concept The Constitution – NZ has one  Rule of Law (theory of law, the law is the most powerful. PM is the most  Rules and practices that determine powerful individual but is subject to the composition and function of the law. Rule: law rules not people) government and which regulate the rights between citizens and the state.  Separation of Powers o Executive o Legislature Types – o Judiciary  Constitutional monarchy Court is public, as public can know what is  Monarchy  Dictatorship going on. Exception of family law.  Republic Laws and Government decision must follow procedures. If not, law is not valid. Kingdom of NZ  Head of State Judges must be independent. Separation of Power (1700’s) – should be Judiciary – divided up, as well as government factions.  Judges Government has large meaning but not  Quazi Judicial Officers, makes decision accurate use. on specific matters. Narrow powers. (Large)Executive – cabinet is the heart of it, Parliament ministers of government and departments,  Boss Speaker of the house – admin minister out of government. Police are apart of the executive, are a department. side  Decides what goes on in parliament Legislative – Consists of Parliament house  Members of parliament debate, all All government departments have factions of ministers are MP due to constitution. power. = no separation of power. Executive – Administration of the law, policy  All members of Parliament in making. executive.  “The Whip” – makes party members Legislative- making laws (Parliament), Statutes. vote for their parties. No removal of Judiciary – Interprets and enforces the law. party if voted against but can be removed from party – end of political Policy and law are not the same. Policy are career. not able to overpower laws. Policy are not law. Judges are voted in/chosen by governor Executive – general in nz as in parliament and executive. Acts in accordance by ministers. Governor  Head of State general has no power. Ministers have power.  Executive council Attorney general submits name to governor  Cabinet general, after advisory meeting with head of  Pm law society, judges chosen.  Ministers and government departments Office of ministers are conventions. Conventions are rules not laws. Add to the Executive council – H.O.S, head ministers, PM. separation of power. (Highest executive arm of the government) A government must resign if out voted in Cabinet – just below executive council, no election; also if a notion of no confidence is legal existence. passed. Ministers must not speak out against Legislature – judiciary member as a convention. Governor general takes advice from limited  Parliament  Head of State ministers such as PM.  House of representatives (speaker of !984 – NZ election called by Rob Muldoon the house, members of parliament) earlier than normal due to economy in a bad committees work as house decision. state. 3 Week normal time to change ministers. Convention states PM elite can tell PM what to do. Muldoon said no to elite PM Dicey – Parliament can make any law at all, as not legally enforceable. Now transition is apart from biding future parliaments. governed by law not conventions. How Statutes are made Law  Bill proposed  Power not to assent bills  First reading (introduce draft  Power to appoint pm legislation, formality like)  Power to appoint ministers  Select committee stage (divisional)  Power to appoint judges  Second readings  Committee stage (clause by clause) -> Conventions whole house of ministers vote  Third reading  Must assent to bills  Must appoint leader who has  Royal Assent (Governor General gives assent) confidence of house of reps  Must appoint on advice of pm Local Bills – local organisations like DCC can  Must appoint of advice of attorney put up. general. Private Bills – ministers opt to put up private Sources of Law bills for government which are then “Chosen out of the hat” to be presented to the house. Legislation Laws can be put through in a few hours with  Statutes  Subordinate legislation reasoning Acts commonly delayed enforcement Common Law and Equity Types of Acts  Judges made law Statues  Public acts – applicable anywhere in NZ (only NZ) Supreme law, overrides subordinate  Private acts – applicable to specific legislation, over rides common law and equity. people/organisations Legislation through house of congress and  Local acts – applicable to specific signed by president becomes statutes. USA parts of NZ has supreme law to override statute. Form – interpretation defines the act and Dicey’s Theory states that a parliament cannot details. bind a future parliament. UK and English Statutes A large Majority (75%) is needed to 1840’s act was passed stating all laws in the pass/remove a entrenched provision. UK were to be applied to NZ One entrenchment law in place with NZ st constitution outlining parliament votes. Edward the 1 signed a magnacata which turned into statute. E.g. cant be thrown into Parliament Supremacy jail without a trial. Bills of rights act 1698, still applies to NZ Presumptions Subordinate Legislation  Act will not bind the crown unless act says otherwise Status  Under statues  Common law will not be affected/altered unless there is no  Overrides common law other interpretation Types  Implied repeal (new overrides old)  Clear