BLAW1004 Study Guide - Final Guide: Proprietary Company, Corporations Act 2001, Regulation A
10 Jun 2018
School
Department
Course
Professor
Module 10 - Business Organisations
Sole Proprietorships
Law goverening
No legislation that specifically
regulates sole traders
Few formalities required
to set up business
Professional qualifications
might be required
Registration for GST (must
register if annual turnover is
more than $75,000)
Subject to CCA and ACL
(Consumer Legislation)
Advantages
Easy to set up
Minimal regulation
Greater privacy
Disadvanatges
Difficulty of
raising capital
Higher tax rate for
individuals v companies
rates
Unlimited liability
An individual who owns a business enterprise as a principal
This type of business structure is otherwise known as a 'sole trade'
The simplest way to structure a business for a sole owner/operator
Can trade under their own name or under a different trading name
Must register a trading name if they trade under a name that is not their own
Can also obtain an Australian Business Number (ABN)
Completely responsible for all risks associated with business (unlimited liability)
No separation between business and personal affairs
Business is not a separate legal entity
Unlimited liability
Initial capital comes from own resources or by taking out personal loans
Succession problems
Sole trade receives profits not wages (pays tax on profits at individual tax rate)
Partnerships
Misapplication of
money or property
The Acts make partners liable as a firm for a misapplication of money
or property received by a partner, or by the firm, from a third party
The firm must pay back any money that has wrongfully been taken
If a partner is a trustee and improperly uses trust property in the
business, or on account of the partnership, the other partners
will only be liable if they had notice of the breach of trust
Property
Partners may wish to lend their personal property to the
partnership, or perhaps allow for some partners to have a
greater claim over certain property, or to use property
Property bought by the partnership belongs to the
partnership and must only be used for the partnership
Land held by the partnership belongs to the partners but is
subject to legitimate claims by other parties, such as creditors
Partner's Rights
and Duties
Partners are entitled to share equally in the capital and profits
of the business; they must contribute equally towards any
losses by the firm, whether or capital or otherwise
Partners are entitles to indemnification (compensation) for any payments or personal
liabilities incurred in the ordinary and proper conduct of the business of the firm, or
for anything necessarily done in the interest of the business or property of the firm
Partners who lend to the partnership more than their
required contribution of capital are entitled to interest
Partners are not entitled to any payment of interest on their required
capital contributions until the profits of the firm have been assessed
Every partner may taken in the management of the partnership business
No partner is entitled to payment for working in the partnership business
No new partner can be admitted without the agreement of all the existing partners
Partners cannot be expelled from the partnership unless the partnership agreement allows for this
Differences of opinion between partners as to ordinary matters connected with the partnership business (such as the
purchase of equipment) may be decided by a majority of the partners, but no change may be made in the nature of the
partnership business (such as a change to the type of business conducted) without the consent of all existing partners
The partnership books are to be kept at the place of business of the partnership,
and every partner has the right to access, inspect and copy those records
All members of the partnership have a right to participate in the management of the business
Partner's Fiduciary Duties
The relationship between partners is fiduciary: the standard of
honesty and proper dealing that partners should display to each
other is similar to that between a trustee and beneficiary
Partners are bound to render true accounts and full
information of all things affecting the partnership to
any partner or their legal representative
Every partner must account to the firm for any
benefit or profit derived from their use of the
partnership property, name or business connection
A partner cannot, without the consent of the
other partners, carry on any business of the
same nature that competes with the firm
Leaving a partnership
Expulsion The majority members of a partnership can expel a member of the partnership agreement allows them to do so
Assignment It is possible for a partner to assign their share in the partnership, or part of it, to another person
Incoming and outgoing
partners' liability
A person newly admitted to an existing partnership is not liable to creditors for prior
debts incurred by the partnership (though this may be made a condition of joining)
Creditors and the public should be
made aware that a partner has left and
no longer has authoruty
Dissolving a partnership
Dissolving a partnership refers to the ending of a partnership, after which winding
up takes place; this is the distribution of the remaining assets and obligations
When a partner leaves or joins a partnership, the effect is to dissolve the earlier partnership
This can be overcome by the partners having a partnership agreement
A partnership that is to operate for a fixed term is dissolved when that term expires
Bankruptcy and death In the absence of any agreement, a partnership will be
dissolved by the death or bankruptcy of a partner
Illegal partnerships A partnership may also be dissolved where the nature of the partnership becomes illegal, or
