University of Sydney Business Law Discussion Questions

  

2105AFE EXAM CONDITIONS
What can I bring into the ProctorU final exam?
The following resources are permitted during the exam (the proctor will ask to
view and confirm these items):
•
This is an open book exam with restrictions;
•
Restriction: Google or any other search engine is NOT permitted,
•
Restriction: Griffith University library books NOT permitted;
•
Blank note taking paper NOTpermitted;
•
Open dictionary permitted;
•
Hand -held non-programmable calculator permitted;
•
Microsoft Word, Excel and PowerPoint permitted.
Date of the Exam
Friday 17 June Final Exam commences between 8.00 am – 10.00am
Students assess the Final Exam through the Assessment 3 (Final Exam via
ProctorU) Folder
How long does the exam go for?
2 hours 10 minutes (130 minutes) Writing
No Perusal time
How much is this final exam worth?
50% (50 marks total)
What’s on the Exam?
The Final Exam consists of FIVE questions.
Students must answer all FIVE questions.
Make sure you follow the instructions for each question.
Questions 1- 3 (inclusive) are short answer questions
Each question is worth 5 marks.
DO NOT use the ILAC method when answering questions 1-3.
Instead apply the law and identify the relevant sections and sub-sections of
Statute law and or case law to support your answer.
Total marks for Questions 1-3
15 marks
Question 4 is a short hypothetical problem-solving question.
Use the ILAC format to answer Question 4.
Total marks for Question 4
15 marks
Question 5 is a long hypothetical problem-solving question.
Use the ILAC format to answer Question 5.
Total marks for Question 5
20 marks
Total marks for the Final Exam
50 marks
What topics in Module 3 are examinable?
Partnership Law
Company (Corporations) Law
Consumer Protection Law
Note Anti-Discrimination Law and Employment Law are not examinable .
EXAM MARKING
How do I get a really high mark?
The good students, who know their law, will be able to draw comparisons
between the hypothetical question and case law if the case law involves
similar facts to the hypothetical.
EXAM STRATEGY
Should I have a strategy for the Exam?
Absolutely. You are what I term an “academic athlete”. Athletes prepare for an
event, but they also have a strategy during competition. You need to prepare
for the final exam, but you must go into the exam with a strategy and stick to
it.
One key part of your strategy should be time management. You have 130 mins
hours working time to complete a 50-mark exam. That equates to 2.6 mins per
mark. Thus, you should devote the following amounts of time to completing
each question:
Question 1-3 (15 marks x 2.6 mins)
39 mins(13 mins each)
Question 4 (15 marks x 2.6 mins)
39 mins
Question 5 (20 marks x 2.6 mins)
52 mins
A student strategy in the past has been: Sticking to pre-defined time limits.
Another strategy is to have a plan for tackling the hypothetical questions. For
example, my advice is to spend time (at least 5-8 minutes) before typing your
answer. This should involve the following:
1. Read the question to identify who you are advising and who they
wish to take action against (this will give you a good idea of the
law you need to consider before you even read the facts!!)
2. Read the facts and highlight those facts you know are relevant
to the law
3. Draw a quick diagram of any relationship between persons
4. Identify the specific legal areas that you are going to cover in
your answer
5. Type your answer
Preparing materials to take into the final exam.
An Open Book Exam can be deceptive for students who think they can limit
their study as they will be able to look up the answers from their textbook on
the day. Based on past student experiences there is little if any time to look up
the answers.
When studying and preparing for the 2105AFE Final exam treat it like it was a
closed book exam. Certainly prepare revision summaries of the topics, or
templates of how to answer a hypothetical partnership question which can be
taken into the exam to prompt you, but also practice writing short answer
questions or solutions to hypothetical problem questions by revisiting the
relevant workshop questions.
Student Consultation During Study Days (No appointments needed)
Jenny Dickfos
Monday 13th June 5.00 pm – 7.00pm on GC campus &Teams
Tuesday 14th June 2.00 pm – 4.00pm on GC campus & Teams
Wednesday 15th June 9.30am – 10.30 am on Teams
Lucy McDermid
Monday 13th June 1.00 – 3.00 pm on GC Campus
DEFERRED AND SUPPLEMENTARY EXAM
Are there any differences between the deferred and supplementary
exam? No. The same topics (but not the same questions) are examinable
under the deferred/supplementary exam as the end of trimester final exam.
