Corporate personality and business organisations Corporate Law: Law principles and practice Liabilities of members Normally, members of an unincorporated association have restricted liability and cannot be made responsible for liabilities beyond the amounts of their subscriptions. Wise v Perpetual Trustees  AC 139 Corporate Law: Law principles and practice Members’ rights Members have few, if any, proprietary rights in the property of the unincorporated association. Cameron v Hogan  51 CLR 358 It is presumed that there is no particular contractual relationship between the members and the unincorporated association, unless a member can show that the association is more like a professional organisation. Cameron v Hogan  51 CLR 358 Corporate Law: Law principles and practice A restraint of trade action may be possible against an unincorporated association where the restraint contained in a contract appears to be unreasonable. Buckley v Tutty (1971) 125 CLR 353. Note the application of statute: see, for example, s 14A of the Associations Incorporation Act 1981 (Vic) and its similarities to s 140 of the Corporations Act 2001 (Cth). Corporate Law: Law principles and practice Dissolution of unincorporated associations Unincorporated associations can be dissolved when events occur that that have the effect of ending the existence of the club or society (association). Assets are collected, liabilities are determined and paid, and the surplus, if any, is distributed. The process can be determined by the association’s rules in their constitution. • • Voluntary dissolution occurs when the members agree to dissolve the association Court-ordered dissolution occurs when the association is no longer functional or the members cannot agree on the purpose of the association Corporate Law: Law principles and practice Distribution of surplus assets Distribution of surplus assets usually takes place in accordance with the club’s or association’s constitution. If the constitution makes no provision for the distribution of the surplus, there is a presumption that each member receives an equal entitlement. Re GKN Bolts and Nuts Ltd Sports and Social Club  2 All ER 855 Re Sick and Funeral Society of St John’s Sunday School, Golcar  Ch 51 Corporate Law: Law principles and practice Incorporated associations An association may register an incorporated association under state or territory legislation, thereby creating a recognised legal entity which can enter into contracts, hold property, and sue and be sued. Not-for-profit organisations can register as guarantee companies under s 150 of the Corporations Act 2001 (Cth). If an association registers as an incorporated association, it is not a company and is not subject to the Corporations Act 2001 (Cth), unless it trades interstate. Corporate Law: Law principles and practice An incorporated association must satisfy certain requirements in order to receive registration (for example, it must have a minimum of five members). An incorporated association should be a ‘not-for-profit organisation’, meaning it can make profits but not distribute them as dividends to members; if it does, it will be held to be a partnership. The same applies to unincorporated associations. After registration, an incorporated association must indicate its status with the abbreviation ‘Inc’. Legislation introduced into a number of states and territories has increased the regulatory requirements on officers within an incorporated association, similar to directors of companies. Corporate Law: Law principles and practice Incorporated associations cont … An association may register an incorporated association under state or territory legislation, thereby creating a recognised legal entity which can enter contracts, hold property, sue and be sued. Not-for-profit organisations can register as guarantee companies under s 150 of the Corporations Act 2001 (Cth). If an association registers as an incorporated association, it is not a company and is not subject to the Corporations Act 2001 (Cth), unless it trades interstate. Corporate Law: Law principles and practice Members’ rights and liability • • • • • • The rules of the association or club constitute a contract between the association and its members. Members will have standing to take action to enforce their membership rights. Legislation provides procedures for dealing with disputes between members and the association. Legislation limits the liability of the members for the club’s debts to the extent provided for in the association’s rules. Members may be liable if they aid and abet wrongdoing through the incorporated association. If an incorporated association trades while insolvent, then the members will become jointly and severally liable for the debt. Corporate Law: Law principles and practice Maintaining financial records and audit An incorporated association must keep and maintain adequate and accurate accounting records. These records will be audited. Dissolution of the incorporated association Winding up of the incorporated association must be in accordance with the Corporations Act 2001 (Cth). State and territory legislation determines