when it is unlawful for the particular members of the partnerships to continue the business
Dissolution by court A court can dissolve a partnership if one of the partners is of unsound mind, engages in
illegal conduct or where the partnership business cannot be carried on except at a loss
Advantages
The pooling of resources and skills is a major advantage of the partnership form
There is far less formality in the partnership form
The partnership form promotes flexibility
There is a greater degree of privacy, as accounts do not have to be disclosed or audited
Income splitting has made genuine partnerships a popular form of business
organisation, since tax is assessed on each individual partner's income
Partnerships are generally easy to finish and dismantle
Disadvantages
Partners have unlimited liability
The limit of 20 members of a partnership, unless it falls under
one of the exceptions in s115 of the Corporations Act
Partners are not separate from the partnership
Partners are liable for any debts or liabilities
incurred during their time as a parter
If there is a breakdown in relations between partners, an application
to the court might be necessary to dissolve the partnership
Partners cannot transfer their share of the partnership, by
sale or otherwise, unless the other partners agree
The intimacy and agency relationship inherent in a partnership means
that one partner may responsible for another partner's negligence
Partnership is the relation which subsists
between persons carrying on a business in
common with a view of profit
The tests for determining if a
partnership exists are whether
A commercial relationship exists
between the parties (an enterprise)
A common business is
conducted by the parties (that
is, there is some mutuality)
A business is conducted with a view
to profit (to share profit)
A commercial
relationship
Expressly created or implied,
evidence gathered by behaviour
and documentation
Canny Gabriel v
Volume Sales
A business in common
Whether there is a business being carried on is first
determining by the Act, which defines a business as
including 'every trade, occupation or profession' - where
there is degree of mutuality
Turnbull v Ah Mouy
A view to profit
Where the enterprise is conducted for
gains, which are then distributed as
dividends to the participants
Statutory Rules
Created and regulated by agreement;
supplemented by Partnership Act of relevant state
What is not of itself a partnership
Joint ownership of property
Sharing of gross returns
Receipt of a share of profits but it is prima
facie evidence that person is a partner
Partnership agreements
Can be express or imlied
Express agreements (in a written form)
can resolve a lot of potential problems
Agreements can determine
The very existence and
membership of the partnership
Right, liabilities and
contributions of each partner
The genuineness of the
partnership for taxation purposes
May modify some implied terms
set by the legislation
Partnership agreements can be made
through a standard form
Legal Significance
Partners have no separate legal
entity from the partnership
Partners have
unlimited liability
Partners are both principals and
agents for each others - their
actions bind other partners
The partnership may enter into
contracts and be sued
Partners do not receive a salary
and cannot be employees
Regulation
Partnership regulation is determined by state and territory legislation
Common law applies to partnerships
A partnership cannot be contrary to public policy
Partnerships may be between 2 and 20 people. Once a partnership is of
more than 20 people, it normally must incorporate: Corporations Act
2001 9Cth) s 115. Though there are many exceptions with professions
Must register a business
Different types of
partnerships
Ordinary Partnerships
Limited Liability Partnerships
Allows for non-participating, working or general partners
Must have at least one general partner with unlimited liability
Offers a simpler means of limiting personal liability, without the expense
of registering and meeting the regulatory requirements of a company
Allows for more confidentiality than a company
Losses sustained by the partnership not distributed to partners
Now taxed like companies
Main advantage of limited liability partnerships is that silent
(non-participating) partners who do not take part in the
management can be designated as 'limited partners'
Allows for silent partners (non participating) to invest without taking part in management
Incorporated Limited Partnerships
Joint and Several
Liability of Partners
Joint liability for contract debts or court judgements mean that
all partners are liable together, but must be sued in one action
Several liability means that partners are liable altogether
and individually - each partner could be sued one by one
Trusts
Obligations and Duties
Regulated by state legislation (in
WA, by Trustees Act 1962)
Appointment
Any legal person may be appointed
Usually by settlor in deed
Appointee can disclaim
Duties
Overriding fiduciary
obligation to beneficiary/ies
Includes
Gathering assets of trust
Carrying out provisions of trust
Completing all duties personally
Maintaining and carrying for trust property
Keep accounts
Informing beneficiaries of matters relating to trust property
Acting impartially between beneficiaries
Powers
According to deed and the court and
supplemented by legislation
Powers in deed are
express and implied
Courts have the power under equity law to remove a
trustee, if this is required in the best interests of the trust
Rights and Liabilities
Carrying out duties - otherwise a
breach of trust subject to
compensating the trust
Rights of trustees
Reimbursement for expenses incurred
in carrying out the duties of the trust
Indemnity from debts incurred on behalf of the trust
According to trustee legislation
Rights of beneficiaries