wording required to restrict the  Regulations and Rules liberty of the individual  Orders  Cannot take private property without  Notices compensation without clear words  No retrospective effect without clear Ultra Vires words. Form Interpretation act 1999 and Interpretation Interpretation of Legislation sections  Case law Rules  Hansard  Literal Rule (starting point, what they  Treaty of Waitangi literally mean)  Dictionaries  Golden Rule (avoids absurdity)  Mischief rule (what mischief is the act Go to interpretation sections -> interpretation act 1999 -> other acts -> case law to set trying to prevent)  Purposive Approach interpretation of law. Noscitur a Sociis (Things of the same kind) Hansard  Records of things said in parliament,  Unless the context otherwise requires – “road” means any road, highway, used to make sense of words. Also considered unreliable due to street, lane, footway or alley. All have public access unknown if its collective reason (now used in interpretation) All look for common factor in definition of Treaty of Waitangi Eusdem Generis Eusdem Generis (A word known by its  Legislation usually read in consistence neighbours) with treaty unless clear otherwise Dictionaries  Unless the context otherwise requires – “Animal” means dog, cat, guinea pigs, canaries, goldfish and other  If all other factors not working, use as last resort anials. Common law and Equity Trying to cover a whole range of texts, “and other animals” would be relative to option of Common law and equity distinctions context. Status – bottom of the pile (regulations  Court of Appeal (breaks into two overpower) segments, high court and employment court) Where does it come from? – made by judges for 1000’s of years under development High Court constantly  District court Nz has difference between law and equity  Maori land court  Environment court Common law sets down basics of law of who’s  Tribunals liable for what Overtime laws limited to certain Employment Court circumstances  Employment relations authority Chancellors court – seek to have equity done District courts deal with smaller calims by kinds court when no common law remedy. 1987, two courts merged, established legal Documents on procedures of defendants position then seek equitable remedy. pleading to all allegations. Statement of claim statement of defence statuary demand. 10 Two courts, common law or equitable remedy. day response. E.g. contractual obligations broken. Disputes Tribunal -> 2 Hardest to appeal Law first then equity. Hierarchy of courts. A higher court sets rules Court Proceedings that bind lower courts  Procedure and pleadings Supreme court can do what they want, but  Trials (headings) are conservative and reluctant to change  Witness box – sworn in and crossed common law. examined (no walk up/not called to stand. Only binding precedents are from NZ courts, other courts (AUS,UK, USA) are only  Trials start with lawyers setting ut basis of case persuasive from those derestriction’s.  Case analysis Reading a Judgement  Doctorine of precedent - main  The facts feature how common law works  Precedents is details of cases – if you  Applicable law get a case similar facts to a precedent,  Distinguishing cases it should be followed for outcome.  Ratio decidenti – statements the  Bind Precedents (from higher courts judge makes on the law must follow)  Oobiter dictum – law what might be  Persuasive Precedents (from in different circumstances higher/lower court)  Finding facts  Decision in the case Hierarchy Sources of law (the end)  Supreme Court (Final Judgement) Judicial thview(review but the courts) – case Treaty’s are agreements between sovereign law in 20 cent for development. state. – consider Maoris as sovereigns Decisions can be disputed incourt (by those Binning with international law. Cannot be will statutory power) e.g. PM and MP’s enforced. (Also done by ignoring.) A breach of natural justice The Nature of Treaties in Law  Beyond reason (the decisions made)  Agreements between sovereign states  Ultra varies (outside their powers)  Recognised as binding in international  Right to be heard law  Right to know charges – evidence  No legal meanings of enforcement in  Right to be represented – what’s international law (although some brought against you punishments maybe available)  A treaty is not a law of a state unless Bas – where the decision maker is biased to incorporated into domestic law by one side. To claim bias decision evidence must statute. be shown. Sovereign State – a country on its own entity Predetermination – decision made before that cannot be told what to do by foreign cases are heard. positions Judicial Process – not about right or wrong Circumstances in which the treaty of Waitangi decision but about the process. was signed Treating of Waitangi - Between the crown and various maori chiefs  Overview of legal position - Drafted by hobsons staff – no legal Missionaries + whalers – 1700’s training - Drafted hastily Interaction between wales and locals caused - One draft given to missionary to problems translate into maori Elizabeth Incident - One English language siged and maori language signed  Independent European captain helped - Two copies not exactly the same a maori tribe attack another one He Maori version contains words that do not  1833 James Buzzby NZ UK resident (confederation of the united trives of accurately reflect the precise meaning of the NZ) equivalent English word. The essential provisions of the treaty 1830’s – French colony in Akaroa Harbour (whatever French did the UK will appose) Article 1 – Confederation of the united tribes and independent chiefs cede “sovereignty” to UK companies now supported to expand to the queen of England. NZ to colonise. Lft. Governor Hobson sent to negotiate with Article 2 – Queen of England guarantees: th maori treaty. TOW signed 6 feb 1840.  