AGENCY 2) Necessity or Emergency: emergencythere must be a genuine emergency where A is entrusted with Ps property and acting in
Agent: A person employed to act on behalf of another.
Types of agency: Auctioneers, Partners, Mercantile agents, real estate agents.
Broker: A mercantile agent who buys or sells goods for a principal (usually in their name), but who doesnt have possession or
documents of title.
Del credere agent: A person who guarantees payment by 3rd parties to the principal in return for extra commission.
Estoppel: A rule of law which prevents a person from denying the truth of some statement formerly made by them, or the existence of
facts which by their words or conduct have given the impression to others of the statements truthfulness.
Factor: A mercantile agent who, in the usual course of their business, has possession of the goods, or the documents of title to the
goods, of their principal and who can sell or pledge the goods whereby the principal is bound by such sale or pledge.
Ratification: The act of adopting a transaction by a person who was not bound by it originally.
General Rule: A cannot be sued for K between P and TP where the A discloses the agency relatipnship and does or does not
name the principal. If not, A will be liable for K. A will be liable if: acted beyond the scope of authority, agreed to be liable, P is non-
existent. LOOK AT DOCTRINE OF UNDISCLOSED PRINCIPAL (BELOW).
-The doctrine of privity of contract allows only those persons who were immediate parties to a contract to acquire rights
and liabilities under it. However, agency (people acting on the behalf of another), is an exception to the rule of the doctrine of privity of
contract.
-Principles may deal with agents (P gives authority to A), who then deal with a 3rd party, but the 3rd party will contract
directly with the principal.
Employer-employee: Employee is agent of employer.
- When the employer expressly or impliedly directs the employee to affect the employers legal relations with third parties, an agency
will arise. For ex; ee selling insurance on behalf of employer.
- Telegraphs v Abbott: A clerk who promised a customer that a telephone would be installed by a specified date was held not to
be an employee. Why? Because their was no evidence on the part of the employer to give an employee in a clerical role
the power to make contracts. The employer must expressly or impliedly direct the employee to act within the scope of the ees
employment.
Employer-independent contractor: No agency, independent contractor has no control over how the contractor will complete the task.
However, an independent contractor can be an agent, as in the case of an auctioneer.
**Classification of Agents **
Special or limited: Agent (A) can only make a particular type of contract or carry out a particular transaction on behalf of the
Principle (P) Must act within Authorisation. (specific type of transaction or transactions outside normal course of business). If A acts
beyond Ps instruction, P is NOT BOUND.
Universal: A stands in the shoes of P & can do almost anything P can do. In any matters at all.
General: A can make contracts of a certain class that are normal for this type of agency or do some act for P which is part of As
ordinary course of business.
Del Credere : A guarantee to a 3rd party to pay for goods if the P doesnt.
Mercantile : auctioneer/people selling goods on consignment pass good title. Folkes auctioneer sold car below
reserve price COURT: good title passed and innocent TP can only sue Auctioneer for damages.
Brokers: Stock/insurance/brokerage companies etc go to these as a consumer (TP) and A will pick through different
parties they are representing (Ps) and find product that suits your needs
Creation (Appointment) of Agency:
Express Agreement: There is a legal relation created by agreement orally, in writing or by deed Must be in writing if Statue of
Frauds applies or if real property.
Implied Agreement: Acy implied from what is usual or customary.
Apparent or Ostensible (by Estoppel): P holds out A, by acts, word or conduct, as an agent to TP. TP reasonably relies on Ps
holding out of A. Rule: Agreement may be implied where reasonable person, examining the conduct and action of parties, would
conclude a Agency relationship and both parties had assented to the arrangement.
2 Situations where Agency can arise CONTRARY to the PARTIES INTENTION:
Operation of Law:
1) Co-Habitation: presumed that spouse or de facto has authority to pledge credit for necessaries suitable for their lifestyle. Pianta v
Macrow and Sons miners wife bought ring idle to suggest thatto (them) a diamond ring is a necessary
-Onus on supplier to show items supplied were necessities Phillipson v Hayter (Ps wife went and purchased gold pen/pencil
case/silk skin cigar case/silk skin tobacco pouch/Russian purse with leather poached by oil HELD : presumption of authority arising
from cohabitation is confined to those items of necessity, here there were not necessities and she is indebted to him and has to pay)
-Presumption can be rebutted if: They expressly forbade the spouse to pledge their credit; They told suppliers, tradesmen, etc not to
supply goods on credit; or The goods ordered were excessive
1
their best interests cannot get in touch with them Great Northern Railway v Swaffield (horse case railway operators reimbursed by
owner for storage of horse in stable) Elements:
[1] a genuine emergency
[2] impossible or extremely impossible to get instructions from P
[3] the person must be entrusted with anothers property
[4] A must be act bona fide in Ps interests and not merely for their own convenience.
Agent by Ratification: Where an agent acts without authority or beyond the authority given the P may in some cases ratify, confirm
or adopt the unauthorised acts as their own
It is retrospective & dates back to the time the contract was made Bolton Partners v Lambert TP offered to buy from A who didnt
have authority to sell, (TP wasnt aware no authority) TP then tried to revoke, but P ratified As unauthorised acceptance & P was
granted an order of SP.
Elements:
[1] A must clearly be acting as an agent. Contract expressly as an A for a P If A does not disclosed acting for P to TP, P cant ratify
A's unauthorized acts.
[2] A must have a known P in mind not necessary that P be named but able to be ascertained at time of making K. Otherwise A
runs the risk of being treated as P Kelner v Baxter (entered into wine contracts before company in existence so were acting personally
and personally liable for wine).
[3] P must have legal capacity to enter the K at formation and at time of ratification
[4] Ratification must occur within a reasonable time of the contract being made & before time fixed for performance of K has
expired.
[5] There should be an act capable of ratification Void K cant be ratified.
[7] P must have full knowledge of material facts at the time of ratification.
[8] Must apply to the whole contract.
[9] P must know or accept w/o qualification what was done (no changes)
[10] Ratification can only be retrospective.
In the case of insurance contracts, ratification may take place even though the subject matter of the contract has been
destroyed at the time of ratification:
Authority of an Agent: REPRESENTATION, RELIANCE, DETRIMENT
Express Actual Authority: Authority conferred by P to A either expressly, orally or in writing.
Implied Actual Authority: As auth. arising b/w P and A, to do anything incidental or necessary for carrying out acts w/in As actual
auth. (incidental or customary authority)
Australia and NZ Bank v Ateliers (Snowy Mtn Hyrdo Case) A had to cash cheques to give business efficacy to contract, as P had
no aussie bank account authority via implication. .
- Mercantile Credits v Jaden Morgan - P submits to the rules of usage and exchange when stockbroker buys shares (A).
Apparent or Ostensible Authority: Where the acts, words or conduct of P lead TP to reasonably believe that A has authority as Ps
agent. P is prevented from denying that such authority exists.
Summers v Solomon: Solomon had employed his nephew, who ordered jewellery from Summers. Nephew quit but ordered
jewellery from Summers and left without paying for it. Due to the previous dealings with the nephew, the failure to inform
Summers of the termination of the nephews employment created a situation of apparent authority. There must be evidence of a
previous course of dealings between the parties. The impression of conferral created by the principal must be conveyed to the third
party
Mercantile Credit Co Ltd v Garrod: Garrod took no active role in running business and Parkin were partners in a garage. Their
agreement specified that buying and selling cars was not to be part of the business; however, without authority from Garrod, Parkin
fraudulently sold a car to Mercantile Credit. Mercantile discovered the fraud and sued for the recovery of the money from the firm (not
Parkin personally). Held: While Garrod was an innocent partner, buying and selling cars was a normal practice in the UK. It was
within the scope of the firms business and as a result Garrod was liable. Each partner is an agent for the other partner(s). Consider:
words or conduct of the principal, custom or trade usuage,
Tooth & Co v Laws: TP relies on Ps holding out of A- Tooth v Laws- Laws sold hotel to TP. Laws left his name as licensee on
door after sold business. New owner continued doing business with the same supplier. New owner stopped paying bills. Laws
liable, apparent Agent (estopped from denying that the owners were A for the purchase of the liquor); Should not have allowed his
name to stay on door. A must be acting w/in scope of actual or implied actual authority (ie. not on a frolic of his own)- Essington
Investments v Regency Property- P gave no construct auth. to A to finalized agmnt w TP(RP) binding K. delivered without
authority was on frolic of his own.
Apparent authority of company personnel governed by CL.
Panorama Developments Ltd v Fidelis Furnishings Fabrics- Company secretary hired cars for his own private use. Told company he
was hiring cars on behalf of company. Held: As long as the company secretarys dealings with an outsider appeared to be within his
scope of authority, his lack of actual or implied authority and his fraudulent intentions were irrelevant. The company had to pay.
Pacific Carriers v BNP Paribas bank gave official stamp to manager arming A with authority conduct of the bank induced or
assisted an assumption from which that party ought not to be able to depart .- P liable to TP for K made by A.
Duties of an Agent:
Arise from express provisions, nature of fiduciary relationship, implication of law.
[1] A must follow Ps instructions failure will leave A open to be sued for any losses incurred by P Bertram, Arm,strong & Co v
Godfray broker was instructed to sell stock at certain price but did not- P sued to recover diff. this applies equally to solicitors,
insurance agents and brokers.
[2] A must act personally delegation is not possible where a personal skill & competence is required unless P gives express
consent. John McCann v Pow: Pow appointed a firm of real estate agents to sell his flat. W/o Ps knowledge or consent, the agents
gave details to a sub-agent, who subsequently sold the property. Held: Personal skills and competence cannot be delegated.
McCaan & Co were not entitled to commission.
Exceptions to the rule: Delegation is sanctioned by the principal either expressly or impliedly. trade usage, where an agent usually
acts through other agents, delegation arises out of necessity, As duties are purely administrative and dont involve the exercise of any
discretion or skill on the part of the agent personally. Instructions are vague or ambiguous, the agent wont be liable if their actions are
reasonable.
[3] A must exercise due care, skill and diligence:
Gratuitous: Exercise such care and skill as they actually would in their own affairs, unless they hold themselves out as having special
expertise (higher standard). Paid: Exercise care, skill as is usually or necessary in the class of business undertaken by the agent.
-Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp: Client instructed insurance broker to insurance against
damage from storm or flood, the policy did not. Clients property damaged by flooding. Held: Broker liable: failure to exercise
reasonable care and skill when carrying out the clients instructions.
[4] A must act in principals best interests Hewson v Sydney Stock Exchange: A was acting as stock broker and stock-trader
(seller). Agency imposes a heavy obligation on the agent not to promote person interests in preference to those of the P. If at any time
the duty of the A towards the P clashes with any other duty, a proper DISCLOSURE of this conflict should be made.
-Law v Law: William and James Law were partners in a manufacturing business. William took no active part in the business and
James eventually bought him out. William believed that the price that the parties finally agreed was fair. W discovered that J had not
fully disclosed all the assets that the partnership held and that, as a result, his share of those assets had been undervalued. He
wanted to have the K set aside. Held: Purchasing partner had a duty to disclose the full extent of the partnership assets .
The test: What a reasonable person would consider material in the ordinary course of business. K will be voidable if not disclosed.
However, this is not true when the principal affirms a contract after learning the full extent of the agents interest.
[5] A must not benefit from secret commissions paid by TPs/secret profit Lungji v Sinclair: L has land to sell, S (A) sold for
$400 to himself, and re-sold for $1,300. A under duty to disclose value of property. Profit went to P. Criminal Code (Cth) s 141, (Qld)
Chpt 42A (s 442A-442M). breach may lead to penalty or imprisonment. (commission will be held on constructive trust and paid to
victim)
REMEDIES- P may recover amount of secret profit from A in restitution, refuse to pay (or recover) any commission to (from) A,
cancel the Acy & dismiss A, sue A and TP jointly for conspiracy to defraud and/or deceit (torts), repudiate K w TP who paid secret
commissions.
[6] A must maintain confidentially of information- Consul Devl v DPC Estates (solictor/clerk same business - could not prove
actual knowledge by clerk of managers breach of fiduciary duty towards resp. company)
[7] A must keep separate and proper accounts An agent must keep their money separate from those of the P
Henry v Hammond Solcitors trust account must clearly define who money is what, cannot be in one bank account and separate
accounts for each P.
Rights of Agent against Principle
[1] Remuneration/payment: A is only entitled to remuneration from P if expressly agreed to pay commission to A (accordance with
k); A has done what was require for $ (performed obligations), or A has been properly appointed. Luxor v Cooper- A brought buyer and
P together - P decided not to sell- A said implied term existed- P follow through w sale- unsuccessful. P not liable for breached K &
commission.
[2] Indemnity from P and reimbursement: Generally, A is entitled to be indemnified against any liabilities and reimbursed for any
expenses lawfully incurred in the course of carrying out Ps instructions. If A acted outside authority, or suffered loss through
negligence or default no indemnity for A. Johnson v Kearle situation where it was held a stockbroker could not claim indemnity in
circumstances where the broker did not act in accordance with the authority given by the client.
[3] Right of lien : A is entitled to retain the goods of P until reimbursement of expenses and commission has been paid. General lien
(by express agreement or recognized category) right to retain any goods in possession irrespective of whether the A has been paid
for transactions concerning those actual goods. Particular lien right to retain the goods in actual possession to which the
transaction in question relates.
Kambell v Smith Auctioneer sold property on behalf of P and received a cheque from the purchaser in payment. A held on to the
cheque until his commission was paid. A exercised a lien over it. COURT agreed that the A had this right.
[4] Stoppage in transit: Available to A when they are personally responsible for the purchase price of goods bought on Ps behalf.
Where the goods are in transit and the A has actually bought them on behalf of the P or must pay for them personally, the A will have
a right to stoppage in transitu, if for instance the P has become insolvent. (i.e wont have to deliver the goods but if they do cant take
them back). A can exercise lien over goods.
Liability of P and A in TORTS
P will be liable to TP for any tort committed by A if acting within scope of agents actual or apparent authority. A must ensure that
he or she acts within the scope of actual or apparent authority to avoid liability:
For breach of warranty of authority; Where an A has acted outside the scope of authority and has represented to TP that they
have the authority to act that A can be sued by the TP for breach of the warranty that they had the authority to act. The action is
only available to the TP in circumstances where the TP did not know the A had no authority. Does not matter whether the A
acted innocently or was under a mistake as to the nature of the authority given OR
For any torts committed in the course of agency Lloyd v. Grace, Smith & Co- A (managing clerk) fraudulently induced a client to
sign papers, told necessary. Managing clerk working w/in the scope of employment; firm VL. A acted within Scope.
Doctrine of Undisclosed Principal
Where an A is appointed to act on behalf of a P with a TP and does not disclose the existence of the P.
The doctrine allows a person who at first glance does not appear to be a party to the k to sue and be sued in their own name on a k
which was entered into on that persons behalf by an A. The TP has option of suing either A or P (NOT BOTH).
Note limitations on applicability:
Agent must act within authority:
Doctrine may not apply where TP does not know of the existence of P and Agent has also contracted on own behalf: Keighley,
Maxsted & Co v Durant A was authorized to buy wheat for himself and the company at a named price on a joint account. A failed
to buy at this price, but bought at a higher price w/o Ps authority from TP. A contracted in own name and made no mention of P. P
approved purchased the next day but did not take delivery. Held: A made K with TP w/o authority and did not disclose existence of
agency relationship. Action of P WAS NOT ratification and company could not be sued by TP.
the Ps name need not have been disclosed at the time of making the k but the Ps status must be known and the agent must have
had the actual P in contemplation
Evidence as to identity of the Principal must be admissible (eg. Statute of Frauds cases)
Termination of Agency: P must give proper notice of As termination to TP, or else A still has apparent authority to bind the P to a K
with TP. P would then have to sue A.
The Acts of the parties:
Mutual agreement; Revocation by P of As authority (P dismisses A); Withdrawing of A from the agreement; Receipt by A of secret
commission; Expiry of a time limit in the Acy agreement; Completion of the purpose of Acy agreement.
Operation of Law:
Performance of the Acy agreement; Lapse of time where A has been appointed for a specific time; Death of P (N.B. Acts done after
Ps death but before notice has reached A are valid & A not liable); Insanity (of P or A); Bankruptcy (of P or A); Frustration.
Remedies: Recession, refusing to pay commission, suing for damages, suing to recover secret commission.
PARTNERSHIPS
Every partner is an agent of the firm and the other partners: Exception is when the partner has no authority to act for the firm in the
particular matter and other person knows this or has reason to believe they are not a partner.
Does a Partnership Exist? Partnership Act 1891 (Qld) s.5 definition - The relation which subsists between persons carrying on
business in common with a view of profit
Advantages: Low cost, share skill of partners, more money. Dis: Unlimited liability, sharing mgmt..
ELEMENTS:
[1] Carrying on of a business: A business is any trade, occupation or profession and it must be an active occupation or profession
continuously carried on Smith v Anderson. Business called themselves a trust, HELD: Not a partnership: No association for the
purpose of carrying on business and no repetition of acts. An isolated transaction or a single venture will not be treated as a
partnership.
BUT:
-Partnership could arise where people entered into a JV in respect of a single undertaking or endeavour Canny Gabriel Castle
Jackson Advertising v Volume Sales (Finance).
[2] Carrying on of a business in common: The business must be carried on by, or on behalf of, all the partners in an agency
relationship Keith Spicer v Mansell. M went into business with partner. Before incorporation, partner ordered furniture for business
from Spicer Ltd, who bought action against M. Was furniture bought on partners behalf? Held: No partnership yet: Not carrying on
business in common with a view to profit yey, but only preparations.
2
[3] Carrying on of a business in common with a view of profit: The parties must intend to make a profit.
Creation of Partnerships
By Agreement- Oral, written, under seal, inferred by a course of dealings or the conduct of the parties.
Clauses written in Partnership Agreement: All elements necessary to create a K are needed to create partnership.
The s 27 Partnership Act provides that certain conditions btwn partners apply unless otherwise provided in the partnership
agreement.
Under Corporation Act 2001 (Cth) s 115 the max. number partners = 20, except certain professions or callings (Corporations
Regulations, Reg 2A 1.01) or formed under another Act (ie. limited partnership legislation).
Illegal Partnerships are void & no relief granted Evert v Williams- sued for decree of dissolution and taking of partnership
accounts, but they were acting in concert as highway robbers, thus illegal.
Capacity to be a partner- a) Persons of unsound mind- can enter agreement during period of sanity- binding the firm as
partner and their co-partners. To escape liability, must I) prove they were of unsound mind when entered into K. II) Other party
knew this. b) minors- can be partner by law. If partner who is a minor enters K w TP on behalf of firm- K binds adult partners but
minor is not personally liable for partnership debts.
When Does a Partnership Exist? (CL backs up Statute 3 elements)
CL Rules- May be formed either EXPRESSLY or IMPLIEDLY, and in each case all the circumstances must be examined in order to
ascertain:
[1] The intention of the parties
[2] Whether there has been a sharing of profits and losses accompanied by a state of agency; and
[3] Whether each party has a voice in the management so that it could be said that an agency exists.
If answered affirmatively- hardly any doubt a partnership exists.
IF STILL NOT CLEAR GO TO STATUTE- negatively framed questions
Statutory Rules- Partnership Act Qld s6(1)courts looks at conduct of parties as well as what was intended regard shall be had to
(not definitive but guidelines)
[A] Is there common ownership of property co-ownership of property does not equate to partnerships. Co-owners are not agents for
each other and usually do not share profits or losses. Joint tenants: Not partners: Have separate rights b/w themselves. Tenancy in
common in not partnership: Unity in possession, but not in interest.
[B] Are the parties sharing of gross returns does not indicate partnership
[C] Is there a sharing of profits prima facie evidence of partnership.
**COURTS WILL LOOK COLLECTIVELY AT CIRCMSTANCES NO ONE ELEMENT EST PART
RELATIONSHIPS TO OUTSIDERS
Every partner is an agent of the firm and the other partners for the business of the partnership. Chan v Zacharia - fiduciary
relationship created among all partners.
Any act done in the usual course of partnership business can bind the firm and the partners.
The authority of partners could be:
Actual (Express or Implied): the other partners are bound by the partners act. E.g. a partner in a farming business has implied
authority to buy farm equipment Molinas v Smith. Borrow money on credit of the firm Goldberg v Jenkins.
Ostensible (or Apparent): A third party must establish (Partnership Act QLD s 8
Apparent authority arises when actual authority is lacking. TP MUST PROVE:
-Partner acted within scope of the business of the kind carried on by the firm,
-Transaction carried out in a usual way. If unusual should alert TP.
- TP reasonably believed that the partner was a partner.
-TP not aware that P lacked authority to bind firm.
LOOK AT Tooth v Laws and Summers v Solomon (above in Agency)
Liability of Partners:
Contracts ss 8-12:
Liability is joint only- creditor has only one right of action have to choose which partner(s) going after. If only partially succeed,
cannot go after the others not initially chosen.
Partners are liable jointly with the other partners for all debts and obligations of the firm incurred while a partner ( s 12)
Plaintiff may sue all partners jointly- those partners sued may have remaining partners joined as co-defendants.
If judgement is obtained against one partner, no further action can be taken against other partner, even if satisfaction cannot be
obtained from the partner sued Kendall v Hamilton. applies in all States, except NSW (joint and several now).
Torts ss 13-16:
Plaintiff can sue partners jointly or severally
Must show that the act or omission was in the ordinary course of the business of the firm.
It is possible to bring an action against each one of the partners until judgment is satisfied.
Liability of co-partners only arises:
Polkinghorne v Holland & Whittington where act or omission was in the ordinary course of business of the firm.
3
H Sr and W were 2 of 3 partners. Sr. was advising P on investments. H Jr (son)(3 rd partner) took over Srs affairs, told W to sell her
stock and invest in another company. Jr defrauded P. Issue: Was the giving of financial advice outside the ordinary course of a law
firm? Held: HCA firm was liable for Hollands son. It could reasonably be regarded as part of a solicitors business to give advice on
investing money in a company in which the solicitor had an interest.
OR
Where money or property of a third person has been received or held in custody by the firm and then misapplied by a member of the
firm, the partnership must make good any loss.
Walker v European Electrons Pty Ltd: A P in a firm dealt with company funds who misused them. Issue: Was the partner acting in the
ordinary course of the partnerships business or acting alone? Held: The fraudulent partner was acting within the normal course of
business and thus all the partners were liable. Rule: If a partner commits a tort in the normal course of partnership business, all
partners are jointly and severally liable for any loss.
Under tort law, partners are collectively and individually liable. Partners may have to pay damages that other partners are unable to
pay for in torts.
Lloyd v Grace Smith It was with the authority of the co-partners.
An apparent partner or Holding Out: A person who holds themselves out as a partner by their words or conduct may become
liable as an apparent partner (s 17). Partnership is sued. Partnership in turn can sue the apparent partner. Mercantile Credit Co v
Garrod: Garrod and Parking were partners in garage. Agreement said buying and selling not allowed. P sold car to Mercantile. Held:
Selling cars was a normal practice for a garage, within the Scope of the business. Both partners liable.
Hospital Products Ltd v United States Surgical Corporation: Blackman had exclusive distribution in Australia for surgical devices
manufactured by the 1st respondent (USSC). Products had patent protection on devices in America NOT in Australia. Distribution b/w
Blackman and USSC was through Bs company HPL (changed to HPI). HPI began to sell products that resembled USSCs. Held: No
fid duty between USSC and HPL. Only contract damages available.
Liability on Change of Partners:
Retiring partners s 39
Remain liable for debts incurred before retirement unless the creditors and other partners agree otherwise (or partnership
agreement says so);
May be liable for debts incurred by the partnership after retirement if they have not taken steps to notify former and new customers
of their retirement.
Hamerhaven v Ogge merely changing name on letterhead is not sufficient must give notice to those the firm had dealings with.
In QLD, notice of retirement or dissolution in Government Gazette may be enough.
However retiring partner may not be liable to persons who didnt know they were a partner before dissolution Tower Cabinet Co Ltd
v Ingram.
Incoming partners s 20
Generally only liable for future debts unless they agree to assume liability for past debts.
RELATIONSHIPS BETWEEN PARTNERS
Partners have implied authority to:
Sell property and goods of the firm, purchase goods used by the firm, employ suitable staff, receive payments, enter into K.
Rights of Each Partner
Unless Partnership Agreement states otherwise, the Partnership Act QLD s 27 outlines the rights partners will have:
(IMPORTANT INDICIA)
Share equally in profits and losses;
Indemnity for any liabilities incurred while acting in the ordinary course of business of the firm all that a partner needs to show is
that what they did was necessarily done for the preservation of the business or property of the firm.