Beneficiaries of full legal capacity can agree to terminate the trust
Can compel performance of trust or prevent breach
but lose the right if they have consented to breach
To information and to inspection of trust documents
To recover and trace trust property
A trust is an equitable obligation that rests on a person (the trustee) who
is personally responsible to deal with specified property (the trust
property) for the benefit of another person or persons (the beneficiary/ies)
Has origins in equity law
Parties are settlor, trustee, beneficiary
Settlor creates trust by settling property
upon trustee for the benefit of beneficiaries
Critical feature is
intention to create trust
The trust is not a legal person - trustee is legal owner of trust property,
beneficiaries hold equitable title i.e. their interest protected by equity
A business can be administered through a trust, a
but trusts were not invented for that purpose
As settlor, a person can vest assets of their own into a trust fund, appoint
themselves as the trustee of the fund for the purpose of running a
business, and appoint themselves, with others, as the beneficiaries
Note however that one person cannot be settlor, trustee and sole beneficiary.
There must be other beneficiaries to make the trust structure work
A trust does not need to be formally created but it serves the interests of each of the parties to
the trust to create a 'deed of trust', especially when the trust is formed to operate a business
As the 'deed of trust' is a legal document, it should be created by a lawyer or accountant
The operations of the business will have to be outlined in the trust deed
Trading Trusts
Not a separate legal entity
Uses the trust relationship of Settlor - Trustee - Beneficiary
Sole proprietor disposes of business to a trustee, usually corporation
Driven by tax considerations
Beneficiaries are proprietor and family members who receive
income of business through a distribution by trustee
Family Trusts
A family may transfer a business to a trust, usually with the trust deed
expressly giving control to a parent as trustee to manage the business
Allows for splitting tax income between different
family members, thereby minimising taxation
Taxation law has intervened to reduce the attractiveness of this form of
trust e.g. by prescribing that beneficiaries must be adults, not children, and
by taxing beneficiaries at the highest marginal rate of tax
Companies
Large and Small
Proprietary Companies
A small proprietary company is distinguished from a
large proprietary company in the Corporations Act. A
small proprietary company is one that has two of the
following characteristics:
The consolidated gross revenue for the financial
year of the company is less than $25 million
The value of gross assets at the end of the financial
year of the company is less than $12.5 million
The company has fewer than 50
employees at the end of the financial year
Public Companies
One that is not a proprietary company
No limit on shareholders - 1 upwards
No limit on fund raising ability
Can seek listing on Securities Exchange
Need 3 directors For greater level of accountability
Name to end in Limited (or Ltd)
The company constitution
Sets out the rights and duties of company members and officers
and the procedures related to the governance of the company
Constitution no longer necessary
Can choose to be governed by replaceable rules in the Corporations
Act. Replaceable rules cover management aspects of a company
A company can mix replaceable rules with rules of its own
A company can change its constitution by special resolution
(requires not less than 75% of the members voting for the change
Any change to the constitution must be in good faith and
in the best interests of all members of the company
Directors of a company
A director is a person who makes important
decisions concerning the company's business
and its financial standing
Every company must
have directors
Public company - 3 of whom 2
are resident in Australia
Proprietary company -
1 who is resident
Collectively known as board of directors
There are different
types of directors
E.g. managing director is the CEO who is very involved in the
business in contrast to a non-executive director who does not
take an active part in the day to day management of the company
Duties of Directors
There are many duties imposed on directors
throughout the Corporations Act
Act with care and diligence - AWA Ltd v Daniels
Act in good faith in the interests of the
company and for a proper purpose
Not to use position to improperly gain advantages or benefit -
Australian Securities and Investments Commission v Alder
Not to improperly use information to own advantage or to detriment of company
To prevent a company trading while insolvent
To disclose important information and present accurate financial reports
The duties imposed on directors are derived from both common law (general
law) and statute - for breach of fiduciary duty and for specific duties
There are both criminal and civil implications for directors and officers,
which means these parties can be prosecuted for a breach of duty, or be
sued by a person who has suffered a loss as a result of that breach
Directors must act in the best interests of the company as whole
The Business Judgement Rule An exception (defence) to the strictness of the
rule of diligence and care where the director
Makes a judgement in good faith for a proper purpose
Does not have a material personal interest in the subject matter
Informs himself or herself about the subject matter of the judgement
to the extend he or she reasonably believe to be appropriate; and
Rationally believes the judgement is in the best interests of the corotation
Winding up a company
Winding up a company brings
an end to its existence. This can
occur in two ways:
Voluntary winding up - initiated by
