1

Business Organisations Run-Through Sheets

Promoters and Pre-Incorporation Contracts

1.

Identify promoter/s (two elements)? a. Factually involved in the formation and/or the initial conduct of the company (before or after incorporation): Twycross v Grant. b. Special/fiduciary relationship with the company that it would be contrary to good faith were the individual to retain a secret profit or refuse restitution of a loss inflicted by him/her: Whaley Bridge Calico Printing Co v Green. Promoters Duties a. Acting in the companys best interests. i. utmost candour and honesty (Central Railway of Venezuela v Kisch) b. Must disclose all material facts. The requirements to pre-registration contract are: a. Has a person entered into a contract on behalf or for the benefit of the proposed company: s 131(1). i. This person faces potential liability (if the company fails to ratify the contract or if the company is not formed at the point of contract) for the contract under s 131(2). ii. The phrase ... on behalf of, or for the benefit of a company would appear to extend to all contractual capacities in which a promoter might act, including that of a purported principal. b. Was the contract entered into before the company was registered: s 131(1): Commonwealth Bank of Australia v Australian Solar Information i. May arise where a person believes the company to be incorporated, laypersons believe the company has changed its name and shelf companies (courts yet to consider). c. Was the company subsequently registered: s 131(2). i. If not, the person who entered into the contract is liable. d. Is the registered company the unregistered company or is it reasonably identifiable with the unregistered company: s 131(1). i. Necessary for the following: To ratify the contract under s 131(1); and To ensure that the person who entered the pre-registration contract is not liable under that contract, subsequent to the companys registration (s 131(2)). e. The company thus, will be considered to be primarily liable. Has the company ratified (s 131(1)) or substituted (s 131(2)) the pre-registration contract. i. Once registered the company has the option to ratify the contract Company may have to accord with terms of the companies constitution which stipulate what is necessary to execute the contract i.e. the company seal or the authority not to use the company seal: s 126(1). It has also been suggested that a contract may be ratified by part performance of the contract.

2.

3.

Business Organisations Run-Through Sheets

ii. What amounts to substitution: A contract sufficiently, substitutes the pre-registration contract to satisfy s 131(2) where the contract are very similar or the new contract expressly states that it is in substitution of the original document. Was any ratification within the time agreed by the parties to the contract, or if there is no agreed time within a reasonable time of the contract (s 132(1)). i. Needs to be ratified/substituted under s 131(1) within the agreed time period stipulated by the parties, and if no stipulation exists, within a reasonable time of the contract being entered into.

f.

4.

If all requirements (a-f) are not met there is no pre-registration contract and the person who entered into the pre-registration contract will not be released from liability.

Business Organisations Run-Through Sheets

Corporations Constitution

1.

Companies are no longer required to have a constitution. a. They can simply use the rules of internal management specified in the Corporations Act. i. Some of these rules are mandatory; ii. The rules that are not mandatory are known as the replaceable rules (some rules a mandatory for public companies, but replaceable for proprietary: ss 135(1)(b) and 249X). A breach of a mandatory rule will constitute a breach of the Corporations Act and will attract relevant criminal and civil liability prescribed by the Act. By contrast, a breach of the replaceable rules will not in itself constitute a breach of the law: s 135(3).

2.