whether surplus assets are given to members, or perhaps to charity. Corporate Law: Law principles and practice Fiduciary duties of committee members The Committee has a fiduciary obligation to the association. Committee members: • • must act in good faith and in the association’s interest must disclose any interests they hold in relation to the association’s business. Corporate Law: Law principles and practice Partnerships Each state and territory has: • • • legislation which determines whether a partnership is in existence, the regulation that applies to a partnership; and further relations that exist between different parties within and outside of the partnership. Corporate Law: Law principles and practice The definition of a partnership The usual definition of a partnership is ‘the relation which subsists between persons carrying on business in common with a view to profit’ and includes incorporated limited liability partnerships. • • • a business relationship must be carried on the partnership must be carried on in common the partnership must be carried on with a view to profit. Corporate Law: Law principles and practice The definition of a business A business is defined as including any trade occupation or profession. It usually requires a repetition of transactions and mutuality by the members, or it may not be a partnership. Smith v Anderson (1880) 15 Ch D 247 A single transaction will not usually determine an enterprise to be a business. Turnbull v Ah Mouy  2 AJR 40 Corporate Law: Law principles and practice The definition of a business cont … An enterprise or association of individuals may amount to alternative relationships if they do not satisfy the requirements of a partnership (e.g. master– servant contracts are not partnerships). If a business has not commenced, it is not a partnership. Goudberg v Herniman Associates Pty Ltd  12 VSCA, 16 Keith Spicer Ltd v Mansell  1 WLR 333 There could be separate businesses, rather than a mutual one. Checker Taxi Cab Co Ltd v Stone  NZLR 169 Corporate Law: Law principles and practice The definition of a business cont … Note that a joint venture is not a ‘business in common’ and consequently is not a partnership (unless the members do conduct the enterprise as a partnership). A club, society or charity is not a partnership because there is ‘no view to profit’. Persons operating a partnership may not even be aware they are in a partnership, since a partnership does not need to be registered (except for a limited partnership). Partnerships are not separate legal entities. The partners share unlimited liability for the obligations of the partnership. Corporate Law: Law principles and practice The definition of a business cont … A partnership may be referred to as a ‘firm’. Note that quite diverse bodies (entities) can form a partnership (e.g. a company and the government could be in a partnership for a project). Corporate Law: Law principles and practice Determining the existence of a partnership A partnership is contractual in nature and may be formed by an agreement, whether express or implied. An express agreement can be written or verbal. An agreement can be implied from the conduct of the parties. Persons who hold themselves out as partners, or allow this to happen, will take the same responsibilities as other partners. Corporate Law: Law principles and practice Rules for determining whether there is a partnership Legislation determines which relationships are, or are not, partnerships. The rules for determining whether a partnership exists expand the application of the ‘partnership definition’. Corporate Law: Law principles and practice Rules for determining whether there is a partnership cont … Sharing of gross returns from an enterprise, or co-ownership of property, does not automatically make the participants a partnership. Cribb v Korn (1911) 12 CLR 205 Sharing of profits does indicate there is partnership, unless the sharing of profits was for reasons other than being in a partnership. For example, • • when there is a repayment to a lender in the form of a share of profits (Re Ruddock  5 VLR 51), or the payment of interest as a share of profits when profits are paid to an employee as part of their remuneration (Walker v Hirsch  27 Ch D 460) Corporate Law: Law principles and practice Rules for determining whether there is a partnership cont … • • when profits are paid to a spouse, domestic partner or child of a deceased partner who receives a share of profits as an annuity on the death of a partner when a person who receives an annuity or share of profits in return for the sale of a business is not by reason of such receipt a partner in the business (Pratt v Stick  17 TC 459). Corporate Law: Law principles and practice If all the facts indicate a degree of mutuality and a lack of independence, then there is a partnership because there is a business in common with a view to profit. Davis v Davis  1 Ch 393 Corporate Law: Law principles and practice Establishing a partnership A partnership can be expressly created by writing up the partnership details, or if the parties orally state their express intention to create a