Good Luck in your Exams
Jenny
2105AFE
INTRODUCTION TO BUSINESS LAW
Lecture 7
•
Module 3 (Part 1) – Partnership & Agency
•
Covers: Business Relationships (including partnership, agency,
sole traders and joint ventures)
1
Important Reminder:
• Your assignment is due by 4.00 pm on Thursday 19th
May
• Your assignment must be submitted online
• It is your responsibility to retain evidence that your assignment was
submitted correctly by the due date
• Please ensure you read the instructions carefully
• Also listen to any directions given in the lectures, workshops and
on the course website
Overview
• Differentiate between & discuss different types of business
structures
• Understanding the advantages, disadvantages & legal obligations of each
• Understand:
•
the nature of agency & the roles of agents & principals
• the legal obligations imposed upon agents & principals
• how to apply the legal concept of agency to case law
• Very brief overview of sections of the Partnership Act 1891
(Qld) & comparison to other types of structure that look like
partnerships
• A brief review & explanation of when to use different types of
business structures understanding the advantages,
disadvantages & legal obligations of such
3
PART 1: BUSINESS STRUCTURES
a) Types of business structures
b) Advantages, disadvantages & legal obligations of
each structure
4
Business Structures
Business Structures
Sole Trader
Partnership
Joint
Venture
Incorporated
Association
Trust
Company
Proprietary
Company
•
•
Seek the advice of a good accountant &
lawyer when considering what form of
business structure you may want to setup.
The main consideration should be liability,
not taxation – thus, this message also
applies to today’s lecture!
Large
Public
Company
Small
5
Sole Trader
• Definition:
• A person who trades alone, without the use of a company structure or
partners and who bears alone full responsibility for the activities of the
business.
• Butterworths Concise Australian Legal Dictionary
• Person carrying on his or her own business on his/her own
• No formal requirements to create, but if a trading name other
than that of the individual is to be used, the sole trader must
register that business name (Business Names Registration
Act 2011 (Cth))
• No distinction between the person and the business
• Person is personally liable for all expenses and losses of the
business
6
Advantages of Being a Sole Trader
Advantages:
✓ Simple
✓ Can work from home
✓ Can trade in own name*
* Limited registration requirements – business name if appropriate, and
licenses if necessary)
✓ No sharing of profits
✓ Retain full control
✓ Taxation advantages when profits are low
✓ Business losses can often be written off your PAYG tax
from another job
✓ Business can be closed, sold, divided or altered at any
time without approvals (Consider having a Business
Deed of Agreement – contract at this time)
✓ No public disclosure of financial information
✓ Cash in hand – naughty, naughty!
Disadvantages of being a Sole Trader
Disadvantages:
x Unlimited liability – the business is not a separate legal
x
x
x
x
x
x
x
entity from the owner, so the owner is personally liable for all
debts
Finance is difficult to obtain
Need to pay own ‘employee’ benefits (super –note CGT
lifetime discount)
Needs own insurance, pay own GST, income tax, keep up
with inflation (taxation disadvantage when profits are high)
Business generally ceases on death or disability of owner
(consider having an Enduring Power of Attorney document)
Big investment of unpaid time
No sharing of skills and expertise (subject to employee
engagement)
Cash in hand – naughty, naughty!
Bottom line: Are you purchasing a job or a business? You will
often work well below what you are worth. Some suggest that to
be better off you need to be making a profit of at least 30%
above a salary
Partnerships
• A partnership is defined as:
• “the relationship which subsists between persons carrying on a
business in common with a view of profit” (s5 PA)
9
Types of Partnerships
General Partnerships
Outsize Partnerships
• Unlimited liability
• Unless otherwise stated, a partnership will
be a general partnership in that all the
partners are liable
• s115(1) Corporations Act sets the
maximum number of members for a
partnership at 20
• However s115(2) allows some exceptions
for professional associations:
• eg. Doctors, lawyers, architects,
accountants
Limited Liability Partnerships
Incorporated Limited
Partnership
• Must be registered
• There are two types of members: general
partners who manage the business and
limited partners who take no part in the
business
• General partners assume unlimited liability,
whereas limited partners are only liable for
the amount of capital they contribute to the
partnership
• A body corporate with legal personality
separate from that of the partners and has
perpetual succession
• Is limited to certain types of venture capital
businesses
10
Not Partnerships
• The following associations are not partnerships:
• Associations for the purpose of pleasure (eg. cricket clubs);
• Charities (ie. benevolent associations); or
• Associations that are not organised for the purpose of making
pecuniary profits (eg. religious associations)
• These associations may make profits but they reinvest
those profits in their primary activities and do not
distribute them as dividends to their members
11
Relationships that can look like partnerships
• Associations of people which possess some of the features of
partnership, but are not partnerships:
• Co-Ownership
• Unlike a partnership:
• Does not necessarily involve carrying on a business with a view to profit
• Not necessarily the result of agreement
• Not necessarily agents for each other
• Can transfer share without consent of co-owner
• Can co-own property as:
• Joint Tenants: Separate rights between the parties but a single owner
against the rest of the world
• Tenants in Common: Participate in co-ownership
• Joint Venture
• Normally not a partnership, but a one-off commercial activity using
shared product, although a single undertaking can amount to a
partnership where the parties are engaged in a commercial activity
with a view to profit
12
Joint Venture or Partnership?