Was the company registered before or after 1 July 1998? a. If yes The companys original constitutional documents will continue to constitute a companys constitution (unless they have been validly appealed: s 1415). b. If no The company will be subject to the replaceable rules: s 135(1). Adopting a constitution a. Replaceable rule are applicable to companies registered after the commencement of the Company Law Review Act 1998: s 135(1). i. Such companies can adopt the replaceable rules or adopt a constitution that displaces the replaceable rules: s 135(2). b. A constitution may be adopted either before or after registration: s 136(1). i. A company adopts a constitution on registration where every person specified on the application for registration as consenting to being a member agrees in writing to the terms of the constitution before the application is lodged: 136(1). ii. A constitution may be adopted after registration through the passage of a special resolution by the company (see below for details on special resolution): 136(2). Altering the constitution (5 things to consider) a. Was there a special resolution at a general meeting? i. A company may prima facie displace or modify the replaceable rules by adopting a constitution: s 135(2). ii. A company may then modify or repeal its constitution or provision in the constitution through the passage of a special resolution: s 136(2). Passed by at least 75% of votes by members entitled to vote on the resolution and proper notice must be given (usually 2 weeks s 249(c)). Are there any further conditions espoused in the constitution which need to be complied with? i. Constitution may have specified a further precondition before the alteration will be valid: s 136(3). ii. S 172 details such preconditions: The resolution must be passed by a percentage of members higher than that required under a special resolution; or The consent of a specified person be obtained; or 3

3.

4.

b.

Business Organisations Run-Through Sheets

c.

That a particular condition be fulfilled. iii. Note: Unless the constitution says otherwise, a pre-condition cannot itself be modified or repealed unless the further requirement satisfied. Alterations affecting members, and the need for members to consent in writing. i. Members are not bound by an alteration of the constitution unless they consent in writing where the change: Requires members to take up additional shares; Increase members liability to contribute to share capital or otherwise pay money to the company (Ding v Sylvania Waterways Ltd). Impose or increase restrictions on the right to transfer shares except where the modification is made in relation to change from a public company to a proprietary company or in the course of inserting takeover provisions: Part 2B.7; s 140(2). ii. Specific provision is also made for the alteration of the constitution to affect: The companys name: s 157; The type of company: Part 2B.7; Class rights: Part 2F.2; The companys ability to dispense with the inclusion of Limited in its name: s 150;

d.

The companys capital: ss 254H and 256A-256E. Common law requirements i. The power to alter the constitution must be exercised bona fide for the benefit of the company as a whole (Allen v Gold Reefs of West Africa) Where the alteration affects all members equally this is the test that must be applied. ii. If the alteration affects shareholders differently, thereby involving a conflict of shareholders interests, the test to apply is espoused in: Gambotto v WCP Ltd. The High Court held in this case that the alteration will be valid unless it is: Ultra Vires (not really relevant as has largely been abolished); Beyond any purpose contemplated by the corporate constitution; and Oppressive (procedurally and substantially unfair i.e. fraudulent or unfair to the minority shareholder).

5.

Binding nature of the constitution as a statutory contract a. The companys constitution and any applicable rules have the effect of a contract under which each person agrees to observe and perform their provision in so far as they are applicable to that person: s 140(1). i. Contract can be altered (refer to above) a constitution cannot state that it is unalterable (Allen v Gold Reefs of West Africa). Separate contract a. Independent contract members may protect their rights by including them in a separate contract (Allen v Gold Reef of West Africa). i. Whilst this will not prevent the constitution being altered to affect such rights, the contract will provide the member with an independent, enforceable source of rights (Oswald v Bailey). 4

6.

Business Organisations Run-Through Sheets

b.

ii. Where this separate contract clearly provides that an alteration of the companys constitution will not affect the right under the contract, the contract would have provided an effective means of protecting the contracting partys rights (Southern Foundries Ltd v Shirlaw). Interdependent contract (automatically change if the constitution is changed) i. Where however, the independence of the contract and the companys constitution is less clear, the contract will not always prevent an alteration of the constitution contemporaneously denying the parties rights under the contract (Read v Astonia Garage Ltd). Thus the interdependency of the contract and the constitution may indicate that an amendment of the constitution also automatically changes the terms of the contract.

7.

Parties to the statutory contract a. Section 140(1) provides that any applicable replaceable rules and/or the companys constitution operate as a statutory contract between: i. The company and each member; ii. The company and each director and company secretary; and iii. A member and each other member. This section does not extend the benefits of the statutory contract to the relations between members and directors and company secretary, nor does it safe guard the rights of third party outsiders. Outsiders and the statutory contract i. Third parties have no rights under the statutory contract, and as such cannot bring an action for a breach of its terms (Eley v Positive Government Security Insurance). ii. Members enforcing outsider rights: A person privy to the statutory contract, for example a member, can only enforce their rights under the constitution in their capacity (Brown v La Trinidad). They cannot enforce their rights in their capacity as an outsider (Hickman v Kent on Romney Marsh Sheepbreeders Association and Rayfield v Hands).

b.