partnership. A written agreement is the best possible way of establishing a partnership, and a standard partnership agreement form can be purchased. A partnership may be implied by the conduct of the parties, (i.e. if they satisfy the definition of a partnership as a business in common with a view to profit). Corporate Law: Law principles and practice Establishing a partnership cont … A partnership agreement should contain all the terms of the partnership: • • • • • • • • • the parties the contributions of each partner the means by which a partner can leave interest to be paid on any loans made to the partnership the means of dissolving the partnership whether dependents of partners may receive a share of a deceased partner’s original share how disputes will be resolved whether a partner actually owns the partnership, or is a partner in name only whether there are senior and junior partners, (e.g. a managing partner). Corporate Law: Law principles and practice Establishing a partnership cont … Note that if the partnership agreement does not make a provision for a contingency, then partnership legislation will determine the relationship and terms existing within the partnership relationship. Corporate Law: Law principles and practice Regulation of a partnership A partnership may need to register a business name if operating under a name other than their own: see the Business Names Act in each jurisdiction. A partnership may need to register an ABN if their turnover is more than $75 000 and they wish to receive a credit for GST. Partnerships are nominally limited to 20 persons, but there are many exceptions (e.g. people such as lawyers, architects, doctors and accountants can have many more members (Regulation 2A.1.01 of the Corporations Regulations 2001 (Cth) Equal opportunity and anti-discrimination legislation applies to partnerships (e.g. Equal Opportunity Act 2010 (Vic) and the Sex Discrimination Act 1984 (Cth)). Corporate Law: Law principles and practice Different types of partnerships There are a number of different types of partnerships, depending upon the arrangements made by the partners themselves. Salaried partner: salaried partners do not normally own a share in the partnership. Instead, they receive a share of the profits, as well as a wage or salary. Note that if a person is held to be a partner, even a salaried one, they will be equally liable. Lynch v Stiff (1944) 68 CLR 428 Corporate Law: Law principles and practice Different types of partnerships cont … Silent or dormant partner: sleeping or silent partners may put capital into a partnership and take little part in the dayto-day running of the business, but may still be liable. Sub-partnership: a sub-partnership is when one partner enters into a contract with another partnership to share their own personal interest in a separate partnership, therefore being in two partnerships at the same time. Australia and New Zealand Banking Group Ltd v Richardson  Qd R 321 Limited liability partnerships: the USA, England, Europe, New Zealand and most Australian states have limited liability partnerships (LLPs). Corporate Law: Law principles and practice Limited liability partnerships The partnership must register as a limited liability partnership. The (limited) partners, who undertake not to manage the partnership, can receive limited liability (to the extent of what they have contributed). General partners, who do manage the partnership, cannot take limited liability. A limited partnership must have at least one unlimited general partner. A body corporate can be a general partner or a limited partner. A limited partnership is taxed similarly to a company (and is hence less popular these days). Corporate Law: Law principles and practice Incorporated limited liability partnerships Australia introduced legislation allowing each state and territory a very special type of limited partnership. These are permitted under the Venture Capital Act 2002 (Cth). This type of partnership is designed for large investment activities. It must be registered and does allow for limited partners, with at least one general partner. This type of partnership requires a written partnership agreement to be in force and this operates as a contract between the ILLP and each partner. Corporate Law: Law principles and practice Partners’ relations to outsiders The principle of partnership legislation is that each partner is an agent for a firm and can bind the firm by an act carried out in the firm’s usual way of business. Kind of business carried on by the firm For a partnership to be bound, a transaction must be a ‘usual’ transaction of that business. This is a question of fact. Mann v D’Arcy  2 All ER 172 Consider: what is the normal business of a petrol station? Is it just petrol? What of papers, confectionary etc? Corporate Law: Law principles and practice Business carried on ‘in the usual way’ If a transaction is carried out in an unusual manner, other partners may not be bound. That is, they may not be bound by an act which is so strange that it indicates a partner is acting without authority. Goldberg v Jenkins  15 VLR 36 Authority to act for