• Joint ventures can be distinguished from partnerships on
the basis that:
• It is usually an ad hoc undertaking for a specific task or time;
• It is a separate venture for each of the parties;
• Liability is individual;
• Profits are received individually;
• Invoices are usually issued separately and paid individually;
• The parties can dispose of their interest in a joint venture without
the need to assign; and
• The parties are not agents for each other and do not owe a
fiduciary duty to each other
• Cox v Coulson [1916] – divided proceeds (profits) between them but
had separate liabilities and therefore was a joint venture not a
partnership
13
Advantages/Disadvantages of Partnerships
Advantages
Disadvantages
• Simple structure
• Generally unlimited liability
• Relatively cheap to set up
• Partners are liable for the debts
• If trading under another name –
must register a business name
• Share skills, economies and
overall efficiency
• No public disclosure of financial
information
• Sharing of profits and losses
and actions of the other
partner(s)
• This is provided the partners are
acting within the scope of the
partnerships business
• Maximum number of members
• No perpetual succession without
prior agreement
• Often no general manager, as
this person may be considered a
partner under some
circumstances
• Sharing of profits and losses
14
PART 2: AGENCY
(a) Nature of agency
(b) Creation and types of agency
(c) Authority of an agent
(d) Rights and duties of an agent
(e) Remedies
(f) How to answer an agency ILAC question
15
Definition
• The law of agency is primarily based on common law
principles and is an exception to the law of privity of
contract
• Definition:
• A relationship existing between two parties whereby one (the
principal) authorises the person (the agent) to act on the principal’s
behalf to negotiate with a separate third party
Historical point – In the absence of fast travel and instantaneous
communication, people acted through an agent far more often. What
happens if something goes wrong? Ultimately the law of agency
dictates what happens next.
16
Important Points
• Two important points about Agency in relation to the Law
of Contract:
• There is a contract between the Principal and the Agent which
creates the authority of the Agent; and
• Exercise of authority by the Agent with a Third Party leads to
creation of privity of contract between the Principal and the Third
Party
Principal
Agency creates contract
directly between
Principal and Third
Party
Creates authority of the
Agent to act on the
Principal’s behalf
Agent
Agent deals with Third
Party creating agency
Third Party
17
AGENCY
How to answer an agency ILAC question
•
Note: For agency ILAC questions, you do not need to refer to
any legislation
18
Template for Agency ILAC Questions: Overview
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
• How was
the agency
created and
what type of
agency is
it?
• What
authority
was given
to the
agent?
• Who is
liable to the
third party,
the principal
or the
agent?
• Has the
agent
breached
any duties?
• What
remedies
are
available to
the principal
and agent?
Step 1: How was the agency created and what
type of agency is it?
• An agency can be created:
• Expressly
• By agreement by deed, in writing or by word of mouth
• Implied or by conduct (holding out or estoppel)
• A reasonable person examining the conduct and actions of the parties
would conclude that there was an agency in existence (e.g. partnership)
• Ratification
• Where the Agent has acted without the Principal’s authority, the
Principal may subsequently ratify the transaction
• Ratification is retrospective, and dates back to the time the contract was
made
• Keighley, Maxsted & Co v Durant [1901] – not ratified – agent did
not disclose and therefore was liable for loss
• Operation of Law
• Necessity (emergency) – there must be a genuine emergency where
the Agent is entrusted with the Principal’s property and, acting in their
best interests, cannot get in touch with them
• Great Northern Railway v Swaffield (1874) – Necessity
• Cohabitation – a presumption that a spouse or de facto has authority to 20
pledge credit for necessaries suitable for their lifestyle
Step 1: Continued…
Types of Agents
Description
Special or Limited
Agent can only make a particular type
of contract or carry on a particular
transaction on behalf of the Principal
General
Agent can make contracts of a class
that are normal for this type of agency
or do some act for the Principal which
is part of the Agent’s ordinary course
of business
Universal
Agent can do almost anything the
Principal can do
21
Other Types of Agency
Note: Not needed for an agency ILAC answer
Mercantile (or Factor)
Agents
Del Credere Agents
Brokers
• Agent guarantees both sale
and payment to principal
• A general agent who buys
and sells on behalf of the
principal but has neither
possession or control
Directors
Partners
Auctioneers
• Directors are agents of their
companies
• Partners are agents of their
co-partners
• Are an agent of the seller until
the fall of the hammer when
they become an agent for the
buyer
• Have control or possession of
goods on behalf of a principal
and can sell them in their own
name
Real Estate Agents
• Not strictly agents as the
relationship is not strictly
‘Principal & Agent’
22
Step 2: What authority was given to the agent? (Overview)
A. Did the agent
have actual
express
authority to do
that act?
If yes, the
principal is bound
B. Did the agent
have actual
implied authority
to do that act?
If yes, the
principal is bound
C. Did the agent
have apparent
(ostensible)
authority to do
that act?
If yes, the
principal is bound
• If not, consider actual
implied authority
• If not, consider
apparent (ostensible)
authority
• If not, the agent is
bound
23
Step 2(a): Did the agent have actual express
authority?
• Actual Express Authority
• The actual authority of an agent arises from the creation of the
agency between the Principal and the Agent
• Authority conferred by the Principal in writing or words (i.e look at
agreement made)
• Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] – actual
express authority
• If the agent did not have actual express authority then consider
whether the agent had actual implied authority or apparent
(ostensible) authority
24
Step 2(b): Did the agent have actual implied
authority?
