week 1: corporations – general - web viewcommon law. the courts will lift the corporate veil...

CONTENTS

WEEK 1: CORPORATIONS – GENERAL..................................................................................................51.1 Definition..........................................................................................................................................51.2 Structure..........................................................................................................................................5

1.2.1 Documentation – Internal Governance Rules........................................................................5

1.2.2 Management – Company Governance Model........................................................................51.2.3 Membership............................................................................................................................5

1.3 Incorporation...................................................................................................................................51.3.1 Shelf Companies....................................................................................................................5

1.3.2 Registration............................................................................................................................61.3.3 Principle of Veil of Incorporation.............................................................................................6

1.3.4 Exceptions – Lifting the Corporate Veil..................................................................................7CASES............................................................................................................................................7

1.4 Classification of Companies..........................................................................................................91.4.1 Classification according to liability of members for company debts (s 112)...........................9

1.4.2 Classification according to public / proprietary companies (s 9)............................................91.4.3 Classification based upon holding and subsidiary companies...............................................9

1.5 Rationale of Incorporation...........................................................................................................10

WEEK 2: CORPORATIONS – RSHIP WITH 3RD PARTIES....................................................................112.1 Company’s Legal Capacity to Contract......................................................................................11

2.1.1 Common Law Doctrine of Ultra Vires...................................................................................11

2.1.2 Corporations Act...................................................................................................................122.2 Company’s Dealings with Outsiders...........................................................................................13

2.2.1 Organs for Managing a Company........................................................................................132.2.2 Protection of outsiders..........................................................................................................13

2.2.3 Common law rules of agency...............................................................................................132.2.4 Statutory Indoor Management Rule.....................................................................................15

Common Law Indoor Management Rule.......................................................................................16

WEEK 3: UNIT TRUSTS...........................................................................................................................171. Nature and Definition of UT.............................................................................................................17

1.1 Definition.................................................................................................................................17

1.2 Creation of Trust......................................................................................................................171.3 Type of trust............................................................................................................................17

1.4 Structure of Private UT............................................................................................................181.5 Uses of UT..............................................................................................................................18

1.6 Rationale.................................................................................................................................181.7 Origin.......................................................................................................................................19

2. Relationship with 3rd Parties............................................................................................................192.1 Liability of Trustee...................................................................................................................19

2.2 Liability of UHs........................................................................................................................20

3. Relationships Inter Se......................................................................................................................213.1 Trustee....................................................................................................................................213.2 Manager..................................................................................................................................21

3.3 Unit Holders.............................................................................................................................214. Termination of Unit Trust.................................................................................................................22

WEEK 4: PARTNERSHIPS – DEFINITION AND NATURE.....................................................................231. Definition and Nature.......................................................................................................................23

1.1 Nature......................................................................................................................................231.2 Characteristics.........................................................................................................................23

1.3 Definition.................................................................................................................................231.4 Creation of partnership............................................................................................................25

1.5 Structure of partnership...........................................................................................................251.6 Use of partnerships.................................................................................................................25

1.7 Rationale of partnerships........................................................................................................26

WEEK 5: PARTNERSHIPS – PARTNERS AND OUTSIDERS................................................................272. Partners and Outsiders....................................................................................................................27

2.1 Relationship between common law agency principles and PA...............................................27

2.2 Liability of firm for contracts.....................................................................................................272.3 Liability of firm for partner’s torts and criminal acts.................................................................30

2.4 Liability of ingoing / outgoing partners.....................................................................................312.5 Liability of non-partners to outsiders [representing to outsider they are a partner].................32

WEEK 6: PARTNERSHIPS – RELATIONS BETWEEN PARTNERS......................................................333.1 Varying P/Ship Terms.....................................................................................................................333.2 Partnership Property......................................................................................................................33

3.2.1 Importance of distinguishing p/ship property from personal property..................................33

3.2.2 Defining p/ship property.......................................................................................................333.3 Rules as to Operation of P/Ship....................................................................................................34

3.3.1 General rules as to interest and duties of partners (s 27(1) PA)..........................................343.3.2 Expulsion of partner.............................................................................................................35

3.4 Fiduciary Duties of Partners..........................................................................................................353.4.1 Partners as fiduciaries..........................................................................................................36

3.4.2 Duration of relationship between partners............................................................................363.4.3 Specific fiduciary duties........................................................................................................36

CONFLICT OF DUTY AND INTEREST........................................................................................373.4.4 Limiting / excluding fiduciary relationships between partners..............................................38

WEEK 7: PARTNERSHIPS – DISSOLUTION..........................................................................................394.1 Dissolution of P/Ships of Different Duration...............................................................................39

4.1.1 Duration of p/ships...............................................................................................................39

4.1.2 Dissolution of fixed term p/ship............................................................................................394.1.3 Dissolution of p/ship at will...................................................................................................39

4.2 Grounds for Dissolution of Fixed Term P/Ship...........................................................................394.2.1 Inclusion of new partner.......................................................................................................40

4.2.2 Supervening illegality...........................................................................................................404.2.3 Dissolution by insolvency, death or charge..........................................................................40

4.2.4 Dissolution by court..............................................................................................................414.3 Process of Dissolution...................................................................................................................42

4.3.1 Winding up on Dissolution....................................................................................................424.3.2 Where firm is reconstituted...................................................................................................43

4.4 Distribution of Assets....................................................................................................................44

WEEK 8: JOINT VENTURES – DEFINITION AND EXISTENCE.............................................................451. Definition and Nature.......................................................................................................................45

1.1 Legal Characteristics of a JV...................................................................................................45

1.2 Use of JVs...............................................................................................................................451.3 Categories of JVs....................................................................................................................45

1.4 Rationale.................................................................................................................................461.5 Distinction between contractual JV and p/ship........................................................................46

WEEK 9: JOINT VENTURES – RELATIONS WITH OUTSIDERS..........................................................492.1 Management of Contractual JV.....................................................................................................49

2.1.1 Operating or management committee..................................................................................492.2 Characterising the Relationship of Operator and Participants..................................................50

2.2.1 Operator as agent or independent contractor......................................................................502.3 Liability of Operator / Participants to 3rd parties in Contract......................................................51

2.3.1 General rule..........................................................................................................................512.3.2 Doctrine of undisclosed principal..........................................................................................51

2.3.3 Ostensible / apparent authority............................................................................................512.3.4 Extent of liability of participant in contract............................................................................52

2.4 Liability of Operator / Participants to 3rd Parties in Tort.............................................................522.5 Characterising the Relationship between the Participants........................................................52

WEEK 10/11: RELATIONSHIP BETWEEN JOINT VENTURERS...........................................................533.1 Nature of Participants’ Interest.....................................................................................................533.2 Existence of Fiduciary Duties.......................................................................................................53

3.2.1 Fiduciary principle................................................................................................................53

3.2.2 Meaning of “obligation of food faith”.....................................................................................533.2.3 Compatibility of the concept of fiduciary obligation with commercial relationship................53

3.2.4 Fiduciary relationships in contractual JVs............................................................................54

3.2.5 Fiduciary duties applicable to contractual JVs.....................................................................55

3.3 Default Mechanisms.......................................................................................................................573.3.1 Types of default mechanisms...............................................................................................57

3.3.2 Doctrine of penalties.............................................................................................................573.4 Assignment.....................................................................................................................................60

3.4.1 Assignment of proprietary rights...........................................................................................603.4.2 Assignment of contractual rights..........................................................................................60

WEEK 11: TERMINATION OF CONTRACTUAL JVS.............................................................................604.1 Termination of JV as Contractual ASSOCIATION.......................................................................604.2 Termination of Proprietary Interest..............................................................................................60

WEEK 12: INCORPORATED ASSOCIATIONS.......................................................................................611. Definition and Nature of IncorporateD Association (IA)...............................................................61

1.1 Definition.................................................................................................................................61

1.2 The context of the AIA.............................................................................................................611.3 Structure of IAs........................................................................................................................61

1.4 Incorporation process..............................................................................................................621.4.4 Corporate Personality...........................................................................................................64

1.5 Rationale.................................................................................................................................662. Relationship between IA and 3rd Parties.........................................................................................67

2.1 Legal capacity of an IA............................................................................................................672.2 Dealings of IA and 3rd parties..................................................................................................68

3. Relationship between Members and IA..........................................................................................693.1 IA’s rules or constitution..........................................................................................................69

3.2 Rights of members of an IA.....................................................................................................703.3 Governance Issues.................................................................................................................71

4. Termination of an IA.........................................................................................................................72

WEEK 1: CORPORATIONS – GENERAL

All legislation in this section refers to the Corporations Act 2001 (Cth) = CA

1.1 DEFINITION

A company is: an artificial legal person created by law; and a company registered under the Corporations Act 2001 (Cth) (s 9).

1.2 STRUCTURE

1.2.1 Documentation – Internal Governance Rules

The rules that shareholders adopt to run the internal administration of the company (eg. The appointment of directors etc) can be either:

o Company Constitution : apply if the company adopts its own rules (s 134) They displace the Replaceable Rules (s 135(2))

o Replaceable Rules (RRs) : apply if the company does not adopt its own rules (s 134) The RRs do not apply to single director/shareholder pty companies Table of rules – s 141

Note: No Liability Companies: Comp’s Const must state its sole objects are mining purposes (s 112(2)(b))

Note: Contractual Effect of Constitution: the Const (and any RRs) have effect as a contract between the company and each member; the company and each director and company secretary; and between a member and each other member (s 140)

1.2.2 Management – Company Governance Model

The BoD exercise all the powers of the company except any powers that the CA or the Comp’s Const (if any) requires the members to exercise in general meeting (s 198A)

1.2.3 Membership

A company must have members Where a company has share capital, members are called shareholders Shareholders provide equity capital to the company Shareholders ultimately own the company

1.3 INCORPORATION

1.3.1 Shelf Companies

Companies that have been incorporated but have no traded – useful when a new company is required urgently

1.3.2 Registration

Incorporation is the process of registering a company - NB. Needs at least one member (s 114)

1. Check availability of proposed name with ASIC and on BNR (s 147) If available, option to reserve name under s 152

2. Complete and lodge application form with ASIC (s 117), must include (s 117(2)):a) Type of companyb) Proposed namec) Name and address of membersd) Details of director/s (names / birth dates / place of birth)e) Details of company secretary/ies (names / birth dates / place of birth)f) Address of director/s and secretary/iesg) Address of company’s proposed registered officeetc…

3. Pay prescribed fee (s 1351)

4. ASIC allots an ACN, register company, issues certificate of registration (s 118) Company comes into existence on date of registration (s 119) Conclusive evidence that company is duly incorporated (s 1274(7A))

1.3.3 Principle of Veil of Incorporation

Once a company is registered, it becomes a separate legal entity distinct from its directors and members (Saloman v Saloman); it will have all the powers of an individual and specific powers of a corporate body (s 124)

o Note : especially power of an individual to sue and be sued, and to acquire, hold and dispose of property

Look out for :

o Related companies: Related companies are treated as separate legal entities unless legislation provides otherwise (Industrial Equity v Blackburn). Here…

o Company property: What is owned by the company is not owned by the shareholders (Macaura v Northern Assurance). Here…

o Company debtor/creditor of member or director: A company can be a debtor or creditor of a member or director (Salomon v Salomon). Here…

o Company commits offence: A company can commit an offence (Hamilton v Hamilton). Here…

o Company contracts with member: A company can contract with its own members (Lee v Lee’s Air Farming). Here…

o Company liable to member: A company can be liable in tort to a member (Lee v Lee’s Air Farming). Here…

Therefore, [company] is prima facie separate from [3rd party / director etc.] and thus [3rd party / director] is not liable for ________ unless an exception applies.

Member’s Liability on Winding Up: Limited liability: Limited liability of shareholders for the debts and obligations of the company

follows from its separate legal status with s 112. o IF limited by shares: Members are not liable for company’s debts on winding up, only liable

for the amount (if any) unpaid on the shares (s 516). Here…

o IF limited by guarantee: Members are only liable for the amount guaranteed on winding up (s 117). Here…

1.3.4 Exceptions – Lifting the Corporate Veil

Statutory

If director: A director will be personally liable for debts incurred by the company where:

o [Trustee] he/she is acting as trustee, for liabilities incurred, for which the company is not entitled to be indemnified by trust assets (s 197)

o [Company insolvent] debt was incurred when reasonable grounds for suspecting the company was insolvent; the director will be liable for loss/damage of unsecured creditors in relation to debts incurred (s 588G-U)

Common Law

The courts will lift the corporate veil where the notion of the separate legal entity is used to defeat public convenience, justify a wrong, protect fraud or defend crime (Briggs v James Hardie)

Specific examples:

o Fraud: Where a company is used as a cloak for fraud (Jones v Lipman). Here…

o Evading legal obligation: Where a company is set up for the sole or dominant purpose of evading a legal obligation, a mere cloak or sham (Gildord Motor v Horne). Here…

o Subsidiary acting as agent: Where a subsidiary is acting as agent of a holding company, the companies can be treated as one (Smith Stone). Here, if [subsidiary] is found to be acting as agent for [company], the veil will be lifted.

May need to look at s 46 (also see Smith Stone test below):

A body corporate is a subsidiary of another body corporate if:

a) the other body:

i. controls the composition of the first body’s board; or

ii. is in a position to cast or control the casting of more than ½ the max number of votes at a general meeting of the first body; or

iii. holds more than one half of the issued share capital of the first body; or

b) is a subsidiary of a subsidiary of the first body (s 46)

Note: if commercial purpose for separate companies: The veil will not be lifted it is appears the entities are being used for separate functions for a good

commercial purpose (ie. Each company in group performs separate function) (Pioneer Concrete – endorsed Smith Stone)

CASES

Salomon v Salomon – corporate veil principleFacts: Salomon owned business, whilst insolvent he sold the business to a company which himself and his family owned. He sold business at inflated figure taking shares and debentures. When the company fell into financial trouble Salomon assigned his dentures to B as security but reserved his reversionary interest. When the company failed and B was paid Salomon claimed his debt to be discharged. Other creditors claimed fraud.

Held: Court dismissed fraud confirming above mentioned principles.

Lee v Lee’s Air Farming – company contracts with member / is liable to memberFacts: Husband was director and shareholder of company, died in employment, widow claimed compensation.

Held: Company could enter into employment contract with husband – because company was a separate legal entity distinct from its founder.

Smith Stone v Birmingham – piercing corporate veil, subsidiary acting as agentFacts: Holding company controlled all shares in subsidiary. Subsidiary had no staff or separate books of account. When subsidiary’s premises compulsorily acquired by council, holding company bought action for loss of business. Council argued that holding company had no standing as subsidiary was a separate legal entity.

Held: Subsidiary was carrying on the business of the holding company and compensation was awarded.

IF RELEVANT: Is [subsidiary company] a subsidiary of [holding company]?

Atkinson J applied 6 criteria necessary for the corporate veil to be lifted on the basis of an agency relationship:

1. Who was really carrying on the business?Yes. Profits of the [subsidiary] were treated as the profits of [holding], as shown by _____. profits treated as holding company’s: Smith Stone books and accounts together: Smith Stone subsidiary had no staff: Smith Stone no separate pay or superannuation arrangements: Adams v Cape Industries Q Does subsidiary enter into contracts in it’s own name?

2. Were the persons conducting the business appointed by the parent company?Yes. [Holding] controls the appointment of the [subsidiary]’s board of directors, by _____. all shares owned by holding: Smith Stone

3. Was the parent company the head and the brain of the trading venture?Yes. [Holding] was the head and brain of the trading venture, as shown by _____. Q Are day to day functions controlled by holding company?

4. Did the parent company govern the venture, decide what should be done and what capital should be embarked on the venture?

Yes. [Holding] made all decisions relating to capital expenditure, as shown by _____. undercapitalised subsidiary: Re FG Films Q Decisions referred to holding company?

5. Did the company make its profits by its skill and direction?Yes. All profits were made by [holding]’s skill and direction, as shown by ____.

6. Was the company in effectual and constant control?Yes. [Holding] was in constant and effective control of [subsidiary].

This agency exception has been accepted in Australia (Pioneer Concrete) and whilst the criteria is unclear (Briggs v James Hardie) the criteria was accepted by Sheppard J in Spreag v Paeson. Here [holding] will likely be found to have exercised complete control or dominion over [subsidiary], and the corporate veil will be lifted.

IF TORT action: However Rogers AJA held in Briggs v James Hardie that in a tort action (personal liability) different criteria would apply.