the firm A partnership will not be bound by a partner’s actions where the outsider knew that the partner was acting improperly, or where they are not aware that the person is a partner and acting on behalf of a partnership. Otherwise partners must take liability for each other’s actions, even if there restrictions on a party’s activities within the partnership agreement. Corporate Law: Law principles and practice Authority to act for the firm cont … A firm will be liable for any act or instrument (letter, document or written form of any type) created in the firm’s name, with the intention of binding the firm or relating to the business of the firm, whether the act is by a partner or not. Corporate Law: Law principles and practice Partners’ liability in contract and tort Each partner is liable jointly with the other partners for all debts and obligations of the firm incurred while they are a partner. The estate of a deceased partner is severally liable for the debts of the partnership contracted before their death, but subject first to the prior payment of their separate debts. Joint liability means collective or combined or share liability. Joint liability means only one action can be brought against the partnership. If a member is missed in the legal action then they cannot later be sued. Corporate Law: Law principles and practice Liability of partners in tort or wrongful act Partners are liable jointly and severally for wrongful acts or an omission of a partner committed in the ordinary course of business, or with the authority of the copartners (e.g. in negligence). In National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, it was found that if an act was not part of the ordinary course of the business, and there was no implied acceptance of the act by the innocent partner, who lacked knowledge of the activities, then the innocent partner may not be liable. Corporate Law: Law principles and practice Liability of partners in tort or wrongful act cont … Severally means individually. Partners can be sued together or individually. Further, partners can be sued at a later point in time if discovered. A plaintiff may choose to sue the wealthiest partner and then leave it to the partners to settle liability amongst themselves. Partners may be liable for each other for a lack care in relation to employees (even if they did not participate in the careless act). Walker v European Electrics Pty Ltd (in liq)  23 NSWLR 1 Corporate Law: Law principles and practice Liability of partners in tort or wrongful act cont … The wrong need not be for the benefit of the firm to impose liability on the innocent partners of the firm. Polkinghorne v Holland & Whittington (1934) 8 ALJ 140 Note duty of care for those relying on advice Hedley Bryne & Co v Heller & Partners  AC 465 Corporate Law: Law principles and practice Criminal Acts Partners are liable individually (and collectively) for each other’s criminal acts if connected to the business of the firm. Bishop v Chung Brothers  4 CLR 1262 Corporate Law: Law principles and practice Liability for misapplication of money or property A firm is liable when money or property of a third person has been received by and misapplied by a member of the partnership. The liability of the firm depends on whether the partner who misapplies the money had express or apparent authority to receive it. It also depends on the money being in the custody of the firm and whether its receipt was in the ordinary course of business or not. Polkinghorne v Holland & Whittington (1934) 8 ALJ 140 Lloyd v Grace, Smith & Co  AC 716 Mann v Hulme (1962) 35 ALJR 153 Corporate Law: Law principles and practice Partnership by estoppel or holding out Where a person is deliberately (or even carelessly) ‘held out’ by words, actions or in writing, to an outsider as being an agent, the firm will be estopped (stopped) from denying liability for that person’s actions or acts of agency. Note, however, some exceptions under Tower Cabinet Co Ltd v Ingram  2 KB 397 and Lynch v Stiff (1944) 68 CLR 428. Any representation made by any partner concerning a partnership’s affairs and in the ordinary course of business, is evidence against the firm. Corporate Law: Law principles and practice Liability of an incoming and outgoing partner A person admitted into an existing firm does not become liable for the debts or obligations contracted before they became a partner. A retiring partner does not cease to be liable for partnership debts incurred prior to their retirement (novation). Novation is the substitution of a new contractual liability in consideration of a release of an existing one. Rolfe & Bank of Australasia v Flower Salting & Co  LR 1 PC 27 Corporate Law: Law principles and practice Relations of partners between themselves Partners are in a fiduciary relationship with each other before, during and after the partnership has ended. They are bound to exercise the utmost good faith in their dealings with each other. Partners relations might be set out in the partnership agreement (e.g. contributions of capital, duration of the partnership). Corporate Law: Law principles and practice Fiduciary