Interest on advances partner is entitled to interest on any actual payment or advance beyond the amount of capital agreed to
subscribe at a max interest rate 6% (27(1)(c)).
Interest on capital not entitled to interest on their capital until net profit had been determined.
Share in management of the business partners may expressly agree to exclude the right to participation in mgmt.
Wages cannot be paid although partners can receive drawings.
Consent of all partners is needed for the introduction of new partners.
A unanimous decision of all partners is required to change the fundamental nature of the business.
Partners are to have access to partnership books; and
A majority of partners cannot expel a partner.
Competition:
Where P sets up a business in competition with the partnership firm, profits will be shared with co-partners.
Rochwerg v Truster: R was partner in RTZ and Teklogix with a client. R joined Tek new firm and received benefits. Held: If it can be
established that the benefits obtained by a partner were the result of a connection with the partnership, they must be disclosed to all
partners.
Duties of Each Partner:
Statute: The partners are under a statutory duty towards each other to:
render true accounts s 31 keep an accurate record of records and disclose all relevant financial information
account for private profits s 32 with respect to information gained during the course of the partnership
refrain from competition s 33 when a partner sets up a business in competition with the partnership firm- profits have to be
shared with the co-partners
Fiduciary Duty: Relationship of trust and confidence Duty of utmost good faith and honesty Duty to avoid conflict Duty to
account (any secret profits/commissions). Confirmed in:
Law v Law: Will sold share in business to James. J undervalued the company (not fully disclosing assets). Held: K set aside, duty to
disclose.
Bitchnell v Equity Trustees, Executors and Agency Co Ltd: Porter running side business with the partnerships client. Held: Breach of
duty, entering into an agreement with a client if a breach of a fiduciary duty.
Partnership Property
All property originally brought into the partnership must be held and applied by the partners for the purposes of the partnership and
in accordance with the partnership agreement s 23.
Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on
account of the firm s 24.
If no agreement, court infers from conduct whether private property or partnership property Kelly v Kelly.
PP can remain private, even if used for purposes of partnership, despite improvements carried out by the partnership Harvey v
Harvey.
Partners have no title to specific property owned by the partnership but has a beneficial interest in the partnership assets Everett v
Federal Commissioner of Tax.
Dissolution of the partnership Dissolution = ends partnership
A partnership may be dissolved (terminated) automatically by: (Automatically means you dont have to go to court)
Action of the parties s 35
By the expiration of a fixed term; however, the partnership may continue as a partnership at will.
If entered into for a single undertaking, the completion of the undertaking;
By a partner giving notice where no time is specified; by any partner giving notice.
Operation of law s 36
By a partner giving notice.
Dissolved at the option of the other partners on the death, bankruptcy or insolvency of a partner.
By order of the court (on application by a partner).
Illegality s 37
automatically dissolved by the occurrence of an event that renders the purpose of the partnership illegal or against public policy.
Court Action s 38- A partner may apply to the court to have the partnership dissolved in the following circumstances:
A Insanity of a partner;
B Permanent incapacity- question of fact;
C Conduct of a partner detrimental to the interests of the partnership- does not have to be associated with the business;
D Wilful or persistent breach of the partnership agreement- e.g. failure to keep accounts; Broad One
E Where the partnership can only be carried on at a loss- of a permanent nature;
F Where the court considers it just and equitable- eg mgmt deadlock.
Consequences of Dissolution s 47
Each Partner is entitled to a return of their contribution to capital before distribution.
If the Partnership is being dissolved because of death, insolvency or bankruptcy, it is necessary to distinguish between partnership
property and private property to determine the rights of the different groups of creditors.
If the Partnership Agreement is silent on the manner of disposition of assets, the Partnership Act applies.
Garner v Murray Rule
A partner is required to contribute cash to eliminate the debit balance in his capital account
In the court case of Garner v Murray (1904), it was held that subject to any agreement to the contrary, such a debit balance
deficiency was to be shared by the other partner not in their profit and loss sharing ratio but the ratio of their last agreed
capitals (the ratio of the balances in the capital accounts before the dissolution, in the absence of any agreement
to the contrary)
Limited Partnerships- Partnership Act 1891 (Qld)
Section 2 Unincorporated LP
A limited partnership consists of at least one general partner who manages the limited partnership and their role is the same as a
partner under partnership law (has unlimited liability) AND
One or more limited partners who are not are not liable for debts beyond their capital contribution.
In Qld, no legislative requirement that limited partners contribute money or property at the time of formation of the partnership.
LP must be registered s 49 PA
NO maximum number of limited partners.
Section 4: Incorporated Limited Partnership (ILP)
One to twenty (20) General Partners
One or more Limited Partners
Separate Legal Entity (can sue and be sued in own name)
Advantages of a Limited Partnership over a Partnership
Formal requirement for a limited partnership are easier. LP is free of formalities and complexities of Corporations Act 2001 (Cth)
Can confer limited liability on a limited partner without having to achieve this via the limited liability company under the Corporations
Act 2001 (Cth).
No limit on the maximum number of limited partners.
Partners can use income tax losses incurred by the partnership.
-Taxed as companies in all cases except registered venture capital entities (where flow through rules)
-General partner can be a company
JOINT VENTURES
Joint Venture: A contractual undertaking btwn two or more parties to engage in economic activity together. Can be incorporated or
unincorporated. Undertake a specific commercial activity for joint profit for a specific time or task. It is a separate venture for each
party. NO FIDUCAIRY DUTY. LIABILITY IS INDIVIDUAL. Profits are received separately.
A Joint Venture can usually be distinguished from a Partnership on the basis that:
(Blurr b/w JV and PART liability/fid obligations/bound by Partnership Act consider these)
Key difference- JV avoids general liability of partners.
Both generally involve 2 or more persons doing something w a view to profit THERFORE distinction then, if they are
carrying on business in common.
Each party must discharge their own separate liabilities as regards the venture Cox v Coulson- theatre case one
party did publicity and printing tickets the other obtained halls and performers shared gross profits of ticket receipts
courts said sharing of gross profits not enough for PART no fid relationship different roles/responsibilities in the JV
Sharing of profits does not itself create a partnership (s 6 (1) PA).
Parties are preparing to engage in a business using a separate entity (which may not yet exist) ( Keith Spicer v
Mansell- no partnership in restaurant case where they left and it did well vs Khan v Miah- partnership intended, opened joint bank
account also said in JV have responsibility to participants when considering entering into JV
It is usually an ad hoc undertaking for a specific task or time;
It is a separate venture for each of the parties;
Assets are usually held as individual shares as tenants in common;
Liability is individual rather than several;
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.
Fiduciary Obligations in JV
-Fiduciary obligations may be found in the JV agreement, if so then the agreement may be considered to be a partnership. (dont rely
on name look at the indicia)
-Fiduciary obligations may also arise during the initial discussion regarding confidential information before formalising the relationship
(Confidentially type arrangement)
United Dominions Corporation Ltd v Brian Pty Ltd : 3 Companies: SPL, UDC, BPT entered in JV for land development. Prior to
JV agreement being signed, SPL got loan from UDC over land, BPT was not aware. Mortgage had clause that allowed that said UDC
would get priority for repayment. Land Sold, BPT received nothing. Held: No JV, but rather partnership, meaning there is a fiduciary
relationship. All parties had duty from obtaining advantages w/o knowledge of others. Consider: Profits were shared, property held
on trust, joint mgmt. Not necessary to reach an agreement for a fid duty to arise.
Characteristics of JV
Gibson Motor Sport Merchandise Pty ltd v Forbes (considering United Dominions case) text p 237 Recognised and common
characteristics of JV:
Participants (P) hold proprietary interests in the assets of the joint undertaking possibly as JT (joint-tenant)
P exercise joint control of the undertaking (if different than mere contract)
P contribution to the joint undertaking does not have to be equal
P rights and obligations relate to their individual contribution. (eg. Own machinery)
P have a joint interest in the undertaking
P mutual commercial gains and mutual profits. (not shared)
s 4J(a) joint venture of the CCA
An activity in trade or commerce:
(i) carried on jointly by two or more persons, whether or not in partnership; or
(ii) carried on by a body corporate formed by two or more persons for the purpose of enabling those persons to carry on
that activity jointly by means of their joint control, or by means of their ownership of shares in the capital, of that body
corporate;
**However the issue comes back to the liability under a JV compared to a PARTNERSHIP
Can encompass: continuing business relationship (ie. Sony/Ericsson); one specific project; a single transaction:
4
 3) Distribution Agreement: Fee makes product in prescribed fashion on own premises which are according to for instruction and carry
PARTNERSHIP Or JV?? CASES the for name. Most likely fast food: McDonalds.
Canny Gabriel Castle Jackson Advertising v Volume Sales Pty Ltd: Media company contracts to bring singers to Australia, financed by Variations in nature of agreements:
Volume Sales. Agreement signed as JV. VS had interest in the Ks and profits to be split equally. Held: Partnership even though - Simple franchisor-to-franchisee agreement: For enters into agreement with fee. Fee can use trademarks/logos and
showed JV. Consider: Joint liability, principal/agent relationship, joint ownership of property, accounts shown as 1 company, profits to conduct business in a certain way for a fee.
be sgared. - Master franchise agreement: For negotiates with sub-franchisor in a particular geographic zone. Sub-franchisor deals with
May amount to a partnership- where the parties are engaged in a common enterprise with a view to profit United Dominions Corp v fees in that zone. Example: McDonalds in China may have a sub-franchisor in charge of this.
Brian (hotel/shopping centre case - B argued PART and UD argued JV if PART entitled to share of profits if JV then no - above - Area agreement: Fee permitted to open up locations in certain geographic area.
case held partnership and they owed B a fid duty so should work in the best interest of the partnership) NOTE: For MUST DECLARE that Fee is an independent contracting party and NOT AND EMPLOYEE OR AGENT!
The Duke Group v Pilmer & Ors: Multiple account firms agreed to form national partnership called NW. NW provided report to
Duke Group saying company x was worth $112 mill (only worth $5mill). Was the claim against the entire group or just the location that Franchising Code of Conduct:
gave the report? If partnership it would be against everyone. Held: No partnership Not carrying business in common in any A) Schedule to Trade Practices (Industry Codes-Franchising) Regulations 1998 (Cth);
relevant sense. Just because labelled partnership doesnt mean they are. ALSO no sharing of profits, no principal/agency relationship, What is a franchise agreement? Clause 4.
no authority to act on behalf of each other. I) Disclosure
Operating a JV Requirement to give disclosure document Clause 6 & 6B.
Often participants are not all actively involved in the venture Franchisors initial obligation Regs 10 & 11.
Manager appointed under separate management agreement II) Mediation
Manage and collect funds from participants Dispute resolution Part IV (Regs- 24-31).
Delegated duty to enter into contracts on behalf of the JV participants (as principal not agent of principal) III) Substantive- Termination, cooling off, release of liability, transfer of the franchise, lease of premises.
Holds property as beneficial owner only Franchisees cooling-off period Reg 13.
May have to employ other parties to carry out tasks for JV Termination- Breach of franchisee Reg 21; No breach of franchisee Reg 22.
Must act in good faith for the JV participants B) Parent legislation- Trade Practices Act 1974 (Cth).
Ending a JV Parts IVA (Section 51AC) TPA prohibits a corporation or other person from engaging in unconscionable conduct ACCC v Simply No-
Usually at the end of the agreement / project or means for which it was employed. Knead.
Retirement of one co venturer usually will end the venture. Section 52 TPA prohibits a corporation from engaging in misleading or deceptive conduct (eg. in falsely promoting the attributes of a
Ownership of assets has not divulged so each owner takes own assets and share of project assets in accordance with franchise to a franchisee) Crawford v Parish.
There is an implied condition of good faith and fair dealing Hungry Jacks v Burger King.
contribution
Key Elements:
*Look at it JV or PART and state liabilities if neither look under K law and respective duties/obligations
Franchisor giver of right (donor)
Franchisee becomes the new business operator (donee)
When Considering this type of matter:
Intellectual Property (Trademarks, Logos, Publications)
1. all the indicia present of a JV or Partnership
Business System (as contained in the Operations Manual, training) - a book of rules/policies/procedures about what is going to
2. Balance the indicia against JV/partnership or other
happen
3. Consider the intention of the parties, but dont rely on what they call themselves.
Payment of Fees by Franchisee to Franchisor (Usually up for upfront fee, ongoing fees/royalties)
4. consider the liabilities of the parties severally and jointly depending on the type of relationship and advise accordingly and in the
Agreement: Coverage consists of Extent of franchise (subject matter, obligations of parties, length, goals, fees, lease
alternative.
requirements), Intellectual property (logos), payment arrangements, royalties, performance standards, competition restraints.
If not a JV or a Partnership, is it merely a contractual relationship or something else eg association, co-operative etc (then dealt with
Some types of fees payable by Franchisees:
under respective laws)
Initial franchise fee (establishment fee)
Ongoing franchise fees (licence fees, royalties)
JV common in mining
Training fees
Mining extremely costly and speculative
Supply of materials from or through Franchisor: Raw materials or ingredients, Packaging materials, Advertising and marketing
One company may own the land and another the expertise to explore or extract the element/compound.
materials, Training materials
Both entities join forces for the project , share the joint profit as agreed and once the project is completed or found not to be
Marketing fees
viable then both parties take their individual assets and the relationship comes to an end.

FRANCHISING
Defintion- franchise means an arrangement under which a person earns profits or income by exploiting a right, conferred by the
owner of the right, to use a trade mark or design or other intellectual property or the goodwill attached to it in connection with the
supply of goods or services. An arrangement is not a franchise if the person engages the owner of the right, or an associate of the
owner, to exploit the right on the persons behalf. Corps Act 2001 (Cth) s 9.
Key Elements- I) Intellectual Property (trademark, logos, publications); II) Business System (as contained in the Operations Manual);
III) Payment of fees by Fee to For (establishment fees, ongoing franchise fees, training fees, marketing fees, supply of materials from
For (packaging, ingredients, etc)).
Franchisee benefits in marketing, developing a business model, conduct business with experience party.
Types:
1) Service Agreement: Fracnhisee can market and sell a service, formulated by the for.
2) Production Agreement: Fee to manufacture a product according to fors instruction before selling it under fee name. Mostly used in
food indust. Bakers delight: Cakes are labelled the way fee wants.
2a) Business Format system: Fee makes/obtains product from authorized source prior to selling it in own premises under for name.
Premises are owned by fee.

5

*Franchisor usually lease the premises then subleases to the franchisee (better control)
Franchising Code of Conduct (overriding legislation) Key Provisions: Code is found in the Consumer and Competition
Act 2010 (Cth). ACCC ensures compliance with the code.
What is a franchise agreement? Clause 4
(1) A franchise agreement is an agreement:
(a) that takes the form, in whole or part, of any of the following: i. a written agreement; ii. an oral agreement; iii. an implied agreement;
and
(b) in which a person ( the franchisor ) grants to another person (the franchisee ) the right to carry on the business of offering,
supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or
suggested by the franchisor or an associate of the franchisor; and
(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a
commercial symbol: i. owned, used or licensed by the franchisor or an associate of the franchisor; or ii. specified by the franchisor or
an associate or the franchisor;
and
(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an
associate of the franchisor an amount including, for example: i. an initial capital investment fee; or ii. a payment for goods or services;
or iii. a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or iv. a training fee
or training school fee;
but excluding:
v. payment for goods and services at or below their usual wholesale price; or vi. repayment by the franchisee of a loan from the
franchisor; or vii. payment of the usual wholesale price for goods taken on consignment; or viii. payment of market value for purchase
or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise
agreement.
(2) For subclause (1), each of the following is taken to be a franchise agreement: (a) transfer, renewal or extension of a franchise
agreement; (b) a motor vehicle dealership agreement.
(3) However, any of the following does not in itself constitute a franchise agreement: (these are all separate) (a) an employer and
employee relationship; (b) a partnership relationship; (c) a landlord and tenant relationship; (d) a mortgagor and mortgagee
relationship; (e) a lender and borrower relationship; (f) the relationship between the members of a cooperative that is registered,
incorporated or formed under any of the following laws: [State/Territory cooperatives legislation] [Corporations Act 2001 (Cth)]
Purpose of disclosure document:
Clause 6A: The purposes of a disclosure document are: (a) to give to a prospective franchisee, or a franchisee proposing to enter
into, renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed
decision about the franchise; and (b) to give a franchisee current information from the franchisor that is material to the running of the
franchised business.
Requirement for disclosure document: Clauses 6 & 6B
Clause 6 (1) A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year
after entering into a franchise agreement, create a document (a disclosure document ) for the franchise in accordance with this
Division.
Clause 6(2)(c): Disclosure Document must be signed by a director or officer of the Franchisor: (as a true and direct copy of that
report)
Clause 6B (1): A franchisor must give a current disclosure document to: (a) a prospective franchisee; or (b) a franchisee proposing
to: i. renew a franchise agreement; or ii. extend the scope or term of a franchise agreement.
Clause 6B(2) If a subfranchisor proposes to grant a subfranchise to a prospective subfranchisee: (a) the franchisor and subfranchisor
must: i. give separate disclosure documents, in relation to the master franchise and the subfranchise respectively, to the prospective
subfranchisee; or ii. give to the prospective subfranchisee a joint disclosure document that addresses the respective obligations of the
franchisor and the subfranchisor; and (b) the subfranchisor must comply with the requirements imposed on a franchisor by this Part.
NB: Subfranchisor = Master Franchisee (Burger King v Hungry Jacks type situation)
6
Franchisors initial obligations: Clauses 10 & 11
Clause 10 A franchisor must give: (a) a copy of this code; and (b) a disclosure document; and (c) a copy of the franchise agreement,
in the form in which it is to be executed; to (d) a prospective franchisee at least 14 days before the prospective franchisee: (i) enters
into a franchise agreement or an agreement to enter into a franchise agreement; or (ii) makes a non-refundable payment (whether of
money or of other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise
agreement; or (e) a franchisee at least 14 days before renewal or extension of the franchise agreement.
When franchisee signs and gives back: Give back copy of agreement, Notification that got legal advice/financial advice, Read
and understood documents, may give 4th one that got accounting advice
Clause 11 (1) The franchisor must not: (a) enter into, renew or extend a franchise agreement; or (b) enter into an agreement to enter
into, renew or extend a franchise agreement; or (c) receive a non-refundable payment (whether of money or of other valuable
consideration) under a franchise agreement or an agreement to enter into a franchise agreement; unless the franchisor has received
from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read
and had a reasonable opportunity to understand the disclosure document and this code. (as per above)
(2) Before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee: (a) signed
statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business,
by any of: i. an independent legal adviser; ii. an independent business adviser; or iii. an independent accountant;
(b) for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective
franchisee: i. has been given that kind of advice about the proposed franchise agreement or franchised business; or ii. has been told
that that kind of advice should be sought but has decided not to seek it.
(3) Subclause (2): (a) does not apply to the renewal or extension of a franchise agreement with a franchisor; and (b) does not prevent
the franchisor from requiring any or all of the statements mentioned in paragraph (2)(a).
Franchisees cooling-off period: Clause 13
Clause 13 (1) A franchisee may terminate an agreement (being either a franchise agreement or an agreement to enter into a franchise
agreement) within 7 days after the earlier of: (a) entering into the agreement; or (b) making any payment (whether of money or of
other valuable consideration) under the agreement. (2) Subclause (1) does not apply to the renewal, extension or transfer of an
existing franchise agreement. (3) If the franchisee terminates an agreement under subclause (1), the franchisor must, within 14 days,
return all payments (whether of money or of other valuable consideration) made by the franchisee to the franchisor under the
agreement. (4) However, the franchisor may deduct from the amount paid under subclause (3) the franchisor's reasonable expenses if
the expenses or their method of calculation have been set out in the agreement.
Termination Clauses 21-23
Breach by Franchisee: Clause 21 (2) The franchisor must: (a) give to the franchisee reasonable notice that the franchisor
proposes to terminate the franchise agreement because of the breach; and (b) tell the franchisee what the franchisor requires to be
done to remedy the breach; and (c) allow the franchisee a reasonable time to remedy the breach. (3) For paragraph (2)(c), the
franchisor does not have to allow more than 30 days. (4) If the breach is remedied in accordance with paragraphs (2)(b) and (c), the
franchisor cannot terminate the franchise agreement because of that breach. (5) Dispute resolution provisions (Part 4) apply.
No Breach by Franchisee: Clause 22 (1) This clause applies if: (a) a franchisor terminates a franchise agreement: i. in accordance
with the agreement; and ii. before it expires; and iii. without the consent of the franchisee; and (b) the franchisee has not breached the
agreement; and (c) clause 23 (special circumstances) does not apply. (2) For subparagraph (1) (a) (iii), a condition of a franchise
agreement that a franchisor can terminate the franchise agreement without the consent of the franchisee is not taken to be consent.
(3) Before terminating the franchise agreement, the franchisor must give reasonable written notice of the proposed termination, and
reasons for it, to the franchisee. (4) Dispute resolution provisions (Part 4) apply.
Special Circumstances: Clause 23 A franchisor does not have to comply with clause 21 or 22 if the franchisee: (a) no longer holds
a licence that the franchisee must hold to carry on the franchised business; or (b) becomes bankrupt, insolvent under administration
or an externally-administered body corporate; or (think about this) (c) voluntarily abandons the franchised business or the franchise
relationship; or (d) is convicted of a serious offence; or (e) operates the franchised business in a way that endangers public health or
safety; or (f) is fraudulent in connection with operation of the franchised business; or (which would put the FA in disrepute) (g) agrees
to termination of the franchise agreement.
Dispute Resolution: Part IV (Clauses 24-31). (effectively mediation)
Part 4 provides for resolution by mediation where the parties agree on a mediator or, failing agreement, by a mediator
selected by the mediation adviser. (Court or private mediator)
The mediation adviser is appointed by the Minister*: Clause 25.
Procedure is set out in Clauses 29 & 30.
24 Definition In this Part: complainant means the person who starts the procedure under clause 29. parties means the
complainant and the respondent in a dispute arising under a franchise agreement or this code. respondent means the person
with whom the complainant has a dispute.
25 Mediation adviser - A mediation adviser is to be appointed for this Part by the Minister.
26 Internal complaint handling procedure - A franchise agreement entered into on or after 1 October 1998 must provide for a
complaint handling procedure that complies with clauses 29 and 30.
27 Code complaint handling procedure - A party to a franchise agreement who has a dispute with another party to the franchise
agreement may start the procedure under clause 29.
28 Choice of procedure - A party to a franchise agreement who has a dispute with another party to the franchise agreement may, at
any time, choose to use the procedure under clause 26 or 27.
29 Procedure (1) The complainant must tell the respondent in writing: (a) the nature of the dispute; and (b) what outcome the
complainant wants; and (c) what action the complainant thinks will settle the dispute.(2) The parties should then try to agree
about how to resolve the dispute. (3) For mediation under a franchise agreement: (a) if the parties cannot agree under subclause
(2) within 3 weeks, either party may refer the matter to a mediator; and (b) if the parties cannot agree about who should be the
mediator, either party may ask the mediation adviser to appoint a mediator. (4) For mediation under this code, either party may
ask the mediation adviser to appoint a mediator. (5) Subject to subclause (5A), the mediator may decide the time and place for
mediation. (5A) Mediation under this code must be conducted in Australia. (6) The parties must attend the mediation and try to
resolve the dispute. (7) For subclause (6), a party is taken to attend mediation if the party is represented at the mediation by a
person who has the authority to enter an agreement to settle the dispute on behalf of the party. (8) For subclause (6), a party will
be taken to be trying to resolve a dispute if the party approaches the resolution of the dispute in a reconciliatory manner,
including doing any of the following: (a) attending and participating in meetings at reasonable times; (b) at the beginning of the
mediation process, making the partys intention clear as to what the party is trying to achieve through the mediation process;
(c) observing any obligations relating to confidentiality that apply during or after the mediation process; (d) not taking action
during the dispute, including by providing inferior goods, services, or support, which has the effect of damaging the reputation of
the franchise system; (e) not refusing to take action during the dispute, including not providing goods, services or support, if the
refusal to act would have the effect of damaging the reputation of the franchise system.
30 Mediation under the code - (1) The mediation adviser must, within 14 days after referral under paragraph 29 (3) (b) or
subclause 29 (4), appoint a mediator for the dispute. (2) After mediation under this code has started, the mediator must tell the
mediation adviser, within 28 days, that mediation has started.