1.4 CLASSIFICATION OF COMPANIES

1.4.1 Classification according to liability of members for company debts (s 112)

Four types: Company limited by shares

o Liability is limited to the amount unpaid for shares (s 516)o Name must have Limited or Ltd at end (s 148(2))o Can be either public or Pty (s 112(1))

Pty – no more than 50 non-employee shareholders (s 113(1))o Use: trading vehicle; 99% companies are limited by shares

Company limited by guarantee

Unlimited company

No liability company (set up solely for mining purposes (s 112(2)(b)))o Mining purposes (s 9) – includes prospecting for or obtaining or the sale of

ores/metals/minerals; in Australia or elsewhere etc

1.4.2 Classification according to public / proprietary companies (s 9)

Public company : A public company is any company other than a proprietary company (s 9)

Proprietary company : a comp that is registered as or converts to a pty company (s 45A(1); s 9)

o Name must have Pty Ltd (s 148(2))o Must be limited by shares or unlimited with share capital (s 112(1))o Must have no more than 50 non-employee shareholders (s 113(1))o Must not do anything that would require disclosure under Ch 6D (ie. No public offers etc) (s

113(3), (4)) Breaching this is an offence of strict liability (s 113(3A)) but the offending act will not

be invalid (s 113(4)) ASIC may require the offending company to change to a public company (s 113)

Small or large: Can also be defined as small or large proprietary companies:o IF (2 of 3 must be satisfied) – revenue less than $25m, gross assets less than $12.5m

and/or less than 50 employees = small pty company, otherwise large pty company

Note:o If shares held by two people jointly: shares will be considered held by one person (s

113(2)(a))

o If only one shareholder: possible for pty company to be incorporated with only one member (s 114) and one director (s 201A)

Benefits of proprietary company:o Can impose restriction on transfer of its shares (Stilwell Trucks v Nascar)o Only need one director (public companies need 3) (s 201A)o Can provide for removal of directors by the board in Const – public companies must be

removed at general meeting (ss 203D, 203E)

1.4.3 Classification based upon holding and subsidiary companies

May be relevant to whether the companies are considered separate legal entities

Two companies +

[Holding] will be deemed to be the holding company of [subsid] because [holding]:

o Controls the composition of the board of [subsid] (s 46(a)(i)); controlled = can appoint / remove all / majority of directors (s 47)

o Has more than 50% voting power in [subsid] (s 46(a)(ii)); or

o Has more than 50% of [subsid’s] issued shares (s 46(a)(iii))

If more than two companies, can be that top holding company is holding company of middle company, who is holding company of bottom company = top company holding bottom company (s 46(b))

1.5 RATIONALE OF INCORPORATION

Rationale = limited liability of members (Salomon v Salomon )

Requirement to incorporate for partnerships or associations if object of gain / more than 20 members (s 115(1))

o Or can be more than 20 members if regulations specify (s 115(2))

Advantages

Creation of new independent legal entity

Perpetual succession

Power to acquire/hold/dispose of property

Can sue and be sued

Easy transferability of shared

Limited liability for investors

Capacity to engage in new business

Taxation – accounting advantages

Disadvantages

Procedural difficulty where shareholders want to bring action on own behalf (Rule in Foss v Harbottle)

Limited role shareholders play in management (s 198A – RR)

Civil penalties for directors

Fees associated with incorporation

WEEK 2: CORPORATIONS – RSHIP WITH 3RD PARTIES

2.1 COMPANY’S LEGAL CAPACITY TO CONTRACT

Here, [plaintiff] is seeking to establish that [agent] was acting for [company] when he/she [entered into contract], making his/her actions those of the company.

[Company] has all powers of an individual, and specific powers of a corporate body (s 124).

o Individual powers include: to enter contracts, sue and be sued, acquire/hold/dispose of property

2.1.1 Common Law Doctrine of Ultra Vires

Prior to 1984, court’s policy was to protect shareholders and outside users from improper use of company funds (Ashbury Railway), with 2 rules:

o Company required to include objects clause in Constitution (type of businesses/activities it could be involved in); and

o Doctrine of ultra vires

Doctrine of Ultra Vires

A registered company can only enter into a transaction that comes within its substantive objects, or is reasonably incidental to those objects.

o If not, the transaction is ultra vires = void (cannot later be ratified) (Ashbury Railway)

o Ashbury Railway : company formed to manufacture railway carriages had no power to construct a railway system

Substantive objects v Mere Powers

Substantive object : when constitution read as a whole, the object is capable of being pursued as an independent activity (an end in itself)

Mere power : when constitution read as a whole, the object could only be exercised in furtherance of, or as incidental to the substantive objects of the company.

o Eg. Ashbury Railway: substantive object “to make railway carriages”, a clause stating company could purchase land would be a mere power that could only be exercised in furtherance of making railway carriages.

Conclude – is the alleged transaction ultra vires (void) at common law? Here, the activity of … can be classified as causally connected with the object of …. Thus the activity will be ultra vires and void, and have no effect [or vice versa].

Conclusion on common law

Objects clauses would be drafted so widely so the Doctrine effectively frustrated and shareholders/creditors not protected from misuse of company funds

2.1.2 Corporations Act

The CA provides two ways in which power of a company can be restricted (ss 124 and 125):

o Objects clause in constitution (s 125(2))

o Express prohibitions on the exercise of power in constitution (s 125(1)).

Effect of non-compliance : Such clauses are optional (except in the case of no liability companies (s 122(2)(b))) and where a company acts contrary to them there is no effect of invalidity on the company’s act (s 125). Therefore, the ultra vires doctrine is effectively abolished.

Companies have unlimited power to do basic juristic acts (s 124(1))

o [ie. a company’s legal capacity is derived from statute, not from its own constitution]

o Eg. contract with third parties / deal with property etc

Do shareholders have any remedies?

No direct remedy under s 125 BUT do arguably do by virtue of:

o Breach of statutory contract: under s 140(1)(a) the company’s constitution (and/or RR) form a statutory contract between the shareholders and the company, shareholders can sue for breach of that contract if company acts outside the objects clause (ie. breaches the constitution)

BUT: members can only enforce what the constitution allows them to enforce; the breach must affect them as a member (eg. right to dividend)

Unlikely that a breach of objects clause will affect member in capacity as member

Would be seeking equitable injunction or declaration

o Application for winding up: under s 461(1)(k) – just and equitable grounds

Where there is a complete failure of the substratum of the company OR disappearance of the common intention of the members (ie. objects clause) (Re Tivoli Freeholds) very drastic remedy!

o Application for statutory injunction: under s 1324 for breach of acting honestly

o Directors’ duty to act in good faith: under s 181

Company’s dealings with outsiders

2.2 COMPANY’S DEALINGS WITH OUTSIDERS

2.2.1 Organs for Managing a Company

The organs for managing a company are the board of directors and the members in general meeting

o IF BoD has all power: Here, pursuant to s 198A, the exclusive powers of management of [company] lies with [directors], the board of directors.

The business of a company is to be managed by or under the direction of the directors (s 198A(1)) The directors may exercise all powers of the company except any powers that the CA or the constitution requires the company to exercise in general meeting (s 198A(2))

o IF managing director: Here, [agent] has been appointed managing director pursuant to RR s 198C which allows management powers to be delegated to a GM.

o IF management powers given to members in general meeting: Here, exclusive powers of management of [company] have been given to the members in general meeting. This replaces the RRs in ss 198A and 198C.

2.2.2 Protection of outsiders

Common law rules of agency Statutory indoor management rule (ss 128-130) Common law indoor management rule

2.2.3 Common law rules of agency

The contract between [company] and [outsider] will be binding where [individual agent] has acted on [company’s] behalf or as its agent within their actual or apparent authority (also reflected in s 126)

Actual authority

Express actual: o Here, [individual] has express actual authority because they acted on behalf of [company]

within the scope of the oral/written authority conferred on them to undertake [specific act]

Note: directors may exercise all powers of the company, eg. Issue shares, borrow money and issue debentures (s 198A – a RR – gives directors exclusive powers of management and is classified as an express grant of authority).

Note: check whether outside scope of authority

Implied actual: 2 instances

1. Anything incidental to / necessary to carry out what is expressly authorised; or

2. Agent appointed to specific office in the company, granted implied authority that accompanies that position.

o If single director : A single director has no implied authority to bind the company except when joined with the whole BoD in a general resolution (Northside Developments v R-G)

If power delegated by BoD : However, here the BoD has delegated authority to [individual – managing director] do [actions]. As such the general principle will not apply (s 198C).

If single director company : However, here the general principle is displaced because this is a single director company.

o If managing director : [Person], as managing director, has wide powers to run the day-to-day business of the company (Entwell v N&G Insurance). However, the powers are limited to ordinary trading transactions of [company] (Corpers v NZI Securities).

o Inactive BoD : Here, [individual] has been acting as a de facto [eg. managing director] and the BoD has been completely inactive and acquiesced his/her actions (Hely-Hutchinson). Therefore, [individual] had implied authority to do all acts a person in such a position would normally do. Here...

o If secretary : Secretary has authority to sign contracts connected with the administrative side of the company such as employing staff and ordering (Panorama Development v Fidelis). A secretary has no implied authority to manage the company (Club Flotilla v Isherwood).

Apparent / ostensible authority

Where a person with actual authority allows the agent to occupy a particular position in the company, and they represent (by words or conduct) that the person has authority to bind the company (Freeman & Lockyer v Buckhurst):

Elements ( Freeman & Lockyer v Buckhurst ):

1. Representation to contractor that agent has authority to enter into contract (of that kind) on behalf of company. Here...

2. Representation made by person/s with actual authority (to manage business of company). Here...

3. Contractor induced by the representation to enter into contract (reliance). Here...

o IF board represented that managing director ok to act: Here, similarly to in Freeman & Lockyer the board of directors has represented (by knowing and not acting) by ____, that [agent] was authorised to act as managing director of [company]. Therefore similarly here to in Freeman [company] will be bound by the actions of [agent] in [actions done e.g. entering contract].

Statutory indoor management rule

2.2.4 Statutory Indoor Management Rule

Operation:

The rule operates where:1. Outsider has dealings with company (s 128(1)); or2. Outsider has dealings with a third party who has/purports to have acquired property from

another company (s 128(2))

o Dealings:

has a broad definition and covers a person who contracts with the company (Barclays). It can include just one transaction (Advance Bank Aus).

Assumptions:

Once s 128(1) or (2) applies, the outsider can make certain assumptions about [company] and [company] cannot assert otherwise (s 129). These assumptions need not in fact be made (Brick and Pipe). Assumptions [outsider] is entitled to make under s 129 are:

1. that [company’s] const/RR have been complied with (s 129(1)): Reflects the common law indoor management rule

eg. Outsider can assume any approval from BoD/shareholders has been obtained

Cannot assume agency (Freeman & Lockyer)

2. that anyone who appears from information provided by [company], available to the public from ASIC, to be a director or secretary:

has been duly appointed; and reflects common law agency principle of apparent/ostensible authority

(Dawson v WBC; Northside Developments)

has the customary authority of persons in such positions in a similar company (s 129(2))

reflects the common law agency principle of implied actual authority (Northside Developments)

[see Implied Actual Authority notes if needed (2.2.3)]

The outsider need not have done an actual ASIC search (Re Madi)

3. that anyone held out by [company] to be an officer/agent of [company] has been: duly appointed; and authorised to exercise the powers and perform the duties customarily

exercised by that kind of officer/agent in a similar company (s 129(3)) reflects the common law agency principle of apparent/ostensible authority – includes

officers and agents

Disentitlement from making assumptions:

An outsider will be disentitled from making the assumptions if they knew or suspected at the time of the dealing that the assumption was incorrect (s 128(4))

o Knowledge: where actual knowledge (hard to prove)

o Suspicion: requires a position feeing of actual apprehension or mistrust (Qld Bacon Ltd).

Test:

Objective – reasonable person (EM to Corporate Law Reform)

Subjective test may be applicable if person actually suspects that the assumption is incorrect (Sunburst Properties)

Apply both

Common Law Indoor Management Rule

The statutory indoor management rule is not a code; the common law rule still has some operation (Aus Capital TV)

Only applies where:

o No s 9 company; OR

o No dealings under s 128(1) or (2)

o Ie. very limited application.

Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been complied with (Royal British Bank v Turquand; Northside Developments). Here,

WEEK 3: UNIT TRUSTS

Issue: Is [plaintiff] able to recover [repayment of debt]?

DIAGRAM:

1. NATURE AND DEFINITION OF UT

1.1 Definition

Definition: a UT is an arrangement where an express trust is constituted by a UT deed and property is vested in a trustee, and that property is managed and invested by a trustee or manager on behalf of the beneficiaries (whose interests are divided into units)

1.2 Creation of Trust

3 Certainties

Here, the 3 certainties are present, certainty of:o objects;o subject matter; ando intention to create a trust.

UTs and Separate Legal Entity Principle

A UT is not a separate legal entity at law, but rather certain property is impressed with the trust.

1.3 Type of trust

Fixed trust: the main distinguishing features of a UT are:o Beneficial interest is divided into units; o Fixed trust such that unit holders (UHs) have a fixed interest in trust property; ando Trustees have no discretion as to selection of beneficiaries OR their quantum

Private v Public o Private : where participation is not offered to any member of the public

Generally free from formalities apart from trustee legislation and CA if corporate trustee appointed

o Public : where intention is that units are to be offered to the public – regulated by CA to protect investors from fraud (Ch 5C)

[T’ee Company][Plaintiff]

(Creditor)

Finance

[Trust Name]

T’ee for

[Venture entered]

Unit Holders

[List]

[List Members of company]

[How they hold shares, if they are directors?]

1.4 Structure of Private UT

Management:

There is no required more divided management – the trustee may be trustee and manager although it is not uncommon to have functions separate

Ie. Trustee vested with trust property and manager conducts day-to-day management

Documentation:

UT Deed: one between settlor, trustee and UHs – fulfils same functions as constitution for company

o Commercial prudence requires execution of UT Deed

Management Agreement: commonly entered into between trustee and manager (if is one)

1.5 Uses of UT

Public use: as vehicle for investment or capital raising

o Public UT provides individual investors with small amounts to invest with benefits of averaging risk of investment, lower admin costs and professional investment expertise eg. Equity trustees or share trusts invest in Aus and overseas shares

Private use: used in private business context (trading trust), useful device for giving effect to a business relationship where bens are at arms’ length (eg. Former partners in partnership)

1.6 Rationale

Advantages:o No/limited liability for UHs if Trust Deed excludes/limits to fact value of unitso Very few statutory formalities (not very expensive, unless corporate trustee used)o Stability and permanenceo Trustee has power to acquire/hold/dispose of propertyo Trustee can sue (and be sued)o Units are negotiable, UHs may generally assign interest freelyo Can provide great flexibility in management (vs. inc company) – even where corp trusteeo Good capacity to engage in new businesso Freedom from statutory regulations, apart from Trusts Act in each juris, freedom from many

provisions of CA Eg. No prohibition against trustee or management company buying back or

redeeming unitso Tax advantages

Disadvantageso Not legal entity, separate from trustee/UH, which is solely liable for creditor’s debts, BUT

commercial UT enjoys advantages of limited liabilityo Lack of control by UHso Tax disadvantages – cannot easily accumulate income, losses trapped within trust (ie. UHs

proportionate losses can’t be offset against income from other sources)

1.7 Origin

In Smith v Anderson the legal viability of a UT as a capital raising investing structure was established. Further, in the case, a UT was distinguished from a partnership or similar association.

2. RELATIONSHIP WITH 3RD PARTIES

2.1 Liability of Trustee

2.1.1 Contractual right of creditor to sue trustee

There are 3 principles:

1. 3rd party has the trustee as its debtor (not the trust as an entity)

2. Trustee incurs debt on behalf of the trust as principle, not agent

3. Trustee has unlimited personal liability to the extent of their own assets (not restricted to trust funds (Vacuum Oil Co)), subject to:

Exclusion of liability in contract (between trustee and creditor); or Appointment of corporate trustee

o Note: trustee has right to reimburse itself out of trust property for all expenses reasonably and properly incurred in execution of its powers and duties (recoupment), OR can pay such expenses out of trust property (exoneration) (Vacuum Oil Co)

2.1.2 Can trustee exclude liability?

Yes, in contract – there is no legal or equitable objection to an express or implied agreement with the creditor that the liability of the trustee is limited to trust assets (Muir v City of Glasgow)

o Whether liability is excluded is a question of construction of the contract as an indication of the objective intention of the parties to the contract (Helvetic Investment Corp)

Helvetic : the words ‘as trustee’ were not enough on their own to exclude the personal liability. In that case it was the name of the trust on the guarantee that implied it was the t’ees were not contracting as individuals but trustees and accordingly the personal liability was limited to the value of the trust assets.