• Actual Implied Authority
• Authority is implied from the conduct of the parties
• The authority to do anything incidental or necessary for carrying out
the principal’s express instructions
• Hopcroft v Edmunds (2013) – includes ascertaining necessary actions
and preparing necessary documents, but does not include the authority
to bind the principal
• Also includes the implied authority that agents of that class would
normally have
• If the agent did not have actual express authority, or actual implied
authority to do that act, then consider whether the agent had
apparent (ostensible) authority
25
Step 2(c): Did the agent have apparent
(ostensible) authority?
• Apparent (Ostensible) Authority
• Where the words and/or conduct of the principal lead a third party
to reasonably believe that the agent has authority
• It is the authority of the agent as it appears to others
• Panorama Developments (Guildford) Ltd v Fidelis Furnishings Fabrics
[1971] – apparent authority
26
Step 3: Who is liable to the third party?
• As a general rule an agent cannot sue or be sued on a
contract between a principal and a third party where the
agent discloses the agency relationship
• If the agent has acted within the scope their authority,
then the principal may be liable to the third party in
contract and/or in tort
• Note that the principal may sue the agent to recover their losses
• eg. If the agent has breached a duty owed to the principal (Refer to Step
4)
• If the agent has exceeded their authority, then the agent
may be liable to the third party in contract and/or tort
27
Step 4: Has the agent breached any duties?
• Every agent owes certain duties to a principal, depending on the
nature of the agency and the express or implied terms of the agency
agreement
• Main duties include:
• Follow principal’s instructions;
• Act in person;
• Act in the principal’s interests (good faith)
• Lintrose Nominees Pty Ltd v King [1995]
• Making full disclosure of any personal interest
• Not making a secret profit
• Regal (Hastings) Ltd v Gulliver [1942] (i.e side businesses/ taking business
opportunities)
• Exercise due care and skill, although the standard will vary according to
whether the agency is gratuitous or for reward
• Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp [1984]
• Maintain confidentiality of information gained from the agency relationship;
• Take care of property; and
• Keep separate and proper accounts, making available for inspection
28
Step 5: What remedies are available?
• Agent’s Remedies
• Right to remuneration
• The Agent is only entitled to remuneration if this is expressly or impliedly
agreed to in the contract
• LJ Hooker Ltd v W J Adams Estate Pty Ltd (1977) – not entitled to recover
commission
• Right to indemnity and reimbursement
• Generally, the Agent is entitled to be indemnified against any liabilities and
reimbursed for any expenses incurred in the course of carrying out the
Principal’s instructions
• Right of lien
• The Agent is entitled to a lien, if the goods are lawfully in the Agent’s
possession and they have not been paid for by the Principal
• Principal’s Remedies:
• Rescission
• Refusing to pay a commission
• Suing for damages
• Suing the agent for recovery of a secret commission
29
Termination of Agency
• Note: Not needed for an agency ILAC answer
• Termination by acts of the parties
• Mutual agreement
• Revocation of the Agent’s authority
• Agent withdrawing from the agreement
• Secret commission (i.e breach of duty)
• Completion
• Expiry of a time limit
• Termination by Operation of Law
• Performance
• Lapse of time
• Death of the Principal, although acts done after the Principal’s death but before
notice has reached the Agent are valid and the Agent will not be held liable
• Insanity
• Bankruptcy
• Frustration
30
PART 3: PARTNERSHIPS
(a) Definition of “partnership”
(b) Authority of partners
(c) Liability of partners
(d) Duties of partners
(e) How to answer a partnership ILAC question
31
The Law of Partnership
• Partnership law is regulated by both statute and common
law
• The relevant statute is the Partnership Act 1891 (Qld)
(PA)
• You can abbreviate to PA for our purposes
• You do not have to look up the sections of the PA and are only
required to use the sections and cases from the lecture notes (and
text) to answer any partnership questions (you should refer to the
text for details of the facts and to support your understanding of the
law of partnership)
• You do not have to use the cases from the Agency Chapter (or
from slides before this point) to answer any partnership ILAC
question
32
PARTNERSHIP
How to answer a partnership ILAC question
•
Note: For any partnership ILAC questions, you only need to
apply the partnership sections and cases (ie. from this slide
onwards, but of course, you should understand how the concept
of agency operates)
33
Template for Partnership ILAC Questions:
Overview
Step 1:
Is there a
partnership?
Step 2:
Step 3:
Step 4:
Has a partner
committed a
tort against a
third party
and who is
liable to the
third party?
Has a
partner
signed a
contract with
a third party
and who is
liable to the
third party?
Has the
partner
breached any
duties?
If yes, continue
with Step 2
If yes, continue
with Step 3
If not, go to
Step 3
If not, go to
Step 4
Step 5:
What
remedies are
available to
the other
partners?
Step 1: Is there a partnership?