30A Termination of mediation - (1) This clause applies if: (a) at least 30 days have elapsed after the start of mediation of a dispute;
and (b) the dispute has not been resolved. (2) If either party asks the mediator to terminate the mediation, the mediator must do
so. (3) Subject to subclause (2), the mediator may terminate the mediation at any time unless satisfied that a resolution of the
dispute is imminent. (4) If the mediator terminates the mediation of a dispute under this clause, the mediator must issue a
certificate stating: (a) the names of the parties; and (b) the nature of the dispute; and (c) that the mediation has finished; and
(d) that the dispute has not been resolved. (5) The mediator must give a copy of the certificate to: (a) the mediation adviser; and
(b) each of the parties to the dispute.
31 Conditions - (1) This Part does not affect the right of a party to a franchise agreement to take legal proceedings under the
franchise agreement. (2) The parties are equally liable for the costs of mediation under this Part unless they agree otherwise.
(3) The parties must pay for their own costs of attending the mediation. (4) In this clause: the costs of mediation under this
Part includes the following: (a) the cost of the mediator; (b) the cost of room hire; (c) the cost of any additional input (including
expert reports) agreed by both parties to be necessary to the conduct of the mediation.
Important Players:
Office of the Mediation Adviser (OFMA):
Established in 1998 by the Australian Government Office of Small Business.
Role of the OMA is to appoint mediators to assist franchisors and franchisees to resolve their problems without going to court.
Franchising Council of Australia (FCA):
Peak body for the $128 billion franchise sector in Australia.
Represents franchisees, franchisors and service providers to the sector.
Formed in 1983 as a not-for-profit trade association.
IMPORTANT DEALINGS
Section 22 Australian Consumer Law 2010.(formerly Parts IVA (Section 51AC) of the Trade Practices Act) prohibits a
corporation or other person from engaging in unconscionable conduct (ACCC v Simply No-Knead (Franchising) Pty Ltd
[2000]).
S51AC: Unconscionable Conduct in business transactions
(1) A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
Engage in conduct that is, in all circumstances, unconscionable.
7
-Simply No-Knead - Bread franchise: Simply (franchisor) got upset with some franchisees. Franchisor decided to remove
franchisees name from telephone directory etc sieze to acknowledge their existence. If advertising done they refused to name the
stores in the advertising. Failed to provide the product to the stores made it difficult. They were deliberately making it difficult
unconscionable conduct under consumer law. Court - Found Simply was in breached and had engaged in conduct that was in all
circumstances that was unconscionable. REMEDY iNJUNCTION S.80
ACCC v Seal-A-Fridge Pty Ltd: S-A-F: Engaged in unconscionable conduct towards fees in contravention of s51AC of the
TPA. Also failed to comply with Franchising Code of Conduct (contravention of s51AD. Fors action: Unreasonably withholding
consent to the transfer of fees, increasing fees CONTRARY to the agreement, disconnecting fees from the company number. For
allowed to profit off fees but must clearly state in agreement why they are increasing. S-A-F also used their strength in bargaining
power to act unconscionably. Held: Was in all circumstances unconscionable.
Master of Education Services Pty Ltd v Ketchell: Under clause 11 of the Franchising Code of Conduct, for must not enter into a
franchise agreement or receive non-refundable money under the agreement, unless received written statement. M-E-S gave
disclosure document and Code to Ketchell, did not get the written statement from her. No suggestion that K did not read or
understand agreement. K sued for unpaid fees, argued failure to get written statement meant agreement was void. Held: While failure
to get written statement was a contravention, this does not mean the whole agreement is illegal and unenforceable. Where
contravention is minor, Court unlikely to invalidate the franchise agreement.
ASSOCIATIONS
Definition: includes any group of persons who have agreed to join together in the pursuit of one or more common objects and
purposes Smith v Anderson. includes companies & partnerships too broad today
Generally used to describe non-profit organizations formed to promote religious, educational, literary, scientific, artistic, sporting
benefits or other similar community-wide benefits.
May be incorporated or unincorporated. (once inc legal entity that can sue in its own right)
Characteristics of a non-profit organization:
Conservative & Unionist Central Office v Burrell:
Lord stated I infer that an unincorporated association in this context the parliament meant two or more persons bound together for one
or more common purposes not being business purposes, by mutual undertakings each having mutual duties and obligations, in an
organization which has rules which identify whom control of it and its funds rest, and on what terms and which can be joined or left at
will. The bond of union between the members of an unincorporated association must be contractual
[1] There must be members of the association.
[2] There must be a K binding the members. (Understanding)
[3] There will normally be some constitutional arrangement for meetings of members and appointment of committees and officers.
(club rules)
[4] A member will normally be free to join or leave the association at will.
[5] The association will normally continue in existence independently of any change in composition.
[6] There must be a historical moment in them when a number of persons combined or banded together to form the association.
(**Date proclaimed association is the date in history claiming to be association)
NB: For unincorporated associations- 1, 2 and 6 are ESSENTIAL.
Characteristics of a non-profit organisation (part of ASSOCIATION)
The aim must not involve the members making a direct pecuniary profit for themselves Adamsons Case.
But this does not mean that association cannot be involved in profit-making activities (ie. raising money by holding fetes, selling
association related products, etc) as long as these activities are oriented toward charitable ends or direct operational costs. (should
not go back to memebers)
Categories: education, scientific, religious, sporting, community falls outside of profit-making. Adamson
Can still pay people as long as its operational/administrative cost. - Adamson
Pay must be limited to the market price reasonable salary Adamson Case. market price for services being provided. (can pay
people employed but at market rate eg accountant- but try to get honorary)
Unincorporated Associations
Advantages:
No formalities, inexpensive, privacy & confidentiality (members not publicly listed)
Disadvantages:
Not a separate legal entity. (exposing members to liability), Committee members may be liable but have a right to indemnity,
Dissolution may be difficult if property involved
Continued:
Association and members are one and the same.
The interest of a member exists only for duration of membership & is not transmissible Watson v J & AG Johnson (Watson wanted to
use club as he did when he was a member but wasnt so couldnt)
Effect of unincorporated Associations rules
General presumption that members do no intend to be Kly bound okay to refuse membership Cameron v Hogan (Pol Party
rejected him membership and did not allow to contest seat again lost premier position and political seat caused him to not have
ability to work 1934 said members not contractually bound and therefore acceptable then) attempts to distinguish this in
McKinnon v Grogan & Plenty v 7th Day Adventist Church of Port Pirie CO-OPERATIVES
Mckinnon - Courts should deal with disputes between individual members and social clubs. To characterise a political party of an International cooperative alliance (ICA)
institution that provides a major sport in the community in some way as a group of friends meeting in the tennis, is characterised as .. An autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and
inadequate in the legal sense - Suggesting that the formalities of a football club or club that has members who pay substantial fees aspirations through a jointly-owned and democratically controlled enterprise - One member one vote policy (all have a
should be distinguished from that of a knitting club or book club say in decision making)
Plenty need evidence parties intended to be kly bound. Members are free to participate and join activities but are not contractually Group of people pooling resources to achieve some common goal.
bound. Presumption does not apply where members and associations are involved in contractual matters such as prop interests Economic, social or cultural needs
association may own property and members entitled to part of the members, or clear indicated that the rules are contractually binding Joint ownership
parties have agreed and signed the document and they agree to be bound by the rules/contract of that nature. if clear intention that Democratic management
members are going to be contractually then will be but otherwise the assumption is they will not be. Legislation - Cooperatives Act 1997 (Qld) and related Regulations
Presumption does not apply where proprietary rights are involved and clear indications that the rules are Kly binding. -Registered with the Department of Fair Trading (or equivalent in each State or Territory)
(i.e property or need for employment then bound o/w not) -A cooperative is formed separate from its members
Contractual Relations: Generally, members are not liable for Ks made on their behalf by any member, the executive, or the Able to enter into and enforce contracts including the ability to hold, acquire and deal with property
committee of the association. Sue or be sued
To be enforceable, any such K must be made w all of the members, or w an agent or trustree acting w/in authority Freeman v Continue regardless of changes of membership (important)
McManus. (uninc pol ass capable of taking lease or tenancy of land? rules that executives could not bring members into kual Liability
relations with third parties no K existed here b/c no legal entity and no authority given to allow in first place: Obrien J ruled the fact Separate legal entity
that the members of a society have entrusted its affairs and management to a committee does not give the committee authority to Members are liable for the amounts each member owes to the cooperative eg unpaid membership fees or subscriptions
make contracts binding on the members especially in a case where the members have no interest in the societys funds) etc (so anything outstanding to what owe to a company and nothing beyond that)
Committee members acting w/in authority will be personally liable on the Ks they have entered into Bradley Egg Farm v Clifford. (similar to corporations)
(poultry farmer enter K with uninc ass whose purpose to give advise and test polutrly rep negligently tested saying poultry was fine
but farmer had to destroy committee was effectively employer of individual who tested poultry and was therefore liable under contract Trading or Non-Trading
(not the members) had they acted in good faith and in reasonable court of activity then could seek indemnity from members or Cooperatives can established as trading or non trading entities (non-trading cannot switch to trading)
common fund) A trading cooperative may distribute any surplus funds to its members
HOWEVER, This many not be the case when the K is for a long term & the composition of the committee changes Carlton Cricket & A non trading cooperative uses surplus funds to support its activities and not to members
Football Social Club v Joseph. LIKELIHOOD of CHANGE can never hold the club liable because its not a separate legal entity you Non trading are often more suitable for community activities such as housing projects, child care.
only contract with individuals well if the K is so long there is a likelihood the committee members may change, if someone is not going While trading are more suitable to primary industry cooperatives
to be there, then you are trying to contract with the club VOID AB INITIO gentlemens agreement no one is liable. IF THERE IS A
LIKELIHOOD THAT THE COMPOSITION MAY CHANGE VOID (contracting here with UNINC ASS and cant because not legal entity Principles
so no contract) 1. Voluntary and open membership
Procedure to form an unincorporated association: 2. Democratic member control
-Very little formality required May need to wait for retirement of member to become member
-Most important consideration is mutual understanding of members Can limit membership rather than getting too big and too difficult to manage
-For practical reasons, members usually adopt a name for the association and a constitution and/or set of rules or by-laws. It 3. Member economic participation
should be noted that there is no set form for these rules to follow, although it is common for them to be in writing. May need to put funds or input of services
-Unincorporated non-profit associations do not need a name in order to function. The main common law restriction on choosing a name Sometimes may not have to buy into it but have to commit to a certain number of hours per month
is that a person does not use it to deceive and to inflict pecuniary loss: See Earl Cowley v Countess Cowley - Earl was given to him 4. Autonomy and independence (can form greater co-ops by working together)
and Countess was given to her b/c she was married to him but they divorced and used Countess after. She used her name to try to 5. Education, training and information (about helping others)
entice and bring people to a charity and raise money some of which went back to her. Court - Not appropriate. Not about fact that 6. Cooperation among cooperatives
she used name that was given to her, but courts held cant use the name to entice or cause pecuniary loss to potential members or 7. Concern for community.
others who may be enticed by that name. Name cant be misinforming.
COOPERATIVES ACT 1997 - SECT 4
Incorporated Associations popular w sporting & recreation clubs. S 4 Objects of this Act: The objects of this Act are to
Associations Incorporations Act 1981 (Qld) (Go to office of fair trade) (a) enable the formation, registration and operation of cooperatives; and
Separate legal entity to its members (body corporate) (s 21). (good for sportin clubs- injury risk) (b) promote cooperative philosophy, principles, practices and objectives; and
Must be not-for-profit (s 5(1)(c)). Qualified by s 4- list of negatively framed factors. (c) protect the interests of cooperatives, their members and the public in the operations and activities of cooperatives; and (Separate
Associations Incorporations Act 1981 (Qld) s 5: An association is not eligible for incorporation under this Act if the legal entity - Can take out insurance as coop public is safe)
association c) is formed or carried on for the purpose of providing financial gain for its members . . . 5(1)(c) qualified by s (d) ensure directors of cooperatives are accountable for their actions and decisions to the members of cooperatives; and
4: In effect: You will still be a non for profit even if make money as long as those things you use for salary, admission fees, (e) encourage and facilitate self-management by cooperatives at all levels; and (members still independent can be ousted out if flaunt
trading with public as ancillary to primary intent, services or facilities for members - Salary for members that perform duty rules etc)
to keep association going - Some associations need to pay people for skills administrative etc as long as for purpose (f) encourage the development, integration and strengthening of cooperatives at local, regional, national and international levels by
of running association it is okay not necessarily pecuniary gain cost of association supporting and fostering State and national peak organisations and cooperative instrumentalities.
If dont have executive dont have an association
Advantages: Association has separate legal entity - Can own property in own name -Can sue and be sued in own name Perpetuity Rules of a cooperative
-Members have limited liability Must be registered
Disadvantages - No major disadvantages, Keeping of separate accounts, financial returns (cost) Express the activities of the cooperative
Procedure to Incorporate: Choose name, Design constitution and rules, Lodge application, Appoint secretar, Provide registered Inform members of their rights and obligations
address Share information eg issuing, cost, transfer
Ongoing requirements: Lodge details of any changes, Keep adequate accounts, Hold annual general meeting, Lodge annual financial Winding up of coop
return, Committee members must comply with duties
8
 Can include restrictions and prohibitions Open to all, not oppressive, unfairly prejudicial or unfairly discriminatory
What allowed to do while working there Oppressive is the same as for corporation law Scottish cooperative wholesale society ltd v Meyer (COOP managed to take 51% of a
As individual not allowed to bring coop in disrepute need to be mindful that even though independent operator also a member of the company and other 49% refused to sell out COOP - Were restrictions on who could produce reyon - COOP was able to change and
coop manipulate the way the company was run - Changed intention of reyon manufacturing to point where shares in company plummeted
As agent to coop have to put coop interests ahead of your own Shareholders took to court and said was not fair as they were manipulating, oppressing activities, making difficult, just wanted to run
Can be amended or rescinded by special resolution or by resolution of the board. business as it was Court: Held in favours of shareholders said can buy shares from shareholders but buy at price they were when
Are not in force until they have been registered (Once registered they are enforceable) they started their bad behaviour so at the hire inflated price
Fines for members breaching the rules or for coops distributing false copies. **As a cooperative cannot force other members to become members of the coop even if know the missing link is going to be great for
coop
Management Active member relates to the activities of the cooperative of which the member must participate in.
Board of directors (3+) Opposed to doing their own thing active member
At least three usually chairperson, secretary and treasurer Can still be an active member and take time off etc as long as transparent and fully informed to other members of coop
Each member has single voice cant have doing different roles Cancellation: if member cannot be located, or not an active member at any time during the required period immediately before
Governed by rules of the cooperative; and that time.
Cooperative Act
Acts of director are valid despite any defect in the directors appointment Meetings
At least 4 meetings per year At least each quarter
Minutes to be kept (and what transpired) Annual general meetings or special meetings
Keep proper accounts (transparent and clear) Quorum s201 in the rules and no business can be conducted unless the quorum has been achieved 50% + 1 or half + 1
Minutes have the majority
Penalties under Cooperatives Act and Cooperatives Regulations (penalty points) - If breach your duties either as executive or as
members Raising Capital
Returns Issuing shares (to raise capital)
No discounts permitted
Ultra Vires acting outside of your ability or role does not exist with Coops Trading coops can distribute dividends from profits (to members)
Doctrine does not apply to cooperatives Borrow from members compulsory loan
Therefore if officers/members of the cooperative exceed their power then they may be sanctioned; and May only become member if contribute an interest free loan to coop
The parties may be bound to the contract even if it exceeded the power; Can call on compulsory loans to the coop (Have to wait and get money paid back through dividends and etc as profits are made)
Exception to agency rule where executives work outside their authority then as members of association or cooperative can ratify that Membership and periodic fees
contract
In coop dont have that discretion have to take it on board that is the situation Winding up of cooperative
Even if outside the co-op and no authority had been given If COOP still solvent can be voluntarily wound up greater than 50% majority by members
Contravention can be relied upon in certain situations Voluntarily, court order or by Registrar (any member can do this admin process)
Might claim against individual Refer to winding up in insolvency below
Sanction them or punish them
Members likely to be bound Other entities:
Affiliation , often a term that is synonymously with association to describe a company whose parent company possesses a minority
COOPERATIVES ACT 1997 - SECT 43 stake in the ownership of the company.
43 Assumptions Small amount of shares
(1) A person may assume that the cooperative's rules have been complied with. Minority stakeholder
(2) A person may assume that anyone who appears, from information provided by the cooperative that is available to the public from Cf
the registrar, to be a director or officer of the cooperative Subsidiary is a company where the parent is the majority shareholder
(a) has been properly appointed; and Parent is majority shareholder
(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or officer Subsidiary is effectively controlled by parent company due to majority shares
of a similar cooperative. Conglomerates
(3) A person may assume that anyone who is held out by the cooperative to be an officer or agent of the cooperative Companies that either partially or fully own a number of other companies.
(a) has been properly appointed; and Structure to manage difficult market events
(b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or Can be difficult for the lawyer and accountant to unravel .
agent of a similar cooperative. Especially if trying to sue a company in conglomerate
(4) A person may assume that anyone who is, or may be assumed to be, an officer or agent of the cooperative who has Sue the lot of them let them argue in court
authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is Agreement between them usually license
genuine or is a true copy. Management considering all companies at same time
(5) A person may assume that a document has been properly executed by the cooperative if it is signed by 2 people , 1 of whom Collaborations
is, or may be assumed to be, a director of the cooperative, and the other is, or may be assumed to be, a director or officer of the The process of two or more people or organisations working together to realise a common goal.
cooperative. May be under the business structure of a joint venture arrangement or a less formal arrangement.
(6) A person may assume that a document has been sealed by the cooperative if it bears what appears to be an impression of the Maybe it is a JV
cooperative's seal and the sealing of the document appears to be witnessed by 2 people, 1 of whom is, or may be assumed to be, b/c of the risk
a director of the cooperative, and the other is, or may be assumed to be, a director or officer of the cooperative. May be for profit or not for profit.
(7) A person may assume that the officers and agents of the cooperative properly perform their duties to the cooperative Means of obtaining greater resources, recognition

Membership
9
 TRUSTS
Identifying a Trust
HOLDING OF THE PROPERTY BY THE LEGAL OWNER (TRUSTEE): Has control of the property
FOR THE BENEFIT OF OTHERS (BENFICIARIES)
A TRUSTEE can also be a BENEFICIARY but not to the exclusion of all others... as there would be a merging of title and
the trust would be extinguished. (trustee can be a ben as long as there are other bens in the trust) Re Douglas
What is a trust?
A trust is a fiduciary relationship, where one person holds a legal interest (title) in property subject to an equitable obligation to use or
keep that property for the benefit of another person (beneficial interest), or for some specific object or purpose.
a relationship where the legal title is in (one person) and the equitable title is in (another person) Hardoon v Bellios.
Trust inter vivos: Trust created by a person while alive (b/w living people)
Testmentary trust: Trust to take effect on the testators death.
Essential Elements:
[1] Settlor- The person creating the trust by settlement of property. (gives legal title of property to trust)
[2] Trustee- The person who has the control of property. (legal title) Can be more than 1 trustee, often exercise duties in relation to
property such as mangage, control, pay income to specified person, invest, etc.
[3] Trust Property- Property held on trust Either real property, personal property, chooses in action (ie. copyright, company shares,
debts, etc).
[4] Beneficiary- Person on whose behalf the Tee must apply any benefit accruing from the property. (equitable title)
[5] Obligation enforceable in equity: Trust gives rise to an obligation on part of trustee, enforceable in equity, to deal with trust
property for the benefit of the beneficaires.
Trust inter vivos: Trust created by a person while alive (b/w living people).
Testmentary trust: Trust to take effect on the testators death.
Trust v Contract: K: Agreement b/w 2 or more parties creating rights and obligations enforceable at c/l. Agreement not essential in
trust. K has consideration. Trust does not. Only parties to a K may enforce it. Trust enforceable in equity.
Trusts v Agency: Agent: Person who has authority (express or implied), to act for principal. Agent: Fiduciary of principal, must act for
benefit of principal, similar to trust. Both trustee and agent must act personally and not delegate their functions. Agent does not incur
personal liability for Ks in which they enter on behalf of the principal (provided the agent discloses that he or she is contracting as an
agent). TRUSTEE LIABLE for Ks entered on behalf of trust and is personally liable. Agency terminated by death of principal or
agent, trust continues. Trustee cannot be directed by the beneficiary.
Trusts and Companies: Trust not a separate legal entity. Company does not hold property on trust for its objects. Company is the
full legal and beneficial owner of its property
Types of trusts:
Express and non-express trusts - Created in pursuant to the Settlor Or where courts determine the parties intended to create a
equitable interest in a third party (Private beneficiary natural or corporate person, Public charitable purpose, Fixed or discretionary,
Executed)
[1] Express trusts (trust instrument/deed exists)- A trust created by an express declaration of intention by the settlor (may be written or
oral).
Types of express trusts used in business structures- discretionary, fixed (non-discretionary), bare (nominee), unit, hybrid, blind, &
service.
**Always look at the trust deed/instrument to see what the trust is doesnt matter what they call it
Discretionary Trust (Family trust)-Where trustee has discretion as to who out of the bens will receive a benefit in any one particular
year. Trustee has full discretionary powers whomever they like. Primary responsibility to give the asset to the bens that would most
benefits the trust. Not necessarily considering the position of every ben. Not about helping the bens, it is about maintain the trust
property for the benefit of all the bens. Fixed Trust (similar to DT) - No discretion on trustee - Locked into trust deed about what each
ben is entitled to get. Eeach ben gets certain % as decided in trust deed. Profit divided based on that %. Bare Trusts- Can be used in
businesses. Used to hold property. The trustee gets told by the bens what to do and when to deal with the property. Not trading trust
trustee cant say much.
Unit Trust (similar to DT/FT) bens get a certain unit allotment of the trust eg. 10/60 units. Can split units and introducing new ben but
need approval of trustee. Units are transferrable. Unitholders have fixed interest based on their units. Often used as a medium for
investment.
Hybrid Trusts-Mix of trusts. Service Trusts -Number of services held in trust as asset protection.
**IMPORTANT make sure distribute profits by 30 June (end of fin year) to avoid major tax implications think about the best interest
of trust and maybe distribute to lower tax bracket bens. IF dont the trust will be taxed at the highest tax bracket.
[2] Non-Express trusts
Absence of express intention
Implied- A trust which arises b/c the law presumes in the particular circumstances an intention on the part of the settlor to create a
trust, although not expressed.
Resulting (a subcategory of implied)- Arise where an express trust fails from some reason (ie. objects uncertain, trust beneficiary dies
before the testator).
Where A purchases property but directs the vendor to transfer it not to himself but to B who has given no consideration for it. Thus B
is presumed to be trustee of property A, in the absence of evidence that A intended the property as a gift to B Napier v Public Trustee
(WA). (Holding legal title without getting legal title)
Where property is conveyed to 2 or more purchasers who have contributed unequally to the purchase price, the presumption is that
they hold the property on a resulting trust in proportions representing their contributions to the total purchase price Calverley v Green.
Trustees of the property of cummins v cummins: Where husband and wife have contrivuted to the purchase price of a home, they hold
equal proportions, irrespective of their actual contributions to the price.
Constructive (usually a remedy)- Where the law considers it would be inequitable or unconscionable for a person to retain property
for their own benefit Baumgartner v Baumgartner. Once delivered to pl trust dissolves. Courts order property to be held on trust.
Constructive trust arises where the law considers it would be inequitable or unconscionable for a person to retain property for his or her
own benefit. Comes into existence by operation of law, not intention.
Baumgartner v Baumgartner: Parites to a relationship (not married but living togther) bought a house (man paid 55% and lady 45%).
Couple separated, man claimed property. Held: Constructive trust: To proportions contributed.
Bofinger v Kingsway Group Ltd: Where party in fid relationship misapplies money, the party will be regarded as a constructive trustee in
relation to the money.
[3] Public or Private trust: Public like charitable/heritage trust where government/council owns trust property allowing public to
access. Private family document between few individuals only for their interest/benefit
Other types of trusts: Charitable trusts - For public benefit Cant exclude people from using those assets of the trusts. Usually open
on certain days or particular functions. Trustee uses property to gain money to continue to operate the property for rest of public (eg.