Undisturbed possession of land,  Tribal societies were subject of forests, fisheries and other properties treaties with European states for a  Chiefs grant exclusive right of pre- long time before 1840(state practice) emption of land to the crown  The Maori has a developed system of law and land tenure Article 3 – Queen of England grants status of British subjects to Maori people  There was a form of political organisation amongst Maori. Problems of Translations Judicial Opinion Article 1 The end of the spectrum  Cede Sovereignty – Kawanatanga  WiParata vs Bishop of Wellington (governance, complete government,  No body politics to form a treaty with full sovereignty) -> mean a sort of so no cession of sovereignty. To that protection extent the treaty is “a simple nullity”. Article 2 Law of Property  Rangitiratanga – unqualified exercise People could be owned but not today of chieftainship  Toanga – Treasures, anything highly Now… prized  Anything other then a person Legal Status of Treaty  Intilectual property (only recently)  Good will is intangible property  International legal personality(statehood) required for a Animals are property (buy and sell) treaty  Was in the confederation of the Real Property united tribes of new Zealand plus Chattels – physical possessions independent chiefs a state as understood in 1840? Chose in action – not capable of physical possessions (shares, book debts) Negative Share – is a right to privileges, it’s a legal right.  Not a treaty at all – consent to Property Expanding Concepts annexation  Maori not particularly organised  No consensus of government  Intellectual property (exclusive rights to ideas and expression)  No consensus of law  Therefore not a state  Licenses (fishing Quota) aka permission  Goodwill Can’t be a legal treaty. Affirmative Ownership  Bundles of rights  Person with them most rights in the not on a scale of maori land ownership. property is the owner Causes issues but now there is a maori land legal system. Restriction of use Real Property  Resource management act 1991  Building cat 1991  Background  Public works act 1981  Doctorine of estates  Common law nuisance and rylands v  Classification of estates fletcher (1868) LR 3 HL 330 o Free simple o Life estate Council Restrictions – no factories in domestic o Stratum estate locations. o Lease hold Disposing of Land (sell it, gift it, wills) All land is owned by the crown. After death with no beneficiary, land returned to crown. Giving away land through security Biggest bundle of rights for land is the owner You are entitled to waste your property (apart from intent of fraud) Life interest – subject to life, life estate that the property rights till holder dies. You can purchase “property” Stratum Estate – body corporate e.g.  Purchase  Gift apartment blocks common access to communal areas and maintenance costs. Sole o Inter vivos o Under a will owner of apartment.  Vesting by operations of law Leasehold – own land, allow others to use Nemo Dat Quod Non Havet (one cannot give Free Simple what one does not have)  Duration uncertain  Statutory exceptions  Ends when the owner dies without o Mercantile law act 1908 heirs o Land transfer act 1952  Potentially forever E.g. Owner – Thief – Purchaser Life Estate Exceptions – under act where some cats as a  Duration is for life of estate owner mercantile agent means nemo dat is nulled.  Duration uncertain  Subjects for rights of holder of land Ownership – Possession Distinction (possession is ownership vise-versa) after life therefore no fight to waste, no right to alter property without Property as security consent. Real Property Stratum Estate Maori land is communal ownership. English  Land divided into stakes law system capable of multiple ownership but  Rights of owners of units same as  Back ground free simple in relation to unit but  Land transfer system other obligations for common  Indefeasible title areas  Exceptions of indefeasible title  Created by statute  Defective title Leasehold Estate  Valid transuctions – Frazer v Walker (1967) NZLR 1069 (PC)  Duration normally specified in lease  Fraud and therefore certain (commercially leases especially)  But termination on notice is common Fraudulent sale of title, no title passes. Nemo (residential tenancies especially) dat rule.  Right for renewal clauses  Right to occupy and use subject to the Deeds registration system – deed transferred from sale of property must be registered. terms of the lease. Estate of possession (occupying land) LTS Estate of expectancy Each piece of land was identified to size and shape if it is on certificate title its legal  Reversions interest.  