• A partnership may be formed either expressly or
impliedly and in each case, all the circumstances must
be examined in order to ascertain:
• The intention of the parties;
• Whether there has been a sharing of net profits and losses
accompanied by a state of agency; and
• Whether each party has a voice in the management so that it could
be said that an agency exists
• A partnership is defined as:
• “The relationship which subsists between persons carrying on a
business in common with a view of profit.”
• Section 5 Partnership Act 1891 (Qld) (PA)
35
Step 1: Is there a partnership? (Overview)
Section 5 Partnership Act 1891 (Qld)
A partnership exists if there are:
“Carrying on a
business”
“Relationship
between
persons”
(ie. two or more
persons)
•Smith v Anderson –
repetition of acts is
indicative
•Canny Gabriel – can
be for a single
undertaking/venture
•Keith Spicer – must
have started “carrying
on”
•Khan v Miah – setting
up prior to trading is
still “carrying on”
“in common”
•Keith Spicer – by or
on behalf of all
partners
“with a view of
profit”
•Minter v Minter –
view to profit despite
short term losses
•Khan v Miah – still a
view to profit if
business ceases prior
to making profit
• *HINT* Always determine if there is a partnership first to see if you can
apply the Partnership Act (unless you are specifically told that the business
is a partnership)
• ONLY look at the rules in Section 6 if it is not clear from Section 5 and the
case law whether a partnership exists
36
Element 1: “Relationship between persons”
• There must be 2 or more people
• Generally limited to 20 partners, though there are some
exceptions
37
Element 2: “Carrying on a business”
• Need a degree of repetition in the parties’ conduct
• Generally would not include an isolated act or transaction
• Smith v Anderson – no repetition of acts
• cf. Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume
Sales (Finance) Pty Ltd [1974] – single undertaking as a ”joint
venture” classed as a partnership
• Generally must have started “carrying on” the business:
• Keith Spicer Ltd v Mansell [1970] – No partnership – parties had
not been the ‘carrying on of a business in common’ at that stage
• However, compare this to the more recent case of:
• Khan v Miah [2000] – “the work of finding, acquiring and fitting out a
shop or restaurant begins long before the premises are open for
business and the first customers walk through the door. Such work is
taken with a view to a profit, and may be undertaken as well by partners
as by a sole trader.”
38
Element 3: “In common”
• The partnership business must be operated by, or on
behalf of, all the partners
• Each party acts as an agent for the others
• The parties share rights and obligations
• Each party benefits from, and is liable for the partnership
obligations
• See:
• Keith Spicer Ltd v Mansell [1970] – No partnership as not “in
common”
• Khan v Miah [2000] – see earlier slide – partnership even though
partnership broke down before restaurant opened
39
Element 4: “With a view of profit”
• The partnership need not actually make a profit, but the
parties must intend to make a profit at the beginning of
the partnership
• Minter v Minter [2000] – partnership despite initial losses
• Khan v Miah [2000] – see earlier slide
40
Element 4: “With a view of profit”
• Note: It is also possible for a person to be a partner (and
liable):
• Even though they do not contribute capital or have a claim to a
share of the profits
• Even though they do not take part in the day to day management of
the business
41
Step 2: Has a partner committed a tort against a
third party and who is liable to the third party?
• A partnership and the partners are jointly and severally liable for
negligent acts of the firm (partners) that cause damage
• Liability is joint (collective) and several (individual)
• s13 PA:
• The firm will be liable if:
1.
A wrongful act or omission was committed by a partner; and
2.
The partner was acting in the ordinary course of the business of the firm, or
with the authority of the other partners; and
3.
Loss or injury is caused to a third party
• See Polkinghorne v Holland (1934) – see later slides
• s15 PA: Liability for wrongs is joint and several
• Where a firm is liable under s13 and cannot pay, partners are each personally
liable
• See Polkinghorne v Holland (1934) – see later slides
• Note: The Partnership Act 1891 (Qld) also deals with crimes (eg.
ss14 and 16).
42
Step 3: Has a partner signed a contract with a
third party and who is liable to the third party?
Overview
Step 3(a): Did the
partner have actual
express authority to
enter into the contract?
Step 3(b): Did the
partner have actual
implied authority to
enter into the contract?
Step 3(c): Did the
partner have apparent
(ostensible) authority
to enter into the
contract?
If yes, the
partnership is bound
If yes, the
partnership is bound
If s8 is satisfied,
then the partnership
is bound
If not, then consider
actual implied
authority
If not, then consider
apparent
(ostensible) authority
If not, then the
partner will be liable
43
Step 3: Continued…
• Partnerships are unique in that every partner is both a
principal and an agent for their other partners
• The three types of authority (actual express, actual implied and apparent
(ostensible) authority) are created through this agency relationship
• Partners also owe mutual fiduciary duties to each other
44
Step 3(a): Did the partner have actual express
authority to enter into the contract?
• Actual Express Authority
• Written or oral (or a combination of both)
• If a partner has actual authority, the other partners will be bound
by the partner’s acts if done in the usual course of business
• If the partner did not have actual express authority to do that act,
then consider whether the partner had actual implied authority
45
Step 3(b): Did the partner have actual implied
authority to enter into the contract?