8.

Ultra Vires a. Narrow Sense Non-applicable b. Broad Sense Applicable to members and directors powers.

Business Organisations Run-Through Sheets

Shares

1.

A share at common law is defined in terms of the rights and liabilities stemming from the ownership of shares Classes of shares a. Power to issue different classes of shares i. ASIC must be notified of the creation of classes of shares or the conversion of shares in a class into shares of another class within 14 days of the creation/ conversion: s 246F(1) Types of shares a. Deferred shares i. The rights to dividends is deferred until dividends of a particular amount have been paid to shareholders b. Ordinary shares i. Entitled to dividends before deferred shareholders, but after preference shareholders c. Preference shares i. A company may issue preference shares under s 254A(1) ii. Establishing that shares are preference shares requires that certain rights be specified in accordance with s 254A(2) iii. This section says a companys constitution or special resolution passes must specify the rights attached concerning 1. Repayment of capital 2. Participation in surplus assets and profits 3. Cumulative or non-cumulative dividends 4. Voting; and 5. Priority payment of capital and dividends 6. redeemable d. Governors shares i. Small proprietary companies may sometimes issue governors shares to the companys founder/ governing director e. Employee shares i. Such shares normally confer limited rights, ensuring that too much control is not conceded to the employees. 1. It is usual for no voting rights to be attached to the shares 2. It is also common that the shares are not transferable 3. The purchase of these shares can be financed by the company through an employee acquisition scheme, approved by the company in the general meeting Variation of class rights a. What is class i. No express label needed, only distinct rights from the rights attached to other shares 6

2.

3.

4.

Business Organisations Run-Through Sheets

b.

Actual variation i. Only those variations which affect the substance, as opposed to the mere enjoyment of a class right need to comply with procedures (White v Bristol Aeroplane Co Ltd) ii. Variation deemed under constitution (Reg 4(3) Table A) iii. Variation deemed under s 246C 1. Deems divisions of shares/classes of shares or membership rights into further classes of shares/ rights to be deemed variations of class rights. This would then constitute an actual variation of class rights iv. Procedure to vary class rights 1. If constitution states procedure: s 246B (i)(reg 4) 2. If the constitution is silent as to how class rights may be altered, as long as these rights are not declared to be unalterable, s 246B (2) specifies how they may be altered v. Challenge to the variation of class rights 1. S 246D (1) allows members with at least 10% of the vote in the affected class to apply to the court within one month (s 246D(2)) of the variation to have set it aside 2. CL- Allens case and Gambotto (bona fide variation in the best interests) 3. If an alteration is oppressive, unfairly discriminatory or prejudicial, the court may also set the alteration aside pursuant to powers conferred by ss 232-235.

Business Organisations Run-Through Sheets

Maintenance of share capital

1.

