run through sheets for bus orgs-1

7/31/2019 Run Through Sheets for Bus Orgs-1

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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 werethe individual to retain a secret profit or refuse restitution of a loss inflicted by him/her:

Whaley Bridge Calico Printing Co v Green.

2. Promoters Dutiesa. Acting in the companys best interests.

i. utmost candour and honesty (Central Railway of Venezuela v Kisch)b. Must disclose all material facts.

3. 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 ifthe 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 extendto 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):CommonwealthBank of Australia v Australian Solar Information

i. May arise where a person believes the company to be incorporated, laypersonsbelieve 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 theunregistered 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)).

The company thus, will be considered to be primarily liable.e. 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 partperformance of the contract.


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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.

f. Was any ratification within the time agreed by the parties to the contract, or if there is noagreed 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 periodstipulated by the parties, and if no stipulation exists, within a reasonable time of the

contract being entered into.

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


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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 CorporationsAct and will attract relevant criminal and civil liability prescribed by the Act.

By contrast, a breach of the replaceable rules will not in itselfconstitute a breach of the law: s 135(3).

2. Was the company registered before or after 1 July 1998?a. If yesThe 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).3. Adopting a constitution

a. Replaceable rule are applicable to companies registered after the commencement of theCompany Law Review Act 1998: s 135(1).

i. Such companies can adopt the replaceable rules or adopt a constitution thatdisplaces 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 specialresolution by the company (see below for details on special resolution): 136(2).

4. 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 aconstitution: s 135(2).

ii. A company may then modify or repeal its constitution or provision in theconstitution through the passage of a special resolution: s 136(2).

Passed by at least 75% of votes by members entitled to vote on theresolution and proper notice must be given (usually 2 weekss 249(c)).

b. Are there any further conditions espoused in the constitution which need to be compliedwith?

i. Constitution may have specified a further precondition before the alteration will bevalid: 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


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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.

c. 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 wherethe 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;

The companys capital: ss 254H and 256A-256E.d. Common law requirements

i. The power to alter the constitution must be exercised bona fide for the benefit ofthe company as a whole (Allen v Gold Reefs of West Africa)

Where the alteration affects all members equally this is the test that mustbe applied.

ii. If the alteration affects shareholders differently, thereby involving a conflict ofshareholders 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 orunfair to the minority shareholder).

5. Binding nature of the constitution as a statutory contracta. 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 isunalterable (Allen v Gold Reefs of West Africa).

6. Separate contracta. 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, thecontract will provide the member with an independent, enforceable source of rights

(Oswald v Bailey).


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ii. Where this separate contract clearly provides that an alteration of the companysconstitution 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).

b. 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 mayindicate that an amendment of the constitution also automatically changes

the terms of the contract.

7. Parties to the statutory contracta. 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; andiii. A member and each other member.

This section does not extend the benefits of the statutory contract to therelations between members and directors and company secretary, nor

does it safe guard the rights of third party outsiders.

b. Outsiders and the statutory contracti. 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 vKent on Romney Marsh Sheepbreeders Association and Rayfield v Hands).

8. Ultra Viresa. Narrow Sense Non-applicableb. Broad Sense Applicable to members and directors powers.


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Shares

1. A share at common law is defined in terms of the rights and liabilities stemming from the ownershipof shares

2. Classes of sharesa. Power to issue different classes of shares

i. ASIC must be notified of the creation of classes of shares or the conversion of sharesin a class into shares of another class within 14 days of the creation/ conversion: s

246F(1)

3. Types of sharesa. Deferred shares

i. The rights to dividends is deferred until dividends of a particular amount have beenpaid to shareholders

b. Ordinary sharesi. Entitled to dividends before deferred shareholders, but after preference

shareholders

c. Preference sharesi. A company may issue preference shares under s 254A(1)

ii. Establishing that shares are preference shares requires that certain rights bespecified in accordance with s 254A(2)

iii. This section says a companys constitution or special resolution passes must specifythe rights attached concerning

1. Repayment of capital2. Participation in surplus assets and profits3. Cumulative or non-cumulative dividends4. Voting; and5. Priority payment of capital and dividends6. redeemable

d. Governors sharesi. Small proprietary companies may sometimes issue governors shares to the

companys founder/ governing director

e. Employee sharesi. 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 shares2. It is also common that the shares are not transferable3. The purchase of these shares can be financed by the company through an

employee acquisition scheme, approved by the company in the general

meeting

4. Variation of class rightsa. What is class

i.