• Actual Implied Authority
• Powers that all partners would usually have in those
circumstances, unless the partnership agreement says otherwise
• These powers generally include:
• Selling of property and goods of the firm;
• Purchasing goods usually used by the firm;
• Molinas v Smith [1932] – binding on partners
• Employing suitable staff;
• Receiving payments and receipts; and
• Entering into contracts on behalf of the firm
• Molinas v Smith [1932] – binding on partners
• If the partner did not have actual express authority, or actual implied
authority to do that act, then consider whether the partner had
apparent (ostensible) authority
46
Step 3(c): Did the partner have apparent
(ostensible) authority to enter into the contract?
• Section 8 PA states that a partner will have apparent authority if:
1.
The partner was carrying on business of the kind carried on by
the firm; and
• Consider what the firm actually does and the kind of activity engaged in by other
firms in the same line of business
• See Polkinghorne v Holland (1934) – see later slides
2.
The transaction was carried out in the usual way; and
• Apply an objective test: Would a reasonable person in the third party’s position
suspect that something was, or could be wrong?
• eg. unusual manner of payment, paying at an unusual location or outside business hours
• See Goldberg v Jenkins (1889) – see later slides
3.
The third party did not know that the partner had no authority;
and
4.
The third party knew or believed that the partner was a partner. 47
Polkinghorne v Holland (1934)
What were the facts of the case?
Were the remaining partners liable?
48
Goldberg v Jenkins (1889)
What were the facts of the case?
Was the partnership bound by the loan?
49
Step 3: Continued…
• If the partner had actual express, implied or apparent
authority to enter into the contract, then s12 applies and
every partner is jointly liable for all debts and
obligations of the firm incurred while a partner
• The creditor has only one right of action
• Best to sue in firm name
• See Kendall v Hamilton (1879) – see next slide
• Note:
• s17 PA: Persons liable for holding out
• If a partner holds him/herself out to be a partner in breach of a
partnership agreement, then the firm (partnership) can sue the partner
personally, but the firm and partners can still be liable. Similarly if a
person allows oneself to be held out personally to be a partner
50
Kendall v Hamilton (1879)
What were the facts of
the case?
Was the partnership
bound by the loan?
51
Liability on Change of Partners
Incoming and outgoing partners
• s20 PA: Liabilities of incoming and outgoing partners
• Incoming partners are generally only liable for future debts,
unless they agree to assume liability for past debts
• Outgoing partners remain liable for debts incurred before
retirement unless the creditors and other partners agree otherwise
• Outgoing partners may be liable for debts incurred by the
partnership after retirement if they have not taken steps to notify
former and (possibly) new customers/clients of their retirement
52
Step 4: Has the partner breached any duties?
• The partners owe fiduciary duties to each other:
• s31 PA: Duty of partners to render accounts etc.
• Partners are bound to render true accounts and full information of all
things affecting the partnership to any partner or his or her legal
representatives
• See Law v Law [1905] – failure to disclose all partnership assets
• s32 PA: Accountability of partners for private profits
• Every partner must account to the firm for any benefit derived by the
partner without the consent of the other partners from any transaction
concerning the partnership, or from any use by the partner of the
partnership property, name or business connection
• Also applies to transactions undertaken after a partnership has been
dissolved by the death of a partner, and before the affairs of the
partnership have been completely wound up, either by any surviving
partner or by the representatives of the deceased partner
• See Birtchnell v Equity Trustees (1929) – liable to account for profits made
using a partnership business connection
53
Step 4: Has the partner breached any duties?
• s33 PA: Duty of partner not to compete with firm
• If a partner, without the consent of the other partners, carries on any
business of the same nature as and competing with that of the firm, the
partner must account for and pay over to the firm all profits made by him
or her in that business
54
Step 5: What remedies are available to the other
partners?
• Sharing of profits and losses (s27 PA)
• Unless the partnership agreement states otherwise, the PA states
that partners will share profits and losses equally
• See Kilpatrick v Mackay (1878) – profits from sale of hotel shared
equally
• Expulsion (s28 PA)
• A majority of the partners can only expel a partner if there is an
express agreement between the partners
• Injunction
• Account of profits
• Dissolution (termination) of the partnership:
• By agreement (s35 PA)
• By court order (s38 PA)
55
Other ways of ending a partnership
• Insolvency or death of a partner (s36 PA)
• Subject to any agreement between the partners
• Partnership becomes unlawful (s37 PA)
• Retiring partner (s29 PA)
• If there is no fixed term for the partnership, any partner may
determine the partnership at any time on giving notice to the other
partners of their intention to do so
56
2105AFE
INTRODUCTION TO BUSINESS LAW
Lecture 8
•
Module 3 – Corporations Law
•
Covers: Fundamental legal concepts of business structures;
Business Relationships – Corporations Law including the
fundamental role of trusts and unincorporated associations
1
If you have questions about the assignment:
• If you have a question about the assignment, please post
your question in the 05 Assessment Questions channel in
the 2105AFE Teamsite.
