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Corporate personality and business organisations

Corporate personality and business organisations. Corporate Law: Law principles and practice. Liabilities of members Normally, members of an unincorporated association have restricted liability and cannot be made responsible for liabilities beyond the amounts of their subscriptions.

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Corporate personality and business organisations

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  1. Corporate personality and business organisations

  2. Corporate Law: Law principles and practice Liabilities of members Normally, members of an unincorporated association have restricted liability and cannot be made responsible for liabilities beyond the amounts of their subscriptions. Wise v Perpetual Trustees [1903] AC 139

  3. Corporate Law: Law principles and practice Members’ rights Members have few, if any, proprietary rights in the property of the unincorporated association. Cameron v Hogan [1943] 51 CLR 358 It is presumed that there is no particular contractual relationship between the members and the unincorporated association, unless a member can show that the association is more like a professional organisation. Cameron v Hogan [1943] 51 CLR 358

  4. Corporate Law: Law principles and practice A restraint of trade action may be possible against an unincorporated association where the restraint contained in a contract appears to be unreasonable. Buckley v Tutty(1971) 125 CLR 353. Note the application of statute: see, for example, s 14A of the Associations Incorporation Act 1981 (Vic) and its similarities to s 140 of the Corporations Act 2001 (Cth).

  5. Corporate Law: Law principles and practice • Dissolution of unincorporated associations • Unincorporated associations can be dissolved when events occur that that have the effect of ending the existence of the club or society (association). • Assets are collected, liabilities are determined and paid, and the surplus, if any, is distributed. The process can be determined by the association’s rules in their constitution. • Voluntary dissolution occurs when the members agree to dissolve the association • Court-ordered dissolution occurs when the association is no longer functional or the members cannot agree on the purpose of the association

  6. Corporate Law: Law principles and practice Distribution of surplus assets Distribution of surplus assets usually takes place in accordance with the club’s or association’s constitution. If the constitution makes no provision for the distribution of the surplus, there is a presumption that each member receives an equal entitlement. Re GKN Bolts and Nuts Ltd Sports and Social Club [1982] 2 All ER 855 Re Sick and Funeral Society of St John’s Sunday School, Golcar[1973] Ch 51

  7. Corporate Law: Law principles and practice Incorporated associations An association may register an incorporated association under state or territory legislation, thereby creating a recognised legal entity which can enter into contracts, hold property, and sue and be sued. Not-for-profit organisations can register as guarantee companies under s 150 of the Corporations Act 2001 (Cth). If an association registers as an incorporated association, it is not a company and is not subject to the Corporations Act 2001 (Cth), unless it trades interstate.

  8. Corporate Law: Law principles and practice An incorporated association must satisfy certain requirements in order to receive registration (for example, it must have a minimum of five members). An incorporated association should be a ‘not-for-profit organisation’, meaning it can make profits but not distribute them as dividends to members; if it does, it will be held to be a partnership. The same applies to unincorporated associations. After registration, an incorporated association must indicate its status with the abbreviation ‘Inc’. Legislation introduced into a number of states and territories has increased the regulatory requirements on officers within an incorporated association, similar to directors of companies.

  9. Corporate Law: Law principles and practice Incorporated associations cont … An association may register an incorporated association under state or territory legislation, thereby creating a recognised legal entity which can enter contracts, hold property, sue and be sued. Not-for-profit organisations can register as guarantee companies under s 150 of the Corporations Act 2001 (Cth). If an association registers as an incorporated association, it is not a company and is not subject to the Corporations Act 2001 (Cth), unless it trades interstate.

  10. Corporate Law: Law principles and practice • Members’ rights and liability • The rules of the association or club constitute a contract between the association and its members. • Members will have standing to take action to enforce their membership rights. • Legislation provides procedures for dealing with disputes between members and the association. • Legislation limits the liability of the members for the club’s debts to the extent provided for in the association’s rules. • Members may be liable if they aid and abet wrongdoing through the incorporated association. • If an incorporated association trades while insolvent, then the members will become jointly and severally liable for the debt.