Pre-requisites for a reduction in share capital a. Share capital may not be reduced unless the company complies with s 256B(1) or effects a permissible buyback under Div 2 of Part 2J.1 b. Section 256B allows a company to reduce its share capital if the reduction: i. Is fair and reasonable to the companys shareholders as a whole; and ii. Does not materially prejudice the companys ability to pay its creditors; and iii. Is approved by the shareholders under s 256C 1. Equal is ordinary shares and selective are all others c. Consequences of failure to comply with s 256B i. S 256D Company purchasing its own shares a. Common law- Trevor v Whitworth, this has been codified b. S 259A and 259C provide that a company is prohibited from acquiring shares or unit shares in itself or issuing or transferring shares to an entity it controls i. it affects individuals capacity not that of the company, thus civilly liable c. Buy Backs Div 2; s 257A i. A company may buy back its own shares if the buy back does not materially prejudice the companys ability to pay its creditors and the company follows procedure d. Company lending money on security of its own shares i. A company is prohibited from taking security over shares in itself or a company it controls: s 259B(1) ii. Consequence civil penalty (s 259F) Company financially assisting purchase of its own shares i. Requirements for financial assistance 1. S 260A provides that a company may only financially assist a person to acquire shares or units of shares in the company or its holding company if certain conditions are met: a. Does not materially prejudice the interest of the company or its shareholders to the companys ability to pay its creditors; or b. Is approved by the shareholders under s 260B c. is exempted under s 260C ii. ASIC V ADLER Exemptions a. S 260C Consequences a. Any person involved in a companys contravention of s 260A contravenes s 260D(2) b. civil penalty

2.

3.

4.

5.

Business Organisations Run-Through Sheets

Dividends

1) Difference between companies with or without a Constitution (a) Company with a Constitution Will specify procedure on how dividends will be paid (b) Without Constitution S 254U Directors may determine how dividends will be paid, time, amount and the method 2)Dividends do not have to paid (Without Constitution) - even when significant profit Phillips v Melbourne, Castlemaine Soap - However may be oppressive if directors continually refuse ss 232 235 3) Effects of Declaring a Constitution (a) Company with a Constitution - Once declared becomes a debt owed to the subject matter (shareholders) s 254 V(2) Mara Development Ltd v BW Rofe pty ltd (b) Company without a Constitution - Debt will only incur when the fixed time for payment of dividend arrives s 254 V (1) , not as soon as declared as in company with a constitution 4) Dividends must be paid out of profit RE Exchange Banking C (Flincrofts Case) - Insolvent companies can therefore not declare a dividend 254 T - Even if there was a loss in the previous year, whilst good business sense to make the loss up first, no legal requirement not to pay dividends out of the next years profit s 254 T Ammonia Soda Co Ltd Ltd v Chamberlain 5) Events after the current financial year - Marra Developments Ltd v BW Rofe Pty Ltd - Once dividends have been declared because company has made profit, even if subsequently it was a false profit due to future events which have altered the profit amount, dividends will still be paid because of the principals in 3(a) above. Therefore if like 3(b) above and the company has no Constitution future events would effect the payment and cease dividends so long as the date for payment had not occurred. 6) Future Profits - Cannot make dividends on profits that have not occurred s254 V(1) - Industrial Equity v Blackburn - Can only give dividend when profit has actually accrued. 7) Capital Gains/ unrealized capital gains - capital gains can be considered as profits, so long as you only include the profit made from selling the asset, not the contribution in the purchase of the asser Lubbock v British Bank of Sth America - Unrealized capital gains occurs when your asset goes up, but you do not sell it . However you issue dividends from the price rise. To use this unrealized profit for dividends it must be established that Dimbulla valley Tea Co Ltd v Laurie - the capital remains intact -asset cannot be subject to short-term fluctuations

10

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- companies regulations must permit it Industrial Equity Ltd The net profits of the company declaring a dividend must not be that of the corporate group but that of the actual company. 8) Consequences of a breach No consequences for breach of s542T W must look to other sections for consequences e.g. directors duties

10

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Directors Duties

1.