members. Can occur when the
company is solvent or insolvent
Compulsory winding up - initiated by an
interested person (creditors, members, directors)
or by the court when the company is insolvent
and unable to pay its debts
A liquidator administers the winding up (takes over assets and control
of the company, pays debts owing to creditors, distributes surplus
funds to members). They then will deregister the company with ASIC
Advantages of
company form
Company form allows for raising of capital from public
Advantages of company
as business vehicle
Company stands as separate legal person
Transfer of shares relatively simple
Enhanced facility for fund raising
and undertaking larger projects
Members able to elect management
Tax benefits (30% tax rate for companies)
Members have limited liability
Disadvantages of
company form
There are significant costs involved in setting up a company
A company has a more public financial position,
and some companies must submit annual reports
A company can be required to undertake a compulsory audit by ASIC
Members of a company cannot always take part in company management
It can be difficult to change a company's constitution
Companies have a liability to pay income tax separately from their members
Extensive regulation and significant penalties are involved
in breaches of law by companies and their officers
The founders and original owners of a company can lose control of
the company if an outsider purchases significant numbers of shares
What is a company?
A company is an artificial entity that is recognised by the
law upon registration with the Australian Securities and
Investments Commission (ASIC)
Once a company is registered it becomes an
incorporated company that is regulated by the
provisions of the Corporations Act 2001 (Cth)
In Australia, ASIC and its subsidiary bodies
have the responsibility of ensuring that
companies comply with the law
The Powers of
a Company
The powers of a company registered under the
corporations act are set out in s124, which provides that a
company has the legal capacity and powers of an
individual both in and outside of Australia
A company is a legal
person in its own right
A company is endowed with capacities similar
to those of a natural person (to enter into
contracts, purchase property, borrow money,
bring a legal action etc...)
Separate Legal
Personality
The company has a legal personality distinct
from that of its directors, shareholders
(members) and company workers
Salomon v
Salomon & Co
Lee v Lee's Farming
Bringing a company
into existence
A company must be registered by ASIC,
which requires compliance at first with
some basic procedures
A registration application to become
a company must contain
The type of company
that is proposed
The company's proposed name, unless
the Australian Company Number (ACN)
is to be in its name
The name and address of
each person who consents to
become a member
The names, birthdates and addresses of those consenting
in writing to become directors or the company secretary
The address of the company's
proposed registered office
The proposed opening hours of the
registered office (if not the standard
opening hours), for a public company
The address of the company's principal place of business (if
not the address of the proposed registered office)
For a company limited by shares or an unlimited company: the number and
class of shares, the amount agreed to be paid for each share (in writing) and,
if not full paid, the amount agreed to be unpaid (in writing) on each share
Post registration
The persons consenting to become a member,
director or company secretary on the application
are deemed to take on their role
The company can choose to have a seal;
if if does, the seal must contain the ACM
in the company name
The company must establish registered of
shareholders, charges and debentures, as
well as minute books
The company must
issue shares
A public officer must be
appointed for taxation purposes
If the company is public, its name must be
displayed, and it must ensure its office is
open during prescribed hours
The company must inform ASIC of any
changes that have taken place within it after
its application for registration
Classification
of compaies
A company can be either a
public or proprietary company
A proprietary company is usually
smaller than a public company
Often used for family
enterprises or small businesses
More than 90% of companies in
Australia are proprietary companies
A public company is a
company that is not registered
as a proprietary company
Not restricted in their ability to raise
capital from the public through an
issue of shares or borrowing
The Corporations Act further
classifies companies according
to liability of members
E.g. limited by shares
A share is an instrument of ownership that can be sold or transferred in
any manner to another. A share is not physical property, but rather a
bundle of rights or a claim evidenced by a certificate that may be issued
If company cannot pay its debts on liquidation, shareholders
liable only to the extent of uncalled value of shares. Once share
is fully paid shareholder cannot be asked to contribute more
There are proprietary companies that are limited by
shares and public companies that are limited by shares
Proprietary Companies
Smaller than public company; often wrongly referred to as a private company
Limits shareholders - minimum of 1 to maximum of 50
Cannot be listed on Stock Exchange
No age limit on directors (must have at least one)
Not required to hold annual general or statutory meetings
Must have 'proprietary' (or Pty Ltd) in name
Cannot raise funds from public
Can limit the transfer of its shares
Can be a one person company
Canny Gabriel Castle Jackson
Advertising v Volume Sales (Partnership)
Issue
Was the business organisation a partnership or a joint venture?