duties to the firm Partners are in a fiduciary relationship with the firm and fellow partners. Partners must act ‘bona fide’, with utmost good faith. Partners’ duties to render accounts: partners must render true accounts and full information of all things that affect the partnership to any partners or their legal representative. A partner of the firm must account to the firm for any benefits they derive without the consent of the other partners from any transaction concerning the partnership, or for any use by the partner of the partnership property, name or business connection. Chan v Zacharia  58 ALJR 353 Corporate Law: Law principles and practice Fiduciary duties to the firm If a partner without the consent of the other partners carries on any business of the same nature as, and competing with, that of the firm, the partner must account for and pay over to the firm all profits made by them in that business Pathirana v Pathirana  AC 233 Corporate Law: Law principles and practice Rules for determining the rights and interests of partners Subject to contrary agreement, express or implied by the parties, partnership legislation set out the rules to determine the rights, duties and interests of the parties in the partnership. • • Partners are entitled to share equally in the capital and profits of a business, and must contribute equally towards any losses (including losses of capital) by the firm. Partners are entitled to indemnity for any payments or personal liabilities incurred in the ordinary and proper conduct of the business of the firm, or for anything necessarily done in the interests of the business or property of the firm. Corporate Law: Law principles and practice Cont … • • • • A partner who contributes to the partnership more than their required contribution of capital is entitled to interest at a statutory rate set by their jurisdiction. A partner is not entitled to any payment of interest until the profits of the firm have been assessed. Every partner may take part in the management of the partnership business, unless the agreement expressly excludes this right. No partner is entitled to payment for working in the partnership business (unless the partnership agreement specifies otherwise). Corporate Law: Law principles and practice Cont … • • • • No new partner can be admitted without the agreement of all existing partners nor can a share of the partnership be assigned. A majority of partners cannot expel a partner unless there is a power to do so in the partnership agreement Differences of opinion between partners as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. The partnership’s books are to be kept at the place of business of the partnership (or the principal place if there is more than one) and every partner is entitled to have access to them and inspect and copy any of them. Corporate Law: Law principles and practice Variation of partnership The right of partners can be express or implied from the partnership agreement and s 23 of the Victorian Partnership Act allows for the variation of an agreement with the consent of the partners, or it can be implied from a course of dealing. Public Trustee v Schultz  38 ALJR 128 Corporate Law: Law principles and practice Partnership property Partnership property is assumed to belong to the partnership and must be used only for partnership purposes. Partnership property will be distributed equally on dissolution, unless the partnership agreement specifies otherwise. Partnership property is not subject to claims by creditors who have personal claims against individual partners, though a claim may be made against the partner’s interest in the partnership. Corporate Law: Law principles and practice Expulsion of a partner No majority of partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. Bond v Hale  90 WN NSW 119 Corporate Law: Law principles and practice Assignment of partnership Under partnership law, it is possible for a partner to assign (transfer) their share (profits) to another, but this is subject to the partnership agreement. Other partners must still agree to the assignee becoming a partner Any assignment must be in writing and the assigning partner must give notice of assignment to the other partners. Corporate Law: Law principles and practice Retirement from the partnership If no partnership agreement exists, and there is no fixed time of partnership operation, the partnership ends by notice of any partner. Dissolution of the partnership A partnership may be dissolved either by an act of the partners or by the court on application. A partnership agreement may determine the time and method of dissolution. Corporate Law: Law principles and practice Dissolution by partners Subject to any agreement between the partners, the partnership can be dissolved: • • • • • • if entered into for a fixed term, by the expiration of that term if entered into for a single venture or undertaking, at the end of that venture if entered into for an undefined period of time (a partnership at will), in which case the partnership ends by notice of one partner by the death, bankruptcy or insolvency of any partner where a