2.1.3 Corporate trustee

Where trustee has limited liability, creditors can be vulnerable

o If company limited liability company, with small nominal share capital, unless company has property of its own

Proceeding against director/s personally : there are 2 circumstances where this can happen:

1. Where company incurs a debt at time where reasonable person in director’s position would suspect the company insolvent (s 588G); or

Assessed at date of contract Supported by factors eg. continuing losses, liquidity ration >1, unpaid creditors

2. Where creditor not entitled to be indemnified out of trust assets (s 197): Must be shown that corp trustee has not and cannot discharge debt (s 197(a)); and

Corp trustee not entitled to be indemnified out of trust assets because (s 197(b))i. Corp trustee committed breach of trust; orii. Corp trustee acted outside scope of its power as trustee; oriii. Corp trustee’s right to indemnity is denied/limited by a term of trust

“Not entitled” does not cover situation where factually trust doesn’t have sufficient assets to satisfy debt (overruled Hanel v O’Neil)

2.2 Liability of UHs

2.2.1 Indirect liability based on trustee’s right of indemnity out of trust assets

General principle : UHs not personally liable for liabilities incurred by the trustee in course of managing the trust, but may be indirectly liable based on:

o Trustee’s right of indemnity; and Exists for all expenses reasonably and properly incurred by trustee in executing its

power and duties as trustee. It gives the trustee an equitable interest (charge/lien) over trust property to enforce the right of indemnity (Custom Credit Corp)

o Doctrine of subrogation The doctrine results in the creditor being transferred the trustee’s right of indemnity

over the trust assets

Defences of UH : 3 defences

1. Doctrine of ultra vires: trustee must act within powers given by trust deed (cf ss 124-125 for companies = trans not invalid and doctrine essentially abolished)

2. Abuse of power: trustee must not breach any duties to trust (cf indoor management rule and ss 128-130 re companies)

3. Exclusion or limitation by trust deed: 2 forms:

Express exclusion of right of indemnity (McLean v Burns)

Limitation of liability of UH to issue price/face value of unit (restirtcs overall liability of trustee to amount subscribed for units by UHs)

2.2.2 Personal liability based on trustee’s right of indemnity where trust assets insufficient

Trustee’s right enforceable in equity as personal obligation against UHs where:

1. Trustee incurs liability at request of UH (may be express/implied);

2. UH is sul juris (of full age and capacity and absolutely entitled (Hardoon v Belilos))

Note: principle applies where multiple beneficiaries in proportion to interest each UH hols (JW Broomhead)

2.2.3 Personal liability based on agency principles

UH will be liable on the basis of the agency principles

BUT generally, liability of this kind will be negated by common clauses in trust deed including:

o UH beneficial interest is said not to entitle UH to interfere in the management or administration of the trust by the trustee or manager

o Agency is expressly excluded between trustee / manager and UH

Relationships inter se

3. RELATIONSHIPS INTER SE

3.1 Trustee

3.1.1 What are the functions of the trustee?

The function of trustee is to hold the legal interest in trust property (Octavo Investments) and, if no manager, to have active role in performing trust obligations affecting the trust property

3.1.2 What are the duties of the trustee?

Preserve trust property Loyalty Keep accounts and supply information Act personally (unless manager appointed) Act impartially between beneficiaries

3.2 Manager

3.2.1 Role

The trustee has primary responsibility to administer trust property in interest of beneficiaries in accordance with trust instrument and trust legislation

It may be appropriate for trustee to appoint manager to assist in administration of the trust

o There will generally be a separate management agreement between trustee and manager

3.2.2 Is the manager an agent?

Where trustee has discretion to employ a manager, they will be an agent of the trustee

They will not be in any direct relationship with the beneficiaries (UHs) unless the instrument provides

3.2.3 Is the manager a fiduciary (re UHs)?

A manager employed as an agent of the trustee can be in a fiduciary position re the UHs in 2 ways:

o Through the trust deed (Phipps v Boardman); or

o By direct fiduciary relationship, because of their level of involvement in transactions for or on behalf of the trust (ASC v AS Nominees)

3.2.4 Is the manager in a contractual relationship with UHs? Where a manager is appointed as agent of the trustee, they generally won’t be liable in contract to

UHs

3.3 Unit Holders

3.3.1 What is the nature of UHs interest?

Fundamentally different from a share in a company as shares confer no legal or equitable interest in assets of company, they are a separate piece of property bested in the shareholder (Charles v FCT)

BUT a unit in UT confers a proprietary interest in all trust property which is subject to the trust deedo So UH has a beneficial interest in the assets of the trust; ando A right to have the trust executed in accordance with the trust deed; ando A right to proportionate distribution of assets of proceedings representing assets of the trust

fund on termination of the trust (Read v Cth)

3.3.2 Relationship with trustee

By assuming trusteeship for the benefit of the UHs, the trustee incurs equitable obligations to persons who become UHs – UHs can enforce in their capacity as beneficiaries

3.3.3 Standing of Single UH to proceed against trustee/manager

In Qld a beneficiary can apply to the court to review an act/omission/decision of the trustee when the beneficiary has been aggrieved by that thing (s 8 Trusts Act 1985 (Qld) )

3.3. Relationship between UHs

Equity will not permit some UHs to prefer their own interests to the interests of all unit holders under the trust deed by not observing restrictions.

Standing to sue: the manager will have standing to sue because of the fiduciary relationship (Rural and Agricultural Management), or if no manager, the trustee

4. TERMINATION OF UNIT TRUST

There are 4 ways a UT can come to an end (be terminated):

1. The principle in Saunders v Vautier: all UHs being of full age and capacity request the trustee to terminate the trust

2. Duration expired: the trust to be wound up because its prescribed duration has ended

3. Power in trust deed: a power permitting the trustee to wind up the trust when its conduct becomes undesirable (eg. New legislation comes into operation etc)

In event of termination, assets must be realised, any unpaid money for units called in, debts paid off and any surplus of assets distributed as per UHs holdings.

WEEK 4: PARTNERSHIPS – DEFINITION AND NATURE

*** All legislation referred to = Partnership Act 1891 (Qld) ***

1. DEFINITION AND NATURE

1.1 Nature

A partnership is an association of persons whose primary purpose is to obtain a pecuniary benefit for their members by profitable trading with non-members.

o Also encompasses company and JV but they achieve this by different methods/structures

1.2 Characteristics

4 main characteristics

1. Identification of individual partner with the firm: partnership/firm is not separate legal entity distinct from the partners

cf company = separate legal entitty

2. Unlimited personal liability of each partner cf company where shareholders have ltd liability

3. Non-transferability of partner’s interest: unless co-partners consent, a partner cannot transfer his/her share in partnership to someone who is not already a partner

4. Control by all partners: every partner may take part in the management of the p/ship business (s 27(1)(e))

cf company – managed by directors not shareholders

1.3 Definition

1.3.1 How do courts determine existence of p/ship?

General principle : Look at objective intention of parties and course of conduct (Fliway)

Effect of clause denying existence of partnership : effect is given to the clause if the terms of the agreement as a whole show it’s not a partnership (Beckingham)

o If ambiguous – clause will be important

1.3.2 Elements of a partnership

Section 5(1) PA :

1. Valid agreement between parties : partners bound together by contractual relationship (Smith v Anderson) (cf: UHs)

Consider common law contract elements – offer and acceptance; intention to create legal relations; consideration

2. Carrying on a business : includes every trade / occupation / profession (s 3; Sch PA) and is an inclusive definition

Ordinary meaning : a commercial enterprise as a going concern (UDC v Brian)

Badges of business :

Repetition and regularity of business activities (Smith v Anderson)o BUT single venture can be partnership where (implicit in s 35(1)(b)):

Land development – massive subdivision (Whitfords Beach)

Huge outlay of capital / huge volume of operations (Whitfords Beach; UDC v Brian)

Canny Gabriel : A lot of capital to produce concert tours

Needs to be more than mere realisation of an asset

Ballantyne : purchase, subdivision and sale of single lot not business where no work done or outlay

Nature of the activities: particularly profit making purpose (Ferguson v FCT)

Organisation of activities in a business-like manner: keeping books (Ferguson v FCT)

Existence of supplementary work done between purchase and sale

3. In Common : hallmark of partnership

Not essential for all partners to take a big role in management (eg. can be entrusted to manager), but it is fundamental that all partners have a right to take part

Elements :

Carried on by / on behalf of the partners (Lang v Jones; Beckingham); and

o Reciprocal agency relationship – partners must have authority to bind each other in terms of creating liabilities or debts (Cox v Coulson)

Mutuality of rights and obligations between partners (Duke Group )

o Indicia of rights include to (s 27; Part 3 PA): Participate in management Share in profits and assets Make decisions about composition of p/ship Indemnity from p/ship assets Interest in capital contributions Retire at will Assign p/ship share

o Indicia of obligations include: Bearing losses equally Render accounts Keep books at place of p/ship Only use p/ship property for p/ship purposes Fiduciary obligations from one partner to others

Salaried partner : depends on the true nature of the relationship, if no interest in capital of firm or clients etc, not partner but an employee (Stekel v Ellice)

4. With a view to profit : net pecuniary gains (Duke Group) [gross returns less expenses]

Does element require sharing of profits ? Common law requires sharing of profits (Pooley v Driver). The PA will preserve the common law unless it is inconsistent with the PA (s 121 PA). Arguably, “view to profit” is not inconsistent enough to negate the common law BUT Aus cases divided on this point:

Cummings v Lewis : required jointly derived & shared profits (s 121 not raised)

Duke Group : may not need to have sharing of profits or jointly derived profit

1.3.3 Additional rules for determining existence of p/ship

The following rules are also relevant for determining the existence of a p/ship (s 6(1) PA):

a) JT / co-ownership etc does not of itself create a p/ship as to anything jointly held (6(1)(a))

FCT v McDonald – co-owners receiving rental profits from leasehold not partners – not carrying on a business, to co-own and share rent insufficient, needed more

b) Sharing of gross returns does not of itself create p/ship (s 6(1)(b); Cox v Coulson )

Gross returns = gross income, before deducting expenses (Cox v Coulson)

c) Receipt by a person of a share of profits is prima facie evidence of p/ship, but does not of itself make the person a partner in business (s 6(1)(c); Badely v Consol Bank )

Profit = gain made by business during year (Re Spanish Prospecting Co)

Receipt of share of profits does not of itself create a p/ship where (s 6(1)(c)):

i. Payment of debt by instalments;

ii. Contract for remuneration of agent / employee (Beckingham) Beckingham : even though provision in contract for sharing profits, agreement

as whole indicate acting as agent for syndicate and not for itself as well

iii. Lender-borrower relationship (John Bridge; Canny Gabriel) 3 indicia:

1. Measure of control exercised by lender – it is reasonably necessary for protection of loan money or does it vest in lender powers of control

2. Period of time for which profits are shared – does It extend beyond loan and interest (if yes, indicative of p/ship)

3. Sharing of losses – if yes, indicative of p/ship

In Canny Gabriel the measure of control was more than reasonably necessary for money advanced

1.4 Creation of partnership

No formal requirements – can be oral / written / arise from course of dealings

1.5 Structure of partnership

All partners must have right to take part in management (s 27(1)(e)) – practically this right if often limited by agreement

Written agreement should be insisted upon

1.6 Use of partnerships

Simple but risky

Many opt for limited liability option – ie. company

Professional services often partnerships

Where don’t want to outlay expense of incorporating and having to report to ASIC

1.7 Rationale of partnerships

Advantages:o Few statutory formalitieso Not great deal of expenseo Stability and permanence – provided for fixed term rather than p/ship at will (s 29(1), 35(1)

PA) And see specimen agreement app 2, clause 2.1

o Sue and be sued in firm name even though not separate legal entityo Every partner may take part in management of business – s 27(1)(e)

App 2, clause 11o P/ship act imposes few terms/restrictions on partners and can generally be overridden by

agreement (s 27) – have considerable freedom o Tax minimisation – eg. Where husband and wife…

Total tax payable is less because of graduated tax system (income can be split)

Disadvantages:o Does not create legal entity separate from indiv partnerso Partners own p/ship property – may become necessary to distinguish between private

property of partner and common property – dissolution of p/shipo Rule – non-transferability of partner’s interest so as to make new partner unless all consent

– clause 19.1 app 2 in SG Follows from fiduciary relationship

o Unlimited personal liability o Unless inc limited partnershipo Capacity to engage in new business is limited – need for consent of all partners, although

can be altered by express/implied agreement (s 27(1)(h) P/ship Act; App 2, cl 2.5)o Tax minimisation not available in true family p/ship

ITAA36 Part 3 Div 6AA

WEEK 5: PARTNERSHIPS – PARTNERS AND OUTSIDERS

Issue: When outsider enters into contract with a partner, will the other partners be liable?

2. PARTNERS AND OUTSIDERS

2.1 Relationship between common law agency principles and PA

Each partner acts as principal for itself and agent for others, ie. they incur liability for themselves and for everyone else, as agent

o Where the PA is silent, common law rules operate (s 121 PA – PA prevails if inconsistency)

2.2 Liability of firm for contracts

2.2.1 General principle:

A partner can only bind co-partners in contract where the partner acted within actual or apparent authority, or co-partners ratify the transaction

2.2.2 Express actual authority:

Common Law: where the partner acts with express authority, on common law agency principles co-partners will be bound

Partnership Act:o s 9(1) PA: under s 9(1) PA, the scope of express actual authority is narrower than common

law as it only binds the firm where a partner, authorised to bind the firm, has done an act:

relating to the business of the firm; and

showing intention to bind the firm.

o s 10(1) PA: under s 10(1) PA, if a partner pledges credit of the firm for a purpose not connected with the firm’s ordinary course of business, the firm is not bound unless the partner is specially authorised.

o NB: ss 9(1) and 10(1) equate with common law position re actual express authority

2.2.3 Implied actual authority:

Common Law: as between partners and outsiders, each partner is the unlimited agent of each other partner in every matter connected with the p/ship business and not beyond the scope of the p/ship (Baird’s Case)

Partnership Act:o s 8(1) PA – 1 st limb : the 1st limb reflects the common law (Construction Engineering), that

prima facie each partner has implied authority of co-partners to do acts for the purpose of the firm BUT authority can be negated by express agreement between partners whether outsider has notice of agreement or not

Construction Engineering : 2 companies entered into p/ship agreement to construct building that T was to enter into building contract on T’s land in own name as principal not agent, then T entered into contract with CE – CE then sought to pursue Hexyl, another partner, for payment

Held: T had no actual implied authority to enter in to the contract as agent for the firm, the prima facie implied authority was negated – Hexyl not liable

Limit on co-partners ability to bind firm : difficulty arises if partners have placed limit on ability of co-partner to bind the firm, ie. no partner can pledge credit in excess of stated amount – in relation to this there are two views as to whether principal bound by actions of an agent acting outside his/her authority

View 1 – There is no implied authority because implied authority rests on the existence of a consensual arrangement between agent and principal that the agent is to have the authority claimed (Hely-Hutchinson)

View 2 – The agent is regarded as having implied authority (Edmund v Bushell; Watteau v Fenwick) The principle is that a principal is liable for all acts within the authority usually confided to an agent of that character despite any express limitations, unless the third party has notice of such limitation.

o Despite strong criticism Watteau has never been expressly overruled. But : in Construction Engineering, provision interpreted to mean that (as above)

prima facie each partner has implied authority of co-partners to do acts for the purpose of the firm BUT authority can be negated by express agreement between partners whether outsider has notice of agreement or not

o The HC did not refer to Edmund or Watteau in Construction Engineering

Managing partner has no implied authority to have custody of the firm’s documents or make admissions on behalf of the firm (Ex parte Merrett)

2.2.4 Ostensible / apparent authority:

Partnership Act: s 8(1) PA – 2 nd Limb : elements:

1. Transaction within scope of kind of business carried on by the firm Objective and subjective test – consider what particular firm does and what similar

firms do

It does not matter that the p/ship itself has never entered into such a transaction if it is within the usual scope of the business (Mercantile Credit – garage liable for cars purchased by partner even though excluded in agreement)

Basic powers of partner in ordinary trading p/ship include (Bank of Australasia):o Selling/mortgaging p/ship propertyo Buying goods on account of p/shipo Borrowing moneyo Contractingo Paying debts

2. Transaction must be carried out in the usual way An unusual manner of carrying out trans should put party who is dealing with the firm

on enquiry as to actual authority of partner

Test for “usual” is objective (Union Bank of Aus)

Whether a transaction falls within “usual” course of carrying on business depends on the nature of the business and practices normally adopted by persons carrying on that type of business (Young v Lamb)

3. Third party must know the partner is a partner In Construction Engineering, T did not have ostensible authority because CE neither

knew nor believed T was a partner

4. Third party must have no knowledge or belief of any lack of authority in the partner

Common law: o 3 elements to establish ostensible/apparent authority at common law (Rama Corp):

1. Representation

2. By persons with actual authority (other partners)

3. Outsider relies on representation to his detriment

o Interaction between s 8(1) 2 nd limb and common law :

PA not as strict, so reliance should probably only be placed on PA (by virtue of s 121) but the same outcome would likely ensue in both cases

2.2.5 Ratification

Common law: The doctrine of ratification will make partners liable for the acts of another partner where that partner had no authority, if the other partners with full knowledge adopt the transaction (Re Oppenheimer)

Partnership Act: The PA is silent on ratification so s 121 brings in the common law doctrine

2.2.6 Type of liability

While partners remain partners, liability is joint, however an individual partner’s estate is severally liable for p/ship debt once partner dies (s 12(1) PA)

2.3 Liability of firm for partner’s torts and criminal acts

2.3.1 Express actual authority:

s 13 PA: the p/ship is liable for any wrongful act/omission of any partner “acting within the authority of his/her co-partners” (s 13(1) PA – 2 nd limb )

o Covers civil liability in tort (eg. where partner acts negligently and causes damage) and criminal liability (Bishop v Chung Bros)

2.3.2 Implied actual authority:

Wrongs : o The p/ship is liable for any wrongful act/omission of any partner “acting in the ordinary

course of the business of the firm” (s 13(1) PA – 1 st limb )

This section covers criminal and civil wrongs (Bishop v Chung Bros)

Originally, High Court took the view that this provision envisaged liability on the subjective basis of the particular firm and also the objective basis of business of a like kind (Polkinghorn)

However, this view has been qualified, and a narrower approach suggested, requiring an examination of the actual practices of the particular firm – subjective consideration (Nat Com Bank of Aus v Batty)

o Comparison with s 8(1): trans within scope of kind of business carried on by the firm

Misapplication of money / property :o Where firm receives money/property in the ordinary course of that firm’s business and it

is misapplied whilst in the custody of the firm, the firm is liable to make good the loss (s 14(1)(b) ; Rhodes v Moules )

Note: after Nat Com Bank of Aus v Batty probably also subjective test, so likely to get same result as 13(1) 1st limb

2.3.3 Ostensible / apparent authority:

A firm is liable to make good any loss where one partner, acting within the scope of his/her apparent authority, receives money/property of third party and misapplies it (s 14(1)(a))

Apparent authority is derived two ways (Mann v Hulme; Rhodes v Moules):

o General nature of the firm’s business; or

o Representation through the conduct of the co-partners

NB: Misapplication generally narrowly construed re s 14(1)(a) – may only cover fraud not negligence, so may need to go to common law by virtue of s 121.