  11. Corporate Law: Law principles and practice Maintaining financial records and audit An incorporated association must keep and maintain adequate and accurate accounting records. These records will be audited. Dissolution of the incorporated association Winding up of the incorporated association must be in accordance with the Corporations Act 2001 (Cth). State and territory legislation determines whether surplus assets are given to members, or perhaps to charity.

  12. Corporate Law: Law principles and practice • Fiduciary duties of committee members • The Committee has a fiduciary obligation to the association. Committee members: • must act in good faith and in the association’s interest • must disclose any interests they hold in relation to the association’s business.

  13. Corporate Law: Law principles and practice • Partnerships • Each state and territory has: • legislation which determines whether a partnership is in existence, • the regulation that applies to a partnership; and • further relations that exist between different parties within and outside of the partnership.

  14. Corporate Law: Law principles and practice • The definition of a partnership • The usual definition of a partnership is ‘the relation which subsists between persons carrying on business in common with a view to profit’and includes incorporated limited liability partnerships. • a business relationship must be carried on • the partnership must be carried on in common • the partnership must be carried on with a view to profit.

  15. Corporate Law: Law principles and practice The definition of a business A business is defined as including any trade occupation or profession. It usually requires a repetition of transactions and mutuality by the members, or it may not be a partnership. Smith v Anderson (1880) 15 Ch D 247 A single transaction will not usually determine an enterprise to be a business. Turnbull v Ah Mouy[1871] 2 AJR 40

  16. Corporate Law: Law principles and practice The definition of a business cont … An enterprise or association of individuals may amount to alternative relationships if they do not satisfy the requirements of a partnership (e.g. master– servant contracts are not partnerships). If a business has not commenced, it is not a partnership. Goudberg v Herniman Associates Pty Ltd [2007] 12 VSCA, 16 Keith Spicer Ltd v Mansell[1970] 1 WLR 333 There could be separate businesses, rather than a mutual one. Checker Taxi Cab Co Ltd v Stone [1930] NZLR 169

  17. Corporate Law: Law principles and practice The definition of a business cont … Note that a joint venture is not a ‘business in common’ and consequently is not a partnership (unless the members do conduct the enterprise as a partnership). A club, society or charity is not a partnership because there is ‘no view to profit’. Persons operating a partnership may not even be aware they are in a partnership, since a partnership does not need to be registered (except for a limited partnership). Partnerships are not separate legal entities. The partners share unlimited liability for the obligations of the partnership.

  18. Corporate Law: Law principles and practice The definition of a business cont … A partnership may be referred to as a ‘firm’. Note that quite diverse bodies (entities) can form a partnership (e.g. a company and the government could be in a partnership for a project).

  19. Corporate Law: Law principles and practice Determining the existence of a partnership A partnership is contractual in nature and may be formed by an agreement, whether express or implied. An express agreement can be written or verbal. An agreement can be implied from the conduct of the parties. Persons who hold themselves out as partners, or allow this to happen, will take the same responsibilities as other partners.

  20. Corporate Law: Law principles and practice Rules for determining whether there is a partnership Legislation determines which relationships are, or are not, partnerships. The rules for determining whether a partnership exists expand the application of the ‘partnership definition’.

  21. Corporate Law: Law principles and practice • Rules for determining whether there is a partnership cont … • Sharing of gross returns from an enterprise, or co-ownership of property, does not automatically make the participants a partnership. • Cribb v Korn(1911) 12 CLR 205 • Sharing of profits does indicate there is partnership, unless the sharing of profits was for reasons other than being in a partnership. For example, • when there is a repayment to a lender in the form of a share of profits (Re Ruddock [1879] 5 VLR 51), or the payment of interest as a share of profits • when profits are paid to an employee as part of their remuneration (Walker v Hirsch [1884] 27 Ch D 460)

  22. Corporate Law: Law principles and practice • Rules for determining whether there is a partnership cont … • when profits are paid to a spouse, domestic partner or child of a deceased partner who receives a share of profits as an annuity on the death of a partner • when a person who receives an annuity or share of profits in return for the sale of a business is not by reason of such receipt a partner in the business (Pratt v Stick [1932] 17 TC 459).