Different liability for the parties applied depending
on what type of organisation it was held to be
Decision
The High Court decided that Volume Sales and the
concert promoters were a partnership, even though
they called themselves joint ventures
The High Court decided there was a
partnership because of the following factors
The parties had joined in a commercial
enterprise with a view to profit
They had agreed to share profits
Disputes were to be
decided by arbitration
There was to be mutual agreement in
the particular enterprise
Facts
A company promoted tours of Australia by the then popular British singers, Cilla Black and Elton John
To finance the tour, the company borrowed from Volume Sales (Finance) Pty Ltd
The agreement between the promoters and Volume Sales later entered into an
agreement with Canny Gabriel, an advertising agency, which provided further
finance for the tour and held as security a claim in the box office receipts
This meant that both Volume Sales and Canny
Gabriel had a claim to the box office receipts
When money was received at the box
office it was taken by Volume Sales
There was a dispute between Canny Gabriel and Volume
Sales over who should get the money first, because
there did not appear to be enough for both parties
Turnbull v Ah Mouy
(Partnership; Business in
Common)
Issue Did a partnership exist?
Decision
The court found there was
no partnership because
there was one single venture
which did not amount to the
carrying on of a business
There was only a contract
for sale of goods
Facts
Turnbull supplied rice to Ah Mouy,
who was to pay Turnbull a
commission for any rice he sold
Ah Mouy made a loss on his sales and
refused to pay the commission
Ah Mouy claimed there was a partnership; he
could not be sued by a partner under contract
Salomon v Salomon & Co
(Companies; separate legal
personality)
Issue
Had Salomon properly created a
company with a separate
persona from himself?
Did any such company
have limited liability?
Was any such company capable
of creating valid securities in
favour of Salomon?
Who should be
paid first?
Decision
The company was validly created in accordance with the
requirements of the then Companies Act; it acquired a legal
persona separate from that of its members, it had the benefit
of limited liability and, in the absence of fraud, was able to
issue valid debentures to secure payment of monies owed
to Salomon
Reason
It was argued that it was contrary to the intention of the
Companies Act to allow Salomon to create a company with a
separate persona and limited liability when the company
essentially consisted only of the members of his family, with
himself remaining in control of the same business he had
been running before
The appeal court disagreed, holding that the
Companies Act laid down certain minimum
requirements for the formation of a company, with
which Salomon had complied
Facts
Over a period of 30 years, Aron Salomon established
a successful boot and shoe manufacturing
business, operating as a sole trader
Salomon was married, with five
sons and a daughter
Four of his sons were
employed in the business
In 1892, Salomon decided to turn
his business into a private
company limited by shares
At the time, the Companies Act required a company to
have at least seven members, each of whom must have at
least one share of whatever value
To comply with these requirements, Salomon,
his wife and five of his adult children became
shareholders in the company
The company, on being incorporated, agreed to pay
Mr Salomon Ā£30,000 to take over his business, and in
payment of this amount, gave Mr Salomon 20,000
paid up Ā£1 shares in the new company, plus 10,000
Ā£1 'debentures'
Debentures are a type of security that
companies can issue, giving a creditor a
preferential right to be paid from the
proceeds of the company's assets
The debentures issued to Salomon guaranteed
payment by the company of the balance of the
purchase price for the business
Mrs Salomon and the five children only
took a single Ā£1 share each
Unfortunately, not long after the company was formed,
industry-wide strikes drove the business into insolvency,
and the company was wound up
The company could not pay both the debt secured by the
debentures and the debts owing to other unsecured creditors
The unsecured creditors questioned whether a
company has been validly created and whether the
debentures it had issued were valid
Lee v Lee's
Air Farming
Issue
Did the position of Lee as the controlling shareholder and director of the
company preclude him from also being a person who worked under a contract of
service with an employer, within the meaning of the Workers Compensation Act?