Directors are considered to stand in a fiduciary relationship with the company and are subject to the duties that stem from that relationship (Regal (Hastings) Ltd v Gulliver). Duty to act honestly/in good faith and in the best interests of the company a. Fiduciary duty i. Directors must do what they honestly believe to be in the companys best interests (ASIC v Adler) two pronged test (quasi-objective test); the law requires directors to act: Honestly (subjective test); and In a manner motivated by an intelligent director in this directors position (objective test). ii. This test is now reflected in legislation: Section 181(1)(a). This section allows for both civil and criminal breaches. b. What constitutes a companys best interest i. Companys interests Strictly, owed to the company; the separate legal entity created by law through incorporation (while solvent interests are those of the corporation as a whole (Greenhalgh v Ardene Cinemas)). ii. Shareholders Refers to the interests of all shareholders while solvent (not just majority shareholders) (Greenhalgh v Ardene Cinemas). Important to take into account the interests of existing and future shareholders as a whole, not a duty to individual shareholders (Percival v Wright). If the company is incolvent or is in a financially precarious position, then the interests of the creditors displaces the interest of the shareholders (Kinsella v Russel Kinsela Pty Ltd). iii. Nominee Directors Precarious position; problematic because nominee directors must grapple with their duty to the company (first and foremost) and the loyalty they must have to the class of shareholders whom they represent. If the interests conflict, the nominee director must place the companys interests over those of their patron. iv. Group Companies As each company is a separate legal entity, the director must consider each companys individual interests not those of the group as a whole (Reid Murray v David Murray Holdings). S 187 provides a statutory exception to this principle by allowing the director of a wholly-owned subsidiary to act in the best interest of the holding company (3 circumstances in notes). v. Creditors While the company is solvent, a failure to consider the creditors interests will only amount to a breach of a directors duty where it also involved a failure to act in the companys best interests (Kinsela v Russell Kinsela Pty Ltd). Where a company is insolvent or of doubtful solvency, the creditors interests displace those of the shareholders/company and the directors must have regard to creditors interests. vi. Employees and Other Third Parties - Interests of third parties should only be taken into account where the employees or third partys interests coincide with the

2.

11

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interest of the company (Hampson v Prices Patent Candle Co.). 3. Consequences of a breach a. Common law equitable relief: i. Injunction (Parke v Daily News Ltd); ii. Declaring such actions to be voidable at the companys option (Kinsela v Russell Kinsela Pty Ltd); and iii. Order for equitable damages (Bruninghausen v Glavanics). b. Statutory relief: i. Injunction: s 1324. ii. Civil penalty: s 1317E(1) Once the declaration is made, in the case of a breach that materially prejudices the interests of the corporation or its member or the corporations ability to pay its creditors or constitutes a serious breach of s 181(1), a court may order the payment of pecuniary penalty of up to $200,000: s 1317G(1). iii. Disqualification Under s 206(1) and (2) where a declaration of contravention has been made under s 1317 on the application of ASIC, the court may disqualify a person in light inter alia, the persons conduct in relation to the management, business or property of the corporation. iv. Compensation A company may initiate an action or intervene in civil penalty proceedings, seeking compensation for the damage suffered by the company, including any profit made by the director, as a consequence of the contravention: ss 1317H and 1317J. v. Criminal Offence Under s 184, the breach will only constitute an offence where the director contravened the provision recklessly or with intentional dishonesty. The court has no power under the Corporations Act to relieve a director from criminal liability. Duty to fetter discretion a. As directors are bound to act for the company, their decision making authority cannot be limited to accommodate anothers interests (cannot contract/promise with a third party to act as that person directs: Thornby v Goldberg). Consequence agreement void: shonky agreements by directors for their own benefit outside the company will be void. Proper purpose doctrine a. Fiduciary duty must be for proper purpose and to promote the interests of the shareholders as a whole: s 181(1)(b) (Australian Metropolitan Life Assurance v Ure). i. Directors honesty Directors must act honestly, although this duty may be breached even though the director is acting honestly. Just because self-interest is not involved will not place the act outside the scope of the doctrine: (Howard Smith v Ampol Petroleum) ii. Importance of improper purpose

4.

5.

12

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b.