  23. Corporate Law: Law principles and practice If all the facts indicate a degree of mutuality and a lack of independence, then there is a partnership because there is a business in common with a view to profit. Davis v Davis [1894] 1 Ch 393

  24. Corporate Law: Law principles and practice Establishing a partnership A partnership can be expressly created by writing up the partnership details, or if the parties orally state their express intention to create a partnership. A written agreement is the best possible way of establishing a partnership, and a standard partnership agreement form can be purchased. A partnership may be implied by the conduct of the parties, (i.e. if they satisfy the definition of a partnership as a business in common with a view to profit).

  25. Corporate Law: Law principles and practice • Establishing a partnership cont … • A partnership agreement should contain all the terms of the partnership: • the parties • the contributions of each partner • the means by which a partner can leave • interest to be paid on any loans made to the partnership • the means of dissolving the partnership • whether dependents of partners may receive a share of a deceased partner’s original share • how disputes will be resolved • whether a partner actually owns the partnership, or is a partner in name only • whether there are senior and junior partners, (e.g. a managing partner).

  26. Corporate Law: Law principles and practice Establishing a partnership cont … Note that if the partnership agreement does not make a provision for a contingency, then partnership legislation will determine the relationship and terms existing within the partnership relationship.

  27. Corporate Law: Law principles and practice Regulation of a partnership A partnership may need to register a business name if operating under a name other than their own: see the Business Names Act in each jurisdiction. A partnership may need to register an ABN if their turnover is more than $75 000 and they wish to receive a credit for GST. Partnerships are nominally limited to 20 persons, but there are many exceptions (e.g. people such as lawyers, architects, doctors and accountants can have many more members (Regulation 2A.1.01 of the Corporations Regulations 2001 (Cth) Equal opportunity and anti-discrimination legislation applies to partnerships (e.g. Equal Opportunity Act 2010 (Vic) and the Sex Discrimination Act 1984 (Cth)).

  28. Corporate Law: Law principles and practice Different types of partnerships There are a number of different types of partnerships, depending upon the arrangements made by the partners themselves. Salaried partner: salaried partners do not normally own a share in the partnership. Instead, they receive a share of the profits, as well as a wage or salary. Note that if a person is held to be a partner, even a salaried one, they will be equally liable. Lynch v Stiff (1944) 68 CLR 428

  29. Corporate Law: Law principles and practice Different types of partnerships cont … Silent or dormant partner: sleeping or silent partners may put capital into a partnership and take little part in the day-to-day running of the business, but may still be liable. Sub-partnership: a sub-partnership is when one partner enters into a contract with another partnership to share their own personal interest in a separate partnership, therefore being in two partnerships at the same time. Australia and New Zealand Banking Group Ltd v Richardson [1980] Qd R 321 Limited liability partnerships: the USA, England, Europe, New Zealand and most Australian states have limited liability partnerships (LLPs).

  30. Corporate Law: Law principles and practice Limited liability partnerships The partnership must register as a limited liability partnership. The (limited) partners, who undertake not to manage the partnership, can receive limited liability (to the extent of what they have contributed). General partners, who do manage the partnership, cannot take limited liability. A limited partnership must have at least one unlimited general partner. A body corporate can be a general partner or a limited partner. A limited partnership is taxed similarly to a company (and is hence less popular these days).

  31. Corporate Law: Law principles and practice Incorporated limited liability partnerships Australia introduced legislation allowing each state and territory a very special type of limited partnership. These are permitted under the Venture Capital Act 2002 (Cth). This type of partnership is designed for large investment activities. It must be registered and does allow for limited partners, with at least one general partner. This type of partnership requires a written partnership agreement to be in force and this operates as a contract between the ILLP and each partner.