Decision
Lee was employed as a worker
within the meaning of the
Workers Compensation Act
Reason
Lee and the company were separate legal entities
and could validly have more than one kind of legal
relationship with each other
Facts
Lee formed a company (Lee's
Air Farming) to carry out aerial
topdressing of crops
He was the controlling shareholder in
the company and was appointed as
its managing director
Lee was also employed as the
company's chief pilot, for which
he was paid a salary
The company insured itself against
liability to pay compensation to its
workers in the case of injuries
Lee was killed in a crash while
flying for the company
His wife, Catherine, claimed compensation from the company on
the basis that, when he was killed, Lee had been employed by
the company as a 'worker' within the meaning of the Workers
Compensation Act 1922 (NZ)
AWA v Daniels
Issue
What duty of care is owed to
a company by the directors
of that company?
Decision
In addition to duties imposed on directors by
legislation, the directors of a company owe a common
law duty to their company to take reasonable care in
the performance of their duties
A breach of this duty of care renders
the executive directors liable to the
company in negligence
Facts
AWA suffered a $49m loss because of
unauthorised foreign exchange dealings
entered into by an employee
The company's auditor had failed to notice the
foreign exchange dealings and had not reported
them to the board of directors
Nor had the auditor pointed out weaknesses of
the company's internal controls and records of
foreign exchange dealing
The trial court held both the auditor and the
executive directors of AWA liable for the the losses
that were caused by these failures
The case was appealed, the directors
denying that they were in breach of
any duty owed to AWA
A company has a legal personality distinct
from that of its directors, shareholders
(members) and company workers
Australian Securities and
Investments Commission v Adler (Company Law)
Issue
In doing these things, had Alder breached his duties
as a director if HIH, in contravention of s180-183 of the
Corporations Act 2001 (Cth)?
Decision Alder had acted in breach
of these sections
Facts
Alder used his position in HIH to arrange
payment of $10m from HIH to one of his
companies, in exchange for which HIH received
a single share in that company
Alder then used this money to buy HIH
shares in an attempt to prop up the value of
these shares on the market
He also used the money to
minimise the losses suffered by
his other companies
In short, Alder used HIH money to
protect his own interests, at the
expense of HIH's interests
ASIC sought a declaration that
Alder, as a director of HIH, was in
breach of his duties to HIH
Alder was a director of HIH,
an insurance company
Alder was also the director of various
other companies in which he had the
controlling interest
One of these companies (A Co)
owned a substantial number of shares in HIH
In April 2000, the price of HIH shares
was threatened by a collapse in the
value of technology shres
Alder was concerned to protect A Co's
investment in HIH shares
Choosing a business structure
Things to consider can include
Costs to establishing and
running a business
Regulation and
intervention of the law
Taxation
Control and equality
Ease of transferring
the business
Intellectual property
Size of the business
Risk
Purpose of the
enterprise
Requirements of
capital (or risk)
Privacy of the enterprise
Whether the business is likely to last for
a long time or even forever
Document Summary
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. A commercial relationship exists between the parties (an enterprise) A common business is conducted by the parties (that is, there is some mutuality) The tests for determining if a partnership exists are whether. A business is conducted with a view to profit (to share profit) Expressly created or implied, evidence gathered by behaviour and documentation. Whether there is a business being carried on is first determining by the act, which defines a business as including "every trade, occupation or profession" - where there is degree of mutuality. Where the enterprise is conducted for gains, which are then distributed as dividends to the participants. The acts make partners liable as a firm for a misapplication of money or property received by a partner, or by the firm, from a third party.