2.3.4 Liability for wrongs joint and several

Every partner is liable jointly with the partner’s co-partners and severally for everything for which the firm, while he/she is a partner, becomes liable under either s 13 or 14 (s 15(1) PA)

Liability of ingoing / outgoing partners Liability of non-partners to outsiders

2.4 Liability of ingoing / outgoing partners

Incoming partners: will not be liable merely by that admission for an act done before he/she became a partner, unless he/she agrees to be liable (s 20(1) PA)

Outgoing partners: will continue to be liable for debts and obligations incurred before retirement (s 20(3) PA)

o Discharge : However, s 20(5) provides that this liability can be discharged by express or inferred agreement between partners and members of the firm as newly constituted and the creditors (s 20(5); Rolfe & BOA )

Such agreement may be express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted

2.5 Liability of non-partners to outsiders [representing to outsider they are a partner]

Issue: Is [non-partner] liable to [plaintiff] for act done by [firm]?

Section 17(1) provides that everyone who represents himself/herself, or allows himself/herself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has, on the faith of the representation, given credit to the firm

Effect:o Agency rules dealing with apparent/ostensible authority o Does not create p/ship between partners and person represented as a partnero Person represented as partner incurs all liabilities of an actual partner with respect to

outsiders acting on representation

Elements of s 17(1) :1. Representation: express or by conduct

Firm doesn’t exist : if firm does not exist: provision will apply where part of representation is that there is a firm or p/ship (Bunny Pty Ltd)

Timing : representation must be made before transaction occurs (Duke Group)

Source : the knowledge can be gained from any source (Duke Group)

If only an employee : look for:

Letterhead bearing names of alleged partners, history between alleged partners and applicant = letterhead was conclusive (Lynch v Stiff)

NB. Must actually be a representation that they are a partner (Duke Group – report was insufficient to do this because did not expressly refer to anyone as partner)

2. Credit given: not defined in PA, has 3 meanings:

Ordinary commercial meaning (don’t demand immediate payment for goods/services supplied)

Entrusting property/money to person for an investment (Lynch v Stiff – this was credit for purposes of s 17(1))

Widest meaning – reliance by person giving the credit upon the performance of some future obligation by the firm (Duke Group – sufficient to satisfy s 17(1), although court did not specify what type of obligation)

3. Credit given on faith of representation: There is no need for total sole reliance, just some reliance

Outsider must believe the representation was true, and acted upon it

There is no need to show that credit would not have been given if representation not made (Lynch v Stiff)

Deceased partner exception to s 17(1): o Deceased partner’s estate absolved from liability where only form of holding out is the

continued use of the firm name or of the deceased partner’s name (s 17(2) PA)

WEEK 6: PARTNERSHIPS – RELATIONS BETWEEN PARTNERS

3.1 VARYING P/SHIP TERMS

Terms of a p/ship agreement may be varied by express agreement or impliedly by a course of conduct (s 22 PA; Const v Harris)

3.2 PARTNERSHIP PROPERTY

3.2.1 Importance of distinguishing p/ship property from personal property

Property used for purposes of p/ship business may become p/ship property OR remain the personal property of a particular partner

It is important to distinguish between the two because:

o On death / insolvency of a partner it is necessary to portion a partner’s property between business creditors of the firm and personal creditors – business creditors must first resort to p/ship property and personal creditors must first resort to personal property

o On dissolution, unless contrary agreement exists, all partners are entitled to share equally in the ultimate residue of the firm (s 47(2)(d) PA)

3.2.2 Defining p/ship property

General rule (s 23(1) PA)

s 23(1) PA: all property and rights and interests in property, originally brought into the p/ship or acquired, whether by purchase or otherwise, on account of this firm or for the purposes and in the course of the p/ship business (partnership property) must be held and applied by the partners exclusively for the purposes of the p/ship and in accordance with the p/ship agreement (s 23(1) PA)

Ultimate determination: s 23(1) does not distinguish personal property and p/ship property; the intention of parties is determinative (O’Brien v Komesaroff; Kelly v Kelly)

Factors relevant to intention:o Express agreement negating that property is p/ship property :

Harvey v Harvey : oral agreement that land contributed by one partner was to be available for the owner’s son whenever the son visited, the court implied from this agreement that the land was never intended to become p/ship property

o Other factors :

Rental fee charge – not p/ship property

Is asset included as capital asset of p/ship in books – if not, not p/ship (key factor in Harvey v Harvey; Kelly v Kelly)

Asset mortgaged to secure p/ship borrowings – indicative of p/ship asset, not conclusive (Brims v Siganto)

Is value of asset much greater than value of capital contributed by other partners – if yes may be partner’s own property (Brims v Siganto)

Is asset substantially involved in p/ship business – if yes, indicative of p/ship property (Waterer v Waterer – partner contributed land where nursery business held, plants planted in land – was substantial stock in trade and therefor p/ship property)

Cf Brims v Siganto – nursery business, one partner contributed land, QCA distinguished W v W on basis that no evidence to suggest the nursery was conducted in same way (shrubs planted in the ground) – not p/ship property

Onus of proof: on those asserting it is partnership property (Kelly v Kelly)

Specific Rule (s 24 PA)

S 24 PA: Property bought with p/ship money is deemed to be bought on account of the firm, unless a contrary intention appears.

o Carter v Renouf : life insurance policy for deceased partner was p/ship property because premiums paid by p/ship

o Kelly v Kelly : payment by p/ship of annual fishing licence did not raise presumption that licence bought on account of the firm within s 24; the fees were not equal to the purchase price of the licence as they did not represent the realisable value of the licence. They were simply a charge for operating under the licence.

Use of p/ship money to improve partner’s personal property

There is no general principle that, in the absence of agreement, a partner whose property’s value has been increased is bound to allow other partners to share in the increased value (Harvey v Harvey)

o Harvey v Harvey : HC held that the additional value of pastoral property attributable to improvements should not be taken into account in the dividing up process – the court ordered the final accounts be amended only to the extent the owner of the land not be charged with the cost of making the improvements

o So: partner is not entitled to the increase in value of the property, but is entitled to the amount spent on making improvements

Interest of partner in p/ship property

Partners have no title to specific property owned by p/ship, have a beneficial interest in each item

o Nature of interest: right to a portion of surplus after the realisation of assets and payments of debts / liabilities (an equitable chose in action which can be assigned to others – Canny Gabriel)

o Caveat: In Qld, held that the interest of a partner in land which was an asset of the p/ship was not such an estate or interest to support a caveat by the partner (Chettle v Brown cf Connell v Bond Corp which took opposite view)

3.3 RULES AS TO OPERATION OF P/SHIP

3.3.1 General rules as to interest and duties of partners (s 27(1) PA)

The interests of partners in the p/ship property, and their rights and duties in relation to the p/ship, subject to any express / implied agreement, must be decided by the rules below (s 27(1) PA)

o Legal effect: terms to be implied into p/ship unless otherwise agreed – essentially default provisions similar to RRs for companies (Khan v Miah)

The Rules [remember, can be displaced by agreement]

s 27(1)(a): partners entitled to share equally in capital and profits of the business, and must contribute equally to the losses (s 21(1)(a))

o Presumption that, where profits are shares in certain proportions, losses to be borne in same proportions, where agreement doesn’t deal with losses (Canny Gabriel)

o “share equally in capital” – courts have doubted whether this is intended to be read literally and amend the common law which presumes that where a p/ship is dissolved each partner is entitled (once creditors paid) to a return of capital they contributed, before surplus is recognised

So, where partner put no capital in, it does not mean they should get a share of capital before surplus distributed – s 27(1)(a) should not be read literally as common law has never said that (Kelly v Tucker ; s 47(b)(iii) PA )

s 27(1)(b): the firm must indemnify every partner re payments made in ordinary and proper conduct of the firm or anything done for the preservation of the business or property of the firm

s 27(1)(e): every partner may take part in the management of the p/ship business (often excluded by express/implied agreement to the contrary)

s 27(1)(f): no partner shall be entitled to remuneration for acting in p/ship business (often excluded by agreement, eg. true “salaried partner” Stekel v Ellice)

s 27(1)(g): no partner shall be introduced as a partner without consent of other partners

s 27(1)(h): decision-making matters:

o any difference arising 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

o Ie. every partner has a right to be consulted, to express view and have their views considered by other partners, and the majority cannot be dictatorial and must act in good faith (ref to fiduciary duty) (Const v Harris)

3.3.2 Expulsion of partner

A majority cannot expel a partner unless a power to do so has been conferred by express agreement (s 28 PA)

Legal principles:o Power to expel must be construed strictly (Bond v Hale)

Bond v Hale : power to expel defaulting partner for misconduct was restricted to the expulsion of only one partner

o Power must be exercised in good faith (Blisset v Daniel – there must not be any improper motive, eg. desire to purchase expelled partner’s interest at an undervalue)

o There must be full and frank disclosure of all material facts by the partner seeking expulsion (Hanlon v Brooks)

o The partner being expelled must have a chance to be heard (Blisset v Daniel)

3.4 FIDUCIARY DUTIES OF PARTNERS

Issue: Does [partner A] have to account to [co-partners/firm] for:[sale of land to partnership][activities in competition with partnership]

To determine this it is necessary to ascertain what duties are between the partnersa) before the partnership was established (pre-contractual fiduciary duties); andb) once the partnership was operational (specific fiduciary duties)c) after the partnership has dissolved (post-contractual duties)

3.4.1 Partners as fiduciaries

What is a fiduciary: a fiduciary relationship exists where:o a person has undertaken to act in the interests of others; and o there is a relationship of trust and confidence (USSC v Hospital Products)

What duties are owed: duties of good faith, the most prescriptive obligation requires upmost good faith and complete subordination to the interests of the beneficiary

Is the relationship between partners fiduciary: Yes, it arises in part because of the mutual trust and confidence between partners, and because of the agency relationship between partners (Birtchnell v Equity Trustees)

3.4.2 Duration of relationship between partners

Pre-contractual fiduciary duties (FDs)

Prospective partners can owe FDs before the agreement is finalised IF they have assumed a relationship of mutual trust and confidence, that is, the parties have embarked on activities before the agreement finalised (UDB v Brian)

o UDC v Brian : HC said fiduciary r/ship because Brian had already advanced funds to the project manager on the faith of the JV, and project manager had purchased land pursuant to the arrangement

After dissolution of the partnership

The FDs of partners continue after dissolution of the p/ship for the limited purpose of winding up the p/ship business (Chan v Zacharia)

The duties cease on final settlement of the accounts after winding up (Metlej v Kavanagh)

3.4.3 Specific fiduciary duties

1. Duty of disclosure

Partners must render true accounts and full information of all things affecting the p/ship (s 31(1))

o Purchasing rule : where one partner purchases the interest of a co-partner (beneficiary), they are a fiduciary acting in a confidential position regarding that interest, and any purchase is voidable at the suit of the co-partner unless the purchasing partner can establish two things:

That the beneficiary was aware and consented to the dealing; and

That the transaction was a fair one where full value was given for the property (interest) and the fiduciary disclosed to the beneficiary all information that it acquired concerning the property (Law v Law)

o Full disclosure of accounts : any partner is entitled to have the p/ship accounts taken, if necessary, by application to the court (if won’t disclose accounts) (Wilson v Carmichael)

2. Duty of honesty

Partners have a duty of honesty in dealings with third parties, whether or not transaction is of a p/ship nature (Birtchnell by virtue of s 121 PA)

o NB: this is a matter relating to partners inter se, not third parties

CONFLICT OF DUTY AND INTEREST

General principle : partners must account to co-partners for any gain obtained in circumstances where there is a conflict between personal interest and fiduciary duty (Chan v Zacharia)

[1.1] Conflict rule: duty of partner not to compete with p/ship business

If partner without consent carries on any business of the same nature and competes with the firm, partner must account for all profits made (s 33(1) PA), elements:

1. Partner carrying on a business Consider badges of business (briefly):

Repetition and regularity of business activities (Smith v Anderson)

o BUT single venture can be partnership where (implicit in s 35(1)(b)): Land development – massive subdivision (Whitfords Beach) Huge outlay of capital / huge volume of operations (Whitfords

Beach; UDC v Brian) Canny Gabriel : A lot of capital to produce concert tours Needs to be more than mere realisation of an asset Ballantyne : purchase, subdivision and sale of single lot not

business where no work done or outlay

Nature of the activities : particularly profit making purpose (Ferguson v FCT)

Organisation of activities in a business-like manner : keeping books (Ferguson v FCT)

The existence of supplementary work done between purchase and sale

2. Business of same nature as firm: ascertained by looking to the p/ship agreement and any course of dealing engaged in by the firm (Birtchnell)

3. Business carried on competed with that of the firm There is no competition is p/ship suspended for any reason (Fleming v McKechnie)

[1.2] Conflict rule: duty of partner not to act for itself when acting for the p/ship

Equitable rule: If partner acts in transaction for p/ship, cannot also act for itself at the same time in that transaction, unless partner gets the fully informed consent of the co-partners (Bentley v Craven; UDC v Brian)

o Bentley v Craven : partner sells own property to p/ship and acts in trans – conflicting interests because partner was more money, p/ship wants to pay less

Remedies: transaction voidable at option of p/ship OR partner may be liable to account for profits

The equitable rule is reflected in first limb of s 32(1) PA: o every partner must account to the firm for any benefit derived by the partner without the consent of

the other partners from any transaction concerning the partnership (1st limb), or from any use by the partner of the partnership property name or business connection (2nd limb).