  32. Corporate Law: Law principles and practice Partners’ relations to outsiders The principle of partnership legislation is that each partner is an agent for a firm and can bind the firm by an act carried out in the firm’s usual way of business. Kind of business carried on by the firm For a partnership to be bound, a transaction must be a ‘usual’ transaction of that business. This is a question of fact. Mann v D’Arcy [1968] 2 All ER 172 Consider: what is the normal business of a petrol station? Is it just petrol? What of papers, confectionary etc?

  33. Corporate Law: Law principles and practice Business carried on ‘in the usual way’ If a transaction is carried out in an unusual manner, other partners may not be bound. That is, they may not be bound by an act which is so strange that it indicates a partner is acting without authority. Goldberg v Jenkins [1889] 15 VLR 36 Authority to act for the firm A partnership will not be bound by a partner’s actions where the outsider knew that the partner was acting improperly, or where they are not aware that the person is a partner and acting on behalf of a partnership. Otherwise partners must take liability for each other’s actions, even if there restrictions on a party’s activities within the partnership agreement.

  34. Corporate Law: Law principles and practice Authority to act for the firm cont … A firm will be liable for any act or instrument (letter, document or written form of any type) created in the firm’s name, with the intention of binding the firm or relating to the business of the firm, whether the act is by a partner or not.

  35. Corporate Law: Law principles and practice Partners’ liability in contract and tort Each partner is liable jointly with the other partners for all debts and obligations of the firm incurred while they are a partner. The estate of a deceased partner is severally liable for the debts of the partnership contracted before their death, but subject first to the prior payment of their separate debts. Joint liability means collective or combined or share liability. Joint liability means only one action can be brought against the partnership. If a member is missed in the legal action then they cannot later be sued.

  36. Corporate Law: Law principles and practice Liability of partners in tort or wrongful act Partners are liable jointly and severally for wrongful acts or an omission of a partner committed in the ordinary course of business, or with the authority of the co-partners (e.g. in negligence). In National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, it was found that if an act was not part of the ordinary course of the business, and there was no implied acceptance of the act by the innocent partner, who lacked knowledge of the activities, then the innocent partner may not be liable.

  37. Corporate Law: Law principles and practice Liability of partners in tort or wrongful act cont … Severally means individually. Partners can be sued together or individually. Further, partners can be sued at a later point in time if discovered. A plaintiff may choose to sue the wealthiest partner and then leave it to the partners to settle liability amongst themselves. Partners may be liable for each other for a lack care in relation to employees (even if they did not participate in the careless act). Walker v European Electrics Pty Ltd (in liq) [1990] 23 NSWLR 1

  38. Corporate Law: Law principles and practice Liability of partners in tort or wrongful act cont … The wrong need not be for the benefit of the firm to impose liability on the innocent partners of the firm. Polkinghorne v Holland & Whittington (1934) 8 ALJ 140 Note duty of care for those relying on advice Hedley Bryne & Co v Heller & Partners [1964] AC 465

  39. Corporate Law: Law principles and practice Criminal Acts Partners are liable individually (and collectively) for each other’s criminal acts if connected to the business of the firm. Bishop v Chung Brothers [1907] 4 CLR 1262

  40. Corporate Law: Law principles and practice Liability for misapplication of money or property A firm is liable when money or property of a third person has been received by and misapplied by a member of the partnership. The liability of the firm depends on whether the partner who misapplies the money had express or apparent authority to receive it. It also depends on the money being in the custody of the firm and whether its receipt was in the ordinary course of business or not. Polkinghorne v Holland & Whittington (1934) 8 ALJ 140 Lloyd v Grace, Smith & Co [1912] AC 716 Mann v Hulme(1962) 35 ALJR 153

  41. Corporate Law: Law principles and practice Partnership by estoppel or holding out Where a person is deliberately (or even carelessly) ‘held out’ by words, actions or in writing, to an outsider as being an agent, the firm will be estopped (stopped) from denying liability for that person’s actions or acts of agency. Note, however, some exceptions underTower Cabinet Co Ltd v Ingram [1949] 2 KB 397 and Lynch v Stiff (1944) 68 CLR 428. Any representation made by any partner concerning a partnership’s affairs and in the ordinary course of business, is evidence against the firm.