Reminders (trusts) Indefeasible title – title cannot be disputed Legal vs Equitable Interests A registered proprietor’s interest in a property  Creation and Transfer is superior to call others. o Legal formalities required Title cannot be taken from you apart from the o Equitable – no formality exception of fraud, and land removal by the necessary (although often is) government Land Transfer (Torrens) System No legal title till name is registered on title of Terminology land  Title (ownership of land, has most Nemo dat without knowledge of fraud goves rights) indefeasible title.  Deed (legal act has been done) 1)Bona Fide (good faith)  Conveyance (preparation of documents to transfer or create 2)Purchaser for value interests)  Certificate of Title (also known as 3)Without notice identifier) 3 ticks means indefeasible title.  Registered proprietor (more than one to title) Fraudulent act = no indefeasible title Used to have duplicates of registration of Knowledge of someone else causing fraud = ownership no indefeasible title. Also thoughts that fraud is occurring. Registration of free simple name of new RP will sweep away unregistered interests unless Not knowing and no suspicious = indefeasible title. - Actual fraud by the new RP Fraud - If the new RP’s designed object of the transfer was to cheat someone out of their unregistered interest or rights,  Actual fraud  Knowledge of fraud that is fraud. - Knowledge that any trust or  Wilful blindness unregistered interest exists in itself Constructive fraud will not defeat not enough to constitute fraud. indefeasibility Am I dealing with the a registered or Heron v Broadbent – possible question unregistered interest? (Loke Yew vs Port Swettenham) Statutory limitations to indefeasibility Using indefeasible title to commit fraud  Examples law to assist in fraud  Property law act (protection of Mortgages lessees)  Public works act (compulsory - Its security acquisition) - A loan agreement  Insolvency act (automatic vesting in Mortgagor – borrower assignee)  Property (relationship) act Mortgagee – lender Fraud Against Unregistered Interests - Nature - Legal mortgages Courts Approach - Equitable mortgages  Registration of free siple is name of - Priority new RP will sweep away unregistered - Equity of redemption interests unless. Legal mortgages (registered) – indefeasible o Actual fraud by the new RP title o If the new RD’s designed object of the transfer was to Equity mortgage (unregistered) cheat someone out of their Legal > equitable known unregistered interest or right, that is fraud Equitable mortgage – in/not in a prescribed o Knowledge that any trust or form unregistered interest exists is I itself not enough to Legal mortgages have priority over equitable constitute fraud mortgages Fraud against unregistered interest For two legal mortgages, the one which is registered first is given priority in ordinal filing The court approach : Between two equitable mortgages, date of - Allows mortgagee to purchase, bank signing has priority. can purchase as well - Sale by auction Constitution - Safe Determines: Disadvantages: - Who has the power to government - More costly - How that power is to be exercised - Process to be followed NZ Govt, direct form of UK Govt. - Timely - Independent auctioneer Signing of manga carta by king john in 1215 Private Sale Magna carta established the concept that monarchs ruled subject to the law - Duty to obtain best price obtainable as at time of sale (advertise) Bill of rights enacted in 1688. - No need to wait for market to pick up Westminster system – that parliament is Cheaper to do and quick. Auctions show best supreme price of the day. Since only parliament can pass acts of Independent expert valuer – to figure best parliament, no one else. Including the crown price available or the executive – can choose to ignore or Proceeds of Sale: dispense with an act passed by parliament, this is set out in the bill of rights act 1688, - Cost of sale article 1. - Repayment of debt wed to mortgagee The NZ Constitution: decision of uk and - Repayment to subsequent mortgages commonwealth courts, treaty of Waitangi, - Any balance to mortgagor decision of nz courts, constitutional Interplay between conventions and laws conventions, nz legislation, imperial legislation. Judicial review – renewing decisions made with natural justice Select committees – 8 members of parliament Partnerships Fair Clough: RP of hotel, leased to brewery for 20 years. Joint Liability – partners are both liable, but if one forfeits others are completely liable. Clause – could not be fully paid off until 6 Separately liable – weeks before lease expires. Preventing repayment (also of sale of lease) Sole Trader – you and the business - Nature of business Court deemed clause void. Any clause that - Applicable law restricts the payment of mortgage void. Equity of redemption. - Formalities - Liabilities, personal and unlimited - Suitability, small businesses Registrars sale: Partnership - Held; not a partner of mill because net profits were not shared (expenses - Partnership act 1908 not shared) - Limited partnerships act 2008 - “special partnerships” – legislation Kahn V Miah repealed in 2008 - Waiter and chef decided to set up “ the relationship which subsets between their own restaurant with two others persons carrying on a business