[1.3] Conflict rule: duty of partner not to benefit itself to exclusion of p/ship

Equitable rule: a partner must not withhold from the p/ship any profit-making opportunity which falls within the scope of the p/ship business

o The source of the profit opportunity is irrelevant, as is that the firm could not have gained the opportunity itself (Birtchnell)

Conflict of duty and interest

Scope: ascertained by looking at express p/ship agreement and any course of dealing the firm has pursued (Birtchnell)

Remedies: partner will be liable to account for profits, although may only be a portion of profits where there was additional exertion (Bitchnell)

o Birtchnell v Equity Trustees : Here, the course of dealings actually pursued by the firm of real estate agents was not

confined to obtaining selling commissions It extended to an opportunity to secure in addition a share of the profits, either by purchasing

interest in land or financing the purchasing of land or additional exertion in realising the land On that basis, the majority of the High Court held that one partner, Porter, took advantage for

himself a profit making opportunity that arose in a transaction of the firm’s business

The equitable rule is reflected in firm limb of s 32(1): o every partner must account to the firm for any benefit derived by the partner without the consent of

the other partners from any transaction concerning the partnership (1st limb),

[2.1] Misuse rule

Equitable principle: a partner must account for any benefit/gain made by reason of/use of fiduciary (ie. being a partner) position or knowledge that results from being a partner (Chan v Zacharia)

o There will be a breach whether or not profit-making opportunity falls within scope of p/ship business (cf. previous conflict rules)

S 32(1) PA: the equitable rule is reflected in the 2nd limb of s 32(1) PA, which provides that o every partner must account to the firm for any benefit derived… from any use by the partner of the

partnership property name or business connection (2nd limb)

Test:o Use of p/ship or business connection : the test is a narrow one and the court distinguished

between offers made to a partner (Russell v Austwick):

because of partner’s personal attributes (not liable to account for profits); and

because of partner’s association with the firm (liable to account for profits).

o Russell v Austwick : A, B & C were common carriers who each conducted their operations of specific routes on the road from L to F. A for himself and the other parties agreed with the mint coy to carry coin from L to F. After this initial agreement a second was reached to carry coin on places not on the road. In making the K the mint coy was under the impression the same people conducting the 1st agreement would carry out the second. However A did not make this agreement known to the others. The crt interpreted this past dealings as enough to est that A had used the name and reputation of the firm for profit and therefore he was liable to account.

3.4.4 Limiting / excluding fiduciary relationships between partners

The PA acknowledges that partners may alter their fiduciary duties (s 22 PA). Further, there is judicial acknowledgment that parties may exclude their fiduciary relationship (Chan v Zacharia).

WEEK 7: PARTNERSHIPS – DISSOLUTION

Issue: Can p/ship be determined or dissolved? What is the effect of dissolution?

4.1 DISSOLUTION OF P/SHIPS OF DIFFERENT DURATION

4.1.1 Duration of p/ships

There are two types of duration:

o Fixed term (s 35(1)(a) PA): where there is a specified time or specified event of uncertain date which terminate p/ship (Moss v Elphick)

Eg. for 5 years, or until happening of particular event

Moss v Elphick : p/ship was to be terminated by mutual arrangement only, court said this was fixed term because p/ship either for joint lives of all partners or earlier mutual agreement to terminate

o Partnership at will (s 29(1); 35(1)(c) PA): undefined time, means the same as no fixed term (Moss v Elphick)

4.1.2 Dissolution of fixed term p/ship

P/ship for fixed term dissolves automatically when the fixed term is up / specified event occurs (s 35(1)(a) PA; Moss v Elphick )

No partner can retire during fixed term p/ship unless they have consent from all partners

Where p/ship for fixed term continued over:

When p/ship for fixed term carried over past its term, it becomes a p/ship at will if no one gives notice to terminate

The terms governing the fixed term continue to govern as far as they are consistent with the p/ship at will (s 30 PA)

o Eg. if in fixed term had to give 6 months’ notice before retirement, that won’t apply anymore because p/ship at will – can give notice right away to dissolve (s 30 PA)

To dissolve new p/ship, partner needs to give notice to all other partners of intention to dissolve (ss 29(1); 35(1)(c) PA)

o If p/ship deed, dissolution notice must be in writing, signed by the partner giving it (s 29(2))

4.1.3 Dissolution of p/ship at will

To dissolve p/ship, partner needs to give notice to all other partners of intention to dissolve (ss 29(1); 35(1)(c) PA)

o Notice can be inferred from course of conduct (Cutts v Holland)

o If p/ship deed, dissolution notice must be in writing, signed by the partner giving it (s 29(2))

4.2 GROUNDS FOR DISSOLUTION OF FIXED TERM P/SHIP

Generally, p/ship for fixed term cannot be dissolved by one partner, but by agreement of all partners. In absence of agreement, a single partner would have to establish other ground for dissolution:

4.2.1 Inclusion of new partner

The admission of a new partner dissolves the p/ship and starts a new p/ship (IRC v Gibbs)

The effect of dissolution cannot be avoided in p/ship agreement (Mackie v Dalziel) nor in agreement between existing partners and the new partner (FCT v Jeffries)

4.2.2 Supervening illegality

If [partner] can demonstrate it is unlawful for:

o The business to continue (ie. p/ship objects have become illegal) (s 37 – 1 st limb PA ); or

o The members of the firm to carry it on in p/ship (s 37 – 2 nd limb; Hudgell Yeates )

the p/ship will be automatically dissolved (s 37 PA – NB. s 37 cannot be contracted out of)

Hudgell Yeates : p/ship of solicitors dissolved where one partner’s practising certificate lapsed because illegal under statute for an unqualified person to be a member of solicitor’s firm/p/ship

o P/ship reconstituted between remaining partners

4.2.3 Dissolution by insolvency, death or charge

Automatic dissolution of p/ship on death or insolvency of partner, unless agreement to the contrary (s 36(1) PA)

o Contrary agreement must be between partners prior to date of death/insolvency

Corporate partner: p/ship is dissolved by winding up of a corporate partner (that is insolvent) (cf. Anderson Group where held that p/ship was not dissolved by winding up of corporate partner because the NSW legislation dealt with bankruptcy, not insolvency)

Charge on share of p/ship property: P/ship may be dissolved optionally by remaining partners where partner has allowed his/her share of p/ship property to be charged for a separate debt of that partner under s 26 PA (s 36(2) PA)

4.2.4 Dissolution by court

Partnership Act

Application to court for dissolution under s 38 PA for reason of (6 cases):

a) Permanent mental disorder (s 38(a)): application may be brought by co-partners or insane partner’s relatives

b) Permanent incapacity (s 38(b)): whether person is permanently incapable of performing his part of the p/ship contract is a question of fact and must depend upon the kind of business carried on by the firm

Courts are loathe to make a decree on this ground if any chance of recovery (Whitewell v Arthur)

c) Conduct calculated to prejudicially affect carrying on of business (s 38(c)): regarding the nature of the business

it is not necessary for the applicant to prove the conduct occurred in course of / was connected with p/ship business (Carmichael v Evans – criminal conduct unconnected with firm’s business was sufficient)

refers to probable effect of conduct on firm’s business reputation

it is not necessary to prove actual business loss or that anyone thought worse of the firm, sufficient to show that if conduct did come to knowledge of customers, firm would have been injured (Pearce v Foster)

d) Wilful or persistent breach (s 38(d)): two limbs:

1 st limb : relates to wilful or persistent breaches of p/ship agreement:

Applies to breaches of express terms, and terms implied by PA (ie. the default rules in s 27 relating to internal relations; inter se matters between partners) (Cheesman v Price)

Can be altered by contrary agreement, but if not, s 27 rules apply

2 nd limb : not reasonably practicable for p/ship to continue (can cover unintended conduct)

The test is whether or not it remains practical for the applicants, thinking and acting reasonably, to carry on the business with the respondent (Jenkins v Bennett)

o Thinking reasonably: just and soundly based ideas, not unfairly influenced by narrow ideas

o Acting reasonably: applicants doing everything to co-operate in relation to matters of managing the p/ship

e) Loss-making business (s 38(e)): the court must be satisfied that for all practical purposes it is impossible for the business to make a profit

This will not be inferred where the current losses are the result of special circumstances of a temporary nature (Handyside v Campbell)

The court will not expect partners to assume financial obligations additional to those they are obliged to assume under the terms of the p/ship agreement rather than order a dissolution (Jennings v Baddley)

f) Just and equitable ground (s 38(f)): courts give themselves a wide discretion in terms of winding up, and the ground is not to be read down with any preceding ground (eg. loss making) (Lock v John Blackwood)

The ground will apply where:

There is ill-feeling between the partner that makes it impossible for them to carry on the p/ship business successfully or beneficially (Knight v Bell)

Management affairs have reached a deadlock (Re Yenidje)

Destruction of mutual trust and confidence (Jenkins v Baddley) – it is insufficient that the person is upset, the loss of confidence must be justified by some detriment / breach of trust/duty or reasonable prognosis that it will follow

Corporations Act 2001

A court can wind up a Part 5.7 body (including p/ship of more than 5 members) if it is unable to pay its debts (s 583(c)(i) Corps Act)

o Unable to pay its debts: includes where creditor has made statutory demand (over $2,000 (stat minimum)) and p/ship fails to pay state demand for 3 weeks after service = deemed unable to pay its debt

4.3 PROCESS OF DISSOLUTION

Partnership may be:

1. Wound up; or

2. Reconstituted and continues to carry on business

4.3.1 Winding up on Dissolution

Winding up: involves payment of debts/liabilities; completion of unfinished contracts; realisation of assets – may be done by partners or by court

Winding up by partners

Partners, other than insolvent partner, have limited agency to effect winding up on the firm, by completing transactions and contracts commenced prior to dissolution and to do actions necessary for winding up (s 41 PA)

Partners will usually have this limited ability to wind up where:

o No falling out between partners – eg. fixed term expired and partner had enough; or

o No special grounds are show by personal rep / insolvency partner such as where assets not in jeopardy

Winding up by the court

Any partner or rep (of deceased/insolvent) partner may apply to the court to wind up the p/ship (s 42 PA)

The limited agency under s 41 is taken away by the court, partly, by the appointment of a receiver to get in any outstanding assets, or wholly, by the appointment of a receiver and manager

The court will wind up where:

o Partner have fallen out; or

o Special grounds shown by rep (of deceased/insolvent partner) or partner such as where the assets are in jeopardy

4.3.2 Where firm is reconstituted

Reconstitution: a winding up is not contemplated and is reconstituted where:

o there is a dissolution of a p/ship on death/retirement of a partner; and

o the p/ship articles provide that the share of the deceased/retiring partner shall pass to surviving partners at a price to be ascertained by reference to last preceding balance sheet

Liability for debts incurred prior to retirement: outgoing partners will continue to be liable for debts and obligations incurred before retirement (s 20(3) PA)

o Discharge : However, s 20(5) provides that this liability can be discharged by express or inferred agreement between partners and members of the firm as newly constituted and the creditors (s 20(5); Rolfe & BOA)

Such agreement may be express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted

Liability for debts incurred after retirement / death / insolvency: where there is a change in the constitution of the firm, all apparent members of the old firm are liable for debts incurred after reconstitution unless proper notice is given (s 39(1) PA)

o Elements :

1. Reconstitution of “firm”: any dissolution which brings about a reconstutiion (includes retirement / death / insolvency)

Does not apply to company takeover of p/ship (s 4 PA def; Sunny West )

2. Apparent: the outsider must have actual knowledge either prior to or at the time of the reconstitution that retired partner was a partner of the firm be it by direct communication or notoriety (reputation) (Tower Cabinet Co):

Eg. signature / outsider’s previous dealings with firm / letterhead (Tower Cabinet Co; Elders Pastoral Ltd)

Tower Cabinet : first dealing with firm, insufficient that only saw name on note paper, no knowledge of partner’s connection other than on that pater, not entitled to treat retiree as a partner

3. Entitled to treat all apparent members of old firm, as still being members: NZ case law treats this as additional element, that a former partner must still

be apparent partner after he/she retires, such as if partner’s name continues to be used (Elders Pastoral Ltd)

Aus authority, however, construes the words as meaning that a person who was an apparent member of the old firm may for that reason alone continue to be treated as a member of the firm, until the outsider has notice of the change (Hamerhaven) – guided by this!

4. Notice of change: New customer : An advertisement in the Gazette is notice to persons who

have not dealt with the firm before the dissolution date (s 39(2))

Old customer : Persons who dealt with the firm prior to reconstitution must be given actual notice of the change (s 39(1); Sunny West; Hamerhaven )

o Conclude: here, proper notice has / hasn’t been given, so the [retired partner] will / won’t be liable for debts incurred after their retirement.

4.4 DISTRIBUTION OF ASSETS

Section 47 PA sets out rules that govern the Final Settlement of p/ship accounts. The application of this section is subject to any agreement to the contrary. However, no agreement between partner can affect their liability to the outside creditors of the firm, unless those creditors are parties to the agreement.

Section 47 Rule for distribution of assets on final settlement of accounts

In settling accounts between the partners after a dissolution of partnership, the following rules are, subject to any agreement, to be observed--

(a) losses, including losses and deficiencies of capital, are to be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits;

(b) the assets of the firm including the sums (if any) contributed by the partners to make up losses or deficiencies of capital, are to be applied in the following manner and order:

(i) in paying the debts and liabilities of the firm to persons who are not partners in the firm;

(ii) in paying to each partner rateably what is due from the firm to each partner for advances as distinguished from capital;

(iii) in paying to each partner rateably what is due from the firm to each partner in relation to capital;

(iv) the ultimate residue (if any) is to be divided among the partners in the proportion in which profits are divisible.

WEEK 8: JOINT VENTURES – DEFINITION AND EXISTENCE

Issue: Are [parties] in a JV?

1. DEFINITION AND NATURE

1.1 Legal Characteristics of a JV

Under Aus law, a JV is not a distinct species of legal association; the term doesn’t have a settled common law meaning.

The specific nature depends on each case (UDC v Brian)

A JV as a matter of ordinary language is an association of persons for the purposes of a trading, commercial, mining or other financial undertaking or endeavour with the view to mutual profit, with each participant usually contributing money, property or skill (majority in UDC v Brian)

o Will often be p/ship, also apposite to joint undertaking other than p/ship – company / trust

o Also in UDC v Brian, Dawson J took the view that the term included the concept of an association of persons who engage in common undertaking to generate a product to be shared amongst them.

o In Cummings v Lewis, it was held there are three essential JV elements:

Association of persons as co-venturers

Engaged in a common undertaking

For the purposes of generating mutual profit or a product to be shared

Section 128A(1) ITAA “’joint venture’ means an enterprise carried on by 2 or more persons in common otherwise than as partners”

o Simply bears a working meaning, confined to the context of that particular Act (tax)

1.2 Use of JVs

Use: Mining syndicates, property developments etc

Reason: to use economies of scale, to spread risk etc

1.3 Categories of JVs

1.3.1 Incorporated JVs

JV company / equity JV – separate legal entity set up to undertake project on participants’ behalf, each participant has number of shares in JV company, shareholders a/ment

Governing law : law of contract, common law and equity; dealing with corporate vehicle so governed by Corps Act

1.3.2 Unit trust JVs

1.3.3 Unincorporated JV

No separate legal entity, creature of contract

Two categories : those which constitute p/ships and those which do not

o Those which do not are contractual JVs (Muschinski v Dodds)

Distinguishing features of contractual JVs :

o Generally single project of limited duration

o JV not usually principal commercial activity of each participant, but specific collaborative extension of each of their commercial dealings

Common clauses in contractual JVs :

o Co-venturers not agents for each other, unless one appointed manager or operatoro All rights to be several rather than jointo Agree to share in product of undertaking rather than monetary profit from sale of producto Common for day to day operations to be conducted by manager or operator – separately

appointed by each of participants (second tier of management)o A/ment usually stipulates that policy matters and supervision of manager/operator lie with joint

decision of managing or operating committee (1st tier of management) – will comprise rep of each participant

o Each participant agrees to contribute an amount to JV expenditure, equivalent to interest amount in JV (eg. 40% interest = 40% contribution)

o Denial of p/ship clause – state the r/ship is not one a partnership but of JVenturerso Common to hold as tenants in commono Dealing with transfer of interest – normally subject to pre-emptive rights, and also that consent

will not be withheld unreasonably – can usually transfer interest subject to…o Fiduciary obligations – might arise by express covenant or may be expressly excluded –

depends on what participants want Normally will be dealt with in some way

Governing law : contractual JVs are governed by the law of property, agency, trust, contract and principles of equity (Muschinski v Dodds)

o Muschinski v Dodds : dealt with obligation to share losses incurred in JV – where consensual joint r/ship that fails without attributable blame and no contractual provisions relevant, and a contractual JV, a similar prima facie rule of equity will apply as in case of p/ship

Held: to the extent JV funds allow, the venturers are entitled to the proportionate repayment of capital contributions, notwithstanding that if the venture had been successful, the return would have taken the form of a share in the JV proceeds

1.4 Rationale

Why would contractual JV structure be chosen? Because statutory formalities are minimised (ie. neither PA nor Corps Act applies) – also tax and commercial benefits

1.5 Distinction between contractual JV and p/ship

1.5.1 What is the effect of a clause denying the existence of a p/ship?

Such a clause is not conclusive as it is the whole agreement and the circumstances that are relevant to intention (MIM v Seltrust). However, the existence of the clause will be relevant (MIM)

1.5.2 ss 5, 6 PA (particularly s 5)

Analysis of definition in terms of elements of s 5(1) PA:1. Valid agreement between parties : generally will be satisfied – contractual JV based on

valid agreement

2. Carrying on a business : includes every trade / occupation / profession (s 3; Sch PA) and is an inclusive definition

Ordinary meaning : a commercial enterprise as a going concern (UDC v Brian)

Badges of business :

Repetition and regularity of business activities (Smith v Anderson)o BUT single venture can be p/ship where (implicit in s 35(1)(b)):

Land development – massive subdivision (Whitfords Beach) Huge outlay of capital / huge volume of operations (Whitfords

Beach; UDC v Brian) Canny Gabriel : A lot of capital to produce concert tours Needs to be more than mere realisation of an asset Ballantyne : purchase, subdivision and sale of single lot not

business where no work done or outlay

o JV can’t be distinguished simply because one single project – as above eg. Whitford’s Beach – single project or undertaking does not of itself negate p/ship

Nature of the activities: particularly profit making purpose (Ferguson v FCT)

Organisation of activities in a business-like manner: keeping books (Ferguson v FCT)

Existence of supplementary work done between purchase and sale

Is a contractual JV engaged in by the participants for the purpose of merely prospecting or exploring for minerals or petroleum a “business”?