  42. Corporate Law: Law principles and practice Liability of an incoming and outgoing partner A person admitted into an existing firm does not become liable for the debts or obligations contracted before they became a partner. A retiring partner does not cease to be liable for partnership debts incurred prior to their retirement (novation). Novation is the substitution of a new contractual liability in consideration of a release of an existing one. Rolfe & Bank of Australasia v Flower Salting & Co [1865] LR 1 PC 27

  43. Corporate Law: Law principles and practice Relations of partners between themselves Partners are in a fiduciary relationship with each other before, during and after the partnership has ended. They are bound to exercise the utmost good faith in their dealings with each other. Partners relations might be set out in the partnership agreement (e.g. contributions of capital, duration of the partnership).

  44. Corporate Law: Law principles and practice Fiduciary duties to the firm Partners are in a fiduciary relationship with the firm and fellow partners. Partners must act ‘bona fide’, with utmost good faith. Partners’ duties to render accounts: partners must render true accounts and full information of all things that affect the partnership to any partners or their legal representative. A partner of the firm must account to the firm for any benefits they derive without the consent of the other partners from any transaction concerning the partnership, or for any use by the partner of the partnership property, name or business connection. Chan vZacharia[1984] 58 ALJR 353

  45. Corporate Law: Law principles and practice Fiduciary duties to the firm If a partner without the consent of the other partners carries on any business of the same nature as, and competing with, that of the firm, the partner must account for and pay over to the firm all profits made by them in that business Pathirana v Pathirana[1967] AC 233

  46. Corporate Law: Law principles and practice • Rules for determining the rights and interests of partners • Subject to contrary agreement, express or implied by the parties, partnership legislation set out the rules to determine the rights, duties and interests of the parties in the partnership. • Partners are entitled to share equally in the capital and profits of a business, and must contribute equally towards any losses (including losses of capital) by the firm. • Partners are entitled to indemnity for any payments or personal liabilities incurred in the ordinary and proper conduct of the business of the firm, or for anything necessarily done in the interests of the business or property of the firm.

  47. Corporate Law: Law principles and practice • Cont … • A partner who contributes to the partnership more than their required contribution of capital is entitled to interest at a statutory rate set by their jurisdiction. • A partner is not entitled to any payment of interest until the profits of the firm have been assessed. • Every partner may take part in the management of the partnership business, unless the agreement expressly excludes this right. • No partner is entitled to payment for working in the partnership business (unless the partnership agreement specifies otherwise).

  48. Corporate Law: Law principles and practice • Cont … • No new partner can be admitted without the agreement of all existing partners nor can a share of the partnership be assigned. • A majority of partners cannot expel a partner unless there is a power to do so in the partnership agreement • Differences of opinion between partners as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. • The partnership’s books are to be kept at the place of business of the partnership (or the principal place if there is more than one) and every partner is entitled to have access to them and inspect and copy any of them.

  49. Corporate Law: Law principles and practice Variation of partnership The right of partners can be express or implied from the partnership agreement and s 23 of the Victorian Partnership Act allows for the variation of an agreement with the consent of the partners, or it can be implied from a course of dealing. Public Trustee v Schultz [1964] 38 ALJR 128

  50. Corporate Law: Law principles and practice Partnership property Partnership property is assumed to belong to the partnership and must be used only for partnership purposes. Partnership property will be distributed equally on dissolution, unless the partnership agreement specifies otherwise. Partnership property is not subject to claims by creditors who have personal claims against individual partners, though a claim may be made against the partner’s interest in the partnership.

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