2
Overview
1. Briefly discuss different types of business structures
2. Explain the essential characteristics of a company
3. Understand:
• Why companies are important
• The different types of companies required to meet the needs of
business and society
• The main duties imposed upon company directors and others
• The concepts of insolvency and insider trading
• How companies may be wound-up
• Procedure, remedies and penalties
3
Note:
• Corporations (Company) Law is regulated by both legislation and
common law principles.
• The legislation is: Corporations Act 2001 (Cth) (CA).
• You can abbreviate to CA for our purposes.
• Please obtain copies of the sections of the Corporations Act 2001that
we consider in this lecture and workshop. All sections required for the
exam are contained in these slides, workshop homework and the
textbook
4
PART 1: BUSINESS STRUCTURES
5
Business Structures
Sole Trader
Partnership
Joint
Venture
Incorporated
Association
Trust
Company
Proprietary
Company
•
•
Seek the advice of a good accountant &
lawyer when considering what form of
business structure you may want to setup.
The main consideration should be liability,
not taxation – thus, this message also
applies to today’s lecture!
Large
Public
Company
Small
6
Key differences between a partnership and a company
•
Differences in the minimum number of members allowed and formation
Partnership
Company
• Partnership is formed by agreement
• Company formed mainly under the
or implied & governed by the
Partnership Act 1891 (Qld)
• Partnerships are not a separate legal
entity & therefore partners are liable
for self & each other
• Partners have unlimited liability
• Property & assets belong (vests) in
partners
• Death or bankruptcy of a partner
can affect a partnership’s existence
• Partners are agents of each other
Corporations Act 2001 (Cth)
• Company is a separate legal entity
and therefore it is the company that is
liable for the debts – although
directors may have to give a
guarantee
• Most shareholders have limited
liability
• Cf personal guarantees.
• Property & assets belong to a
company not directors
• Death or bankruptcy of a
shareholder does not generally affect
the company’s existence
• Members of a company are not
agents for the company (although
officers are)
7
Which business structure to use?
Ask your accountant and lawyer
Sole Trader
Partnership
• For low risk activities – limit
• Mum & Dad partnerships
personal liability
• Close family only involved
• Often short term
venture/limited profitability
• Partnership of family trusts
• Possibly a ‘side hustle’ like Etsy.
• Little prospect of significant
growth – often only returns a
‘wage’ to the owners
• Unsure about future of the
venture
• Essential to have a partnership
agreement – for termination,
valuation, introduction of capital,
payments to partners etc.
• Losses can be distributed to
partners, but you need to know
who you are ‘getting into bed
with’
8
Which business structure to use?
Ask your accountant and lawyer
Company
• Corporations Act 2001 (Cth)
• Must form under Act (used to be form
201 (now online) + pay a fee $506 +
company name 37$ per year + $273
annual fee)
• Protection from liability – limit family
exposure to loss
• Sometimes lower tax rates (flat rate)
• Separate shareholders – family trusts?
• Different classes of shares – consider
impact on CGT concessions
• Dividend strategy where unrelated
parties are involved
Incorporated/Unincorporated
Associations
• Associations Incorporation Act 1981
(Qld)
•
Must form under Act but not for trading purposes
(used for sporting and recreational clubs)
• Advantages of incorporation include:
• Protection from liability for members (except
for unpaid membership dues);
• The right to sue (and be sued) in the
association’s name;
• The right of the association to hold property;
• The right of the association to make a profit
(but not for trading purposes);
• It can invest and deal in any surplus finds; and
• It has perpetuity
• Unincorporated Association: the
members & the body are one & the same
whereas with incorporation the association
becomes a separate legal entity from its
members
9
PART 2: ESSENTIAL CHARACTERISTICS OF A
COMPANY
10
The Corporate Concept
• Business undertakings in Australia are to a large extent
carried on through a company structure
What is the usual reason for this?
• Companies have distinct advantages over partnerships
and sole traders
• Registering a company (a corporation) creates an artificial legal
personality (entity) which creates a separate legal existence of
the company to its officers, directors, secretaries, shareholders,
employees etc. (separate legal entity/ legal personhood)
• It is this concept of separate legal existence that creates
advantages (and some disadvantages) for commercial
purposes
• The concept of separate legal existence is distinct from the concept
of limited liability but both concepts provide protection for company
members (shareholders).
11
If there is insolvent
trading or the company is
formed for an improper or
illegal purpose
Corporate Veil
If someone
wants to sue
Directors
Can be sued
Officers
Members
Saloman v Saloman
12
Corporate Personality and Corporate Veil
• The common law concept of a ‘corporate veil’ supports the principle
of a company as a separate legal entity.
• Salomon v Salomon [1897]: Salomon lent money to a company as
a debenture holder
• “The company is at law a different person altogether from the (shareholders) and
though it may be that after incorporation of the business is precisely the same as it
was before and the same persons and managers, and the same hands receive the
profits, the company is not in law the agent of the subscribers or trustees for them. Nor
are the subscribers or members liable in any shape or form except to the extent and in
the manner provided by the act.”