Currumbin Wildlife). Commissioners for Special Purposes of Income Tax v Pemsel: Charity comprises of 4 principal divisions: Trusts for
the relief of poverty, for the advancement of education, advancement of religion, for other purposes beneficial to the community. Where
it is clear that the settlor intended to give property for charitable purposes, the trust will not fail even if the objects are uncertain.
Establishment of an express trust:
The three certainties- I) Binding trust is intended Re Robertson. II) Identification of trust property (of subject) III) Identification of the
objects of the trust (the bens) Perpetual Trustee v John Fairfax & Sons; Knight v Knight (authority for the three certainties)
Express trust created by I) Declaration II) Transfer III) Direction (to show it was a trust intended).
**when dealing with these you need to be really specific as to what each entails and analyse
*CERTAINTY OF INTENTION must be certain that a trust was intended (analyse the words/conducts)
*CERTAINTY OF SUBJECT - Trust property must be able to be identifiable and defined and not blended with non-trust property. A
mere expectancy is not property and cannot be the subject matter of a trust. Nature and quantum must be identifiable (in the subject
matter).
*CERTAINTY OF OBJECTS Persons who are to have the benefit of the trust must be certain; if not the trust will fail Perpetual
Trustee Co Ltd v John Fairfax & Sons Pty Ltd. Trust not uncertain because the actual person to whom the distribution is to made
cannot be known in advance of the date of distribution. It is sufficient that under the provisions of the trust the beneficiaries will be
ascertainable at that date: Kinsela v Caldwell.
Trust Uses
Succession Law each will contains a simple trust or could be a trust deed in themself (testamentary trust)
Protective Trust protection of assets from a spendthrift or lacking capacity beneficiary
Protect asset from the ben maybe has low intellect or spends too much
To protect beneficiary and the property put in the trust
Entitlement to use property but manage the risk
Asset protection remembering the trustee has legal title and the beneficiary has a beneficial interest; ownership is not with the
trustee but with others.
Investment trusts to pool investment funds
Like self manage super funds - Can draw shares/income/property owned into self-managed superannuation fund
Trading trust often with a corporate trustee and fixed or discretionary in nature.
Business assets fit inside or part of the business assets are in the trust
Might have another company structure dealing with everyday risky issues of that trust
Trust is owner
Trustee is running business acting as trading trust
Any income is given to the bens according to the trust deed
Trusts as a remedy - Eg. Constructive trust arrangement
Unincorporated associations and trusts a trust may be used to validate the gifts to an unincorporated association which would
otherwise fail as the UA is not a legal entity.
Who gets the property?
Would be held on trust for the association even though the uninc association is not a separate legal entity - Uninc Association cannot
hold legal interest in property or assets on their own
Kytherian Association of Queensland v Sklavos - Property left to uninc association. Gift would lapse because lack of objects ass
itself could not take the property and were the bens under the will. Court - Suggested May be given to the members. But what if one of
them leaves the ass? Suggested may become part of the asss general funds (can have funds as long as give to charity). Suggested
10
that the courts order that the gift is held on trust to the association for the purposes of the association. However it was felt even that
may fail due to the lack of perpetuity unless it was a charitable body (so suggested they become a charity type body).
Leahy v Attorney Genera of NSW - Gift was given to a group of nuns (unincp ass). Nuns took a vow of poverty so could not accept the
gift. The courts considered what would be most appropriate as to whether the nuns could hold it or not. Issue: If a gift is made to
individuals whether under there own names or the society, and the conclusions is reached they are not intended to take a beneficial
interest, then they take it as a trustee. Court - Suggested that because nus could not take a gift as gifts to themselves, they could take
the gift to them as trustees for the benefit of others then had to determine who the others were (i.e who the bens were). Important to
determine who the bens would be if they were the trustees.
Courts try to work out ways to save gifts rather than let them fail
Government Trust utilities or land held for public purposes may be established as a trust rather than a corporation. For public
purposes. Parks can be held in trust.
**Can have trust license out assets think about in business arrangement trading trusts i.e have a trust license out assets to
doctors so it can protect the asset.
Legalities of Trusts
Deeds whether inter vivos trust or testamentary trust must satisfy the minimal requirements of a trust deed.
Inter vivos created while trustee/bens are still alive
Testamentary trust trust in a will (Created after death of an individual)
Regardless when it comes into existence it must satisfy the elements of trust and for certain purposes:
The purpose of the trust cannot be of an immoral, illegal or against public policy
All of the above can result in pulling apart a trust
Improper: Cant make trust for marijuana, Evading creditors, Evading taxes
Family court can pull apart trust to determine type of trust and what assets each party is entitled to
Immoral - Eg. Trust set up against the sanctity of marriage: Ramsey and Trustee Executors v Agency Company Ltd
- HCA held that the direction by the testator that his son will be absolutely entitled to the balance of the trust estate
when no longer married to his present wife did not offend public policy. Clause in will that son will have rest of estate
as long as he is not married to her. Said this was not an immoral statement in the fact divorce had become more
popular and there was no blame in divorces courts have supported such condition. Court said they will leave it
there but wont get the benefit until he is divorced.
Trustees of the Church Property of the Dices of NewCastle v Ebbeck - Testator left his estate to his wife for life then
to his three sons equally between them as long as they retain their protestant faith. ON the death of the wife the Two
sons had already married before her death to roman Catholics had to convert to Catholicism. Third one was about
to marry another roman catholic. None of them stayed in the protestant faith. Court Did not uphold the clause in the
will because it encouraged divorce and the sons were permitted to take their interest in the trust property. Got it
regardless of what religion they held did not want to discourage marriage because it was immoral
Trusts to avoid Creditors. if the trust was created to separate the legal ownership from the creditors of the bankrupt settlor. The
trustee-in-bankruptcy may render the trust void. If the trustee is a company The Corporations Act 2001 (Cth) may have the same
effect. - Cant take property you own in your name and give to someone in trust will take back and become part of creditors render
trust void.
Trusts to evade taxation are void as against the Commissioner of Taxation. (however Can use trust to minimize taxation or manage
your trust liability but not for evading)
NOTES: Trustee in bankruptcy - they get legal title - holding on behalf of creditors when you go bankrupt
Rule of Perpetuity
Performs a useful social function in limiting the power of members of generations past from tying up property in such a form as
to prevent its being freely disposed of in the present or the future
Situation where set up trust deed doesntt mean it goes on forever
Time comes where trustee can sell property or give to the bens according to the terms of the trust deed
B/c the trust is no longer in existence will be wound up because of its running out of time
Period = extends to the lifetimes of persons alive at the date of creation of the trust and 21 years from the date of the death of the
last survivor of those persons.
Statute modifications Qld not more than 80 years
A: Property Law Act 1974(Qld) s 209
So if trust deed is created today 2013 then 2093 on this day it will seize to exist
At that point will be wound up and assets distributed to current BEN
South Australia abolished perpetuity can go on forever beyond 80 years
Usually have date of cessation in trust deed
Resettlement of Trust variation and termination:
HC examined what constituted resettlement in Commission of Taxation v Commercial Nominees of Australia- case about amendment to
trust deed of superannuation fund. Determined that resettlement occurs where there is a change to:
The beneficial interest of trust property
The terms/rights/obligations of Trustee
Additions to/deletions from trust property
11
Merger or splitting of trusts
-Variations can occur by the courts, beneficiaries or the trustee.
-However, be careful of variations that may constitute a resettlement - a variation that results in changes to the class of beneficiaries
or the nature of their beneficial interests. Resettlement may trigger adverse implications in tax law. (Taxation Department looks closely
at this)
Then for properties moving from trust to new trust will have to pay the fees/taxes attached to the transferring of the
property
Changes in class - So if go from primary to secondary to tertiary beneficiary might constitute a resettlement
If introducing new parties to a trust can constitute to a new trust
Redefining a beneficial class, changing the terms of trust, or rights and obligation of trustee constitute resettlement
Changes in the nature of the features of the trust property could be resettlement
Additions of property which could amount to a renew or separate settlement
Depletion of trust property may also be resettlement
Change in the termination date may constitute a new trust esp if exceeds perpetuity
Change to the trust not contemplated by the terms of the original trust and a change in the essential nature of the purpose
of the trust or merging one trust together can be new trust
**Be mindful to client that resettlement could trigger adverse complications in tax law
-Termination by revocation reserved in the trust instrument, consent of beneficiaries or by way of distribution of trust property to the
beneficiaries (once all property distributed trust seizes to exist and is wound up)
Duties under a Trust
Trustee holds and deals with the trust property for the interests and benefits of the beneficiaries
Trustee have duties over and attaching to the trust property
Trustees duties are can be onerous and many are fiduciary in nature.
In comparison, beneficiaries have few duties or rights as single right is to direct the trustee to act and allow a number of
remedies if trustee fails to perform appropriately (cant tell to act or how to can only request to act and if they dont and if
something happens then they have a claim against trustee)
Appointment of trustees:
-Minor should not be appointed as a trustee (contractual disability). Settlor
Duties of Trustees
Initial Duties - Trustee needs to become familiar with trust deed are responsible for their duties - Need to know objects/bens/3
certainties etc
Fundamental duty to obey the terms of the trust - And the Trust Act of the state trustee can go to court to get direction should an
issue arise (dont know how to act or problems with bens)
Standard of Care - That of a prudent business person trustee are trustees of a business and have to manage the assets if they are
managing a business s 22(1)(b) Trusts Act 1973 Qld. But if you are a professional acting as a trustee, or you employ professional then
the test goes higher to that of that profession and what the standard of care would be then s 22(1)(a) Trusts Act 1973 Qld. Where
trustee is in breach of the duty to exercise reasonable care, he or she will be liable to make good the actual loss caused to the estate
by the breach Elders Trustee & Executor Co Ltd v Higgins.
Primary Question: Was the loss caused by the breach of the trust? Youyang Pty Ltd v Minter Ellison Morris Fletcher: Not liable
for losses that would have occurred anyways. As trustee, M personally liable for losses caused by breach of trust.
Duty to prove information: Trustee is obliged to inform the beneficiary of their rights under the trust instrument Hawkesley v May.
Duty to not make a profit out of trust: Scott v Scott: Trustees cannot make a profit out of their trust. If they do, they must account for the
profit to the trust. Williams v Barton: Where a trustee is in a position where her or his duty conflicts with personal interests, the trustee
must put duty first.
Duty to preserve trust property: Take possession, preserve it, properly invest trust fund. Can invest trust funds in any form of
investment (s 21 of Trusts Act 1973 (Qld), unless expressly prohibited in instrument creating trust. Standard of Care - That of a prudent
business person s 22(1)(b). Partridge v Equity Trustees Executors & Agency Co Ltd: If trust owed outstanding debts, trustee is obliged
to collect them, or at least obtain an acknowledgement that they are owing.
Duty to keep account - Keeping accounts separate. Having accounts for ordered or viewing by permitted property. A trustee can
employ accountants/auditors to assist them which would be paid out of the trust so can rely on professional services which the costs
are paid by the trust
Duty to act in person/Administer the trust personally (personal liability as requirement to deal with trust personally). Trustee must act in
person in administrating the trust estate. General principle: Trustee may not delegate the performance of their duties and powers to a
3rd party, UNLESS trustee is expressly authorized by the trust instrument. Trustees allowed to aminster trust through 3 rd party where
NECESSARY for doing or where a prudent business person would (such as employee a stockbroker). Trustee can employee and pay
an agent (solister) unless forbidden under trust instrument for the purpose of carrying out the trust. Trustee not responsible for the
agents default if employed in good faith and did not failed to exercise reasonable care in circumstances.
Agents s54 - Trustees are acting agents for the trust agency duties/responsibilities apply. Always acting primarily in the best interest
of the trust. Trustee can employ agents but agents advise and the trustee does and ultimately the trustee is responsible for the
actions. Trustee is the one who ultimately decides and makes those decisions.
Unanimous Decision Making - If have multiple trustees they must make decisions together. If have issue where cant agree go seek
advice which is paid for by trust to a point where can agree. Can also get a court direction/assistance to clarify the problem. There
needs to be unanimous decision making between co trustees. If one disagrees and found to be wrong they will both still be liable.
Difference comes with charities - Public trust dont have this unanimous decision making but the majority can rule.
Fiduciary duties s23- Fid relationship between trustee and bens. Dalhonty v Dalhonty - fiduciary capacity of the highest order - Legal
title with trustee and beneficial rights with bens two roles dont meet. Bens have no or little control over trustee trustee has to do
with upmost respect to bens and always considering bens best interest. Trustee always consider trust best interest so should flow to
bens interest as well.
As mere ben cant tell trustee what to do but tell them to follow the trust deed trustee has control over your potential
asset this is a fiduciary capacity of the highest order
Trustee is put into the role whether aware or not- so have to make sure they are doing the proper thing
Purchase of trust property - Trustee needs to go back to trust deed and see whether can buy real or personal property or shares and
the like. All stipulated in trust deed, if not then look at prudent business person as to what purchases can be made.
Duty to act impartially s23 - Impartially cannot favour some bens over other bens. Need to look at apportionment whether to capital
or income need to look at trust deed and understand as to what the requirements. Seek direction of courts If concerned. Need to look
at what is best for the trust and trust property. What is important to maintain trust property and trust assets and what is in the trust deed
as well. Need to act according to the deed and the rights of those bens.
Duty to invest - S21 of Trust Act/23 modern approach unless court determines any restrictions: Says to invest funds in any form of
investment, and such an investment at any time, but also must be consistent with a trustee exercising any power of investment shall
exercise the care, diligence, and skill of that of the prudent person of business would exercise in managing affairs of others prudent
business person. DUTY TO PRESERVE TRUST PROPERTY too
Duty to pay correct Beneficiaries - If paid the wrong bens, then trustee would be personally liable to make good the wrong pool the
money back from wrong bens if they can. Need to consider who are the proper bens from time to time. If overpayment to one ben, up
to trustee to get money back. Need to put the trust back in to the position had they paid proper ben and the other bens can sue for
breach if trustee doest
*Identify problem/remedy/what to be done to advise your client?
Powers of Trustee (arise from the instrument)
Power of Sale - Look at trust deed as can give this power and tell you how to sell. IF trust deed is silent then go to the Trust Act s45:
usually says by public auction. Trustee duty is to preserve trust property power of sale is by expressed or implied authority.
Expressed authority might have in trust eg property has to be sold at certain time and cash distributed to bens. Implied authority
because best action and been given proper advice to do that. Need to consider how to preserve the trust property . What would the
prudent business person do?
Power to mortgage: Unless stated in trust instrument, trustee can obtain mortgage for the preservation of assets only with the sanction
of the court or beneficiaries.
Power to insure: Trustees can insure any property against loss or damage.
Power to lease: Can lease, must be reasonable (onus on trustee and lessee to show reasonable).
Power to repair or improve: Power to effect repairs and improvements. Temporary repairs charged to income, permanent improvements
charged to capital of trust.
Power to apply to court for advice: If trustee disclosed to the court all relevant facts acts in accordance with the judicial advice, trustee
is not liable for breach of trust.
Power to compromise: Can compromise, submit to arbitration, or otherwise settle claims so long as they act in good faith.
Rights of Trustee
Right to remuneration: Trustee not entitled to charge for their services: Exceptions If allowed by trust instrument or if trustees have
consented if they are not a minor.
Right to reimbursement: Trustee entitled to reimbursement money in connection to trust. JW Broomhead Pty Ltd (Vic) v JW Broomhead
Pty Ltd: Where trust assets are insufficient to reimburse, beneficiaries are liable to trustee.
Right to indemnity and recoupment s72 TA - Can recoup all their costs. Cant take a wage (might be possible under the deed). As long
as act within their duties as a trustee and according to the trust act they can be indemnified as well. Ron Kingdom Real Estate Pty Ltd
v Edgar - An incident of trusteeship that enables a trustee to act in the best interest of the trust in an impartial and disinterested manner
with some assurances that his professional financial position will not be prejudiced. Suggested that because some people are unwilling
trustee (i.e are not aware until lands in their lap) and are doing it as good as they possibly can, they should be able to be protected if
they do the right thing. There should be some consideration or assurances that the trustee will be looked after.
Right to contribution from co trustees - Co-trustees are jointly and severally liable. Recall unanimous decision making. Liability joint and
several between co trustees and can be for the entire amount regardless of co trustee contributions. Eg. If co-trustees were found to do
the wrong thing can be made to pay the entire amount back to the trust.
Right to impound the interest of a beneficiary s77 TA - Trustee has right to impound the interest of the bens go to courts. **Even if got
consent of all the bens to do something the trustee can ignore that direction if hand being forced can look back at the deed and say
can be held liable if go wrong then apply to court for court to impound trust property - courts resolve issue and potentially give back to
trustee. Courts can impound property where the breach of trust by the trustee has occurred due to the instigation or written consent of
the beneficiary. Eg. Bens said want to dissolve the trust and give order with all consent the trustee doesnt want to because of
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property/low market/not time to sell and shouldnt as prudent business person so goes to the court because of the bens actions court
will impound those and tell trustee to look after as were doing and not to proceed along those lines.
Right to seek advice and directions from the court s96 TA/23 - If there is ambiguity in trust deed or confusion courts opinion will be
binding on trustee and protected. *Order can be final and relied upon even If bens dont like about what trustee things is the best
interest of the trust. Statutory right and then that court opinion is binding and the trustees have discharged their duty.
Rights of Beneficiaries
Enforcing Trust - Can ask trustee to do their job but cant tell them how to or what to do pretty much ask them to get their act together.
Can only ask to enforce the trust within the trust deed.
Right to information - Right to know what trust property. Right to financials, info, dividends, income, etc. Might have separate legal
implications as to the reason behind why need this information. Right to know accounts have been paid and look at financial situation of
trust. No right to determine in discretionary trust as to who gets what Eg. Cant force trustee to give $1000 left into account trustee
has to act impartially.
ownership of trust property - No ownership of trust property. Depends on type of trust. If discretionary trust then a Mere expectation of
future property. If fixed or unit then bens know what their entitlement is entitlement is over entire trust property and not segregate
different trust properties to different bens. Units about the entire trust property. Not appropriate to say that one unit holder is responsible
for land so therefore should pay land tax dont get burden of trust property either. Expectancy of % of property even though wont be
determined by the end of fin year.
Terminate trust: If of legal age
Interests unit trust, discretionary trusts. Interest in discretionary trust mere expectation the bens have mere expectation the
trustees will give bens some income from trust or some asset when trust is dissolved but no absolute right to it. Read v
commonwealth of Australia. Gartside v Inland Revenue Commissioners.
Breach of Trust
-TT is accountable for their own acts or defaults in the administration of the trust and will be liable to make good any loss. TTs
obligation is to put the trust estate in the same position it would have been had the breach not occurred Re Dawson. Where the TT
committed breach but acted honestly and reasonably and ough to be excused the court may excuse the TT wholly or party: Trusts Act
1973 (Qld) s 76.
Standing to Sue - When breach of trust who has standing to sue? Most time bens dont have but courts will allow in certain
circumstances. **If sue the trust you sue the trustee. The trustee can then sue other parties bens have no standing to sue. Bens can
apply to the courts but will be difficult if dont have the info. Circumstances: Trustee has acted against trust act and majority of bens say
are aggrieved then can apply to court for leave to appear if leave granted then bens can sue the trustees otherwise not unless have
good reason to satisfy the courts.
Remedies for breach of trust - Compensation an equitable remedy of putting trust back into the position it would have been in
before the breach had occurred. Not like damages where get other costs and pecuniary damges etc about putting back in position.
Account of profits any profit made goes back into the trust no right for personal interest (no secret commissions if do they will
be paid into the trust). Personal action against third party recipients of trust property re Diplock (Trustee thought he was to
give up to a quarter of million pounds to charities named in the will. Court said breach of duty because other bens that had entitlement
before the charities. Here trustee was given funds away to the wrong bens. Bens had a right to sue the trustee s113 TA. They agreed
the trustee should compensate the trust for 15,000 pds. Court said can also approach the charities and seek a refund/return of any
monies they have not yet processed (eg. Cheque etc). *Did not get all back as funds already cleared and used by charities, but funds
not fully cleared or received were able to get back from charity whom did not have a claim.)
Defenses to Breach of Trust (For trustee) - Exemption clauses but not if fraud, dishonesty or other action that would be against the
public policy of the trust and duties of trustee. If no great wrongdoing themselves and loss that occurred s30B/24 (investment) eg.
Fall in market if exemption clause within a trust deed then not have to make good the wrong of the sums lost. Relief by court s76-
Court says trustee has done all things reasonable in the circumstances and could be exonerated. Consent acquiescence or release
by the beneficiaries (notify and seek their consent). Or Situation like re Diplock where all bens will consent on how far to take against
trustee. Can have consent on bens to accept the loss and not further deal with the trustee or blame trustee.
Trusts and other Business Structures
Blending a Trust with other business structures is often the norm. Eg having a corporate trustee for the trust or having a company as a
beneficiary etc
Trust where beneficiaries are companies
Trust with partnerships
Can be mixed up and make sound business structure
Some situations where look similar and look different:
Trust and Bailment
Bailment is where there a contractual relationship between the bailee and bailor and have to be satisfied. Bailee is like
trustee hold property for another. Both bailee and trustee owe duties in respect to the property they hold fiduciary duty
owed by bailee to bailor and ben to trustee. Difference - Contract of bailment does not create a trust and the bailor cannot
transfer title but the trustee can. Trustee can sell the property and transfer the title the bailor cant. Bailor can only hold
personal property where trustee can hold personal and real property.
Trust and Agency
 Both trustee and agents act in the interest of and for the benefit of another. Agency and Trustee roles are fiduciary in
nature. Agency relationship does not require that the agent be vested with the principals at the time during the agency. The
agent acts as a conduit but never own or have title in the property. Trustee has the legal ownership of the property (have
the legal title). Agent acts on the instructions of the principal and while trustee acts in terms of the trust deed and not
generally any instructions from the beneficiaries. Agents incur no personal liability where they disclose they act on behalf of
the principal, provided they act within the scope of their duty. Agency is terminated at the P and A discretion or at the death
of the P. Trust will continue even after death of trustee. Trust not usually terminated at will usually some other event.
Trust and Debt - Henry v Hammond[1913]: Looked at the terms upon which the person receives the money are that he is bound to
keep it separate and to hand that money so kept as a separate funds to the person entitled to it, then he is a trustee. Where someone
is receiving money but has to keep it separate from their own money and cannot blend it then they are determined to be a trustee. If on
the other hand he is not bound to keep the money separate but he is entitled to mix it with his own money, and deal with it as he
pleases, and when call upon to hand it over the equivalent sum, then he is not the trustee of the money but merely a debtor. If
someone loans money and expected to pay it back, no requirement to keep separate from own funds and can bend, and when lender
calls for the funds back then you are a debtor
Important for bankruptcy - IS the person holding it on trust for the individual? Or is it a debtor/creditor relationship?
Trust and contract - Contract is an agreement giving rise to a legally enforceable obligation binding parties which differ from a trust. In a
trust the parties are not bound the trustee does not have to do what the bens tell to do. Trustee bound by the rules of the trust deed.
Trust do not require consideration where as a contract does. Trust create proprietary interest for beneficiaries, not right between the
partie. Breach of contract requires compensation for the innocent parties. Trustee has the ability to make good the trust (So if trustee
fucks up has to make good the trust put back in position it was in before messing up). Contract not necessarily a fid relationship
usually independent people acting in their own best interest. Constructive trust can be created from a breach of contract i.e the
remedy that occurs because of a breach of contract.
Trustee and Executor - Executor is a boss of the will they are the ones that have to find all the deceased person property (personal or
real) and make it all safe. Locate it, organize funeral, and do other things. Once property is located it is then held on trust by the trustee
who keeps it safe for the bens. Executor can be trustee. Often written in the will exector and trustee.
**Similarities between Trustee, Partner, Director, Agents etc
Advantages of Trusts
Asset protection (only trustee liable b/c sue trust)
Income streaming (Can deliver money from trust at end of fin yr and manage tax to be paid)
Degree of limited liability if corporate trustee used with right of indemnity against trust assets
Some tax advantages (If money stays in as of 30 June (End of fin year) will be taxed at 46.5% (highest bracket) however If
distributed before then not taxed at all from trust and only tax at individual ben rate)
Ability to attract capital (investors in unit trusts or loans from banks)
Ease of succession/estate planning.