Where an act is prompted by several purposes, one of which is improper, whether there is a breach will depend on which of those factors was the trigger for the directors actions and whether that purpose is a proper or improper purpose (Mills v Mills). iii. Share issues Directors honesty usually comes up in the issuing of shares. This can include defeating a takeover, facilitating a takeover by weakening majority or minority shareholders voting power entrenching control of the company in oneself, family members or associates or benefitting one groups of shareholders at the expense of others (Howard Smith Ltd v Ampol Petroleum Ltd). iv. Registration of share transfers Where a breach involves an improper refusal to register a share transfer, the transferee is entitled to be registered (Australian Metropolitan Life Assurance Co Ltd v Ure). The common law remedies are now supplemented by s 1071F. Where the court finds that a refusal/failure to register shares is without just cause the court may order the registration or make such other orders it thinks just and reasonable: s 1071F(2). Consequences of a breach i. Generally A transaction stemming from an improper use of power is voidable at the companys option (Bamford v Bamford). ii. Share Issue If the breach involves an improper share issue that has been ratified, an action may be brought by the company or an aggrieved person to have the share issue disallowed and the share register rectified under s 175(1). iii. Registration of share transfer Where the breach involves an improper refusal to register a share transfer, the transferee is entitled to be registered (Australian Metropolitan Life Assurance Co Ltd v Ure) s 1071F. iv. Statutory Duty A breach of this duty will have criminal consequences if the director contravened the provision recklessly or with dishonest intent: s 184(1)(d). Similarly a civil penalty provision also applies: s 181(1)(b). Thus same penalty as above (on page 14).

6.

Statutory duty to avoid conflicts of interests a. Fiduciary duty Under both the common law and Corporations Act, directors are bound to avoid any conflict between their personal interests and those of the company (the duty extends to avoid being placed in such a position where such a conflict is even possible (North West Transportation Co Ltd v Beatty)). i. Contracting with the company at company law Directors could use their management powers to have the company contract in terms that would directly or indirectly extend profit to themselves. The courts have consequently declared that a director of the company is precluded from dealing on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict with the interests of those whom he is bound by fiduciary duty to protect (North West Transportation Co Ltd v Beatty). The directors interests in the contract need only be small for the contract to fall within the rigors of this rule.

13

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b.

ii. Contracting with the company under the constitution A constitution will typically modify the common law duty by expressly providing that directors may contract with the company despite any consequent conflict of interests. In addition, contrary to the common law, the constitution usually prescribes that the conflict of interest must be disclosed to the board, rather than the general meeting (s 194). iii. Company contracting with the company under the Corporations Constitution Under s 191 a director who has a material personal interest in the matter that relates to the companys affairs must give the other directors notice of his or her interest unless one of the exemptions in s 191(2) applies. Use of position for the personal profit in equity i. Under both the common law and the Corporation Act directors are prohibited from using company property, company information, corporate opportunities or their position in the company or inside information for personal profit (Regal (Hastings) Ltd v Gulliver). Directors may breach this duty even though, the directors were acting bona fide, the company suffered no consequent loss, the transaction benefitted the company or the company was unable to make the profit itself. In Queensland Mines Ltd v Hudson, it was found that because Hudson had informed the board of directors of his actions and had acquired their consent, the court held there was no real sensible possibility of conflict: The correctness of this decision is doubtful and it is well established that disclosure of conflict to the board of directors is insufficient (Furs Ltd v Tomkies). Only informed general meeting can ratify such a breach (Bamford v Bamford). Use of position for personal profit under Corporations Act i. Sections 182 and 183 complement the common law remedies by prohibiting officers and employees from improperly using their positions or corporate information to directly or indirectly gain an advantage from themselves or third parties or to cause detriment to the company. Objective Test: Whether there has been impropriety from the viewpoint of a reasonable person with relevant knowledge and hence does not require a subjective intent to obtain an advantage or cause detriment to the company (Forkserve Pty Ltd v Jack and ASIC v Adler) refer to notes regarding this issue.

c.

7.

Duty to act with reasonable care and diligence a. Common Law i. Objective Standard: Did the director exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise (Daniels v Anderson; s 180(1)). Applies to both executive and nonexecutive directors. b. Statutory duty of care and diligence i. Section 180(1) provides that a director or other officer or a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise.

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c.