• However the court may ‘lift the veil’, and take action against the
directors personally where:
• There is insolvent trading
• A company is formed for an improper or illegal purpose (eg. used as a
vehicle for fraud)
• Example – Lifting the Veil (not in text):
• Commonwealth Bank of Australia v Friedrich (1991): A director (Maxwell
Eise) was held personally liable for $96,704,998. The Court held that the
director was liable for debts incurred by the company that he had failed to
prevent. Eise was deemed to have breached the predecessor of s588G of the
Corporations Act (trading insolvently)
13
Advantages of Incorporation
✓ Liability of share holders is generally limited to monies owing on shares
✓ The company creates the profits and is responsible for the debts
• However – this is quite often not the reality as to obtain credit most proprietary companies will
be required to give a personal director’s guarantee for debts if the company fails to pay
✓ A company has powers to do all things an individual can do plus additional
powers – eg. Transfer/sell shares – Ability to access small business concessions
(subject to turnover/asset limits)
✓ A company can enter into contracts and own property in its own right
✓ Sue and be sued in its own name
✓ Be fined by a government body
✓ Allows for perpetual succession – flexibility of entry and exit of owners and
managers
✓ Access to finance – eg. Charges (a security interest – kind of like a mortgage)
✓ Taxation benefits – Limit to 25 % taxation for the company, leasing of equipment, 14
cars etc.
Disadvantages of Incorporation
• Higher set up costs
• Compulsory reporting and auditing requirements – increases costs (note – very
unlikely for small pty ltd companies)
• There is still some personal liability that can be imposed on the director(s),
specifically regarding some tax and withholding obligations (director’s guarantees)
• ie. A director’s guarantee is a contractual obligation made by a director to personally assume
liability should the company fail to pay
• Duties and obligations on directors – penalties for directors (obviously in small
company’s directors/ shareholders
• Management/control often vested in the Board – shareholders have limited control
or input
• Corporate veil will sometimes be lifted (insolvent trading)
• Shareholders technically have no proprietary interest in company property (not
‘entitled’ to dividends, only get residue of property after creditors paid off).
15
PART 3: UNDERSTANDING CORPORATIONS
Part 3A Why companies are important
Types of Companies
Organs of Company
Part 3B Duties of Officers/Directors
Insolvency and insider trading
Winding Up
16
Corporate Regulation and Registering a
Company
• The body charged with corporate regulation in Australia is the
Australian Securities and Investment Commission (aka
‘ASIC’).
• It is a legal requirement that all companies be registered with
ASIC (Form 201 – now online). The ASIC website sets out the
steps for registering a company:
• http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Starting%20a%20c
ompany%20or%20business
• Generally ASIC takes civil action under s50 ASIC Act whilst
the Department of Public Prosecution (DPP) initiates criminal
proceedings following ASIC investigations under the relevant
sections of the Commonwealth Crimes Act
17
Useful Websites
• www.asic.gov.au
• Useful information for small business
• Search/register a business name
• Search company names
• Search ABNs and ACNs
• Search disqualified directors
• Recent news
• Complaints
• Also:
• www.abr.gov.au
• www.ato.gov.au
18
Registering a Company and Issuing Shares
• s117: A company is treated as a discrete legal entity when ASIC registers it
following a prescribed application fee being paid by a person, whether corporate
or individual
• s118: Upon registration of the name ASIC must issue a certificate of registration
stating:
• its company name;
• the registered office (every company must have a registered office in Australia from date of
•
•
•
•
registration – s142(1));
its ACN;
the company type; (NL, Ltd, Pty Ltd, etc)
the jurisdiction; and
the date of registration.
• s118: ASIC registers the company and issues a 9 digit Australian Company
Number (ACN)
• s119: The company comes into existence on the date of the certificate of
registration
• s120: A person is a member of a company if they are identified as a member of
the company on its application for registration
• ss168 and 169: Every company must have a register of its members
19
(shareholders) containing personal information and their ownership details –
usually kept at the registered office
Types of Companies in Australia
Australian
Companies
Public
Companies
Shares
ASX Listed
Proprietary
Companies
Others
Guarantee
No liability
Unlimited
Liability
Small
Large
Limited by
shares
Unlimited
with share
capital
Shares are the parts into which the capital of a company is divided.
• Rights to receive a share of the profits
• Different shares set out different rights
• Shares can be transferred/traded
• Dividends: Represents the division of the company’s surplus amongst its shareholders
20
Proprietary Companies
• Definition:
• A company whose constitution limits membership to 50 non-employee
shareholders
• Limited by shares
• Prohibited from offering shares or debentures to the public (mostly)
• Distinction between large and small proprietary companies
(s45A CA)
• Small proprietary company – if company and any entities that it
controls have at least two of the following characteristics over the
financial year:
• Consolidated gross operating revenue of
Purchase answer to see full
attachment