**Note Will have trusts in it basic trust is created by will
Disadvantages of Trusts
Not a separate legal entity
Too complex for some small business enterprises
Difficult to dismantle
Possible tax disadvantages (If not distributed before june 30th)
Directors of trustee company may be personally liable
Difficult to include new equity holders (b/c the taxation department says they resettled the trust)
CORPERATIONS LAW Corperations Act 2001 (Cth)
A company is an artificial entity recognised by the law as a legal person with its own rights & liabilities. It is regarded as an
entity this is separate & distinct from its owners (shareholders or members) & managers (directors and officers).
Limited liability- shareholders are not personally liable for the companys debt (unless shares not fully paid)
Corporations Act 2001 States referred their power to the Cth s 51 (xxxvii)
Australian Securities and Investment Commission (ASIC)
Responsible for administering the Corporations Act 2001.
Government authority that registers companies and provides certificate of title.
provides publicly accessible information on all Australian companies through its national corporate database, ASCOT.
Regulates financial products, financial services and financial markets
Responsible for ensuring compliance with the Corporations Act
When it is in the public interest to do so- ASIC has the power to initiate civil proceedings ASIC Act, s 50.
**In any Co. question should address name and whether public/private and limited liab etc
PROMOTERS
*Before company is registered with ASIC there are promoters who promote the possibility of the co. coming into existence act as
agents and need them to establish company **Broad interpretation below
Promoters are those who establish the company, who profit from its establishment (Tracy v Mandalay).
13
A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the
necessary steps to accomplish that purpose. Twycross v Grant
A person who enters into a contract on behalf of a company before it is registered is also sometimes refers at as a promoter.
Active promoters: persons who actively undertake the formation of a company by carrying out the procedures necessary for
incorporation (registration, preparing of the companys constitution, obtaining directors and shareholders, raising capital etc).
Includes persons who form a proprietary company to purchase a business previously owned by a sole trader ( Salomons case).
The directing mind and will of a promoter company is a promoter (Aequitas v AEFC).
The position is therefore if you are going to be a promoter then have to disclose yourself as a promoter to an independent board or
any potential members Aequitas v AEFC; Gluckstein v Barnes
Passive Promoters: persons who take no active part in the incorporation of the company and the raising of its share capital, but
leaves this to others on the understanding that they will profit from the enterprise (Tracy v Mandalay ).
* Note: Parties in advisory capacity (accountants, solisters) are NOT promoters. However, if they are stakeholders in the company
then they are promoters.
Important Principles for Promoters
Tracy v Mandalay - A person who takes no active part in the incorporation of a company and the raising of its share capital, that who
leaves this to others on the understanding that they will profit from the enterprise, may also be a promoter. Promoters OWE a fiduciary
obligation to the company which they attract liability.
Gluckstein v Barnes- Promoters have a duty to disclose to an independent board ( or to the shareholders if this is not possible
because the board is not independent) any personal profits that may arise from their position as promoters. This is in addition to
disclosing their interests in any contract with the company.
Aequitas v AEFC - An officer who represents the directing mind and will of promoter company may also be regarded as a promoter.
Duties of Promoters
Twycross v Grant: Person may continue to be a promoter even after the appointment of the board of directors where the directors
are passive and act in the interests of the promoters.
promoter has a fiduciary duty with the company and is therefore under a obligation to the promoted company to act in good
faith and to avoid conflict of interest with other companies (Aequitas v AEFC) for the entire period of which the person is a
promoter (Duties include: Not to make a secret profit at the expense of the company, Duty to account to the company for any benefits
they received, Duty not to defraud the company , Duty not to disclose confidential information about the company to outsider, Duty not
to hide personal interest they may have)
promoters must fully disclose their interests in contracts with the company they are promoting (an independent board OR to
existing or potential members) non disclosure is a breach of the promoters duty towards the company (Erlanger v New Sombero
Phosphate Board of Dir same for both companies bought 55 k and sold at 110 k to self at profit did not disclose to members - new
BOD came in and members found out so had right to claim against previous BOD). Remedy was recession. There is a breach of the
disclosure of interest in a contract by the head of the syndicate by appointing his own guys as the board of directors. How it should
have been done: Even when appointing your own person: Provide full information to the board of directors which then exercises
objective judgement to make an independent decision (must be in the best interest of the company).
promoters have a duty to disclose personal profits that may arise from their position (Gluckstein v Barnes bought debentures
and made 20 k on that also got 40k on sale of business did not disclose to members about the 20 k and were required to pay it back
as breach of their duty 40k was accepted by members NOTE: BOD wont sue self so then Shareholders will have right of action if
can prove to the court they are the only party available to bring one in this type of case)
Remedies of Breach of Fiduciary Duties (by promoter)
There are available to the company and not the shareholders:
Rescission: if a promoter breaches the fiduciary duties owed to the company- recession of contract. Irrelevant whether a profit was
made or there was not dishonest motive. Under contract law, for the right to rescind to be available:
Company must rescind reasonably promptly after becoming aware of the misrepresentation
After becoming aware of misrepresentation- company must not act in a manner indicating it affirms the contract
Must be possible to restore parties to their original positions- resitutio in integrum
Prior to rescission, innocent parties must not have acquired interest in the property
RESULT: promoter must return consideration received and the company must return the property (Erlanger v New Sombrero
Phosphate Co).
** If misrepresentation is fraudulent- company may obtain damages as well as rescission. (Re Leeds and Hanley)
Recovery of Secret Profits: must be separate from the contract price (Gluckstein - company could recover secret profit but not
rescind the contract).
Where the promoter during the course of promotion acquires property for personal gain instead of for the company, the company
may obtain a constructive trust order and require the promoter to hander it over at cost.
Liability under Corporations Act
s 711(2)(3) require a prospectus to set out certain information with respect to a promoters interest in the formation, promotion or
property acquired by the company. Omission of that information (or untrue statement, etc) contravenes s 728(1). If a promoter is
involved in that contravention, persons who suffer loss or damage as a result may recover that loss or damage from the promoter s
729.
Promoters may be liable to recovery by liquidators (ss 567 or 588FH).
**ONCE REG THE PROMOTERS CAN BECOME DIRECTORS (KEEP DIRECTORS DUTIES IN MIND)
PRE REGISTRATION CONTRACTS
CL : prior to registration a company does not exist as a legal person. Therefore, a company cannot enter into a legally binding contract
until it is registered (Newbourne v Sensolid).
A company could not have an agent before it was registered b/c the law of agency presumes the existence of a principal at the
agent Ked.
The company was not bound by a K made prior to its registration The person who purported to make the re-registration K was
not personally bound by the K (Black v Smallwood).
Promoter only personally bound if intended to K as principal (the promoters contracting personally. Cf. Black v Smallwood
individuals entered into K and signed as directors. They reasonably believed the Co. was formed and were acting as directors. Held
not to be personally responsible did not sign personally but signed as directors for a co. that didnt exist cf. where signed as promoters
personally.)
**Note however the innocent TP must not be fraudulent or know otherwise
Novation- company could be liable on pre-registration K if they entered into a fresh K on the same terms after registration.
Corporation ACT section 131: now replaces CL rules respecting pre-reg Ks (s 133).
Statue s 131: enables the outsider to enforce a pre-registration contract after it is registered. If registration does not occur or the
company does not ratify the pre-registration contract, the person who entered the K becomes personally liable to pay damages to the
other King party.
Ratification after Registration (of purported contract)
s 131(1) A company has adopted or confirmed the pre-registration K by ratification, & is bound by and is entitled to the benefit of the
pre-registration K entered into on its behalf or for its benefit.
Aztech Science v Atlanta Aerospace - K stated it would come to an end if Aztech was not registered or failed to ratify K within 60 days.
Aztech tried to ratify after 63 days, but parties had agreed to an extension of time; conduct proceeded on the assumption that Aztech
had ratified and thus created K under s 131.
s 126(1) a companys power to ratify may also be exercised by an individual acting within the companys express or implied
authority ratification may also be implied from the companys conduct.
Liability where company not registered or fails to ratify (Where Outsider can sue)
s 131(2)(3) The person who entered into the pre-registration contract is liable to pay damages to the other contracting parties is the
company is not registered within either an agreed time or a reasonable time after the contract is entered. Or reg but does not
ratify. lost profits and wasted expenditure.
Bay v Illawarra Stationary all 4 accountants sued s 131(2) also imposes a liability for damages only on the person who enters into
the pre-registration contract on behalf of the company even though that person may be acted on behalf of others. however, he may
have action against the others if he was acting their as an agent in the K.
s 131(4) if the company ratifys the pre-reg contract but fails to perform all or part of it- court may order the person who entered into
the K to pay all or part of the damages that the company is ordered to pay.
s. 132 (1)(2) party to pre reg contract can release person from liab by singing a release, however the promoters (person) can exclude
liability from outsider but not obtain indemnity from the company. (so can claim against co. but co. can also claim against promoters)
NOT only promoters are covered by ss 131-133: But any person who enters into a contract for a yet to be registered company
Post-registration options: Once registered, the members of the company can i) ratify any pre-registration K ii) not ratify the K, &,
possibly, sue the person who purported to execute the K on behalf of their company (eg. for breach of promoters duties) iii) novation
(Execute new K on same or similar terms - Agree to K with minor issues essentially two similar Ks acting as 1 K where both parties
agree and no dual obligations)
Promoters Duties - Timeline
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REGISTRATION AND ITS EFFECTS
Regulated by Corporations Act (2001)
Registration creates separate legal entity facilitating limited liability.
Registration = incorporation at the beg of the day which its registered (s 119); Incorporation = separate legal entity.
The separate Legal Entity: (Consequence of Reg)
all powers of a natural person plus corporate powers (eg, to issue shares and grant floating charges s 124(1) Powers under s
124(a): Issue and cancel shares, (b): issue debentures. (c) grant options over unissued shares, (d) distribute property among
members, (e) grant security interest in uncalled capital,
a company may enforce rights by suing (in its own name) and conversely it may incur liabilities and be sued by others s 236
a Company may sue and be sued by its own members (such as BOD or management).
Acquire, hold and dispose of assets - a company may own property distinct from its shareholders or members:
shareholders/shares do not have a propriety interest in the property (Macaura v Northern Assurance M sold timber property
but kept insurance. Co did not have insurance. Fire happened. M motive to get insurance but insurance co. said no dont have interest
in property b/c was a mere share owner). NOTE: Law changed since Macuara - Insurance Act allows to take out insurance policy
and have interst on that policy an can make claim against it.
a company can continue to exist despite changes to its members- company only ceases when deregistered by ASIC s 601AD(1).
-a company can enter into ks and incur liabilities in cos own name
-s 126: Power of company to make a K can be excercised by an individual acting with the companys express or implied authority on
behalf of the company.
Limited Liability
The liability of shareholders of a company limited by shares is limited to the amount, if any, unpaid on the issue price of the shares s
516. I.e. Shareholders NOT liable for companys debts if shares are paid off.
Advantages:
Facilitates investment and economic activity- provides protection and reduces costs of raising capital
Reduces need for monitoring- shareholders dont need to monitor the managers of the co.; if co. fail, loss confined to the equity
invested.
Promotes liquidity and market efficiency (thus promoting market for corporate control)- free transfer of shares.
Facilitates equity diversification- allows investors to acquire shares in a number of different companies b/c personal wealth not
affected co. fail.
Tax consideration
However: may encourage excessive risk taking (problem for creditors) affects trade creditors the most
Company as a separate legal entity:
Salomons case: a de-facto one person company can be recognised as being a separate legal entity.
**Established that once the formalities of incorporation are satisfied - a new entity exists that is separate & distinct from its
shareholders & directors with limited liability. (Also, a s/h can be a secured creditor, applies to one man co, and co was not Ss
Agent)
Case showed the Separation between the natural person and the company even though the natural person is the controlling mind
of the company
(Facts: S owned sole trader business then started company and sold assets to company and got debentures and also gave loan, also
was majority shareholder and some shares to family co. went insolvent and the unsecured creditors tried to claim he was
director/majority shareholder/owned previous sole trader company and that he should not get any money Court: Co. was sep legal
entity from S, natural person, and was a creditor and happens to have debentures which have higher standing than unsecured
creditors so can get the money before them)
s 114 Corp Act: Allows for formation of public company with 1 shareholder.
Application of Solomons Case :
Lee v Lees air farming one person may function in dual capacities (Facts: Lee incorporated LAF and was single director and
employee. L flew plane but crashed and died. Ms L claim work cover. Work cover said he was director and not entitled. Ms L argued
he was director/employee. Court he was in his capacity of an employee when he died not as a director so was therefore entitled to
work cover)
Macaura v Northern Assurance shareholders have no legal or equitable interest in their companys property. M owend land with
timber, sold land to company. Land burnt down including timber. Insurance only covered what was in Ms name not Company name.
Macleod v The Queen: Shareholder found guilty of stealing company property under s 173 of Crimes Act 1914 (Cth) for fraudulently
using company property for own use.
Corporate Groups: each company in a group is a separate legal entity distinct from other companies in the group applied
Solomon principle. (parent/subsidiary companies set up to manage risk and encourage investment)
Who do you sue? Big company? Subsidiary?
Application of Solomon
Walker v Wimborne- Directors moved funds and used assets of one Co. as security for others- HC refused to recognise group as
single entity. (Facts used assets of one co. for security for loans obtained by other. Co.s went into liquidation and liquidator took
action against directors claiming fraud, negligence, and breach of duties. Held in group situation the individual cos owe a duty to
their s/h and creditor as solvency declines, not to the group.
Industrial Equity v Blackburn- IE asserted it could pay dividends out of profits made by subsidiaries (other companies in group) even
though had not paid dividends to IE- HC rejected this approach. Dirs failed to consider interest of co and instead considered
interest of group as paramount and should be found that breached their duty If sig consequence in considering group activities then
Dirs held liable however if no detrimental effect then no prob if dir considers as a whole group. Accounting was done as an entire
group, however this did not mean the veil should be lifted
Pioneer Concrete Services- Clause in marketing agreement limited to subsidiaries. (facts: parent co named in deed but was not
meant to bind and therefore subsidiary should taken fault for not performing deed)
Why Lift the Corporate Veil?
Existence of veil can be abused:
Consider the position of: unsecured creditors and tort claimants (help find relvant information to sue)
Because of abuses, the veil is sometimes lifted to impose liability on:
LIFTING (Piercing) THE CORPORATE VEIL
Veil of incorporation: the recognition that a company is a separate legal entity distinct from its shareholders.
Company: Sep legal entity sep assets, sep liabs, can enter ks, can own property
Members (s/hs): own shares w no prop int in cos assets, may also be debtors/creditors/directors
Co is Separate entity + limited liability = shareholders not personally liable
By Statute : In some circumstances directors may become personally liable for debts incurred by the company. (occurs where statute
contains express provisions imposing liability/penalty)
S 588V: Holding company (group of companys) liable for insolvent trading
S 588V(1)(a): The corporation is the holding company of a company at the time when the company incurs the debt.
(1)(b): The company is insolvent at that time, or becomes insolvent by incurring that debt.
(1)(c): At that time there are reasonable ground for suspecting that the company is insolvent or would become insolvent.
(1)(d): 1 or both of the following subsectinos aply:
(i): The corporation, or 1 or more of its directors, is aware at the time that there are ground for suspecting: or
(ii): It is reasonable to expect that:
(a): A holding company in the corporations circumstances would be so aware; or
(b): 1 or more of a holding companys directors would be so aware; and
(1)(e): that time is at or after the commencement of this Act (2001).
s 588W(1): (a) Where corporation has contravened s 588V, (b) the person to whom the debt owed has suffered loss due to the
companys insolvency, (c) the debt was wholly or partly unsecured when the loss occurred, (d): the company is being wound up; the
companys liquidator may recover from the corporation, an amount equal to the loss. s 588W(2): Action must be taken within 6
years.
Defences: s 588X: If corp and each relevant director had reasonable grounds to expect company was solvent and would remain
solvent even if it incurred debt at that time. S 588X(4): If proved that director did not take part in mgmt. of corporation at the time due
to illness or for some other good reason. S 588(5): Defence to prove that corp took all reasonable steps to prevent the company from
incurring debt.
Directors Liability for Insolvent Trading Arises when the directors breach their duties by failing to prevent the company incurring
debts when there are reasonable grounds for suspecting that it is insolvent s588G.
Directors who breach this duty are liable to pay compensation equal to the amount of loss or damage suffered (ss 588J, 588K,
588M).
Contravention may invoke civil penalties pursuant to Pt. 9.4B.
If failure to prevent the company from incurring the debt was dishonest is a criminal offence by the director s 588G(3).
Uncommercial Transactions to ensure that persons do not obtain preferential treatment from the company at the expense of the
companys creditors. s 588FB- prevents insolvent companies from disposing of assets prior to liquidation through uncommercial
transactions.
588FB(3) companies liquidator can set aside any uncommercial transaction entered into within two years of the commencement of
winding up.
Company Officer Charges company officers who lend their company funds secured by a charge over its assets differently from
secured loans by arms length creditors s 267.
Financial Assistance where a company provides financial assistance for the acquisition of its own shares in contravention of s
260A- persons involved may be liable under civil penalty provisions. The company is not guilty of an offence s 260D.
**Other legislation (including taxation, occupational health and safety, environmental protection and various regulatory regimes)
By Common Law:
(Occurs where no relevant statutory provision but some overriding policy reason court lifts veil)
-Australian courts have been reluctant to depart from Solomon and lift the corporate veil. Except when:
Fraud:
Gilford Motors Ltd v Horne (Facts: GM had H as prev employee who was fired. H took customer list. H then registered a company and
in that company he used the client list he got from GM. H breach employment K with GM. H tried to use his position and say he set up
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a new company which has not done anything wrong cannot go through corporate veil to find out where got customers from. Courts
- Lift the veil which went back to copied documents from GM. Corporate veil lifted in this case to prevent the fraud and breach of
employment contract (contract law))
Re Darby Darby and Gyde formed one company and set up assets then set up new company that bought assets off that company for
highly inflated prices. The issue is that they said they had nothing to do with the final company however they had enticed people to
invest in the company. They were able to demonstrate how successful the company was because of assets purchased from other
companies. Courts -Able to lift corporate veil and see the scam going on down through the different companies. Dummy company
was set up to perpetrate a fraud. Ordered to disgorge profit made
Avoidance of legal Obligations: if the company as been used as a sham so as to avoid a legal obligation under contract or statute.
Gilford Motor Co v Home: Use of company to avoid restraint of trade clause injunction granted even though company was no a
party to the service agreement (Took customer list in violation of employment contract and for own company)
Green v Bestobell Industries Pty Ltd Green (manager of B), became aware B was preparing Tender offer for construction work.
Green created his own company (w/o Bs consent or knowledge) and got tender. Court B got injunction against C and account of
profits against G. G breached duties: conflict of interest and misappropriation of business opporunties)
Jones v Lipman: L was seller of land who entere into K for sale of land with J. L wanted to avoid K, formed a new company who
purchased the land at a lower cost. Held: Company was a faade, J got specific performance (it was possible here because L owned
the new company that purchased land).
THINK ABOUT DIRECTORS BREACH OF DUTY TOO
LIFTING THE CORPORATE VEIL OF GROUP COMPANIES (Corporate Group)
The benefit of the group as a whole:
Tax benefits: Corp Group allowed to lodge single consolidated tax return for entire grop.
Equiticorp Finance Ltd v Bank of NZ- Directors of associated companies owe separate duties to act in the best interests of each
company. A bank loan to 1 company in group was paid off by another company in group, Was this a breach of duty by the directors of
the company who paid the loan off? Held: No breach, transaction benefitted the group as a whole. Also benefitted the transferring
company as the group as a whole had relations with the bank.
Moving Targets: when it is difficult for the creditors to determine the actual legal entity they are working with b/c companies are
working as single entity w/in a group Qintex Australia Finance v Schroders Australia- tension btwn realities of commercial life and
applicable law. (lift CV to see dir intentions)
Subsidiaries as agents or partners: when the court finds that a subsidiary has been acting as an agent for its holding company-
enables the subsidiarys assets to be regarded as being owned by Parent company and Parent company will be held liable for the
agents acts.
Smith Stone & Knight v Birmingham Corporation: B.C. wanted to buy land off S.S. Land occupied by subsidiary of B.C: BW:
Held:that there are 6 requirements before the Salomon principle could be disregarded to support the finding that a subsidiary carries
on business as an agent of the holding company (parent co):
[1] profits of subsidiary must be treaded as profits of the holding company
[2] the persons conducting the business must be appointed by the holding company
[3] the holding company must be the head and brain of the trading venture
[4] the holding company must govern the venture and decide what should be done and what capital to use
[5] the profits of the business must be made by the holding companys skill and direction
[6] the holding company must be effectual and constant control of the sub.
(if majority answered or even one then enough to say one co is sub and other is parent sometimes need to pierce the CV to get this
info)
Smith facts:
parent co. purchased a partnership, later incorporated it into a subsidiary subsidiary owned virtually 100% by parent (except for 5
shares held in trust by directors of parent)
sub. Had no assets, no employees except for manager who had no authority to access books sub. Used assets of the parent
company council compulsory acquired land owned by parent but used by sub. parent sought compensation from council for
disturbance to sub. And cost of moving Issue: had the parent suffered a loss resulting from the councils acquisition of the land sub
was using?
judge held really an agency relationship (6 questions above)
Tort Liability Briggs v James Hardie: B got asbestosis while employed by J.H., the courts may be prepared to lift the veil and make
parent companies liable for their subsidiaries torts (Facts: lifted CV and found Co knew products were unsafe but chose profit over
safety risk). However in James Hardie v Hall it was held no duty was owed to the employee of the NZ subsidiary by the holding CO,
as the holding CO did not employ those responsible for workplace safety or occupy the NZ plant.
CSR Ltd v Wren: Where parent company directed or controlled its subsidiarys operations and provided mgmt., Parent company owes
duty of care to the subsidiary employees.
COMPANY REGISTRATION
All companies must register with ASIC (as well as foreign companies & Registrable Australian Bodies (eg. incorporated
associations)).
Registration = incorporation (s 119); Incorporation = separate legal entity.
Steps for registration i) select type of company s 112- a) proprietary co s 113; b) public s 9 ii) select name s148- a) CAN s
148(1)(b) b) availability of name s 147 iii) obtain consent of proposed members, directors/secretaries s 117(5) iv) select registered
office s 142 vi) rely on RR s 135 OR prepare const. w agreement of members s 136 v) lodge application for registration w ASIC s
117(1); pay registration fee ($400); ASIC issues certificate of registration s 118 and ACN s 148(1)
On-going compliance requirements vary depending on the type of company- but some are common to all i) registered office s
142 ii) notify certain events to ASIC (ie. appointed directors/secretaries s 250B(1), their resignation s 250A(1)) iii) issue of shares-
update register of members s 169, ASIC lodgement s 254X & share certificate s 1071H iv) maintain financial records s 268(1),
registers s 168 & minute books s 251(A) & s1306 vi) use & display company number & name on premises for business & public Classification According to Liability
documents ss 144 & 153(1). Liab of memebers: directors and s/h
Misuse of Name: Closely resembling names may resemble each other. Tort of passing off and seek damages for loss of profits and Company Limited by Shares s 9: company formed on the principle of its members limited to the amount, if any, unpaid on the
goodwill. Injunction also available. shares respectively held by them. Issue price for shares determined between the company and the investor. (can be Public or
Cameron Real Estate Pty Ltd v Cameron: Cam Real Estate got injunction, same industry and locality Likely chance of confusion. Proprietary) Eg. Ltd or Pty Ltd. Raise funds by issuing shares to investors.
Company Searches: Some things to look for: Have you got the correct ACN? Type of company (public, proprietary, limited by Fully paid shares- shareholder cant be forced to contribute any more $
guarantee), Is the company still registered? Address of company office, Who are the current director(s) and secretary?, Number of Partly paid shares- shareholder liable to pay balance of issue price on call. (liab to remaining balance)
issued shares (are they fully paid shares?), Are there audited accounts? Are there any charges? Has a receiver or administrator been Company Limited by Guarantee s 9: members have the amount of their liability limited to the amounts they have undertaken to
appointed? Is the company being de-registered or wound-up? contribute to the property of the company in the event of it being wound up. no share capital. clubs, charities and other non-
How to Start a Company trading organisations (Public Only Ltd)
Step 1: Decide if a company or a business structure is right for you members liable to pay up to amount specified as members guarantee in companys application for registration on winding up s
Step 2: Choose a company name 117(2)(m).
Step 3: Decide how to operate your company Unlimited Company s 9: members have no limit on their liability accountancy and solicitor practices.
Private company atleast 1 director No Liability Company: prohibited from engaging in activities that are outside its mining purpose objectives. Need constition.