Business judgment rule (DEFENCE) i. Allows a director who has otherwise breached the duty of care whether at common law or under s 180(1) to plead this rule in defence: ss 180(2) and 185. ii. Director satisfies the duty of care if they have made a business judgement: In good faith for a proper purpose; They do not have a material personal interest in the subject matter of the judgement; They have informed themselves about the subject matter to the extent they reasonably believe to be appropriate; and They rationally believe that the judgemet is in the best interests of the corporation. Business judgement is defined in s 183 as any decision to take to take or not to take action in respect to a matter relevant to the companys business operations.

d.

Reliance and delegation i. Section 198D(1) provides that, unless the companys constitution provides otherwise the directors may delegate any of their powers to: A committee of directors; or A director; or An employee of the company; or Any other person. The acts of the delegate are as effective as if the director had acted: s 198D(3). ii. Section 190(1) Directors are responsible for the acts of the delegate. iii. Section 190(2) Not responsible where the director believed on reasonable grounds that the delegate would exercise the powers in accordance with the duties of directors and that the delegate was reliable and competent. iv. Section 189(a)(i) (iv) Director may rely on advice from certain others (listed in notes). Consequences of a breach i. Section 180(1) is stated as giving rise to only civil obligations. No criminal penalty. However, in practice, a breach of this section may overlap with breaches of other directors duties which may give rise to criminal penalty.

e.

8.

Insolvent Trading a. Duty to prevent insolvent trading i. Liability is placed on company officers in certain cases where they allow the company to incur debts when either the company is insolvent or the debt will render the company insolvent. ii. Section 588G(1) and (2) provide that directors contravene the section if the fail to prevent the company from incurring a debt when: They were the director of the company; The company was insolvent or incurring the debt rendered the company insolvent; There were reasonable grounds to suspect the company was insolvent or would become insolvent; and

15

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b.

c.

d.

e.

f.

g.

The director was aware of these grounds or a reasonable director in the like position in a company in the companys circumstances would be aware. Insolvency (s 588G requires the upon the company incurring the debt the company was insolvent or that debt made the company insolvent). i. A company is insolvent when they cannot meet their debts as and when they fall due: s 95A. ii. In determining a companys solvency regard must be had to: The companys existing debts; and The debts they will incur in the future. iii. The court will have regard for: The companys ability to borrow money; The companys ability to release assets; Promises of injection of capital; and Whether the creditor would extend credit to the company. Debt (s 588G requires incurring of a debt and does not apply in the absence of a debt (Perkins v Viney)) i. In determining the debts that may be taken into account, s 588G(1A) assists by deeming certain actions to be, in essence deemed debts: These actions include the paying of a dividend, a reduction in share capital and the provision of financial assistance of the acquisition of shares. Incurring a debt i. When a debt is incurred it is important to the operation of the legislation because the company must either be insolvent when the debt was incurred or the debts rendered the company insolvent. A company incurs a debt when by its choice, it does or omits something which as a matter of substance and commercial reality, renders it liable for a debt for which it would not otherwise have been liable (Leigh-Mardon Pty Ltd v Wawn). Objective test (directors do not contravene s 588G, however, just because the company is insolvent) i. There must also be reasonable grounds to suspect that the company is insolvent when the debt is incurred (s 588G(1)(c)); and ii. Moreover, the director must be aware of these ground of suspicion, or a reasonable direction would be aware of these grounds (s 588G(2)). Defences s 588H(2) (5) i. Expected solvency (H(2)) ii. Delegation (H(3)) iii. Illness (H(4)) iv. All reasonable steps were taken (H(5)) Consequences i. Liquidator compensation (s 588M(2)) ii. Civil Penalty: same as above in relation to s 181(1) iii. Criminal breach: As with other statutory duties a breach of s 588G will not give rise to a criminal penalty unless the director actually suspected the company was, or would be as a result of the debts, insolvent and the failure to prevent the debt being incurred was dishonest: s 588G(3). s 588K

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Partnerships

1.