in common - Before it opened, relationship with a view to profit”. Refer to between plaintiff and other 3 broke partnership act, S4. down - Plaintiff sought to end partnership at Carrying on a business – includes every will and have his share of partnership trade, occupation or profession. S2 assets A single venture can constitute a business - Was there a business? e.g. rock concert. In common Welsh V Jess - If business is operated by or on behalf - 2 people agreed to enter into a 90 of people they are ‘in common’. mile beach fishing contest and agreed e.g. if several people carrying on a business to share the prize. with a view to a profit on behalf of sale - Expense of trip to be shared proprietary may not be a partnership - One of the people won the major price and refused to share e.g. one person managing a business on - Argued there was no partnership behalf of two others; partnership may exist - Court found no partnership but between those two others. contract between parties. Formal requirements for a partnership With a view of a profit - Definition excludes certain - Sharing gross returns does not mean relationships making a profit - Rules for determining existence of a partnership – refer to partnership act Cox vs Coulson S5 - Coulson owned a theatre and agreed - No restriction on number of partners to take 60% of receipts from ticket - Companies may be partners - An agreement in writing between the sales - Mill provided props and actors and partners is not required agreed to take 40% Hudgell Yeates & Co Vs Watson *actor injured member of audience with pistol - One legal firm of 3 partners - Coulson was sued; was he a partner - One partner failed to renew his practicing certificate and technically (therefore liable?) could not practice - Client refused to pay firms bill as the Common terms in partnership deed: partnership was illegal - Held that partnership dissolved when Termination practicing certificate not renewed but - Dissolve if partners death, unless remaining partners constituted a new otherwise stated in deed partnership payment required - Can be ‘at will’ and partners give notice It is usual to have partnership agreement/deed – unless varied by agreement or deed, the terms of the Expulsion partnership act apply. - Majority cannot expel any partner without specific right in agreement Rights and duties between partners - Variation by consent Restraint of trade clause o Can include failure to obect to - If too widely drawn, will be stuck a particular course of dealing down by the courts as contrary to - Contractual freedom governs many public policy aspects of the partnership act o Sleeping partners Fiduciary duties of partners o Almost any arrangement All partners are fiduciaries towards each other possible - Duty to render full disclosure of all - The act set out a number of default rules in particular s27 partnership matters - Partner must not make a private Profit of a partnership profit at the expense, or compete with the firm - Divided equally unless agreement - Duty may continue even after partner - Losses paid first out of undistributed profits, then capital, then equally by leaves firm the partners (Act, s47) Conflicts of interest - On dissolution of partnership assets, - Large national or multinational firms advances and capital distributed in proportion of profit share often have conflicts - A fiduciary must disclose all relevant Management of business Partnership information in their possession to their clients - All partners have right to participate - Information barrier’s ‘chinese wall’s’ in management - No right to remuneration Partners and Outsiders - Admission of new partners requires consent of all existing ones - Ever partner is a agent of the firm and partners - Ordinary matters concerning running the partnership business decided by - Every partner is an agent of the firm majority and for the purpose of the business of - Change in nature of partnership the partnership and acts of every business decided by all partners partner who does any act or carrying on in the usual way of business of the Limited Partnerships kind carried by the firm of which is a member bind the firm and his - Limited partnerships act 2008 - Purpose to provide an internationally partners……. Partnership act s8 - No doctrine of ultra vires exist recognised investment vehicle - Depends solely on agency law - New Zealand limited partnership structure is modelled on the internally - Partner can have actual authority or apparent authority or apparent accepted Delaware model authority General and Limited Partner - Liabilities are typically joint and several - There must be at least one general partner and one limited partner who Duration of Liability s20 are different legal entity - They could be a general partnership - New partner is not liable for old debt and retiring partner is not liable for as a company new debts after they leave General partners: - Agreement between partners as to - Manage the partnership properly and their liabilities will have no effect on third party business - Death or bankruptcy of a partner - Are jointly and severely liable with the terminates liabilities from that date limited partnership and other general partners for the debts and liabilities of Pont v Wilkins the