Narrow view : because immediate object is acquisition of capital asset, rather than acquisition of stock for consumption or sale, arguably not a business (but this is probably unduly narrow)

Broader view (better view) : activities of JV formed for commercial purposes where participants are engaged in a commercial enterprise with the ultimate object of financial gain = business – aligns with UDC v Brian

3. In Common : need to show separate businesses being carried on by parties [?]

Elements :

Carried on by / on behalf of the partners (Lang v Jones; Beckingham); and

o Reciprocal agency relationship – partners must have authority to bind each other in terms of creating liabilities or debts (Cox v Coulson)

o To negate this look for :

Denial of agency JV operator may be agent, but if severally appointed does not

act on behalf of participants jointly, but severally BUT a management committee will be reps from all

participants who have an important say re management (UDC v Brian) = joint decision-making body (in favour of p/ship)

Mutuality of rights and obligations between partners (Duke Group )

o Indicia of p/ship rights include (s 27; Part 3 PA): Participate in management Share in profits and assets Make decisions about composition of p/ship Indemnity from p/ship assets Interest in capital contributions Retire at will Assign p/ship share

o Indicia of p/ship obligations include: Bearing losses equally Render accounts Keep books at place of p/ship Only use p/ship property for p/ship purposes Fiduciary obligations from one partner to others

o To negate this look for : Separate contributions equivalent to JV interest Several liability, not joint (Beckingham) One party able to make a loss while other makes a profit (Cox

v Coulson)

4. With a view to profit : net pecuniary gains (Duke Group) [gross returns less expenses]

Does element require sharing of profits ?

Cummings v Lewis; Cooley v Driver : sharing of profits essential

Duke Group : suggested may not need to have sharing of profits or jointly derived profit

UDC v Brian ; MIM v Seltrust : argument that there is no profit as each participant has a right in accordance with % interest in JV to share in the product of the undertaking rather than any money profit from the sale

o supported by Pennington v McGovern and s 6(1)(a) PA – co-ownership does not acquaint to a p/ship

Conclude – Here there is / isn’t a partnership as the mutuality requirement is / isn’t satisfied and there is / isn’t a view to profit.

NB. Definition of p/ship in ITAA unlikely to cover a contractual JV, as unlikely to be carrying on a business as partners or be in receipt of income jointly (s 995.1 ITAA)

IF NEEDED Additional rules for determining existence of p/ship (s 6(1) PA)

a) JT / co-ownership etc does not of itself create a p/ship as to anything jointly held (6(1)(a))

FCT v McDonald – co-owners receiving rental profits from leasehold not partners – not carrying on a business, to co-own and share rent insufficient, needed more

b) Sharing of gross returns does not of itself create p/ship (s 6(1)(b); Cox v Coulson )

Gross returns = gross income, before deducting expenses (Cox v Coulson)

c) Receipt by a person of a share of profits is prima facie evidence of p/ship, but does not of itself make the person a partner in business (s 6(1)(c); Badely v Consol Bank )

Profit = gain made by business during year (Re Spanish Prospecting Co)

Receipt of share of profits does not of itself create a p/ship where (s 6(1)(c)):

i. Payment of debt by instalments;

ii. Contract for remuneration of agent / employee (Beckingham) Beckingham : even though provision in contract for sharing profits, agreement as

whole indicate acting as agent for syndicate and not for itself as well

iii. Lender-borrower relationship (John Bridge; Canny Gabriel) 3 indicia:

1) Measure of control exercised by lender – it is reasonably necessary for protection of loan money or does it vest in lender powers of control

2) Period of time for which profits are shared – does It extend beyond loan and interest (if yes, indicative of p/ship)

3) Sharing of losses – if yes, indicative of p/ship

In Canny Gabriel measure of control was more than reasonably necessary for money advanced

WEEK 9: JOINT VENTURES – RELATIONS WITH OUTSIDERS

Issues: What are the general sources of [Joint Venturer]’s liability to [seller]? What are the relevant principles governing [Joint Venturer]’s liability for [Operator]?’

First steps:This matter is based in [contract/tort] and therefore [JV] may be liable under section:

PA (Ostensible Authority 2nd limb) 8 PA (Implied Authority 1st limb) 9 and 10 PA (Express Authority) 12 PA (Joint Liability)

However here:

IF obvious no partnership:o There is no prima facie partnership on the facts because [e.g. no agreement dealing with the

sharing of liability or losses and profits].

IF expressly told no partnership:o Here, expressly stated no partnership – therefore no liability will arise through PA.

IF maybe Partnership:o See previous section

2.1 MANAGEMENT OF CONTRACTUAL JV

2.1.1 Operating or management committee

Two tiers of management :

1. Operating / management committee Function :

Grant management committee overall responsibility for the implementation of the project

Eg. In exploration phase, management committee sets broad policy and outlines proposed activity and budgets – manager has to implement projects and budgets

Then, in development phase, higher expenditure, committee may be given higher degree of supervision over manager / operator (eg. to obey all reasonable instructions of committee)

Voting procedures : day to day decision making will generally be majority rule, fundamental matter may require unanimous vote (depends on JV agreement)

2. Operator / manager Function : to supervise and conduct operations on behalf of participants, usually

includes: Preparation and submission to committee of exploration plans and budgets Exclusive possession of all JV property Engagement of all agents/indept contractors Giving notice to participants to pay their share of expenditure

Negotiating third party contracts

Who normally assumes the role? Usually a participant, perhaps largest participating interest or subsidiary – less common for it to be independent contractor (will likely only happen if no participants have skills to be operator)

2.2 CHARACTERISING THE RELATIONSHIP OF OPERATOR AND PARTICIPANTS

2.2.1 Operator as agent or independent contractor

Agency: relationship that exists where one person has authorised capacity to create legal relations between principal and third party

Independent contractor: person who acts in his own interests to produce a given result without being under the control of the person for whom he does it

Courts look at objective intention of parties as ascertained from the agreement and conduct

o A clause denying agency is not conclusive (Garnac Grain)

Agent or contractor? Where JV agreement does describe operator/manager as agent, acting on behalf of the JV, probably proper classification (Hospital Products)

o Resource JVs which are contractual JVs will normally have agency r/ship between participants and operator/manager

Liability of operator / participant to 3rd parties in contract and tort

2.3 LIABILITY OF OPERATOR / PARTICIPANTS TO 3RD PARTIES IN CONTRACT2.3.1 General rule

Where an operator enters into a contract with 3rd party expressly as agent, the contract is between the participants and the 3rd party and the operator possesses no rights or liabilities under the contract

o However, it is not common for operator to say they are acting as agent / to enter contract as agent for participants

2.3.2 Doctrine of undisclosed principal

Doctrine: if operator has entered into contract in its own name without revealing the agency, but is acting within its actual authority, the operator or participants can sue or be sued on the contract (Marginson v Potter)

o If participants obtain judgment against the operator, the 3rd party cannot sue the participants even if they have obtained judgment against the participants (Kendall v Hamilton)

Exclusion: the doctrine is excluded where, objectively, the operator enters into contract as principal (expressly or impliedly) (UK Mutual v Neville)

o If the doctrine is excluded : Even if an agency r/ship exists, the participants do not acquire rights/liabilities against the 3rd party, and 3rd party’s rights to sue in contract are limited to the operator/manager (UK Mutual v Neville)

Indemnity: the operator is entitled to an express indemnity provided the expenditure is incurred in the course of its duties

2.3.3 Ostensible / apparent authority

Definition: Where a person with actual authority allows the agent to occupy a particular position in the company, and they represent (by words or conduct) that the person has authority to bind the company (Freeman & Lockyer v Buckhurst):

Elements (Freeman & Lockyer v Buckhurst):

1. Representation to contractor that agent has authority to enter into contract (of that kind) on behalf of company. Here...

2. Representation made by person/s with actual authority (to manage business of company).

3. Contractor induced by the representation to enter into contract (reliance). Here...

IF representation made by silence: In Martyn v Gray, a financier’s failure to correct a representation made by a mine manager to a creditor was held to be enough to make him liable. Similarly here [participant/s]’s silence could be held to be a representation.

IF agent not named in representation: In Martyn v Gray, the financier was held liable for the representation by the mine manager even though he was not specifically named (as the proprietor) in front of the creditor. Similarly here the [participant/s] representation may be sufficient, even though [they] didn’t state specifically who the authority was for.

IF participants weren’t disclosed: This cannot apply where participants are undisclosed (because no representation made by them).

There is no need to prove that third party would not have entered into contract if representation had not been made (Lynch v Stiff)

Application of PA: apparent authority may arise under s 17(1) PA as the provisions has application to situation which do not concern an existing p/ship so that it is not necessary to establish a JV is a p/ship because applying it

2.3.4 Extent of liability of participant in contract

Presumption that participants are jointly liable (Keay v Fenwick). However, this can be rebutted if it is apparent the liability is several:

o Eg. if operator appointed separately (Keay v Fenwick)

o Eg. if contract with 3rd party apportions liability, making liability several (Tyser)

2.4 LIABILITY OF OPERATOR / PARTICIPANTS TO 3RD PARTIES IN TORT

Participants: will be jointly liable to [3rd party] in tort for loss of injury caused by authorised acts of the operator

Operator : will be personally liable for any loss or injury caused by their wrongful act or omission irrespective of whether they were acting on behalf of the participants.

Operator engages independent contractor : Any wrongful act or omission of [independent contractor] does not become a direct act of [operator] unless [operator] has ordered the act that constitutes the tort, and that act either comprises the wrong or leads by physically necessity to its commission (Stoneman v Lyons). Thus [operator] may not be liable for negligence of [independent contractor] unless it owes a duty to [3rd party] (Stoneman v Lyons)

2.5 CHARACTERISING THE RELATIONSHIP BETWEEN THE PARTICIPANTS

Liability to 3rd parties in contract OR tort for the actions of an individual participant in a contractual JV does not extend to other participants unless the r/ship of principal/agent exists between participants

Is there an agency relationship between participants?o Unlikely in contractual JVs, the agreement will usually deny agency except re operator

o Agency should not be implied from conduct in typical contractual JV

o Nothing inherent in contractual JV that gives rise to apparent/ostensible authority – but doesn’t mean that words/conduct cannot raise ostensible authority

o UDC v Brian : generally nothing that gives rise to agency r/ship between participants in JV

WEEK 10/11: RELATIONSHIP BETWEEN JOINT VENTURERS

3.1 NATURE OF PARTICIPANTS’ INTEREST

Interest comprised of:o Proprietary interest as co-owner in each of the venture assets; and

o Rights or choses in action (contractual rights) represented by the JVA and related agreements

Cf p/ship: partner has no title to any specific property owned by p/ship, rather has an equitable interest in each asset of p/ship (MIM Ltd v Seltrust); right to take a portion of the surplus after assets realised and liabilities paid out (Canny Gabriel)

3.2 EXISTENCE OF FIDUCIARY DUTIES

3.2.1 Fiduciary principle

There is no universal definition (Hospital Products), but the general premise is that trust is given or confidence reposed and the concern of the fiduciary principle is to prevent the abuse of that trust or confidence.

3.2.2 Meaning of “obligation of food faith”

In a JV relationship the duty owed is one of utmost good faith, requiring complete subordination to the interests of the beneficiary or joint interests.

Breach: if this is breached remedies include account of profits, constructive trust or equitable injunction

3.2.3 Compatibility of the concept of fiduciary obligation with commercial relationship

Judicial restraint on imposing fiduciary obligations

There is some judicial restraint on imposing fiduciary obligations in commercial contracts, but such a context will not necessarily negate fiduciary relations altogether (Hospital Products)

Two views by HC in Hospital Products:o Narrow view (Gibbs, Wilson, Dawson) : where arrangement is purely commercial between

parties at arms’ length, these factors are important if not decisive in excluding fiduciary duties

o Broad view (Mason, Deanne) : every transaction must be examined on its merits to ascertain whether or not a fiduciary relationship exists

Generally accepted criteria for identifying fiduciary r/ship:

Not common to all judgments but some commonality:

o Representative element: where person undertakes to act in matter in the interests of another or joint interests – person entrusted with power to affect another’s interest (Hospital Products)

o Relationship of trust and confidence

o Requirement to perform some duty

o Inequality of bargaining power (BUT Pacific Coal v Idemitsu suggests the first two most important)

3.2.4 Fiduciary relationships in contractual JVs

Can fiduciary relationship arise in a contractual JV (eg. Mining JV)?

It follows (from 3.2.3) that joint venturers are not fiduciaries per se (UDC v Brian). Whether a venturer is a fiduciary may depend on the form of the JV and the particular functions and obligation of participants (cf UDC v Brian)

o Form: if JV p/ship = fiduciary; if unit trust = fiduciary (unit trustee to unit holder), but what about contractual (mining) JV?

Mining JV: participants in mining JVs have been held to be fiduciaries; the court accepts as a necessary feature that participants must be in a position of mutual confidence and act to further the JV (Pacific Coal v Idemitsu)

o In Pacific Coal there were express terms in JVA relevant to this finding, including “just and equitable” and “bona fide”

Pacific Coal v IdemitsuFacts JV of 7 participants (incl pl & one def) entered into investigation agreement, licence granted and

renewed Idemitsu met with gov to press upon them need to develop, without the knowledge of JV On of pl’s was concerned it wasn’t viable 2nd licence renewal was rejected by gov who then invited 3 JVenturers to apply for authority to

prospect Argued Idemitsu persuaded Gov to let them do this to exclusion of other JVenturers Argued breach of fiduciary duty through:

o Misuse ruleo Conflict of duty and interest rule

Held In deciding a fiduciary r/ship did exist, Ryan J:

o Did not need to resolve whether JV was p/ship or not, dealt with as contractual JVo Was fiduciary r/ship in existence having regard to form of JV and obligationso Rejected arguments that commercial agreement entered into precluded existence of fiduciary

r/shipo Crucial criteria were representative element and existence of mutual trust and

confidence These criteria were made out having regard to terms in JV agreement, particularly

covenant to be “just and equitable” and act “bona fide”o Also, scope of fiduciary r/ship extended to acquisition and maintenance of authority to prospecto It was a breach of fiduciary r/ship of Idemitsu who sought to deprive other participants of their

interests – suggested breach of conflict rule and misuse rule Remedy: benefit should be held on constructive trust for other participants, BUT Pacific Coal had

deliberately frustrated JV so it would be unconscionable to have constructive trust so Idemitsu ordered to pay $30m in damages for breach of fiduciary duty

Fiduciary duties applicable Default mechanisms

3.2.5 Fiduciary duties applicable to contractual JVs

Extent of fiduciary obligation:

It is more likely the fiduciary r/ship will be a limited one rather than a comprehensive one (Hospital Products; Noranda)

Contractual terms relevant to the imposition of fiduciary obligations:

Terms that suggest fiduciary r/ship:o Covenant to act just and equitable and bona fide ( Pacific Coal )

Terms that negate fiduciary r/ship:o Detailed clauses on rights and obligations – in Noranda it was held that equity should not

intervene where the JVA comprehensively covers all contingencies This may prevent court finding fiduciary r/ship

o Narrow scope of JV : if defined so that participants are not liable to account for gain from closely related activities, this may avoid the conflict rule but not the misuse or breach of confidence rules (Noranda)

Ie. May be a fiduciary r/ship but may be limited in its scope

o JVA permits activities otherwise in breach of fiduciary duties : Parties have capacity to take action in matters by reference to their own interests

(Hospital Products) Right to compete outside JV area Ability to use confidential information

Pre-contractual and post-contractual fiduciary obligations

Pre-contractual: Fiduciary duties may arise before any formal JV agreement is reached, although the type of r/ship and duties will vary with each case (UDC v Brian).