Are they a partner? Note: If we are told they are a partner, skip to step 2. Starting point Section 6(1) i. Is there joint ownership? ii. Do they participate in gross returns? This will not in itself create a partnership: s6(2). However, if the individual is paid out of the firms common fund, that is, receives a percentage of the firms gross returns, this is a strong indication they are a partner. Differs from gross profits in so far as they include all the sums received or receivable by the firm without the prior deduction of outgoings and expenses: Cribb v Korn Do they share in profits? Prima facie if there is a share in a percentage of profits then they are a partner: s 6(3) No partner is entitled to remuneration but the rule can be varied by the partners agreement: s 28(6).

iii.

iv.

This can be varied by agreement ie. Salaried partner/advanced payments of overall share of profits that they have to pay back at the end of the year if their percentage of profits is less than the advancement. In this case depending on the agreement the courts may deem the individual to be a partner: Stekel v Ellice Do they share in losses? All partners must contribute equally towards the firms losses: s 28(1) Therefore if an individual is haring in the firms losses, this suggests they are a partner. There does not have to be an agreement in regards to the sharing of losses: Canny Gabriel v Volume Sales Pty Ltd Rights of partners If a person is exercising the rights of the partners illustrated in s 28 this may support a claim that they are a partner. S 28(5) and (9) provide respectively that partners have a right to partake in the firms management and to access the firms books. Other factors Ie. If the partners name is included on the letterhead then they may be found to be a partner.

v.

vi.

2. i. ii.

What liability does the partner have? When did the individual become a partner? The individual will not be liable if they were not a partner at the time of the act: s21(1) Once it is established that a person is a partner, that person will be deemed to be an agent of the firm and of their co-partners; s 9 Thus, each partner is both an agent and principal and has the authority to bind the firm and the co-partners when carrying on in the usual way of the firms business; s 9 Does the partner have express authority? Is contained within the partnership agreement, if there is one, and in the Partnership Act. 17

iii.

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Express authority can be negated or qualified by contrary agreement of the partners: Construction Engineering Pty Ltd v Hexyl Pty Ltd Limitations on authority will not affect the ostensible authority of the partner unless such a restriction is represented to the third party: Freeman &Lockyer v Backhurst

iv.

Was the person held out to be a partner i.e do they have ostensible/apparent authority? The person may be liable if held out to be a partner if s 18 applies. Applies where: A person holds out Or allows another to hold out that s/he is a partner; They are precluded from denying that they are a partner Three conditions must be satisfied before liability will be incurred under s 18: 1) A representation or holding out 2) A third party must have relied on the representation; and Reliance is not a but-for test. Only that there was a detrimental reliance on the holding out. WILL ALMOST ALWAYS BE CONTENTIOUS ON EXAM. 3) Credit must have been provided. This has been interpreted widely by the courts. The mere delivery of the item to be purchased is considered to be giving of credit

v.

Was the act which the partner is undertaking one which is done in the usually course of the firms business? A pledge not connected to the business will not bind the firm automatically; the partner will need to seek special authorisation for the transaction: s11

1. i.

Contractual or tortuous liability (or both)? Tortuous liability The firm may be liable for wrongful acts/omissions committed in the ordinary course of the firms business: s14 The ordinary course of the firms business is viewed objectively (Polkinghorne v Holland). Must look at the partnerships business. Liability is joint and severally liability, therefore the partner may be sued individually: s16

ii.

Criminal liability may also apply: s15 Contractual liability Liability is joint: s13 Under s 9, each partner is an agent and therefore has the authority to bind co-partners (at the time the contract was made) when carrying on business in the usual way of the firms business. This is determined objectively: Mercantile Credit v Garrod. Special authorisation is needed if it is beyond the kind of business undertaken by the firm: s11 Was the purchase made in the firms name showing the intention to bind the firm? s10

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iii.

No act done in contravention of a restriction of authority to which the partners have agreed will be binding on the firm if the third party has notice of the limitation of authority: s12 The liability is constricted to the wrongdoer unless the other partners have notice.

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