No express label needed, only distinct rights from the rights attached to othershares


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b. Actual variationi. 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 intofurther 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 rights1. 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 rights1. 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.


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Maintenance of share capital

1. Pre-requisites for a reduction in share capitala. Share capital may not be reduced unless the company complies with s 256B(1) or effects a

permissible buyback under Div 2 ofPart 2J.1

b. Section 256Ballows 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 othersc. Consequences of failure to comply with s 256B

i. S 256D2. Company purchasing its own shares

a. Common law- Trevor v Whitworth, this has been codifiedb. 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 liablec. Buy Backs Div 2; s 257A

i. A company may buy back its own shares if the buy back does not materiallyprejudice the companys ability to pay its creditors and the company follows

procedure

d. Company lending money on security of its own sharesi. 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)

3. Company financially assisting purchase of its own sharesi. Requirements for financial assistance

1. S 260A provides that a company may only financially assist a person toacquire 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 itsshareholders to the companys ability to pay its creditors; or

b. Is approved by the shareholders under s 260Bc. is exempted under s 260C

ii. ASIC V ADLER4. Exemptions

a. S 260C5. Consequences

a. Any person involved in a companys contravention ofs 260A contravenes s 260D(2)b. civil penalty


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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


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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 breachNo consequences for breach of s542T W

must look to other sections for consequences e.g. directors duties


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Directors Duties

1. Directors are considered to stand in a fiduciary relationship with the company and are subject to theduties that stem from that relationship (Regal (Hastings) Ltd v Gulliver).

2. Duty to act honestly/in good faith and in the best interests of the companya. 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 ofallshareholders while solvent (not justmajority 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, thenthe interests of the creditors displaces the interest of the shareholders(Kinsella v Russel Kinsela Pty Ltd).

iii. Nominee Directors Precarious position; problematic because nominee directorsmust 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 companysinterests over those of their patron.

iv. Group Companies As each company is a separate legal entity, the director mustconsider 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 thedirector of a wholly-owned subsidiary to act in the best interest of the

holding company (3 circumstances in notes).

v. CreditorsWhile the company is solvent, a failure to consider the creditorsinterests 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 creditorsinterests 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 takeninto account where the employees or third partys interests coincide with the


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interest of the company (Hampson v Prices Patent Candle Co.).

3. Consequences of a breacha. 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 materiallyprejudices the interests of the corporation or its member or the

corporations ability to pay its creditors or constitutes a serious breach ofs

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 beenmade 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 directorcontravened the provision recklessly or with intentional dishonesty. The

court has no power under the Corporations Act to relieve a director from

criminal liability.

4. Duty to fetter discretiona. 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: shonkyagreements by directors for their own benefit outside the company will be void.

5. Proper purpose doctrinea. 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 honestyDirectors 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


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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 issuesDirectors 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 transfersWhere 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 andreasonable: s 1071F(2).

b. Consequences of a breachi. 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 toregister 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 interestsa. 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 companycontract 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 thecontract to fall within the rigors of this rule.


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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.

b. Use of position for the personal profit in equityi. 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 actingbona 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 hadinformed 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 wellestablished 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).c. Use of position for personal profit under Corporations Act

i. Sections 182 and 183 complement the common law remedies by prohibiting officersand 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 ofa 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.