partnership - W retired, but worked part time - May, but do not have to, invest in the limited partnership - Name of firm unchanged and no public statement was made to Limited Partners advertise retirement - Two long term clients sued firm to - Like a shareholder are not liable for recover stolen money the debts and liabilities of the limited - Held: could succeed against W partnership, provided they are not involved in general management Tort Liability - Financial risk is limited to the - Partnerships are liable for torts of investment made - Certain “safe harbour” activities are other partners committed within ordinary course of business of firm, or allowed. “strategic planning” with authority of other partners. Advantages of limited partnership Proceedings Commission V Ali Hatem - A separated legal entity with limited - Employee was sexually harassed; was liability for limited partners perpetrator’s partners also liable? - The identity of limited partners is confidential - Was it in ordinary course of business? - Perpetrator had primary responsibility Company Nature/Veil for staffing - Held: co-partner liable Key Concepts: - Separate legal entity Companies act 1993 - Shareholders limited liability Major reform: Company: - Abandoned the English model - Director - Rejected harmonization with Australia - Shareholder - Followed Canadian model, the - Employee business corporation act1985 Policy: Come into force on 1 july 1994 - Why allow companies - 1955 act companies given 3 years to re-register Attractions of trading in partnership form - Automatic re-registration on 1 july - Ease of investment and disinvestment 1997 - Ease of increase in scale of operations One Person Company - Perpetual succession - Separation of ownership and control 1955 act: - Limited liability - Vehicle for borrowing - Memorandum two shareholders - Director and company shareholder - Acceptance - Separate legal entity 1993 act: Formation - Statutory constitution - Companies may adopt their own - Companies act 1993 - Reserve a company name constitution - Apply to register a company Major Transaction - Directors and shareholders sign consents 1955 act: - Certificate of incorporation issues - No equivalent History: 1993 act: - Guilds setup in corporate forms under - Gives shareholders greater control royal charter - World charters granted to groups if over shareholders various trading interests - Directors cannot carry out a major transaction without consent of - The industrial revolution saw the expansion of business ventures which shareholders by special resolution led to limited liability companies Solvency Test New Zealand History 1955 act: - Various company legislation leading - Capital maintenance to the companies act 1955 - Reform of the 1955 act lead to the 1993 act: current 1993 act - Solvency test - Protection for creditors - All 7 family members given 1share - Two arms of solvency test each o The liquidity test - The balance of 20,000 shares o Balance sheet test allocated to salomon - In return for selling his business to the Directors Duties company he received 20,000 shares - 1993 act codifies directs duties and a debenture of $10,000. - Salomon was: - 1993 act introduces the interests register o The vendor of the company’s business Conflict of interests o Managing directors of the company Minority Shareholders o Majority shareholder 1955 Act: o Secured creditor of the company - No majority buy out rights - The company failed and salomon sued 1993 Act: the company for the unpaid debenture as a secured creditor - Minority shareholders may require - If he succeeded the unsecured trade the company to purchase their shares creditors would get nothing - The liquidator resisted the claim on in certain circumstances o Major transaction the basis that the company was a o Amalgamation sham and that salomon really owned the business and therefore liable for o Certain changes to company constitution its debts - The house of lords found in favour of o Change in shareholder’s rights salomon Separate Legal Personality - The court confirmed that the company was an entirely different - A company is a separate legal person from salomon. All the personality statutory requirements were met - It is separate from its shareholders - Therefore it has its own rights and - Salomon was able to enforce his security and unsecured creditors got liabilities nothing - Some referred to as “the corporate Veil” Limited liabilities for shareholders Salomon V Salomon Co & LTD Two aspects: - Salomon ran a boat manufacturing - The liability of shareholders to the business as a sale trader company - Decided to form a company and sell - The liability of a shareholder for his business to the company company obligations to outsiders - Required to have a minimum of 4 shareholders Shareholder liability to the company is limited to: - Any amount unpaid on a share hold Section 97 by a shareholder - Any liability expressly provided for in Liabilities of shareholders the constitution - 1. Except for when the constitution of - Any liability for breach of directors a company provides that the liability duties where the shareholder is of the shareholders of the company is deemed to be a director unlimited, a shareholder is not liable - Repayments made in beach of the for an