Public company atleast 3 and 2 residents Registered as such s 162. (Mining only NL)
Secretary? Proprietary and Public Companies
Sole director? Proprietary Company- must either be a company limited by shares or an unlimited company with share capital s 112(1) and must
Who sits in what seat? have no more than 50 non-employee shareholders s 113(1). Joint holders of shares= 1 person s 113(1).
Step 4: Understand your legal obligations as an officeholder Public Company- other than a proprietary company s 9.
Step 5: Get consent from officeholders, members and occupiers PUBLIC PROPRIETARY (private)
Step 6: Register your company Function Lg bus w many investors- > disclosure For sml-med size bus
Step 7: Understand your legal obligations regarding your company name, ACN and ABN obligations
Step 8: Order a commemorative record of registration (optional) Membership @ least 1 memb s114- no max @ least 1 memb s114; max 50 s113
Use of Company vs Partnership or Trust: Shareholders
Good summary in L&H recap
Name Limited ltd Must have Pty if limited Ltd
Separate legal entity or not?
Replaceable rules Single director/SH - RRs not required s 135(1). Single director/SH - RRs not required s 135(1).
Who is liable for debts?
Directors @ least 3 s 201A- must be individually @ Least 1 (1 resident)
Agency - who are the agents?
appointed- can only be removed by resolution
Enforcement of legal rights
of membs s 203D. (2 residents perm
Duration perpetuity?
residency)
Transfer of interest
Formalities and expense Secretary Must have @ least 1 residing in Aust s Doesnt have to have 1
Management and ownership 204A(2),
Tax effects Raising Funds Shares, debentures or other securities- need Prohibited s 133(3)- cant get public funds.
disclosure doc.
AGM (an gen meet) @ least 1x year unless only 1 memb - 1st within Not Necessary.
TYPES OF COMPANIES
18mo of incorp s 250N
Corporate vs Non-corporate Entities:
Auditors appoint an indep auditor to audit financial Lg Pty- same as public
Corporate separate legal entity reports
A business may involve:
Registered Office Must be open to public in hours set out in s Not obliged to keep it open to the public
more than 1 corporate (as a company; incorporated association ..)
145
more than 1 non-corporate (as a trust; association)
Listing Can be listed or unlisted Cant be listed
mix of corporate and non-corporate structures (Creative)
Certain changes of status permitted s 162(1). (ie. Pty LtdLtd; Ltd Pty Ltd (need to reduce financial disclosure obligations-
Many factors involved in selection (eg, size, profit motive, taxation treatment, liability (risk mgmt), administration burden)
max 50 SHs); GuaranteeLtd; NLLtd).
special resolution of members + lodging app to ASIC ss163 & 164.
s 45A(2): To be a small proprietary company must satisfy 2 out of the 3 criteria: (a): operating revenue for the year <$25mill. (b)
Value of assets is <$12.5mill. (c) <50 employees.
Advantages of small pty companies:
-Few requirements in relation to lodgement and audit/financial reports (not required to prepare annual financial report
or appoint auditor. ONLY need to prepare financial reports if shareholders holding 5% or more of the voting shares

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want s 293. Large and public companies: required to prepare annual financial reports s 292. Also, maintain sufficient
financial records to allow true and fair financial statements to be prepared s 286.
Holding/Subsidiary Companies
s 46(a) CA: a company is a subsidiary if another company: (i) controls the composition of the board; (ii) Is in a position to cast, or
control the casting of, more than half of the votes at a general meeting; (iii) Holds over half of the issued share capital (prefs
excluded).
S 50AA controlled relationship- 1st entity has capacity to control outcomes of 2nd entities financial & operating policies. (related to
body corporates)
Also: Ultimate Holding Co, Wholly owned Sub.
ASX Listed Companies:
Need 400 shareholders with share value of at least $2,000. 350 S/H with at least value of $2,000 and 25% of whom are unrelated
parties of the company. 300 S/H with at least $2,000 and 50% of whom are unrelated parties of the company.
Trustee Companies
Eg. Corporate Trustee rights to indemnity another way of managing liability under trust deed
Statutory trustee company- acts as executors & personal representatives of deceased estates- where no executor available.
(perpetual, public trustee buth in trustee companies in bus of being public co as managing others assets legal holders of those
assets and distributing to bens under Deed or Act)
Trustee company in discretionary trust- $2 companies- have no capital of their own, asset protection, income splitting.
Trustees right of indemnity- entitled to be reimbursed from the assets of the trust. But not if the trustee breaches the trust (ie.
unauthorised investment). But then directors of trustee company may be liable s 197.
Disclosing Entities: (doubling up at least if not more of responsibilities)
**Sometimes situations where co staring to have effect on the market and got considerable investments within eh
company (shares etc) ASIC increasing responsibilities to that of a disclosing entity
Mainly listed entities, but also where securities issued to over 100 people and a disclosure document lodged with ASIC.
triggering factor for increased disclosure
Subject to periodic reporting, ie must lodge
half-year financial reports as well as annual financial reports.
Subject to continuous disclosure requirements to ASX if listed or ASIC if not.
CONSTITUTION AND REPLACABLE RULES (CA)
Purpose of Constitution/RR
To govern internal relations between: (all binding) - how run company
the company (as a separate legal entity)
the members
officers of the company (directors etc)
The company can adopt a personalised set of rules to suit its particular circumstances: (in the form of a constitution)
large, public company vs small, family company
S 134 companys internal mgmt may be governed by replaceable rules contained in the Corporations Act, by a constitution or by a
combination of both.
Internal rules may come from more than one source, and are determined by i) the type of company ii) whether the company was
registered before (have memorandums & articles of association) or after (Constitution) 1 July 1998. (Pre 1998 co can repeal consti,
amend consti, take no action)
For a single member/director company replaceable rules do not apply s 135(1). May have a constitution but cannot exclude s
198E- all decision-making power rests with the sole director/shareholder.
Other companies governed by RR or Constitution or both RR & Const.
Replaceable Rules
Apply to those companies that do not have a constitution.
Certain RR a) apply only to proprietary companies b) are mandatory for public companies. (table of RR in s141)
do not apply to company formed before 1998 which retained its constitution s 135
company has power to alter its constitution by a special resolution of its members s 136(2) - (any change to constitution it must be
bonafide in the best interests of the company as a whole Allen v Gold Reefs.)
replaceable rules can be displaced or modified by the adoption of a constitution s 135(2)
replaceable rules can also be displaced or modified by a special resolution
The Companies Constitution
**Consti state the purpose and object fo a company (THE RR DONT)
Constitution required for no liability companies and limited by guarantee companies that omit Ltd.
If constitution excludes all RR, they do not apply. Except any mandatory RRs applicable to public companies.
If constitution does not exclude all RRs- they apply to the extent no modified by constitution.
EFFECTS OF CONSTITUTION AND REPLACEABLE RULES
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S 140(1) provides that a companys constitution (if any) and any replaceable rules that apply to a company have effect as a contract
between: the company and each member, the company and each director and the company secretary and member and each
other member (Statutory Contract)
Contracts between company and each member
S 140(1)(a)- a companys constitution and any applicable replacement rules have effect as a contract between the company and each
member (Hickman- clause provided disputes to be referred to arbitration- member went to court).
Enforcement of Constitution by Members
S 140(1)(a)- a member is able to require the company to comply with the provisions of the constitution
Constitution as a statutory K- i) remedies are more limited declaration or injunction only ii) can be modified w/o consent of every
party iii) written K but not signed iv) no consideration given.
Alteration of internal rules
A company can modify or repeal its constitution by special resolution s 136(2)- can also adopt a constitution to modify or displace ay
replaceable rules that apply to it by the same method s 135(2).
Special Resolution s 9: resolutions passed by at least 75% of the votes cast by member entitled to vote
(Normally any change to constitution it must be bonafide in the best interests of the company as a whole Allen v Gold Reefs.)
s 249L(c) requires notice of the meeting where the resolution will be set out
Statutory and general law limits on the power to alter internal rules.
s140 (2)- cannot change the constitution to adversely effect a members right to adversely affect their shares; s136 (3)(4)- entrenching
provisions (Consti can say special resolution no effect unless further requirement in consti for mod/repeal is complied with; unless
consti says o/w a co can modify/repeal the further requirement only if the further requirement is complied with)
Part 2F.2- special rights; Part 2F.1- oppression.
Gambotto- Additional tests of fairness and proper purpose may have to be satisfied if the alteration involves removal of any important
membership right. (Facts: Pre 1998 case Maj s/h amended articles of association/incorporation to give righto acquire min s/h at set
price. Min s/h did not vote on change of consti and took to court. Min s/h given leave to appear in courts b/c looked like oppressive
behaviour. Min s/h Successful Court Oppressive actions as Maj s/h try to force hands of Min s/h and could not. the amendment can
be used to eliminator min s/h only when their continued presence is detrimental to the co. i.e Can eliminate min s/h if they are
blocking advancement of company. So if min s/h was not agreeing because could then HCA would look at is as stopping co from
trading/expanding. However, if do this b/c dont like min s/h and has no impact on co per se then oppressive. Also cant fix price on
shares at the time) REFER TO TEST BELOW (good for expropriation of minor shareholdings too)
Objects Clause; Limitations on Powers
Companies have the power of an individual & also the powers of body corporate s 124
Companies with a constitution can state objects and limit their powers by stating an express restriction/prohibition s 125(1).
Not-for-profit, JV, No Liability, professional practice companies all may have protective style object clauses.
Breach of object clauses
companies which act outside their capacity (ie. their objects or self-imposed restrictions on powers) are said to have acted ultra
vires (outside scope).
Validity of any act of the company that is ultra vires is preserved by ss 125-126.
An ultra vires act may be relevant fact in other actions under the Corporations Act- eg. breach of duty by a director Part 2D.1,
oppression part 2F.1, & winding up s 461(1)(k).
eg. Co went out and sold assets to another co to avoid insolvency laws would be ulta vires get assets back (this is deliberately
depriving the creditors and would be void)
Enforcement of internal rules
Breach of a companies constitution or a RR is not a contravention of the Corporations Act breach is not an offence no
criminal or civil liability; cant be prevented by statutory injunction power.
Statutory remedies will only be relevant if breach also constitutes oppression or breach of directors duties- matters which are
offences by virtue of other sections of the Act.
Broadly, under the general law, the company may enforce the internal rules against members.
Members may enforce the internal rules against the company by- using the statutory derivative action (part 2F.1A) or suing to
enforce a personal right.
COMPANIES RELATIONS WITH OUTSIDERS
Since a company is regarded as an artificial entity separate and distinct from its members and directors it can only be represented by,
or act through, individuals, either by application of the organic theory or the law of agency.
Competing Interests:
General Requirements:
not contrary to general law (for ex need to respect contract law)
not void or voidable under Corporations Act
To enter into a contract
If dont create proper contract is it voidable? Or void because ultra vires? (consider these)
not contrary to the interests of the company and other party knew this
Eg. If third party knew or ought to have known what the company was telling them was false/incorrect then cant come back saying
they are right and the company is wrong (if knew about it then you are also a party to it)
company not insolvent or on the verge of insolvency:
Around 580s there are insolvency things
Cant trade with a company if cant pay the bills now
Cant trade even if know on the verge on insolvency (have to try to preserve some of the assets for the creditors)
cannot disregard the interests of creditors (Kinsela)
Directing Mind and Will of a Company
Organic Theory
-Extension of the law of agency stating their is a person/body behind a company where the mind/will comes from
A company can act through its agents provided they have requisite authority- where agents have actual or apparent authority, those
action within the scope of their authority bind the company.
The board of directors and members when acting are treated as being the company itself they are the organs and that is the state
of mind or ego and directing mind of the Co. Northside Developments
The acts of the organs of the company are the acts of the company itself and their state of mind is the state of mind of the company.
The directing mind and will is not only the agent, but an organic part of the company:
Who is Directing Mind and Will?
A corporation is an abstraction- has no mind or body of its own; its active & directing will is sought in the person who is the directing
mind & will of the corporation Lennards Carrying v Asiatic Petroleum (Facts: L was ship owner and a director of L guilty of causing
damage to A. Director said sue co. not his fault and should not be found guilty of actions of co. Vic Liab only to
employees/employers not directors and at time he was director not employee. HOL held liab can be imposed on co. for acts of
directors by virtue of directors are controlling minds of the co. Director punished for activity he declre was the companys.)
The knowledge of a chief investment officer can be attributed to a company Meridian Global Funds v Securities Commission. (Held:
Need to lift the corporate veil to determine who is directing mind/will of co and see what is going on behind that veil)
the directors intentions equate to the intention of the company- brains of the company HL Bolton v TJ Graham & Sons (Held:
Equated co structure to human body brains are directors and controlling hands are employees and rest of the body is workers etc)
Directing mind can also be employees with managerial power Tesco Supermarkets v Nattrass (Facts: T had soap product on sale
but ran out and manager replacd with regular soap product. Customers sued on false advertising. T said they did everything
reasonable and cant always physically be there. They educated managers etc. Said to go after manager who hadnt followed
instructions properly. Court - agreed with T and said as long as they did what was reasonable. It is up to individuals in workplace to
work properly.)
The secretary may be regarded as an organ of the company Donato v Legion Cabs (Held: Secretary had authority as natural
mouthpiece to speak on behalf of co and its affairs. Secretary person responsible to talk to about co to media etc so had controlling
mind/will from directors through secretary as mouthpiece)
where control of company changes, the company may change its mind and adapt the intention and purpose of its new controllers
Federal Commission of Tax v Whitfords Beach (Facts: Original co bought land for recreational use but was bought out and new co
wanted to use for residential development. FCT decided that the change of use of the land for residential was at higher tax bracket
and co was liable for that. Court because of change of control was a change of mind it doesnt mean people who changed their
mind were not liable for taxation.)
Separate pieces of information known by several people can be aggregated and attributed to their company Brambles Holdings v
Carey (Held: Combination to create controlling mind and will: come from top and go down, group mentality: all directors together,
column structure comes down from high to low etc either way are the controlling mind and will of the co)
contrast- May not be aggregated where information has not been communicated to a company officer in the normal way Re
Chisum follow established lines of communication for info to be attributed to co (Facts: Bank gave loan to co which went insolvent.
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Liquidator argued bank should pay money to the creditors and ought to have known co was struggling. Court said bank relied on
normal lines of communication and did not have to go to everyone or know all things) **NORMAL LINES OF COMMUNICATION
Execution of Documents (Contracts)
A company is able to enter into a contract directly be executing a contractual document.
s 126- agent signs own name for and on behalf of the company.
Execution without Common Seal
A company may also execute a document without using a common seal if 2 directors and a company secretary sign the document, or
just a sole director (one person co) s 127(1)
(If not followed then not validly signed contract)
Common Seal
Historically, a common seal was required for executing documents now they are optional
s 127(2)- a company with a common seal may execute a document by affixing its common seal and the fixing of the seal is
witnessed by the appropriate officer. These are:
2 directors of the company
a director and a company secretary or;
for a Pty company with a sole director who is also the company secretary- that director
The affixing of a seal to an instrument makes the instrument one of the company itself Northside Developments
Constitution can modify requirements for affixing of seal MYT Engineering- only one witness
Execution of a deed s127(3)&(4)
-Main difference between deed and contract is deed has no consideration
One Person PTY Companies
A sole director may witness the fixing of a seal of a Pty company that only has one director who is also the sole secretary s 127(2).
*Ss 127(1)-(2) protect outsiders. S 127(4) provides that a company can execute documents in other ways.
Contracts Made By Agents
S 126 allows a company to contract through an agent - rules of agency apply.
An agents act binds the principal to a contract with an outsider in a number of ways:
[1] Actual Authority (Express or Implied)
Must be within the scope of authority- whether express or implied.
An agent appointed to manage a business has implied authority to make all those contracts that a manager in such a position
customarily has - Hely Hutchinson v Brayhead
Brick and Pipe Industries director had implied actual authority to act as company b/c he a controlling shareholding & assumed role
of MD with the acquiescence of other directors transactions made w/o referral to other members on board
[2] Apparent or Ostensible Authority
Agent having apparent authority arises if a principal gives the impression that an agent has authority to act on the principals behalf.
Does not depend on any agreement between principal and agent.
Apparent authority for agent arises when:
Principal represents or holds out to OUTSIDER that agent has the requisite authority to maker particular contracts on the
principals behalf
The outside relies on the principals representation to enter into the contract with the agent, purportedly acting on Ps behalf
* Principal is not liable merely on representations of agent, must actually make representations
This representation can occur expressly or by conduct most likely by conduct, which occurs in 2 ways:
[i] Principal permits agent to occupy a particular position- principal represents or holds out that the agent has the customary authority
of a person in such a position (similar to agent acting with implied actual authority)
[ii] Principals conduct permits the agent to carry out particular tasks on the principals behalf that are beyond the scope of the agents
customary authority. (ie Bookkeeper purchasing office equipment) but if employer holds out to outsider that person has this
authority, then they would be liable for purchases
Authority of Companys Agent
Common Law
Constitutions of companys must be registered with ASIC 136(5) So the constitution is available for public inspection. Doctrine of
constructive notice- now largely abolished by s 130(1); Exception- documents relating to company charges s 130(2). (Info available
in ASIC does not constitute CN)
Ultra Vires: selling outside your object/purpose? Outside the scope? the act may still be valid: s 125(2) acts of co not invalid
merely because they appear to be ultra vires (outside constitution)
Turquand Case (Rule below)
Holding Out: Holding out is representing to another that a particular person has authority. For example, person A says to person B
you can deal with person C (think in terms of director). For an enforceable holding out, person A must have actual authority to act
on behalf of the company:
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd - Director held out that the other director was a secretary
when in fact he was another director but signed as a secretary. BP had to honour the contract. The director was the
dominating force and was taken to represent the mind and will of the company and would have the authority of the managing
director anyway.
National Australia Bank Ltd v Sparrow Green Pty Ltd - Judge stated that the leader director can act on behalf of the
company even thought he had no actual authority. Another director held him out to be the proper director to have that
authority. S had to return the money they had borrowed from N because the director who had authority to deal with the
company is in a special status and as a result the company should be bound to the agreement. HELD the loan was a fair loan
signed by somebody and even though he did not have the authority it was not an issue because BANK thought he did at the
time so the parties have to agree with the terms of the contract and pay the money back.
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd - The managing director has a customary authority to enter into
contracts relating to day to day management of the companies business (day to day activities of the company). Saying that
certain people in certain positions in a company that have certain jobs to do they are customary jobs.
Eg. If you are a director or the ceo or the secretary there are certain abilities to function in that role while in that role if the custom is
you can sign it then third party can rely on the customary position at that time
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd the representation is usually by the
conduct and is usually made by the board of directors. Eg. Letter of introduction/phone call/opportunity to introduce as the
agent Eg. Outsider cant rely on the agent saying they are the one they deal with. As a rule the outsider cannot rely on the
agents own representation that he has the authority. Saying that it is not for the agent for the company to say have the
authority but if truly the agent of the company probably have a letter of introduction or had have contact with the company and
they are now saying the agent is the person to finish up the contract/paper work with now have held the agent to be the
authority under the holding out.
Statue (s129 Assumptions)
Compliance with constitution and RR (Assumption the company has done everything under these and dont have to
check on these)
Person named as director/secretary have lodged documents (Person holding self out as director who you are holding a
contract is assumed to be who they say they are)
Person held out by company as officer or agent (If company or director told you the person can sign on their behalf you
can assume it is correct)
Proper performance of duties by officers and agents (Assumed they have done what they were meant to do)
Due execution of documents with or without seal (Followed rules/obligations when entering into contracts)
Authority to warrant documents
***THESE ARE ALL STATED BY PROPER PROVISIONS BELOW in s129
When are statutory assumptions relevant?
Rule in Turquands Case - s 129(1) (Consider rule with s129)
The Rule: Even though persons dealing with a company are taken to have constructive notice of the contents of the companys
public documents, they need not go further to ensure that the internal proceedings of the company have been properly carried out -
can assume proceedings were.
Exception- where the person dealing w a company has actual knowledge of an irregularity or is put on inquiry by the
circumstances and fails to make inquiries Northside Developments v Registrar- General (Case: says that if one director is
communicating that they are communicating on behalf of whole board then binding on company not talking on behalf of themselves)
S129 (2) person named in ASIC records has been 1. duly appointed 2. customary authority of director or company secretary of
company (normal customary authority of a position)
S129 (3) person held out by CO has been 1. duly appointed 2. customary authority of that kind of officef of similar CO (eg. Managing
director)
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd
o Where two parties formed a company and were both directors
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o One director engaged architects without authority
o Courts held: It was customary for that person in a development company to engage architects and were therefore
bound by the contract (even though tried to get out of paying the architects bill)
Australia & New Zealand Banking Group Ltd v Australian Glass & Mirrors Pty Ltd
o Holding out had occurred as its directors had previously conducted negotiations and signed documents as if they
were directors
o History between the parties where these people had acted as authority previously
o Whether they had authority now was not up to the outsider to explore
o This was assumed and accepted under s129(3) that the assumption can be relied upon for holding out
Re Madi Pty Ltd
o Company lodged documents with ASIC that a person was the secretary
o That person entered into a loan agreement within the capacity but had not yet been properly been put into that
position according to the constitution of the company
o There was no suggestion that the lender knew of the ASIC documents or relied upon them or assumed that the
person who stated they were the secretary did not have the customary authority
o Held: Can assume the documents had been complied with and that the person holding themselves out to be the
secretary was the secretary
S 129 (4) officers and agents properly performed duties
S 129 (5) due execution without seal if per s 127(1)
S 129 (6) due execution without seal per s 127(2)
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd
o One saying were the director and the other saying they were the secretary
o The company held out that the director, as signed as secretary, was the secretary and the company
had to honour the guarantee in that case
MYT Engineering Pty v Mulcon Pty Ltd (1999) 17 ACLC 861
o The document was executed under common seal and signed. The director and secretary who was
the same person. Two places to sign: one for secretary and one for director the individual signed in
both places.
o The other party should have been aware this was not proper execution of the documents as at the
time the legislation did not contemplate a single director/secretary role (as it now does).
o Could they rely on the contract knowing one person signed as secretary and director? No the two
people would have had to sign.
Myers v Aquarell Pty Ltd [2000] VSC 429
o There was a mortgage executed by a sole director and secretary with a common seal. The lender
here was able to assume that it was correctly executed and in compliance with the execution sections
of s127.
o Even though the company constitution referred to the company having at least two directors and any
witnessing or affixing of the seal by one director and the companys secretary.
o The constitution did not reflex what was happening in practice in that it was a sole director now.
Company stayed with old constitution which did not reflect that. However sole director does not need
a constitution. The outsider could therefore rely on that.
S 127 (7) office or agent has authority to warrant authenticity of documents overrules CL principle in Ruben v Great
Fingall (Facts: Sec forged share documents and gave to self. Sec took to bank and used as collateral for loan which did
not pay. Bank relied on Turquand saying can assume internal issues were managed by co. and therefore what was in
front of them was acceptable. HELD co not bout by forged documents as sec only had ability to deliver valid
certificates. Bank could not claim money back b/c of forgery. **OVERRULED BY STATUE banks can rely on
authenticity of documents)
Limitations to Statutory assumptions
The right to make assumption from s 129 is lost when person knew (Is the knowledge limited to actual knowledge?
Brick & Pipe) or suspected (Is it an objective or subjective test? Sunburst v Agwater ) that the assumptions were
incorrect: s 128(4)
The assumptions in s 129 may be made even if an officer or agent of the company acts fraudulently (Story v Advance
Bank) or forges a document, in connection with the dealings: s 128(3). (Outsider does not know there has been fraud so
may still be bound by the agreement)
Ruben v Great Fingall Consolidated Fraudulently created share certificates
Company liable in Tort or Crime
Under organic theory- organ (directing mind & will) of company committed wrong (Tesco must be higher level
manager).
Deeming provision s 769B(1). (conduct by person of co. or person by direction of co., both within actual/apparent
authority) S 181(1)(a) Director must exercise power and duties in good faith in best interest for corporation and (b) for a proper
Under Vicarious Liability- Companies liable for employees acts Mousell Bros v London & North Western Railway; purpose. Note: s 181 is a civil penalty (see s 1317E).
and strict liability offences under statute (wrongful act = liability) S 182(1) Directors or ees: Duty not to make improper use of position (a) Gain advantage for themselves or someone
both company and wrong-doer can be liable Hamilton v Whitehead (Facts: MD was mind of co and he was liable as a else; or (b): cause detriment to the corporation: Note: s 182 is a civil penalty (see s 1317E).
principal and yet did not preclude his liab as an accessory two different hats and responsible for both) i.e can find the S 183(1) Director, officer, or ee: Duty not to make improper use of information to (a): gain advantage for themselves
co and directors liable and charged for same individual acts Halton v Arms (Confirmed this) or someone else, or (b) cause detriment to the corporation. Note: s 181 is a cival penalty (see s 1317E).