7. Duty to act with reasonable care and diligencea. Common Law

i. Objective Standard: Did the director exercise their powers and discharge theirduties with the degree of care and diligence that a reasonable person would

exercise (Daniels v Anderson; s 180(1)). Applies to both executive and non-

executive directors.

b. Statutory duty of care and diligencei. 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 anddiligence 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 extentthey reasonably believe to be appropriate; and

They rationally believe that the judgemet is in the best interests of thecorporation.

Business judgement is defined in s 183as any decision to take totake or not to take action in respect to a matter relevant to the

companys business operations.

d. Reliance and delegationi. 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 hadacted: 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 dutiesof directors and that the delegate was reliable and competent.

iv. Section 189(a)(i) (iv) Director may rely on advice from certain others (listed innotes).

e. Consequences of a breachi. Section 180(1) is stated as giving rise to only civil obligations.

No criminal penalty. However, in practice, a breach of this section mayoverlap with breaches of other directors duties which may give rise to

criminal penalty.

8. Insolvent Tradinga. Duty to prevent insolvent trading

i. Liability is placed on company officers in certain cases where they allow thecompany 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 toprevent 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 orwould become insolvent; and


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The director was aware of these grounds or a reasonable director in thelike position in a company in the companys circumstances would be

aware.

b. Insolvency (s 588G requires the upon the company incurring the debt the company wasinsolvent or that debt made the company insolvent).

i. A company is insolvent when they cannot meet their debts as and when they falldue: 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.

c. 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 bydeeming certain actions to be, in essence deemed debts:

These actions include the paying of a dividend, a reduction in share capitaland the provision of financial assistance of the acquisition of shares.

d. Incurring a debti. 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 somethingwhich 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).

e. Objective test (directors do not contravene s 588G, however, just because the company isinsolvent)

i. There must also be reasonable grounds to suspect that the company is insolventwhen the debt is incurred (s 588G(1)(c)); and

ii. Moreover, the director must be aware of these ground of suspicion, or a reasonabledirection would be aware of these grounds (s 588G(2)).

f.

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))

g. Consequencesi. 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 ofs 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 pointSection 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 orreceivable by the firm without the prior deduction of outgoings and expenses:

Cribb v Korn

iii. 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 thepartners agreement: s 28(6).

This can be varied by agreement ie. Salaried partner/advanced payments ofoverall 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

iv. 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

v. Rights of partnersIf 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.

vi. Other factorsIe. If the partners name is included on the letterhead then they may be found to be a

partner.

2. What liability does the partner have?i. 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)ii. 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 firmand the co-partners when carrying on in the usual way of the firms business; s 9

iii. Does the partner have express authority? Is contained within the partnership agreement, if there is one, and in the Partnership

Act.


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Express authority can be negated or qualified by contrary agreement of thepartners: Construction Engineering Pty Ltd v Hexyl Pty Ltd

Limitations on authority will not affect the ostensible authority of the partner unlesssuch 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 ifs 18applies. 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 out2) A third party must have relied on the representation; and

Reliance is not a but-for test. Only that there was a detrimentalreliance 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 firmsbusiness?

A pledge not connected to the business will not bind the firm automatically; the partnerwill need to seek special authorisation for the transaction: s11

1. Contractual or tortuous liability (or both)?i. Tortuous liability

The firm may be liable for wrongful acts/omissions committed in the ordinary course ofthe firms business: s14

The ordinary course of the firms business is viewed objectively (Polkinghorne vHolland). Must look at the partnerships business.

Liability is joint and severally liability, therefore the partner may be sued individually: s16 Criminal liability may also apply: s15

ii. 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: MercantileCreditvGarrod.

Special authorisation is needed if it is beyond the kind of business undertaken bythe firm: s11

Was the purchase made in the firms name showing the intention to bind thefirm?s10


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No act done in contravention of a restriction of authority to which the partnershave agreed will be binding on the firm if the third party has notice of the

limitation of authority: s12

iii. The liability is constricted to the wrongdoer unless the other partners have notice.

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