Post-contractual: It appears less certain that any fiduciary r/ship may arise in circumstances when the JV has terminated (Marcon Corp)

Content of Fiduciary Duties

Duty of confidence : pl may have an action for breach of confidential information, elements (Coco):

1. Personally received info of a confidential nature from another : pl must show info confidential and not common/public knowledge. There is no settled test but factors include:

Extent info is known outside business (eg. only operators / participants knew)

Amount of money / effort expended by pl in developing info

Ease / difficulty with which info could be properly acquired / duplicated by others

Value of info to pl and its competition

2. In circumstances of confidence : objective test, whether reasonable person in shoes of recipient would infer circumstance of confidence

Eg. Here, [operator/participant] acquired the info for limited purpose due to their position and arguably would be in circumstances of confidence

Value of info to pl and its competition

3. The other is not entitled to made unauthorised use of info : need not be a conscious use

Eg. Here, [def] used the info without consent

If used but didn’t disclose: There is no requirement that the info be communicated by a beneficiary, just that info is acted upon and obtained in their capacity as fiduciary (Towner v NUB) – ie. if info used with no consent = breach

4. Harm / Detriment : unclear whether necessary element

Here [pl] has suffered harm, so if harm is needed it exists (Cth v Fairfax)

Here [pl] has not suffered harm, however this may not be necessary (NRMA v Geeson; NP Generators)

Duty of disclosure (purchasing rule) : where venturer purchasing another’s interest

o Unless the following elements are established, the purchase is voidable at the suit of [seller] (Law v Law):

1. Beneficiary seller was aware of and consented to the contract;

2. Full value was given for the property and the fiduciary disclosed to the beneficiary all the info which they acquired concerning the value of the property.

Applies whether participant purchasing from co-participant (Pacific Coal) or operator purchasing from participant

Duty to disclose accounts (Wilson v Carmichael)

Duty of honesty (Birtchnell v Equity)

Conflict of duty and interest rule : [Def] as a fiduciary cannot benefit himself to the exclusion of others in the JV without their consent (Pacific Coal)

o Whether [def] is in breach requires determining whether the activity falls within the scope of the JV, by looking at the JVA as a whole and the course of conduct (Pacific Coal – obtained licence to exclusion of other JV participants; Birtchnell)

Misuse rule : [Def] must account for any benefit/gain obtained by reason of/use of its fiduciary position or opportunity/knowledge resulting from it (Chan v Zacharia).

o This duty is not limited by the scope of the JVA

Remedies

Venturers must account for benefit/gain obtained by reason or use of their fiduciary position (Chan v Zacharia)

o Equitable injunction to restrain

o Account of profits made by the breach

o Constructive trust (Pacific Coal – ordered benefit of new licenses be held on constructive trust – but not applied because JV frustrated at early stage)

o Equitable damages (Pacific Coal - $30 million, because of early frustration of JV it would have been unconscionable to order constructive trust)

3.3 DEFAULT MECHANISMS

3.3.1 Types of default mechanisms

The JVA specified each participants’ interest in terms of % which normally determine the size of a participant’s obligation to contribute to the costs of the venture, as well as its share in ownership of assets, right to vote and right to product.

Operator calls for participants to pay calls to it

A failure to pay a call triggers the default mechanisms which may include:o Advancing of monies by other participants repayable as a debt at high rate of interest by

the participanto Forfeiture (deemed withdrawal)o Dilutiono Right of non-defaulters to purchase defaulter’s interesto Cross-chargeo Operator’s lieno Loss of right to take production

What if JVenturer defaults in payment?

Nature of the dilution clause

Issue: Is the default mechanism (dilution clause OR option to acquire clause) valid?

The clause essentially provides for diminution of non-paying participant’s interest and increase in paying participants’ interests, at pro rata rate.

o Where non-paying participant doesn’t or elects not to pay

o Eg. For every $100 not paid, loses 1% of interest and other participants get pro rata % of that and pay $100 pro rata

3.3.2 Doctrine of penalties

Definition of penalty

A contractual term is a penalty where it imposes a burden on a defaulting party for a breach (IAC Leasing; Legione v Hateley)

Doctrine is equitable principle adopted by common law (AMEV-UDC) to protect contracting parties particularly where one occupies a position of power (UDC v Brian; AMEV-UDC)

Elements of doctrine of penalties

1. Clause imposes secondary obligation as addition security for the performance of the principal object of contract (Legione v Hateley; AMEV-UDC)

o Where monetary obligation : Element applies to monetary obligations

o Where dilution clause : A dilution clause may impose a penalty under this element because the non-paying participant is under an obligation ultimately transfer a portion of their interest, losing part of their interest (and other participants interests increase)

To reflect the transfer of a proprietary interest would have to properly transfer by signed legal documents etc.

This element will be made out because ultimately it’s a transfer of a proprietary interest by the non-payer to the payers (Revell v PC)

o Where, eg, equipment hire : Where clause allows contractor to use equipment of insolvent builder, not a penalty clause (Mosaic)

2. Is provision penal rather than compensatory: equity relieves against oppressive unconscionable provisions where nature penal rather than compensatory (Esanda Finance)

Two tests:

a) Degree of disproportion between stipulated sum and pl’s likely loss ( Esanda Finance ):

If it is a genuine estimate of damages then it won’t be a penalty

If the sum stipulated is extravagant and unconscionable compare to the gross loss, it will be a penalty (O’Dea v Allstates)

If clause forfeits % of interest (std dilution clause): probably reasonably comparable with the effects of failure to pay the contribution, and would not be a penalty (Monarch Petrol)

Monarch Petrol : In an exploration JV held there were a number of factors in JVs such as high risk, very expensive, commercial operation, requiring a steady flow of funds by JVs paying their funds/share in the JV.

o Where they don’t it places a heavy burden on other participants. Therefore there is nothing unconscionable in reducing the non-payer’s interest provided the dilution is reasonably comparable with the effects of the failure to pay the contribution.

If clause forfeits all of interest: probably unconscionable where default leave participant with nothing (Mosaic Oils)

However, counter-argument that participants left to pick up expense and if unable to may face insolvency, so potential damage is not small (Dunlop Pneumatic)

And it is questionable whether the assumption in Mosaic Oils was based on any evidence that the defaulting participant would loose millions, because in an exploration JV there may not be any profitable deposits and the lost profits would be minimal.

b) Nature of r/ship : by reason of the r/ship, an obligation is imposed that it would be unconscionable for the innocent party to enforce the provision

Where commercial participants at arms’ length with good legal advice and equal bargaining power – probably difficult to prove unconscionable to enforce dilution clause

3. Imposition of obligation on breach: o In the UK, the doctrine is limited to payment of an agreed sum or transfer of property

(Export Credits)

o In Australia the proposition is that the doctrine only applies when an obligation is imposed on breach, and this has been accepted but not authoritatively decided (O’Dea v Allstates; AMEV-UDC)

o Regardless, here there is [payment of agreed sum / transfer of property] and thus the doctrine will apply.

o However, it is clear that this element will not be met where there is a provision for payment of sum conditional on an option or election (including option to end contract) (Bridge v Campbell; IAC Leading)

So, if have the words “election” or “option” the element won’t be met, but if words are “default” or “breach” element fulfilled

4. Conclusion: generally, element 1 and 3 will be met but not 2, so doctrine will not apply

Application of doctrine of penalties to option to acquire defaulting party’s interest at FV -5%

No penalty: This kind of clause (ie. to purchase interest at fair value less 5%) does not impose a penalty because the first element will not be satisfied because the purpose of the clause is not to compensate nor to punish

o While clause provides a measure of inducement not to default, the context of the clause suggests that it is concerned with the most convenient way to allow JV to progress, not with imposing secondary liability (CRA v NZ Goldfields)

Is clause a forfeiture?

Forfeiture involves a loss of a proprietary right due to a breach by the defaulter (Legione v Hately)

o The doctrine of relief against forfeiture grants relief against unconscionable conduct, namely that a person should not be permitted to insist on its legal rights to take advantage of another’s vulnerability for the unjust enrichment of itself (Stern v McArthur)

A forfeiture on insolvency clause : will not apply as it is void under bankruptcy law . However, Young J did not refer to equitable principles, as there must be a disponee and disponor in order to have a disposition. As there is no disponor in a forfeiture, there can be no disposition.

o However, Young J’s judgment in Mosaic Oil has been criticised – when there is a transfer assignment document, there is a disponee and disponor and therefore there is a disposition.

Elements of relief against forfeiture :1. Are there exceptional circumstances? Forfeiture must be due to exceptional

circumstances: (either)

There has been fraud, accident, mistake or surprise: (Legione)

The action of the vendor is unconscionable: (Legione; Stern v McArthur)

2. Is enforcement of the clause unconscionable? Person should not be permitted to insist upon his legal rights to take advantage of

another’s special vulnerability or misadventure for the unjust enrichment of himself (Legione; Stern v McArthur).

Legione outlined numerous factors that indicate but are not conclusive in determining unconscionability.

Here the loss/diminishing of the defaulter’s interest would result in it paying less JV expenditure in the future with a corresponding increase in contribution by the non-defaulting participants. If anything the non-defaulting participants are perhaps exposed to the risk of insolvency based on paying higher amounts of expenditure. The dilution clause then could be seen as a proper and not unconscionable way of adjusting the rights of the parties to the changed circumstances.

3. Contract rescinded for breach of an essential term? Here the clause operates on default rather than an election not to pay therefore

element would be made out.

4. Able to cure breach? If [applicant] must be able to show he is in a position to cure the breach. Therefore

he would have to pay his outstanding call and interest. On the facts it is unlikely this could happen as _______. Therefore element probably will not be satisfied.

5. Protection of property rights?

This element would be satisfied as [Applicant] has property rights as a co-owner in the JV property

Enforceability of penalties clause

Penalty provisions are unenforceable, because voidable, if not totally void, in contract common law and equity (AMEV-UDC)

3.4 ASSIGNMENT

3.4.1 Assignment of proprietary rights

The capacity of a JV participant to assign proprietary rights is clear but the right to assign is not unrestricted.

Common clauses :

o It is common for the assignment clause to contain a right of pre-emption, that is the assignee who has received a 3rd party offer must make that offer to the other participants before assigning the interest.

o It is common to have a no assignment without prior consent of other participants clause, that consent not to be unreasonably withheld (Noranda) Noranda : held that where there is nothing express in the JVA there is no reason to

limit the range of the matters relevant to what is reasonable Reasonable will depend on objective evidence Suitability : it may be reasonable to withhold approval where proposed assignee eg.

lacks expertise or has insufficient capital etc.

3.4.2 Assignment of contractual rights

Generally, the benefits of a contract are assignable in equity, unless the contract calls for personal performance, eg.

o Manager, not assignable unless consent providing for in JCA

o In practical terms most JVAs do allow for operator / manager role to be assigned if consent provided

WEEK 11: TERMINATION OF CONTRACTUAL JVS

Termination depends on the nature of the participants’ interest which is contractual and proprietary

4.1 TERMINATION OF JV AS CONTRACTUAL ASSOCIATION A JVA must be terminated by one of the accepted methods of contractual discharge:

o Performance (or expiry term – fixed term); o Discharge by agreement (consent of parties); o Rescission for breach or frustration

Resources industry: quite often these are not suitable so JVA will usually have own mechanisms for terminating the contract:

o Dilution clause : where interest will eventually be nothing if participant does not pay – if only 2 participants and one’s interest is nothing, JV will terminate

o Withdrawal clause : participant can stop paying and elect to withdraw from JV and no longer support it

4.2 TERMINATION OF PROPRIETARY INTEREST

The discharge of the contractual interest does not destroy proprietary rights in the JV The participants remain co-owners under PLA 1974, until sale or partition which terminates the

proprietary interest.

WEEK 12: INCORPORATED ASSOCIATIONS*** All legislation refers to the Associations Incorporation Act 1981 (Qld) (AIA) ***

1. DEFINITION AND NATURE OF INCORPORATED ASSOCIATION (IA)

1.1 Definition

An IA is an artificial entity created by the AIA

Without the AIA, associations would be “unincorporated”

1.2 The context of the AIA

Legal status of unincorp not-for-profit associations (NFPs):

NFPs are not a separate legal entity; generally NFPs are voluntary associations of members (Leahy v AG) formed for social, charitable, scientific, education, religious and literary purposes.

Distinguishing from p/ship:

Members should not make direct pecuniary profits (Ex parte WA Nat Football)

o Although, NFPs can still be involved in profit-making activities provided profits aren’t distributed to its members

Problems:

Because NFPs are not separate legal entities (Leahy v AG), they face a number of problems:o Personal liability of committee members for debtso Members have no contractual rights under association’s ruleso Issues with entering into contracts with 3rd partieso Issues with property ownership

Purpose:

The AIA provides for the incorporation of NFPs to remedy the above problems

Administration:

The AIA is administed by the Office of Fair Trading

o Functions : maintain a register of IAs including name, address, registered office and financial docs (s 16) and the public may inspect this register (s 18)

1.3 Structure of IAs

Documentation:

The IA must have rules (s 6(1))

o It can either accept the model rules or create its own (s 6(2))

o The rules consist of: Association’s registered name Objects Model rules

o If model rules used this must be recorded on the register (s 46(1))

Management:

The business and operations of the IA must be controlled by a management committee (ss 60(1); 61(1))

o Management committee must have at least 3 members (s 61(3))

Membership:

An IA must have at least 7 members (s 5(1)(a)). The rights and obligations of members are governed by Part 8.

1.4 Incorporation process

The decision to incorporate:

Advantages : a NFP may elect to incorporate under the AIA – has following advantages

o Association solely liable for own debts

o Liability of the members/management committee is limited to amount of annual membership

o Association has the capacity to enter into contracts

Ineligibility : an association is not eligible to incorporate under the AIA where it (s 5(1)):

a) Has less than 7 members

b) Is: i. A corporation; ii. A partnership; iii. An organisation under IR Act 1999iv. A school council or parents and citizens association

c) Is formed for or carried on for the purpose of providing financial gain for its members [see below]

d) Is provided for in a special Act that: i. Incorporates the association’s governing body; or the trustee’s property for the

association

e) Has as its main purpose the holding of property:i. In which members have a disposable interest; orii. That members have a right to divide between all or some of them; oriii. For use by all members, or persons claiming through members; oriv. For distribution of property or income from property from all of some of the

members, or for persons claiming through members;

f) Has an object of raising a fund by subscription of tis members to make loans to them.

Formed or carried on for purpose of financial gain (s 5(1)(c)) : An association will not be formed for the purpose of financial gain where:

a) No part of the financial gain is divided/received by any membersb) Association is established to protect/regulate a trade/business/industry/pursuit engaged in

by members or which they are interested in;

c) Association provides its members with facilities/services;

d) Association trades with members, but the trade is ancillary to its principal purpose: (Trading Wick and Co);

e) Association trades with public, but trade is ancillary to its principal purpose, and not substantial compared with its other activities;

f) Association makes financial gain from: i. Trading under (d) or (e); orii. Charging admission fees to displays, exhibits, contests, sporting fixtures, or other

occasions conducted to promote its objects; oriii. Charging subscriptions to further its objects; or

iv. Receiving donations to further its objectives;

g) Members are entitled to divide the property between them on dissolution;

h) Member of the association: v. Receives a salary as employee/officer;vi. Makes a financial gain which a non-member would be equally entitled to;vii. Receives a trophy or prize because of a competition;viii. Receives temporary assistance because of injury/bereavement/financial hardship

suffered by member.

Procedure to obtain incorporation:

Pre-incorporation steps : 1. Incorporation Resolution: Members must resolve to incorporate the association and

adopt proposed rules (s 6); requires 75% of votes (s 6(1))

2. Appointment of person to apply for inc: Members must be ordinary resolution appoint an individual ‘appointed person’ to prepare and apply for incorporation (s 7(1))

3. Elect interim officers: The association must elect interim officers including a president and treasurer for the incorporated association. They may include a secretary and other officers. These officers are taken to hold the elected offices on the association becoming incorporated until new officers are appointed (s 8)

4. Lodge application for registration: Documents needed: Application for incorporation; Copy of proposed rules and a statutory declaration by the ‘appointed person’ that the

rules comply with the AIA or that proposed rules are the model rules, and a copy of the objects proposed for the association (s 9(1), (3)).