obligation of the company by solvency test reason only of being a shareholder - 2. Except where the constitution A shareholder is not bound by an alteration of the constitution that provides that the liability of the shareholders of the company is - Requires a share holder to acquire or unlimited of a shareholder to the hold more shares in the company company is limited to: - Increase the liability of a shareholder o Any amount unpaid on a to the company unless the share held by the shareholder shareholder agrees in writing to be o Any liability expressly bound by the alteration provided for in the constitution of the company Contract o Any liabilities under sections - Section 15 CA93 131-137 of this act that arises by reason of section 126(2) of - Section 97 CA93 this act. Shareholders liability for company obligations o Any liability to repay a to outsiders: distribution received by the shareholder to the extent that - Because the company is a separate the distribution is person from its shareholders, the unrecoverable under section shareholders are not liable for debts 56 of this act. of the company o Any liability under section 100 - Often eroded by major creditors of closely held companies requiring the of this act - 3. Nothing in this section affects the shareholders and directors to liability of a shareholder to a company personally guarantee the under a contract, including for the performance of the company issue of shares, or for any tort or obligations breach of a fiduciary duty or other Section 15 actionable wrong committed by the shareholder Separate legal personality Lee vs Lee’s Air Farming LTD - A company is a legal entity is its own right separate from its shareholders - Facts: Mr lee died while flying the companies aircraft and continues in existence until its from the new Zealand register - Workers compensation act provided that there had been no concealment compensation to family members of of true facts dead employees - Held: court refused to lift corporate - Issue: could mr lee be an employee of veil the company i.e. was mr lee separate from lee’s air farming LTD. Daimter Co LTD V Continental Tyre Co LTD Facts: Challenging the veil cases - Commenters have suggested that the - Continental tyre incorporated in test should be: “is the purpose for english but with german shareholders and directors invoking the veil legitimate or illegitimate?” - During WW1 continental sued daimter Question: what is the legitimate/illegitimate - Daimter refused to pay continental on purpose. the basis they were an alien enemy and it was illegal to trade with the - Are either of these criteria useful enemy - Veil have been lifted there has been - Held: veil lifted – issue where o Fraud / sharp practice company was controlled not o Existence of a sham incorporated Chen V Butterfield Gilford Motor Co ltd V Horne Facts: Fasts: - The butterfield partnership agreed to - Horne was the former director of rent premises from clydebank Gilford motor co LTD - To avoid personal liability, it was agreed that the lease would be to a - His employment contract contained a restraint of trade clause company - If he left, he was not permitted to - No formal lease was drawn up until seek business from gilfords customers Clydebank sold the premises to the - Horne left Gilford and set up his own chens company which enticed gilfords - A company was formed solely for the customers anyways purpose of acting as the lessee - Gilford sued to enforce the restraint - The rent was not paid of trade - The chens brought proceedings - Hornes defence: it was not he but his against the partnership arguing the company that had taken customers company was a mere sham or façade - The court gave an injunction against and therefore the butterfields were both horne and his company personally liable - the company had been formed for the - Court refused to lift the corporate veil purpose of avoiding the restraint of - The original parties to the lease were trade clause fully aware that the company was - the court held that the company had formed to enter into the lease and been set up for a fraudulent purpose Relationship of the company to the outside provision restricts the capacity of the world company or those rights, powers and privileges Corporate capacity – background - Doctrine of ultra vires - memorandum and articles of - Relevant to previous powers and object clauses association prior to 1984 o objects and powers Corporate Capacity o company could only carry out acts specifically empowered - Companies act 1993 amendment to do Companies act 1993 section 17)1): abolishes o objects and powers often widely drafted undermining doctrine the principle - (1) no act of a company and no - After 1984 transfer of property to or by a o Companies incorporated after company is invalid merely because 1984 were not obliged to the company did not have the state their objects and powers capacity, the right, or the power to do o Instead given: “all the powers the act or to transfer or take a of a natural person” although transfer of the property companies could limit their powers Section 17(2): preserves doctrine for insiders: subjection (1) does not limit – Corporate capacity – current position a) Which relates to injunctions to Companies act 1993 section 16(1) restrain