Criminal Code Act 1995 (Cth)- generally requires a) physical elements (ss 4.1-4.3) and b) fault elements (ss 5.1-5.6) S 184(1) Criminal offences A director or officer of corp commits and offence if they: (a) are reckless or; (b): are
strict liability- no fault elements, defence of mistake of fact intentionally dishonest and fail to exercise their powers and discharge their duties: (c) in good faith in best interests of
absolute liability- no fault elements, no defence of mistake of fact. corp or (d) for a proper purpose.
Corporations Act 2001 (Cth)- check whether section imposes civil penalty (fine, banning order) and/or criminal penalty S 184(2): Criminal offences: A director or officer or ee of a corpo commits an offence if they use their position
(for a company, a fine up to 5xs the max s 1312). dishonestly: (a) with intention of directly or indirectly gaining advantage for themselves or someone else or in causing
Part 9.4 offences generally detriment to corporation or (b) recklessly as to whether the use may result in themselves or someone else directly or
s 1316A- no privilege against self incrimination (Environmental Protection v Caltex). indirectly gaining an advantage, or in causing detriment to the corporation.
S 184(3): Criminal offences: A person who obtains info because they are or have been a director or officer or ee of a
Summary corp commits and offence if they use info dishonestly: (a) with intention of directly or indirectly gaining an advantage for
Dealing with corporations by outsiders themselves or someone else or causing detriment to the corp; or (b) recklessly where the result may to themselves or
Need to act in best interest of company someone else directly or indirectly gain an advantage.
Need to consider what is best with shareholder interaction with outside world too (previous Cook v Deeks: Breach= Where director, while negotiating a K for the company, without appropriate disclosure and approval, arranges
slides) for the contract to be diverted from the company to the director personally or to another company in which the director is involved.
Balancing of responsibilities, needs of the company and needs of the third party. Queensland Mines Ltd v Hudson: Directors who take up a corporate opportunity avoid breaching their fiduciary duty if they make full
Organic theory, controlling the mind and body of the corporation. Remembering the corporation has to disclosure and the company gives its approval or consent.
have some organic control as is otherwise an artificial entity Green v Bestobell Industries Pty Ltd: Company need not suffer any loss.
Companies ran by people behind them
Duty to prevent insolvent trading:
Third parties are able to assume some internal management and other issues have been properly
S 588G (1)(a) Applies when a director at the time the company incurs a debt; and (b) company is insolvent at the time
addressed by the corporation.. S 129
of or becomes insolvent by incurring the debt; and (c) at the time, reasonable ground for suspecting that the company is
Make honest assumptions
insolvent or would become insolvent; and (d) that time is at or after commencement of the Corporations Act (2001).
Unless s128 exemptions apply. S 588G (2): By failing to prevent the company from incurring the debt the person contravenes this section if: (a) the
Cant rely on s129 if knew, suspected etc person is aware at that time that there are such grounds for suspecting, or (b) a reasonable person in position would be
Civil and criminal charges can be laid against a corporation aware.
Note: Section is civil penalty under section 1317E(1).
DIRECTORS DUTIES S 588H: Defenses to s 588G: s588H(2): Defence if prove that, at the time the debt was incurred, the person had
Directors of company have agency relationship also bound by statute and common law reasonable grounds to expect and did expect, that the company was solvent and would remain solvent even if debt
Controlling mind and will of the company has certain obligations: incurred. Also s588H(4) Prove that director was ill at the time or for some good reason did not take part at that time in
Corporate governance seeks to allocate roles, responsibilities, and accountability b/w participants. the mgmt. of the company.
Common law duties Walker v Wimborne: Directors have a duty to exercise their powers in a way that does not prejudice the companys
Duty to act bona fide (In good faith) in the interests of the company as a whole ability to pay its creditors. If lending company is in financial difficulties, its directors prejudice the interest of the lending
Duty not to act for an improper purpose (act for proper purpose) companys creditors if the interest rate on the loan is not on commercial terms or if the borrowing company is, or
Duties of care and diligence becomes, insolvent and cannot repay the loan.
o In any decision making as director or other upper levels of management (b/c can also control he S 189: Reliance on information or advice provided by others: S189(a): A director relies on info or professional or
mind/will of a company) expert advice, given by: (i): an ee of the corp whom the director believes on reasonable ground to be reliable and
competent in relation to the matters concerned; or (ii): a professional advisor/expert in relation to matters that the
Duty to retain discretion (For company)
director believes on reasonable ground to be within the persons professional or expert competence; or (iii) another
Duty to avoid conflicts of interest
director or officer in relation to matters within the directors or officers authority; or (iv) a committee of directors on which
Not to get self in position where will get in conflict the direct did not serve in relation to matters within the committees authority; and look at s 189(b):
Duty not to disclose confidential information S 189(b): the reliance was made: (i) in good faith; and (ii) after making independent assessment of info, having regard
Duty not to abuse corporate opportunities to the directors knowledge of the corp; The directors reliance is taken to be REASONABLE unless contrary proved.
Statutory Duties Corporations Act (Cth) S 190: Responsibility for actions of delegate: 190(1): If director delegates a power to anyone, director is
S 180 Care and diligence- Directors and other: (Civil penalty only). responsible for the delegate as if they had exercised the power. S 190(2): Director not responsible for delegation if:
S 180(1): Directors/officers must exercise care and diligence that a reasonable person would if they: (a) were a director s190(2)(a): director believed on reasonable grounds that delegate would excecise with duties imposed on directors of
or officer of a corporation in the corporations circumstances, and; (b) occupied the office held by and had the same company; and (b) director believed on reasonable grounds, in good faith, and after inquiry (if needed) that delegate was
responsibilities within the corporation as the director or officer, Note: Civil penalty provision Section 1317E. reliable and competent in relation to power delegated.
S 180(2): BUSINESS JUDGEMENT RULE: Director/officer who makes a business judgment is taken to meet the S 191: Material personal interest- Directors duty to disclose: Director has duty to notify other directors of material
requirements of s 180(1) if: (a): make judgment in good faith for a proper purpose; and (b): do not have a material personal interest when conflict arises.
personal interest in the subject matter of the judgement; and (c): inform themselves about the subject matter of the Totex-Adon Pty Ltd v Marco: Conflict of interest when companys funds are mixed with the directors personal fund or with the funds of
judgement to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgement is in the another company in which the director has an interest.
best interests of the corporation. Must be a belief that a REASONABLE PERSON in position would hold. Paul A Davies Ptd Ltd v Davies: If directors, without proper disclosure, obtain funds from the company for their personal use, it is no
The Bell Group v Westpac Banking Corporation (no 9) - subjective and objective element of the duty. Director will breach their duty "if, defense for them to assert that the funds obtained were lent to them.
on consideration of the surrounding circumstances (objectively viewed), the assertion of directors that their conduct was bona fide in
the best interests of the company and for proper purposes should be doubted, discounted or not accepted".
20
 A company can raise capital - i) Equity- issuing shares through subscription, rights issues, dividend reinvestment plans, company
Criminal Penalties General Rule: Company is the P options; by issuing converting preference shares ii) Debt- by issuing debentures & unsecured notes, convertible notes, and other
Breaching section 184, which lists certain offences attracts criminal penalty for dishonest behaviour. loans.
Similarly, a director contravening section 588G(3) faces criminal proceedings. The maximum penalty is a fine Issue price of shares:
of $200,000 or five years imprisonment, or both (Schedule 3 of the Corporations Act). Issue price determined by company (eg, net asset backing)
Section 206B of the Corporations Act provides for automatic disqualification from managing a corporation for The issue price may vary between share issues
criminal convictions (for a certain period of time atleast If not for life) Can issue shares for a non-cash consideration (eg, an asset) - must represent moneys worth Re White Star Line
Civil Penalties Can issue shares as fully or partly paid shares
The sections of the Corporations Act attracting civil penalties (addressed in Part 9.4B of the Corporations Act) Proceeds of issuedebited to share capital account (Shareholders equity section of companys balance sheet)
include: Restrictions on share issue
ASIC is the national body responsible for company registration and securities regulation in Australia. (takes matter to Restrictions in the companys internal rules (eg, number of shares issued)
court). Under section 1317J(1) of the Corporations Act can apply to the court for a: declaration of contravention, Where the issue varies the rights of existing shareholders: must comply with s 246B procedure (LOOK BELOW)
pecuniary penalty order (on company and director), compensation order. (eg. 7.8 M dollars for HIH) Pre-emption right of shareholders in proprietary companies: s 254D (replaceable rule)
(a) Fines - The court may order a pecuniary penalty of up to $200,000 under section 1317G if: Classes of shares:
-a declaration of contravention by the person has been made (section 1317E) Why Have Classes of Shares?
-the contravention: materially prejudices the corporation or its member or materially prejudices the corporations ability To confine control of the company to holders of a particular class of shares
to pay its creditors or is serious. To enable dividends to be distributed in different amounts to different shareholders
(b) Compensation to a corporation for damage resulting from the contravention To raise share capital on terms similar to loan capital (eg, redeemable preference shares)
Pursuant to section 1317H, the Court may order a person to compensate a corporation for damage suffered by the For taxation reasons
corporation if: s 245A(1)(c): Company may issue fully paid or partly paid shares.
1) the person has contravened a corporation civil penalty provision in relation to the corporation or scheme and s 254M: Person who holds partly paid shares is liable to pay calls on the shares.
2) the damage resulted from the contravention s 516: Shareholder need not contribute more than the amount (if any) unpaid on the shares.
(c) Disqualification from managing corporations Rights of shareholders
Section 206C of the Corporations Act gives the court power to disqualify a person from managing corporations for a A co. may issue different classes of shares classes are differentiated by the rights given to each group
contravention of a civil penalty provision. A person disqualified may apply to the court for leave to manage a corporation The most common special class is preference shareholders
under section 206G. (doesnt stop members of families from acting in your role) Preference shares carry a fixed dividend rate (and may carry other rights) need have two different classes so here preferred
NB: The courts have the power to grant officers (which include directors) relief from civil liability if the person has acted shares and preferential over ordinary shares (eg. Of rights attached: 2 votes per share, higher dividend depends on
honestly and ought to fairly be excused. (can ask to be exonerated from proceedings + need to show evidence tried to constitution/internal rules and agreement at time of issue)
persuade or advise to act in a different manner) The rights are to be stated in the companys constitution or a special resolution (s 254A)
Shareholders can ratify breaches of fiduciary duty, but there is doubt as to whether shareholders can ratify breaches of Where rights are stated, they are exhaustive (there are no implied right). Where rights are not stated, some presumptions apply to
statutory duty. fill any gaps (presumptions provided by law)
CASES Dividend rights of preference shareholder- are dividends cumulative?
ASIC v Adler and Ors (HIH CASE**) -Dividends are choses in action i.e they are future property (until dividend is declare it is future property so is a mere expectation but
Issue was a payment of $10M by an HIH subsidiary to a company of which Rodney Adler was a sole director. By when declared it becomes current property and have a right to it then)
use of a trust mechanism, approximately $4 million was used to acquire HIH shares, venture capital unlisted Does special resolution or constitution say cumulative?
investments were purchased from another Adler company, and loans were made to entities which were YES- Rely on special resolution/constitution.
associated with Adler. NO- Presumed entitled to cumulative dividend (Webb v Earle) Has dividend been declared & fallen due for payment? NO- no right
These transactions occurred with no board or member approval and without disclosure the loans were given to payment; YES- right to receive dividend but NO right to surplus profits (United Lankat).
without proper documentation or security being sought and the payment was made so that it would not come to Issue of shares
the attention of other HIH directors. Contractual rules: Offer and acceptance, rights issues, issue of fewer shares than applied for, allotment an issues of shares.
Adler was found to have contravened four sections of the Corporations Act relating to a director's duty to act in Restrictions on allotment:
good faith and for a proper purpose (section 181), duty not to improperly use position (section 182), duty not to -Minimum subscription : s723(2), s722, s 724, 737(1), 737(2), 737(3)
improperly use information (section 183), and the duty to act with due care and diligence (section 180). -Financial market quotation,
The court found that three former directors of HIH, together with a corporation controlled by the defendant, were -Expiration of disclosure document: s 711(6), 714(2), and 715(3).
knowingly concerned in a contravention of the related party rules (under section of the Corporations Act), even if Validation of improper issues of shares:
they did not appreciate it was a contravention having mistakenly considered that the transaction fell within the s 254E: Court validation of issue: On application by a company, a shareholder, a creditor or any other person, the court may make an
arm's length exception. order validating, or confirming the terms of, a purported issues of shares if: (a) the issue is or may be invalid for any reason; or (b) the
Mernda Developments Pty Ltd v Rambaldi: Test is whether an intelligent and honest man in the position of the directors terms of the issue are inconsisten with or not authorized by (i) this act; or (ii) another law of a State or Territory; or (iii) the companys
reasonably believed that their conduct was in the best interests of the company. constitution (if any).
Darvall v North Sydney Brick & Tile Co Ltd (No 2): Directors may act in what they consider to be the best interests of the Re Swan Brewery Co Ltd:
company as a commercial entity even though this may not be in the short-term interests of shareholders. Kokotovich Constructions Pty Ltd v Wallington:
SHARE CAPITAL Share Classes and Rights:
Classes of shares: Are differentiated by rights given to each group.
A share is an item of intangible property also known as a chose in action- ownership for a share does not gives the investor
-Co may determine rights/restrictions attached to shares s 254B(1)(a).
proprietary rights as defined by the companys constitution and the law gives expectation of dividend in future and carries very little
Ordinary shares: They will have equal right to dividends after payment of preference shares. A full right to vote is usually given by
rights (Such as Voting only)
the Co constitution. Ordinary shareholders have the right to share in any surplus of the Co assets in the event of winding up.
Share Capital is the total amount that investors provide to the company in consideration for the shares issued to them.
Preference Shares: Entitled to dividends at a fixed rate irrespective of the Co performance and are seen as similar to creditors.
Company will issue shares to investors to fundraise. Price of a share is determined by contract between company and investor
Co has power to issue PS: s 254A(1)(b), Co may convert OS in PS; and (b) convert PS into OS: s 254G(1).
Investors who pay the full price of shares have no further liability to contribute to company
Variation of Share Rights

21
 Variation of Share Rights (What if they change your class of shares to something else?)
Where do you find that right? Constitution , Replaceable rules, Special resolution, Contract (terms of issue)
Has the right been varied or cancelled?
Assess the effect of the change: Some changes taken to be variations (s 246C), All other changes: varied or
cancelled right; varied operation of right (eg, Greenhalgh) may not be a variation of class rights
Greenhlagh v Arderne Cinemas Ltd - there was different classes of shares where G held shares of a particular class. Gs shares were
worth 2 shillings each. Other shares worth 10 shillings each. Company decided that for each 10 shilling shares you got 5 of the 2
shilling shares. No change in share value but attached is voting rights as a shareholder. This was all done in consultation of the s/h
and they accepted the change special resolution etc. G said he did not like that and that they varied his shares and argued the right
as a s/h had changed because changed the other rights of the other shares. Court - Said in practicality it did because his shares
were diluted further. It wasnt his class that change but another. He was not entitled to or needed to vote on it. Therefore he was not
part of the process of voting on a share variation.
Why Shareholders Need Protection
Variation procedure in s 246B legal means whereby rights of shareholders may be increased, decreased or removed
altogether
Risk that company could use procedure for a non-legitimate reason:
to eliminate a person from being a member (eg, by cancelling all rights attaching to shares)
to benefit some shareholders at expense of others (eg, increasing voting rights of one shareholder group only)
to prejudice some members (eg, by reducing rate of dividend payable to one group of shareholders only)
Step 1: PROCEDURE: Variation of class rights 246C (when variation occurs)
Does company have a constitution with variation procedure?
Company has constitution: Follow procedure s 246B(1): If a company has a constitution that sets out the procedure for varying or
cancelling: (a) for a company with share capitalrights attached to shares in a class of shares; or (b) for a company without a share
capitalrights of members in a class of members; those rights may be varied or cancelled only in accordance with the procedure.
The procedure may be changed only if the procedure itself is complied with.
NO Constitution- Follow procedure s 246B(2) (a) Those rights may be varied or cancelled only by special resolution of company;
AND 246B(2)(c): by special resolution passed at a meeting. S246B(2)(c)(i): OR S246B(D) with the written consent of members with
at least 75% of votes in the class. S 246B(3): Company must give written notice of the variation or cancellation to the members of the
class within 7 days after the variation or cancellation is made.
Variation of shares rights for existing class before division s246C:
S 246F: Co must lodge documents and resolutions with ASIC in the following prescribed way. (a) division of shares into classes not
previously so divided, (b) conversion of shares into another class (2) Notice must be lodged w/I 14 days after division/conversion
(3) Public [Co] must lodge with ASIC a copy of each document or resolution that (a)(i) attaches rights to issued/unissued shares, (ii)
varies/cancels rights attached to issued/unissued shares, (iii) varies/ cancels rights of members in a class of members that does not
have Share Capital, (iv) binds a class of members
Remedy: (3A) offence based on (1) or (3) is offence of strict liab.
Step 2: HAVE THE RIGHTS BEEN VARIED?
S 246C: Certain action taken to vary rights etc
s 246(1) If the share in a class of shares in a company are divided into further classes, and after the division the rights attached to all
of those shares are not the same: (1)(a): division is taken to vary the rights attached to every other share that was in the class existing
before the variation; and (1)(b) members who hold shares to which the same rights are attached after the variation form a separate
class.
s 246C(2): If the rights attached to some of the shares in a class of shares in a company are varied: (2)(a) the variation is taken to
vary the rights attached to every other share that was in the class existing before the variation; and (2)(b) members who hold shares
to which the same rights are attached after the variation form a separate class.
Companies without share capital:
s 246C(3): If the members in a class of members in a company without share capital are divided into further classes of members, and
after the division the rights of all of those members are not the same: (a) division is taken to vary the rights of every member who was
in the class existing before the division; and (b) members who have the same rights after the division form a separate class.
S 246C(4): If the rights of some of the members in a class of members in a company without a share capital are varied: (a) the
variation is taken to vary the rights of every other member who was in the class existing before the variation; and (b) members who
have the same rights after the variation form a separate class.
Companies with 1 class of shares:
S 246C(5): If a company with 1 class of shares issues new shares, the issue is taken to vary the rights attached to shares already
issued if: (a) the rights attaching to the new shares are not the same as the rights attached to shares already issued; and (b) those
rights are not provided for in: (i) the company constitution; or (ii) a notice, document or resolution that is lodged with ASIC.
Preference shares
S 246C(6): If a company issues new preference shares that rank equally with existing preference shares, the issue is taken to vary
the rights attached to the existing preferences shares unless the issue is authorized by: (a) the terms of issue of the existing
preferences shares; or (b) the companys constitution (if any) as in force when the existing preference shares were issued.
22
**Greenlagh co. properly followed s246B. G was not member of affected class. Couldnt vote. His class was affected but not the
class that was VARIED. C/L meaning of a variation of class rights is extremely narrow. At C/L variation affects the strict legal rights of
the member of the class. Examples: Right to a specified rate of dividend or the right to appoint directors to represent a particular class
of shareholders.
White v Bristol Aeroplane Co: Bonus issue to holders of ordinary shares held not to affect, vary, deal with or abrogate the rights of
existing preference shareholders. While the bonus issue affected the % of votes, did not affect strict legal rights of shares. Shares
continued to have 1 vote per share.
Crumpton v Morrine Hall Pty Ltd: C owned shares in company, entitled C to certain rights in respect of 1 of 6 units in a home building
owned by the company. Company altered constitution and restricted the right of its shareholders to lease the units and allow
determinations of the right to occupy in certain circumstances. Held: Shares were divded into different classes despite the fact that
the constitution did not refer to the group of shares as classes. They were classes Groups had different rights to other group.
5 with one class of shares if new shares are issued varied if rights arent the same and those rights not provided in constitution or
notice or doc lodged with ASIC.
Step 3Right to challenge s 246D- Gives members of a class the right to apply to the court to set aside a variation or
cancellation of their rights or a modification of the constitution to allow their rights to be varied or cancelled. Application must be made
by members with at least 10% of the votes of the class concerned, and under s 246D(2), must be made within one month after the
variation, cancellation or modification is made. S 246D(4): Members of the class may appoint 1 or more of themselves to make the
application on their behalf. S 246D(5): Court may set aside the variation, cancellation or modification it if it satisfied that it would
unfairly prejudice the application.
Other grounds under general law or Corporations Act 2001 (Cth) (Eg. If for Oppression issues Part 2F.1)
Maintenance of Capital
SHARE CAPITAL REDUCTION: / Share buy back
General principle: Capital must be maintained for protection of creditors and shareholders (Trevor v Whitworth). Company is
generally prohibited from reducing its issued share capital. 1 way of doing this is by buying back shares.
Directors must make decisions where considering rights and obligations to creditors and shareholders
Two most vulnerable parties
Trevor v Withworth - A company is generally prohibited from reducing its issued share capital because it might prejudice its
creditors rights however the law does not expect capital to be returned to shareholders before creditors. Share capital reduction
would diminish available funds of companies to pay its creditors .
-Modified by Chapter 2J
Facts of case: Executors of Whitworth sold Whitworths shares back to Whitworth. Prior to second instalment of payment,
Whitworth went into liquidation. Executors claimed the sum from the liquidator (Trevor). Whitworths articles permitted them to buy
shares back, BUT company still had not power to purchase own shares.
Self-Acquisition Prohibition:
s259A: Company must not acquire shares in itself except: (a) in buying back shares under s 257A; or (b) in acquiring an interest
(other than a legal interest) in fully paid shares in the company if no consideration is given for the acquisition by the company or an
entity it controls; or (c) under a court order; or (d) in circumstances
Also says directors cant deal with their own shares Eg. Asic v Adler put money in another company huge
conflict of interest
-Exceptions these share capital transactions permitted: reduction of capital (Part 2J.1); share buy-back (Part 2J.1); financial
assistance (Part 2J.3)
-Perhaps company is a financial lender and exempt from this under s260
Restrictions on dealing in own shares (ss 259A-D)
General prohibition against acquiring its own shares (Trevor v Whitworth). Covers both direct and indirect acquisitions.
-Acquiring or dealing in own shares generally prohibited: (s259A)
Indirection acquisitions- transfer/issue of shares to an entity controlled by (eg. another company, partnership or trust).
Some acquisitions permitted by s 259A share buy-backs s257A; acquisitions under court order; and pursuant to security taken
over shares s259B(2)(3).
Giving Financial Assistance for Purchase of Shares (ss 260A-C)
Reason for concern- lending money to borrow companies shares- if loan not repaid, same effect as if company bought its own
shares: (ASIC v Adler dont encourage cos to loan monies to themselves to buy shares in themselves or related co.)
section 260A- permits company to give financial assistance in 3 limited situations only:
1. Where there is no material prejudice to the company, its shareholders or creditors. (i.e where surplus money and wont
have detrimental effect on co s/h and creditors)
2. Where the shareholders approve the assistance
3. Where the assistance is exempt by s 260C (I.e where financial lender)
Financial assistance includes:
payment of dividend
making of loan/issuing debenture
giving security over companys assets
financial assistance given by a subsidiary or another group company:
 Would the honest reasonable objective person believe that it was in the best interest of the company or group of
companies? (in terms of s/h and creditors)
ASIC v Adler (as above)
ZBB (Aust) Ltd v Allen - ZBB was paying excessive dividends via the company to the shareholders. Equated to Financial
Assistance. If giving more than what company can give is that they are giving FA to shareholders potentially buy more
shares or invest more etc. This was not allowed.
Indirect financial assistance: Darvall v North Sydney Brick & Tile Co Ltd Principle: In most cases the directors of a company do not
have a positive duty to maximise the share price of company by hawking the companys shares when in a merger discussion although
it is consistent with their duties to try and maximise the price. Eg. When they are in a situation where one company is merging with
another under this principle the directors dont have to keep at the other company or the investors to try to get the maximum price for
the shareholders but they should do the best as they possibly can. Dont have to break records to get high prices but should do
whatever they can to get the max possible in the circumstances. Need to have reasonable mediation to get max price.