5. Notice of application: On receipt of application, chief exec may require association to give further info or docs and to publish a notice about the application if there is a contentious issue, which may permit a person to lodge an objection against the association’s incorporation (s 10)

6. Payment of prescribed fees: Once lodged, prescribed fees under the regulations must be paid: s9(2)

Certificate of incorporation : o CE must grant or refuse the application (s 12(1)), he can refuse if satisfied the proposed

rules do not comply with the AIA (s 12(2))

o If application granted, the CE must register the ass’s details on the register – on registration the ass is incorporated and the name becomes the registered name (s 14)

o On registration the CE must issue a certificate of inc to the association; the certificate is conclusive evidence that the requirements of registration have been complied with (s 15)

Name : Association must have the word ‘incorporated’ or ‘inc’ as the end of its name (s29) o Name must be in English characters: s29

o Name must appear on seal (otherwise use of the seal is not effective): s31

o Must ensure a document it issues has registered name in legible English (otherwise penalty): s32

Effects of incorporation:

Association becomes a body corporate with perpetual succession and it may sue or be sued in its corporate name: s21

Association has all the powers of an individual (can enter contracts, acquire/hold/dispose of property, make charges for services/facilities, do other things necessary/convenient to carry out its affairs) and can issue secured/unsecured notes/debentures/stock for association: s25

Members and management committee no longer liable for debts of the association: s 27

1.4.4 Corporate Personality

Principle of veil of incorporation

The principle applies to IAs; the members of the management committee are not personally liable for the debts of the IA

Lifting the veil

Statutory exceptions: committee members can be made personally liable for breaches of legislation by the IA:

o WHS Act 1995 (Qld): officers of IA must ensure their IA complies with the act – if the IA commits an offence, each member of the m/ment committee also commits an offence

o AIA: if association does not comply, the management committee is personally liable:

Eg. If IA owns/leases real property, must have public liability insurance, if they don’t each member of the committee is liable

Common law exceptions: the courts will lift the veil where the notion of the separate legal entity is used to defeat public convenience, justify a wrong, protect fraud, or defend a crime (Briggs v James Hardie)

EXAMPLE Briggs v James Hardie

Facts: The plaintiffs were employed by a subsidiary company and argued that the veil of incorporation should be lifted to allow them to recover for personal injury against the holding company.

Held: The veil may not be lifted just because it is shown that the holding company exercises complete dominion or control over a subsidiary company (per Rogers at 861). It is reasonable that different considerations should apply in an action in tort from the criteria applied in actions in contract or revenue or compensation cases (per Rogers at 863).

[more discussion below – fraud, evading legal obligation, subsidiary etc]

o IF fraud: Where a company is used as a cloak for fraud (Jones v Lipman) Jones v Lipman : defendant contracted to sell land but before completion, transferred

title to a company in which he was a joint director. Held: The company was a cloak for the defendant, a device and sham to

avoid the law – ordered specific performance of the transfer against the defendant and the company (Russell J).

o IF evading a legal obligation: Where a company is set up for the sole or dominant purpose of evading a legal or equitable obligation (Gilford Motor v Horne)

Gilford Motor v Horne : Horne was restrained from using a company (where the only shareholders were Horne’s wife and a business associate) to breach a covenant as part of a service agreement with the Gilford Motor Company not to solicit its customers

o IF subsidiary acting as agent: Where a subsidiary is acting as an agent of a holding company, the companies can be treated as one: Smith Stone. Therefore, if [subsidiary] is found to be acting as an agent for [holding company] the veil will be lifted (Smith Stone). In Smith Stone, Atkinson J applied 6 tests to determine who was actually controlling the business.

1. Who was really carrying on the business? The holding company. Profits of the [subsidiary] were treated as the profits of

[holding], as shown by _____. o profits treated as holding company’s: Smith Stone o books and accounts together: Smith Stone o subsidiary had no staff: Smith Stone o no separate pay or superannuation arrangements: Adams v Cape

Industrieso Q Does subsidiary enter into contracts in it’s own name?

2. Were the persons conducting the business appointed by the parent company? Yes. [Holding] controls the appointment of the [subsidiary]’s board of

directors, by _____. o all shares owned by holding: Smith Stone

3. Was the parent company the head and the brain of the trading venture? Yes. [Holding] was the head and brain of the trading venture, as shown by…

o Q Are day to day functions controlled by holding company?

4. Did the parent company govern the venture; decide what should be done and what capital should be embarked on the venture?

Yes. [Holding] made all decisions relating to capital expenditure, as shown by _____.

o undercapitalised subsidiary: Re FG Filmso Q Decisions referred to holding company?

5. Did the company make its profits by its skill and direction? Yes. All profits were made by [holding]’s skill and direction, as shown by…

6. Was the company in effectual and constant control? Yes. [Holding] was in constant and effective control of [subsidiary].

STATE: This agency exception has been accepted in Aus: Pioneer Concrete v Yelnah; and while the criteria to be applied is unclear (Briggs v James Hardie), the criteria applied by Atkinson J in Smith Stone was applied by in Spreag v Paeson.

Here [holding] will probably be found to have exercised complete control or dominion over [subsidiary], and thus the corporate veil will be lifted.

1.5 Rationale

The AIA provides an alternative to NFPs becoming incorporated as a company limited by guarantee under the Corps Act.

Advantages of incorporating under AIA Advantages of registering under CA

Lower cost of incorporation Available if you cannot incorporate under AIA because of eligibility issues under s 5(1) AIA

Lower ongoing costs of putting in documents with the department that governs your registration

Better if you are an Australia-wide association (otherwise under AIA you will have to register in every jurisdiction which would cost more)

Relationship between IA and 3rd parties

2. RELATIONSHIP BETWEEN IA AND 3RD PARTIES 2.1 Legal capacity of an IA

Common law doctrine of ultra vires

Under the common law doctrine of ultra vires, if an IA acted outside its objects (in rules / Const) the act or transaction was ultra vires and void (ie. of no effect) (Ashbury Railways).

o This doctrine applies to IAs (Walker v Mt Victoria)

IS [purpose] a substantive object or a mere power?

o Substantive Object : when association’s rules/objects are read as a whole, the object is capable of being pursued as an independent activity – an end in itself.

o Mere Power : when association’s rules/objects are read as a whole, the object could only be exercised in furtherance of or as incidental to the substantive objects of the company.

Application : Here [power exercised e.g. application for gaming license] does not fall within a [substantive object/mere power e.g. provision of foods and drink to members] and thus under the doctrine of ultra vires would be void. Similarly to corporations (s125(1) Corps Act) however the actions of the association won’t necessarily be invalid: s26(1) AIA.

The AIA

Under the AIA, an IA has powers of a natural person (s 25(1) AIA), however, they must state their objects (ss 9(3), 46 AIA)

o There are 2 views: Narrow View: s 25(1) must be read down by earlier sections, which require objects

to clearly be stated, therefore the unlimited legal capacity would be read in accordance with the objects of the association, in order to allow s26 to operate

Broad View: s 25(1) isn’t read down by earlier sections requiring objects to be stated, thus giving IAs unlimited legal capacity – leaving s26 with no operation.

o Application: Here, according to the narrow view [association] has acted outside its stated

objects/rules (i.e. must be within powers and objects). Here, according to the broad view [association] has acted outside its stated

objects/rules (i.e. could be somewhat outside objects as long as within powers which are that of an individual).

Who can bring proceedings where IA acts outside its objects? [members or the IA – not outsiders!]

o S 26(1) stops the IA or third party from asserting that its actions were ultra vires and invalid. Instead the lack of power/capacity can only be asserted by (s26(2)):

a member to restrain the doing of acts / transfers / conveyances to or by the association;

N.B. Court will grant injunction (and maybe compensation) under s26(2)(a) where just and equitable (s26(3)).

the association or member against the present or former officers.

o Advise [outsider] that the [transaction/license] should only go ahead on the condition that the IA broadens its objects clause (which association can do by way of special resolution). That way, [outsider] will be protecting from members avoiding payment by asserting that the [transaction/license] was ultra vires.

Queensland Rugby Football League v WorrellFacts: Association being liquidated. Question over distribution of surplus assets - Colts League Club was incorporated under iAIA. Objects of the club (under rule 2) to foster rugby league in that area, to provide clubhouse training and to do any other thing consistent with forgoing of the objects. Liquidation entered into deed of settlement and Vertican Touch Association got cash and property because they were beneficiaries of winding down of the winding down of the joint venture. Distribution was challenged on basis of ultra vires.

Held: Helman J looked at rule 31 requiring assets go to clubs with ‘similar objects’ and held that the four clubs the money did go to were similar (although admittedly not as similar as either of the applicants (Queensland Rugby League and Vertican League). Judge assumed rule 31 was substantiative object; if treated as a mere power then substantiative object would be in clause 2 (to support rugby league). That is, if the judge had treated Rule 31 as a mere power, it would have been read that it was only to be for a rugby league club, in which case it would have been ultra vires. However Helman J pointed out that even if it was ultra vires the action could not be brought by the applicants because s26 limited it to members.

NB. Specific powers: IAs are given specific powers to (s 25(2)):o Enter into contractso Acquire / hold / deal with / dispose of propertyo Make charges for facilities and services it supplieso Other things necessary or convenient to be done in carrying out its affairs

2.2 Dealings of IA and 3rd parties

Organs for managing IA

IAs must be controlled by a management committee (ss 60(1); 61(1) ; Re Vasalla ) (ie. this is a mandatory requirement)

o Re Vassallo : The body changed its rules so that management functions were carried out, not by a management committee, but rather by a board of directors. It was very clear that the board of directors took over basically all of the management functions of the previous management committee.

Held : The QCS held that Part 7 (ss 60, 61) is mandatory – IAs can only be managed by a management committee comprising members that include a president and a treasurer. Therefore, the amendment of the rules and the powers of the board of directors were held to be invalid.

Management committee must:

o Have at least three members of whom one holds the office of president that another holds the office of treasurer (s 61(3))

o Be composed of adults (s61(2))

o Hold meetings as often as necessary for properly conducting the business/operations of the association

Must be at least once every 4 months and a quorum must be prescribed by the rules: (s63)

o Ensure association has a nominated address for service of documents (s17)

Sources of protection of outsiders

Sources of protection of outsiders

1. Common law rules of agency and AIA: Deeming provision : Every member of the management committee and any manager acting in the

business of operations of the IA is deemed to be the agent of the IA for all purposes within its objects: s60(2).

Section 60(2) AIA makes it clear that the common law rules of agency apply so that any member of the management committee can bind the incorporated association for all purposes within the objects of the association. Thus outsiders dealing with the association are protected by the common law rules of agency: s60(2).

Contract between [manager] and [outsider] will be binding where [manager] acts on [association]’s behalf or as its agent within their actual or apparent authority.

Defect in member’s appointment : the acts of a member of the m/ment committee shall be valid notwithstanding any defect that may afterwards be discovered in their appointment qualifications (s 60(3))

If someone not deemed to be the agent of the association pursuant to s60(2) (common law rules apply for IAs plus the deeming provisions in s 60(2)):

o Actual Authority: Here, there has been:

Express actual authority : because [individual agent] had express [oral/written] authority from the association to act in the capacity of [actions/role of agent] on behalf of [association].

Implied actual authority : because to [carry out an authorised activity OR to carrying out a specific office/role].

o Apparent/Ostensible Authority: apparent or ostensible authority is where person/s with actual authority allows the agent to occupy a particular position and their words or conduct act as a representation that the person has the authority to bind the IA: (Freeman & Lockyer). 3 elements:

1. Representation that agent has authority to enter into a contract on behalf of the association of the kind of contract sought to be enforced. Here

2. The representation was made by person/s with actual authority. Here

3. 3rd party relied on the representation when entering into the contract. Here

2. AIA: No similar provisions to sections 128-130 CA (assumptions etc) in the AIA, which extend the

principles of ostensible authority to protect persons dealing with IAs and abolish the doctrine of constructive notice under the common law (therefore main form of protection for outsiders dealing with IAs are the common law rules of agency).

3. Common law indoor management rules (don’t need to look at)

3. RELATIONSHIP BETWEEN MEMBERS AND IA 3.1 IA’s rules or constitution

Nature of IA’s rules

Registration: rules registered by IA may be its own or the model rules (s 46)

o Where IA’s rules don’t cover particular matter, the relevant model rule applies unless the model rules express excluded (s 47)

Mandatory content: where IA adopts its own drafter rules, the rules must regulate specified matters (Reg 7, Sch 3 AIR) eg:

o The name and objects of the association;

o The constitution, election, or appointment, meetings and powers of the management committee;

o Amendment or rescission of, or addition to, the rules of the incorporated association;

o The way the income and property of the association may be used.

Model rules: The AIA provides for the declaration of model rules, which may be adopted by an IA. There is no compulsion for an IA to adopt the model rules (ss 46(1), (2); Reg 8, Sch 4 AIR)

Rules as a contract: the rules of an IA constitute the terms of a contract between the members from time to time and the IA (s 71(1))

3.2 Rights of members of an IA

Common law rights: disputes between members of a NFP (either amongst themselves OR between members and the association) will nto attract the court’s intervention (Cameron v Hogan), provided the disputes were dealt with according to the rules of the NFP and principles of natural justice

Rights under AIA:o The rules of an association take effect as a contract between the members and IA (s

71(1)) so the policy of non-intervention is excluded.

o The IA is bound by the rules of natural justice (s 71(3); Cameron v Hogan )

o Where a member of an IA is deprived by a decision of the IA of a right conferred on the member by the rules of the IA as a member, the Supreme Court has jurisdiction to adjudicate (s71(2))

Powers of court in juris to adjudicate: Court has power to make orders directing that an IA’s rules are to be observed and

orders declaring or enforcing the rights and obligations of members between themselves and between an incorporated association and its members although no right of a proprietary nature is involved: s72(1) & (2)

Court may also grant such relief as is appropriate in the circumstances or refuse an application where the issue raised in the application is trivial or the unreasonable conduct of a party is responsible for the making of the application or has added to the cost of the proceedings: s73(1) & (2)

Court has the power to review the decisions of the management committee but only where a member has been deprived of a right conferred by the rules or if the court considers that the member is entitled to have the rules of natural justice apply to the process in question: Re Maggacis

Re MaggacisFacts: M (app) sought appointment by resp to senior coaching position, no remuneration but payment of relocation expenses etc. Interview panel recommended M but IA appointed W after secret ballot. In accordance with rules of IA, the function of interview panel was to recommend only, there was no obligation on m/ment committee to accept recommendationHeld: ss 71-73 applicable to dispute, dispute not justiciable by the court, the court said intervention only activated if a member has been deprived of a right conferred by the rules, or if the court considered the member is entitled to have the rules of NJ applies to the process in questionHere: app not deprived of any right, express or impliedSO: court had no juris to deal with matter under ss 71-73

Governance issues / Termination of IA 3.3 Governance Issues

Governance Issues

The AIA requires persons appointed or elected as committee members to comply with similar standards to those which regulate the eligibility of persons to be or to remain company directors.

IF ineligible:

Person not eligible to be elected as a member of an incorporated association’s management committee if has been convicted of an indictment or summarily tried and sentenced to imprisonment (other than in default of payment of a fine) and the rehabilitation period in relation to the conviction has not expired: s61A

IF removed from committee:

Person may be removed from management committee if: as prescribed by rules: s64(1) a majority of the members present at the meeting vote in favour of removing the member: reg 15(3)

IF bankrupt:

The office of a member of a management committee is vacated in circumstances prescribed by the association’s rules or if the person becomes bankrupt or is convicted of particular offences such as an offence under the AIA: s64

Duties of management committee:

Case law suggests that directors of a building society not regulated by the Corporations Law (Hazelhurst v Wright) and officers of a trade union (Taylor v National Union of Mineworkers) owe the relevant body fiduciary duties. On the basis of this authority it has been assumed that committee members of incorporated associations owe similar fiduciary duties to the association.

The AIA does not impose statutory fiduciary duties on committee members of incorporated associations such as those imposed on directors of a company under corporations law.

A court may not permit a member of an association to institute proceedings against a member of the management committee where there has been a breach of duty (similar to rule in Foss v Harbottle where a wrong done to a company by a director or third party can only be enforced by the company itself). Case law suggests that courts are likely to resolve issues as to standing to institute legal proceedings by applying relevant company law principles and making appropriate adjustments for distinctions: Finnigan v NZ Rugby Football Union Inc

4. TERMINATION OF AN IA

Winding up of an IA

Voluntary winding up: An IA may be wound up by special resolution passed at a GM called for that purpose (s 89) – requires 75% of members present

Court winding up: An IA may also be wound up by the Supreme Court if:

o the incorporated association is unable to pay its debts;

o If the incorporated association carries on any operation whereby any member thereof makes any financial gain contrary to the provisions of the AIA;

o If the court is of the opinion that it is just and equitable that the incorporated association should be wound up.

Who may apply: A member or a creditor of the IA may apply to the Supreme Court for a winding up order (s90)

Winding up pursuant to Corps Act: In QBE Workers Comp, it was held that an IA cannot be wound up pursuant to the Corporations Act as it is an association, not a corporation and is void from the operation of the relevant sections of that Act (though it is stated in the AIA that, with respect to the winding up of an incorporated association, the provisions of the Corporations Act apply with all necessary changes (s91(1))