conduct by a company that would contravene its constitution; or - 1. Subject to this act, any other enactment, and the general law, a b) Which relates to derivative actions by company has both within and outside directs and shareholders; or c) Which relates to actions by nz - A. full capacity to carry on or shareholders of a company against the directs; or undertake any business or activity, do d) Which relates to actions by any act, or enter into any transaction; and shareholders to require the directors of a company to take action under the - B. for the purpose of paragraph (a) full rights, powers and privileges. constitution or this act Limits on corporate capacity Section 17(3): “the fact that an act is not, or would not be, in the best interests in a Companies act 1993 section 16(2) company does not affect the capacity of the company to do the act” Capacity and Powers: Distinguish - (2): the constitution of a company may contain a provision relating to - Ultra vares acts of company capacity the capacity, rights, powers, or - Acts of company officers outside their privillages of the company only if the authority Doctrine of constructive notice - Wilfully shutting one eyes to the obvious - Third party deemed to have - Wilfully and recklessly failing to make knowledge of all company documents such inquires as an honest and available for inspection reasonable person would make - Doctrine was modified by internal - Knowledge of circumstances which management rule would indicate the facts to an honest - Companies act 1993 section 19 and reasonable person abolishes doctrine: ‘ no constructive notice” – a person is not affected by, - Knowledge of circumstances which would put an honest and reasonable or deemed to have notice or person on enquiring knowledge of the contents of, the constitution of, or any other Companies and third Parties document relating to, a company merely because - Who can bind the company in transactions with third parties? o The constitution document is registered on the NZ register; - How can a company incur obligations? - Meridian global funds management or o It is available for inspection at asia ltd v the securities commission an office of the company - The problem: company is an inanimate person therefore: - No notice “merely” because the documents are available o Whose knowledge/actions o Which knowledge/actions can BUT be attributed - The persona dealing with the Listed 4 rules for attributing conduct/state of company might still have actual or mind of company officers to the company constructive knowledge that the itself so that the company can be liable company office lacked authority under agency rules. S(18) proviso, this - Express and implied primary rules - General rules of attribution could still allow the company to deny the validity of the transaction - Specific rules Section 18 Powers of Directors and shareholders prior to 1993 act - Prevents a company from asserting that company constitution was not - Default control rested with shareholders complied with etc - Articles of association defined of - Note: ”unless the person has, or ought to have, by virtue of his or her directors - Initial articles determined by company position with a relationship to the company, knowledge of the matters promoters - Powers delegated to directors could referred” not be exercised by shareholders Backen Delvaux Formula - Residual powers of shareholders to ratify where directors powers exceed - Actual knowledge Directors – management power –s218 b. Does not have authority to exercise a power which a 1. The business and affairs of a company director, employee, or agent must be managed by, or under the of the company carrying on direction or supervision of the board business of the kind carried of the company by the company customarily 2. The board of a company has all the has authority to exercise powers necessary for managing, and d) A person held out by the company as for directing and supervising the management of the business and a director, employee, or an agent of the company with author to exercise affairs of the company a power which a director, employee 3. Subsections 1 and 2 are subjects to or agent of the company carrying on any modifications exceptions or business of the kind carried on the by limitations contained in this act or the companies constitution the company does not customarily have authority to exercise that power e) A document issued on behalf of a Power to Bind Company – s18 company by a director, employee, or “a company or a guarantor of an obligation of agent of the company with actual or a company may not assert against a person causal authority to issue the dealing with the company or with a person document is not valid of genuine who had acquired property, rights or interests unless the person has, or ought to from the company that – have, by virtue of his/her position with a relationship to the company, a) This act or the constitution of the knowledge of the matters referee to company has not been complied with: in any paragraphs (a)(b)(c)(d)(e) as the b) A person named as director of the case may be. company in the most recent notice reeved by the register under - (2) subsection (1) applies even th
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