Permitted Transactions (Part 2J.1)
Reasons for undertaking capital reductions and share buy-backs:
To return capital in excess of companys needs to shareholders (consider tax implications behind this)
To bring share capital more into line with the net assets of the company (eg. Co realised assets and it has shrunk so wants to keep
all in line so dont have a lot of dividends to pay)
To bolster earnings per share (if the company has cash available, they may buy back shares to reduce the quotient on the earnings
per share ratio- i.e less shares increases the earnings per share inc share price if less shares).
To exchange equity for debt b/c it can raise debt finance on more attractive terms (good debt can set good debt against profits to
reduce net profit lower taxes)
To eliminate a minority shareholder from the corporation (Gambotto- usually done through a selective buy back; requires additional
steps**** ABOVE).
Additional reasons for share buy-backs to reduce administrative costs by buying out the holders of odd lots of shares. To enable
employees to realise shares acquired under an employee share scheme. To enable a retiring shareholder to be bought out of a
company (business succession planning).
SHARE CAPITAL REDUCTION:
Requirements for a capital reduction (256A-E)
Restrictions in internal management rules (if any)
Company must not reduce its capital unless it complies with statutory requirements: section 256B(1) & 256D(1)
s 256B(1): A company may reduce its share capital in a way that is not otherwise authorized by law if the reduction:
(a): is fair and reasonable to the companys shareholders; and (b): Does not materially prejudice the companys ability to pay its
creditors; and (c) is approved by shareholders under s 256C.
Permitted share capital reductions under s 256B(1): a company may reduce its share capital if the reduction: All 3
1. is fair and reasonable- Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd GKL wanted to have selective reduction of capital that
involved a cancellation of the shares held by GKLs minority shareholders in consideration of a payment to them for 55 cents per
share, this was 8 cents more than what was fair and reasonable as determined by market expert. Reduction would give GKL 100%
ownership of the company. Although the majority got a special benefit (full control) it was still fair and reasonable because minority got
an enhanced price for their shares.
Re Fowlers Vacola Manufacturing a reduction that involved a payment to only ordinary shareholders was not fair because the
preference shareholders were given preference in the constitution upon winding up. Fairness required at least equal treatment
between the ordinary and preference shareholders.
Objective test-assess the effect of the reduction on shareholders collectively, rather than individually.
Factors to consider for Fair and Reasonable:
Adequacy of consideration paid to shareholders? Market value? Or less?
Practical effect of reduction on the rights of different groups of shareholders?
Is reduction being used to effect a takeover?
Should the reduction be undertaken as a scheme of arrangement?
Being allowed to keep ones investment in the company
2. does not materially prejudice companies ability to pay creditors, creditors may apply for an injunction to block reduction
1324(1A): Gives creditors standing to apply for an injunction to prevent a reduction of capital if the companys insolvency is an
element. 1324(1B): Company has onus to prove that the reduction does not prejudice its ability to pay creditors.
3. is approved by shareholders under 256C: Permits capital reduction if approved by SHs under s 256C.
s 256C(1)- If the reduction is an equal reduction: It must be approved by a resolution passed at a general meeting of the company.
Special shareholder approval for selective reduction.
s 256C(2): If the reduction is a selective reduction, it must be approved by either (a) special resolution passed at general meeting of
the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the
reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or (b) a resolution agreed to, at
a general meeting, by all ordinary shareholders.
S256D: Failure to comply with section 256B is a Civil Penalty provision (section 1317E).
23
S 1324: Encompasses reductions of capital made in contravention of s 256B where the reduction is not gair and reasonable to the
companys shareholders as a whole or prejudice the ability of the company to pay its creditors. Court may grant an injunction.
What Kind of Reduction
S256B(2) reduction is either an equal or selective reduction. It is an equal reduction if: (a) relates to ordinary shares, (b) applies to
each holder of ordinary shares in proportion to the number of ordinary shares they hold, (c) terms of reduction are same for each
holder of ordinary shares. OTHERWISE, it is a selective reduction. (3) in applying (2), ignore differences in terms of reduction are: (a)
different accrued dividend entitlements, (b) differnet amount unpaid on them, (c) introduced solely to ensure that each shareholder is
left with a whole number of shares
IF: Insolvent Trading
S588G go to section in Directors Duties.
Procedure of Reduction
256C (1) If equal reduction, must be approved by resolution passed at GM. (2) special shareholder approval for selective reduction,
approved by either (a) special resolution passed at GM, with no votes in favour of resolution by any person who is to receive
consideration as part of reduction or whose liability to pay amounts unpaid on shares is reduced, or by their associates, or (b)
resolution at GM by all ordinary shareholders. (3) if cancellation of shares must also be approved special resolution at meeting of
shareholders whose shares are to be cancelled. Company must lodge with ASIC resolution within 14 days after it is passed. (4)
company must also include notice of meeting a statement.
Consequences of Violation
256D (2)(a) contravention does not affect validity of reduction or of any K or transaction connected with it, (b) company not guilty of
ofence (3) civil penalty provision s 1317E. (4) any person violating s 257B is guilty of offence.
SHARE BUY-BACKS [SBB] (s257)
NB: SBB Are a form of Capital Reduction.
S257A- Co may buy back shares if:
(a) the buybacks do not materially prejudice the companys ability to pay its creditors (b) the company follows the procedures laid
down in pt 2j.1 Div 2 of the act. Note 1: subject to constitution which may preclude company from buying back shares.
S257B Buy Back Procedures (Table)
IF: Minimum Holdings Buyback- s257H cancel shares, s254Y notify ASIC of cancellation.
IF: Employee Share Scheme Buyback- scheme under which shares in the Co or a HC may be acquired: (depends on 10/12)
Within 10/12 Limit s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of cancellation.
Over 10/12 Limit s257C ordinary resolution, s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of
cancellation. (+s257C if 10/12 exceeded)
10/12 Rules: s257B(4) - 10/12 limit is 10% of small number, at any time in last 12 months, of votes attaching to voting shares.
Exceed 10/12 IF: s257B(5) (a) all voting shares in company have been bought back in last 12 months, (b) voting shares will be
bought back if proposed buy-back made.
IF: On Market Buy Back- s257B(6) if it results from an offer made by a listed corp on a prescribed financial market in the ordinary
course of trading on that market (Depends on 10/12)
Within 10/12 Limit s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of cancellation.
Over 10/12 Limit s257C ordinary resolution, s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of
cancellation. (+s257C if 10/12 exceeded)
10/12 Rules: s257B(4) - 10/12 limit is 10% of small number, at any time in last 12 months, of votes attaching to voting shares.
Exceed 10/12 IF: s257B(5) (a) all voting shares in company have been bought back in last 12 months, (b) voting shares will be
bought back if proposed buy-back made.
IF: Equal Access Buyback Scheme- scheme that satisfies all of the following conditions:
a) the offers under the scheme relate only to ordinary shares
b) the offers are to be made to every person holds ordinary shares to buy back the same percentage of their ordinary shares.
c) all of those person have a reasonable opportunity to accept the offer made to them
d) buyback arrangements are not entered into until a specified time for acceptances of offers
3) the terms of all the offers are the same
Within 10/12 Limit s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of cancellation, s257E lodge offer
documents with ASIC, s257G disclose relevant info when offer made.
Over 10/12 Limit s257C ordinary resolution, s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of 259E. When a company controls an entity
cancellation. s257E lodge offer documents with ASIC, s257G disclose relevant info when offer made, s257C ordinary
resolution. (+s257C if 10/12 exceeded)
259F. Consequences of failing to comply with section 259A or 259B
(1)(a) contravention does not affect validity of acquisition or of any K or transaction connected with it, (b) company not guilty of
ofence. Note 1: civil penalty provision s 1317E. (2) any person violating s 257B is guilty of offence.
10/12 Rules: s257B(4) - 10/12 limit is 10% of small number, at any time in last 12 months, of votes attaching to voting shares. FINANCIAL ASSISTANCE FOR PURCHASE OF SHARES: (s260)
Exceed 10/12 IF: s257B(5) (a) all voting shares in company have been bought back in last 12 months, (b) voting shares will be
ss 260A-C not encouraged because the company may lose out on assets that could be available to other creditors- rare
bought back if proposed buy-back made.
circumstances
IF: Selective Buyback- s9 Definition: Not min holding, employee share scheme, on-market, equal access scheme.
S260A - Co may only financially assist a person to acquire shares in the company or holding company of the company if (a) giving
s257D special resolution, s257F 14 days notice, s257H cancel shares, s254Y notify ASIC of cancellation. s257E lodge the assistance does not materially prejudice the (i) interests of the company or its shareholders or the (ii) Companys ability to pay
offer documents with ASIC, s257G disclose relevant info when offer made, s257C ordinary resolution (+257D selective its creditors OR (b) the assistance is approved by shareholders under s260B- see below; or (c) the assistance is exempted under
buyback requires special shareholder approval) s260C.
s257E IF 257B applies Procedure: Lodgement of Offer Documents to ASIC. (2)(a) FA may be given before/after acquisition of shares, (b) may take form of a dividend.
If, s257B applies, company must lodge with ASIC before agreement is entered into, a copy of: (a) document setting out terms of offer, S 260A(1): permits [Co] give [FA] in 3 situations: (a) no material prejudice to [Co], [SH] or creditors onus on [Co] that [FA] not
(b) document that is to accompany offer. materially prejudice ; (b) assistance approved by [SH] under s 260B; (c) assistance exempted under s 260C
s257F IF 257B applies Procedure: Notice [FA] given by [SB] or another group [Co]
If, s257B applies, company must lodge with ASIC before notice of intended buy-back at least 14 days before agreement entered into. ASIC v Alder: [SB] gave [TP] [FA] to acquire shares in [HCo] materially prejudice to [HCo] & [SB] b/c lack of safeguards &
disadvantage terms & [SB] exchange for something less value than $ handed over breached s260A(1)
s257F IF 257B applies Procedure: Disclosure of Relevant Info when offer made ZBB v Allen: indirect [FA] underwriting agmt for shortfall & depositing full subscription $ = making loan = [FA]
If, s257B applies, company must include along with offer to BB, a statement setting out all info known to company that is material to Indirect [FA]: can find indirect [FA] in context of the use of defensive tactics against takeover (Darvall v North Sydney Brick & Tile)
decide whether to accept offer. Hunters Products Group Ltd v Kindley Products Pty Ltd SH of Hunters agreed to buy the shares owned by Hunters other SH, turns
s257H Effect of Accepted BB out money from Hunters Bank Account, H: FA.
+ s 257J other relevant provisons S 260B(1): [SH] approval for [FA] must be by: (a) special resolution at general meeting w/ no votes being cast in favour of the
(1) all rights attached to those shares are suspended, shares are transferred and cancelled. (2) company must not dispose of shares resolution by [Pe] acquiring the shares or their associates; or (b) a resolution agreed at a general meeting by all [OSH]
it buys back. An agreement entered into in contravention of this ss is void. (3) immediately after registration of transfer to company, S 260B: (2) Listed [HCo] approval for [FA] must be by special resolution passed at general meeting of corp; (3) not listed Australian
shares are cancelled. [HCo] approval for [FA] be by special resolution at a general meeting of body corp that will be the [HCo], company must lodge with
ASIC at least 14 days before giving the financial assistance a notice in the prescribed form stating that the assistance had bee
CONTRAVENTION OF (S 257) approved.
S 1317E S260C Exempted FA
Transactions valid despite contravention S260D- BREACH OF S260A- if Co provides FA in contravention of s260A of Corp Act, the contravention does not affect the valifity
[Co] not guilty innocent victim of the FA or of any contract or transaction connected with it and the Co is not guilty of an offence, s 260D(1)- any person involved in
[Of] of [Co] involved in contravention = guilty of civil penalty fines up to $2K or management banning order up to 5 yr ( ASIC v the contravention is subject to a civil penalty, s260D(2)
Alder) S 1317E- civil penalties
REMEDIES
Investors: right to withdraw and have money returned (1) securities issued is in contravention of s 724; (2) right in (1) is exercisable Issue Capital Reduction Share Buy-Back
by written notice to [Co] w/in 1 month of issue date; (3) if seller not repay money as required in (1), [Di] or seller liable: s 737 Role of SHs on losing membership of co. No need for direct SH consent SHs bought out must consent to buy-back
Effect on all SHs Must be fair & reasonable to SHs as a No equivalent requirement
Indirect SELF-ACQUISTION (s 259) whole
Effect on creditors Must not prejudice cos ability to pay its Must not prejudice cos ability to pay its
creditors creditors
259B. Taking security over own shares or shares in holding company: (1) Co must not take security over shares in itself or in a SH approval - Equal reduction- ordinary resolution - Equal access- not required unless >
company that controls it, except as permitted by subsection (2) or (3): - Selective reduction- special or 10/12 rule.
(2) Company may take security over shares in itself under an employee share scheme that has been approved by (a) resolution at unanimous resolution - Selective reduction- special or
GM, (b) if subsidiary resolution at GM, (3) special exception ok if (a) companys ordinary business is providing finance, (b) security unanimous resolution
is taken in ordinary course of business on ordinary commercial terms. Information requirements Notice of meeting & statement of material Notice of meeting & statement of material
(6) if company after 12 months still holds any of shares, company commits offence. Based on (7) strict liability. information information
Effect on share capital Shares cancelled following reduction Shares bought back cancelled
259C. Issuing or transferring shares to controlled entity
(1) Issue or transfer of shares of a company to an entity it controls is void unless: (a) the issue or transfer is to the entity as a personal Unincorporated Non-Profit Associations
representative; or (b) transfer is to the entity as trustee and neither the company nor any entity it controls has a beneficial interest in
Smith v Anderson: Association includes any group of persons who have agreed to join together in the pursuit of one or more
the trust. (c) the issue to the entity is made as a result of an offer to all the members of the company who hold shares of the class
common objects or purposes often to promote religious, educational, literary, scientific, artistic, etc).
being issued and is made on a basis that does not discriminate unfairly, either directly or indirectly, in favour of the entity. (d) the
Unincorporated non-profit associations :
transfer to the entity is by a wholly owned subsidiary of a body corporate and the entity is also a wholly-owned subsidiary of that body
-Not a legal entity.
corporate
Doust v Attorney- General: If association has assets, they belong (subject to the rules) to the members.
259D. Company controlling entity that holds shares in it Cameron v Hogan: Any rules that regulate affairs do not necessarily constitute an enforceable contract b/w the members as they
If still holds after 12 months, (e)must cease to hold shares, (f) company must cease to control entity. (4A) strict liability are presumed to be not legally binding.
24
Bohemians Club v Acting Federal Commissioner: A voluntary association of persons who agree to maintain for their common
personal benefit, and not for profit.
Re Thackrah: Association: there must be some rules either written or oral, by the members of it are tied together. There must be
some constitution.
Conservative and Unionist Central Office v Burrell: Essential characteristics of a non-profit association:
1) Must have members of association
2) A contract binding the members among themselves
3) Must be a moment where number of persons combined together to form the association.
Formation of Unincorporated Non-Profit Associations:
-Little formality required, Mutual understanding b/w members is important, Do not need a name in order to function.
Earl Cowley v Countess Cowley: When choosing a name, cant use it to deceive.
-In changing rule, majority decision will usually suffice Master Grocers of Victoria v Northern District Grocers Co op Ltd.
Associations rules and their effect:
-General assumption: Members of unincorporated non-profit associations do not intend to be contractually bound by the
associations rules.
-No legal obligation b/w members unless rules make it clear that there is Cameron v Hogan.
Cameron v Hogan: Hogan took action against the Victorian Central Executive of the Australian Labor Party complaining of the
actions of its members in reference to the performance of endorsement procedures for a parliamentary election and their decision to
expel him from the party. HC Held: Rules did not have contractual force. A member has no contractual right under associations rules
to complain when unjustifiably excluded from the association. For action in contracts a member must show that the rules conferred
upon them.. a contractual right to the performance of the particular duty upon which he insists.. (as) such associations are
established upon a consensual basis but, unless there were some clear positive indication that the members contemplated the
creation of legal relations inter se, the rules adopted for their governance would not be treated as amounting to an enforceable
contract.Were the rules relating to the selection of candidates intended to operate as a contract? The rules of the association did not
operate to create enforceable contractual rights and duties b/w members or executive officers and members.
Management:
-Usually administered by a committee comprising certain members.
-Where committee formed committee members often personally responsible for debts incurred in the name of association Bradley
Egg Farm v Clifford.
Committee members liable by the fact they are committee members, does not matter that a particular committee member was not
present at the time of the action Ward v Eltherington.
Contractual relations:
-No right to enter into k (not a legal person).
-K made with all members or agent or trustee acting within their authority.
- Freeman v McManus Members of an association are not liable for Ks made on their behalf by committee members or by agents
of the committee
Carlton Cricket & Football Social Club: K was for a lease expressed to last for 21 years. The club (Fitzroy Football Club) had a
fluctuating membership. Agreement signed by 2 officers of association. The agreement was made with the association itself. The
football club then agreed to play at a different location. Held: No legal contract as the association is not a legal entity. Shouldve
contracted with members of the association. Rules of association conferred no authority on the committee to bind all the members
and there was no resolution of the members indicating that they approved of the agreement.
Re Falvey; Ex parte Goddard. Rules of an association may provide that the members of the committee shall be indemnified
against any personal liability, or such an indemnity may be given in respect of a particular transaction:
Peckham v Moore: Peckham sued as a football player for workers compensation. Who was his employer? Held: Club committee
was proper employer. Which particular committee was liable? The 1972 Committee (he signed his K in 1970: there was a diff
committee in 1970). Payment comes out of the associations funds.
Bailey v Victorian Soccer Federation: Football referee died during match, wife claimed workers compensation from
unincorporated association. Held: For the purpose of Workers Compensation Act, unincorporated bodies are capable of being
employers within the meaning of the act.
Tortious Liability:
-It will be the committee members who will be liable in respect of tortious claims.
Smith v Yarnold: Smith injured when defective grandstand collapsed. Facility was ran by an unincorporated association. Smith sued
committee of which Arnold was secretary. Held: Committee liable as occupiers of premises.
Owen v Northampton Borough Council Generally a member of an unincorporated association does not owe a duty of care to other
members of the association if that is the only relationship between them .
Right and Liability of members:
25
Most cases do not have contractual relationships between members.
Ordinary members: Liability is usually limited to the amount of their subscription or entrance fee Wise v Perpetual
Trustee Co Ltd. In this case, trustee was held personally liable.
Liability can be altered in the agreement of the members.
Members are entitled to use property of the association for as long as they remain members Re St James Club.
Court Proceedings and Unincorporated Non-Profit Associations:
Halsburys Laws of Australia: Courts will interfere with associations when:
o Rules are contractually binding and there is a breach Plenty v Seventh Day Adventist Church of Port
Pirie. In this case the rules of the association recognized a limited right of recourse to the courts. This was a
clear and positive indication that the members contemplated the creation of legal relations.
o Where there is a dispute concerning proprietary rights: Members may challenger a committees decisions
dealing with disposition of property Rednall-Short v Grier.
o Public policy justifying juridical intervention: Cant oust the jurisdiction of the court to determine disputes.
Held committee could not take away right to bring action to court: Harbottle Brown & Co Pty Ltd v Halstead.
o Interference with a right to work: When associations have power to regulate employment, such as by
granting licenses, courts will often intervene when a person is prevented from working Nagle v Fieldon.
o Where the dispute involves an unreasonable restraint of trade: Examination of whether the ruels of the
association amount to a restraint of trade. Tully v Buckley: Tutty (minor) signed a K to play rugby with
association. There were unreasonable restraints not allowing Tutty from moving to another club. Court said
rules had contractual force and therefore they could intervene.
Procedural Dilemmas:
Wood v McCarthy: Plaintiff can bring action against representative of the association, such as officials.
Lee v Surry Hills Mutual Loan Club: The associations name, as a plaintiff is ok as long as the identity of the members of
the association and the fact that they are the parties brining litigation.
Gifts to unincorporated Associations:
Rule: A gift to an association if a gift to its members at the time the instrument takes effect. Gift will then be valid.
Leaby v Attorney-General: Gift of real estate made to trustees as my said Executors and Trustees shall select. Held: It
was gift.
Gifts purpose usually needs to be charitable to be valid: Victorian Women Lawyers Association Inc v Commissioner
of Taxation.
Bacon v Pianta: Gift for associations sole use and benefit was held to be invalid. A gift to an association is valid if it
operates as one to the individual members at the time of the bequest. If gift in trust for the benefit of both present and
future members, it is invalid.
Is a non-profit association a charity?
Victorian Women Lawyers Association Inc v Commissioner of Taxation: Relevant task it to assess the true character or nature
of the entity by reference to its objects, purposes, and activities.
Dissolution:
Rights of members when association dissolves?
Must be a division of property of the club or association among those alone who are the owners of the property, to the
exclusion of former members Re Sick.
Business Ethics
United Nations Convention Against Corruption:
-All those in direction and management of companies need to identify and examine what they regard as the basic underpinning of
their system of values.
-Lack of ethics in cases of misconduct corporate governance, human rights, environmental protection and corruption.
-Corporate failures due to ethics: Accounting fraud, extravagant spending, payment of large bonuses to sr mgmt..
- Accounting misconduct undermines business confidence because investment decisions are made on the assumption that the
reported figures are accurate.
Corporations Act 2001 (Cth): Imposes upon companies and directors obligations which have ethical dimension. Directors duties
include the duty to act in good faith, not make improper use of information, and disclose personal interests.
Benefits of business ethics:
-More profitable in the long run better reputation. Loss of confidence by consumers means reduced business.
-Corporate social responsibility: Impacts on society
-Triple bottom line= Consider Financial, social, and environmental.
United Nations Convention Against Corruption :
-Australia ratified treaty on 7 Dec 2005, will be implemented under Corporations Act 2001 (Cth).
United Nations Global Impact:
Principle 1: Business are asked to support and respect the protection of international human rights within their sphere of influence.
P 2: Make sure their own corporations are not complicit in human rights abuses.
P3: Business are asked to uphold the freedom of association an the effective recognition of the right to collective bargaining.
P4: Elimination of all forms of forced and compulsory labout,
P5: Effective abolition of child labour
P6: Elimation of discrimination in respect of employment and occupation.
P7: Businessnes are asked to support a precautionary approach to environmental challenges.
P8: Undertake initiatives to promote greater environmental responsibility; and
P9: Encourage the development and diffusion of environmentally friendly technologies.
Note: NOT legally binding.
Organization for Economic Co-operation and Development (OECD) Guidelines: International instrument for multinational
business operations: NOT LEGALLY BINDING.
-Obey domestic law, not seek or accept exemptions from human rights, environmental, health, safety, labour and taxation laws.
Should not engage in improper involvement in political life of host state. Environmental standards. Consumer protection: products and
services should be safe. No fraudulent or misleading representation to consumers.
Corporate Ethics Code:
-Ethics code defined as a written, distinct, and formal document, which consists of moral standards used to guide employees and
corporate behaviour.
-Aspirational code: Sets out ideas of best practices but is general unenforceable.
-Presciptive code: Specific and breaches are subject to punishment.
Can include: Observance of the law, companies impact on others, respect for personal privacy, non-discrimation against ees, declare
conflicts of interests, should not exploit others.
Criminal Code Act 1995 (Cth) Div 70:
-Person commits offence if provides benefit to foreign public official which is not legitimately due, with intention of influencing official in
order to obtain business advantage. Consider: Is the payment customary, necessary, or required Sch, s 70.2(1A). It is a defence that
the conduct is lawful in the foreign officials country: Sch, s 70.3. Also defence to show the benefit was of minor value and was
provided for the purpose of expediting or securing the performance of a minor and routine government action.

Radio: Broadcasting Services (Commerical Radio Current Affairs Disclosure) Standard 2012: Ads which may affect the content of a
commercial radio current affairs program must be disclosed during the program (Clause 7).
TV: Commercial Television Industry Code of Practices: Current affairs or documentary programmes must disclose existence of
commercial arraignment (clause 1.20). Ads must be clearly presented as ads.
Tobacco advertising prohibition Act 1992 (Cth): Illegal to broadcast or publish a tobacco advertisement because of children. Content
of packaging has also been strictly regulated (generic packaging).
Advertising for children:
- The Code for Advertising and Marketing Communication to Children: ads must not promote an inactive lifestyle or
unhealthy eating or drinking habits (Clause 2.15(a).
- Childrens Television Standards 2009: Prohibit ads in which a product of service is promoted by a film or tv character or
popular celebrity (35(1)). Only applies to ads during programs that are rated C (Children) or P (preschool).

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