partner allows their share to be charged for their personal debts if the partnership business becomes illegal. Corporate Law: Law principles and practice Dissolution by the court Partners can apply to a court for dissolution where: • • • • • • A partner has been declared of unsound mind and incapable of management. A partner is incapable of performing their part of the partnership contract or business, (e.g. from professional disqualification). A partner has been found guilty of conduct that will prejudicially affect the business. A partner continually commits a breach of the partnership agreement, acts contrary to the interests of the partnership or is continually absent. The partnership business cannot be carried on except at a loss. The court is satisfied that it is just and equitable to dissolve the partnership. Corporate Law: Law principles and practice Notification of dissolution Partners can (and should) give a public notice of the end of the partnership. This is notice that retiring partners can no longer bind the firm. Lack of public notice may allow a retiring partner to bind the firm for their activities (e.g. by use of the firm’s letterhead). Corporate Law: Law principles and practice Distribution of property post-dissolution On the dissolution of the partnership, the property of the partnership is used for payment of partnership debts and obligations. Partners share the remaining surplus, and this may be used for payment to personal creditors. Profits from an ongoing partnership may be distributed to the family of a deceased partner (subject to the partnership agreement). Corporate Law: Law principles and practice Distribution of assets on dissolution of the partnership Losses and deficiencies must be paid first from profits, then from the capital and lastly from the partners individually according to their individual proportional rights. The distribution of assets follows a certain order of priority: • • • • payment of debts and liabilities to non-partners payment to each partner of money lent to the partnership, other than their capital contributions, which is paid in proportion to their contribution if the funds are insufficient payment to each partner of their capital (or in proportion to their contributions if there are insufficient funds) payment to each partner of the surplus in proportion to the agreed share of profits while the partnership was a going concern. Corporate Law: Law principles and practice Advantages of a partnership • • • • specialisation of skills and a pooling of resources fewer formalities and less expense a degree of flexibility in terms of constructing the partnership relationship the possibility of income-splitting, though it is subject to taxation regulations. Corporate Law: Law principles and practice Disadvantages of a partnership • • • • • • • Partners have no separate entity from the partnership. The unlimited liability to creditors means that personal assets may be available to creditors of the partnership. Partners are liable for each other’s actions Partners must take out personal insurance and superannuation because they cannot employ themselves. Partnerships are limited to 20 members, though there are some exceptions Partnership legislation may override certain agreements made between partners. Dissolution of a partnership may be prompted by an application to a court, or breakdown of partnership relations. Corporate Law: Law principles and practice Joint ventures Joint ventures may be used for a one-off or fixed-term project to produce profit to be shared by the coventurers. The definition of a joint venture is quite vague and in some instances tax legislation may determine that a joint venture is, in fact, a partnership. Tikva Investments Pty Ltd v FCT (1972) 128 CLR 158 Corporate Law: Law principles and practice Defining a joint venture A joint venture is an arrangement or contract whereby two or more parties enter into an agreement to contribute to a specific project, and hold respective shares, without forming a partnership. Each party contributes some skill or property, not necessarily of the same type, for the purposes of joint ‘product’, without binding their joint venturers as principals or agents—unless each has expressly agreed to do so. Unlike a partnership, a joint venture is not a business in common. Corporate Law: Law principles and practice Distinguishing a joint venture from a partnership A joint venture which conducts an enterprise as a ‘business in common’ will be a partnership. If the joint venture agreement is not properly documented and the roles of each party are not properly distinguished the enterprise may be held to be a partnership. Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 11 Corporate Law: Law principles and practice The law governing joint ventures Joint ventures are not registered. Joint ventures are not regulated by any particular statute, though they may be subject to general business legislation (e.g. business names legislation, company legislation, tax legislation). Corporate Law: Law principles and practice Joint venture agreements Members of a joint venture should set out their relationship in a contract. Any agreement should specify ownership of property, rights of members, resolution of disputes, and the process for leaving or dissolving the joint venture. Corporate Law: Law principles and practice Use of joint ventures Joint ventures may be used for projects for which a single party does not have the necessary capital, expertise or licence to undertake the particular project. Joint venture projects might occur in mining, research and development, manufacturing or housing development. A joint venture can be an association of entities in any number of business combinations (e.g. two or more companies or two sole traders. Even a government may enter a joint venture.). A joint venture on reaching a membership of 20 must incorporate (Corporations Act 2011 (Cth) s 115). Corporate Law: Law principles and practice Ending a joint venture A joint venture may end: • • • by agreement by agreement under a contract when the project comes to an end. Corporate Law: Law principles and practice Advantages of joint ventures over partnerships • • • • • • Joint ventures are not responsible for acts of coventurers: co-venturers are not agents for each other. Joint ventures have greater flexibility in determining the tax treatment of various items in their accounts. The joint venture can dispose of its share of its product in any manner. Generally joint venturers can transfer or assign their interest in the venture without consent. If a fiduciary relationship does not exist between coventurers then they may be able to compete with and against each other. Because of the uncertain nature of joint ventures, they have a measure of protection from being sued in the name of the joint venture. Corporate Law: Law principles and practice Syndicates A syndicate is similar to a joint venture, but is more easily distinguished by comparing it to a partnership. Syndicate members do not have a fiduciary relationship, nor accept liability for each other, as occurs in a partnership. A syndicate is a combination of persons who have become associated for the purpose of promoting some business enterprise. A syndicate is a relationship in which the parties have fewer mutual or common interests than those existing between joint venturers. Beckingham v The Port Jackson and Manly Steamship Co (1957) 57 SR (NSW) 403 Corporate Law: Law principles and practice Trusts A trust is an equitable obligation. It is an obligation enforceable in equity, which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of another person (the beneficiary) or for the advancement of certain purposes. Corporate Law: Law principles and practice Trusts A trust is not a separate legal entity like a company, and is not created through a contractual relationship between all the parties to the trust. A contractual relationship may exist between the trustee and the settlor, but the beneficiaries of the trust have no contractual rights in the creation or enforcement of the trust. Rights and obligations of the different parties to a trust arise under the law of equity. A trustee can be both a settlor and beneficiary (at least, one of the beneficiaries). Corporate Law: Law principles and practice Parties to the trust There are three parties to a trust: • • • The settlor is the person who creates the trust (also called the creator or donor). If a trust is created unintentionally, as in a situation of an implied, constructive or resulting trust, there will be no settlor. The trustee is the person to whom the trust property is vested or transferred. For an express trust, a specific trustee is nominated. The beneficiary is the person (or persons) who benefits under the trust, and is known as the cestui que trust. Corporate Law: Law principles and practice Parties to and elements of a trust The subject matter of the trust is the trust property. This can be tangible or intangible property, personal or otherwise. The trust property can be a chose in action or possession. It can be legal or equitable property. It can be land, shares, money, and the like. To create an express trust, there will be a trust instrument known as the ‘deed of trust’ or ‘deed of settlement’. It is the document by which the settlor vests the trust property into the hand of the trustee, and it also sets out the rights and obligations of the parties to the trust. Corporate Law: Law principles and practice Types of trusts Express trusts are created according to the express and intentional declaration of the settlor. They are: • Discretionary trusts: the trustee is given discretion in relation to the operation of the trust (e.g. who the beneficiaries are, how much they get). • Fixed trusts: the trustee does not exercise any discretion regarding the interest or portion the beneficiary will take. • Executed and executory trusts: in an executed trust, the intentions of the settlor have been completely declared so that the trustee’s main duty is to carry out the terms of the trust. Corporate Law: Law principles and practice Types of Trusts cont … • • Bare and special trusts: a simple trust that is used as a repository for holding property or assets and has no active duties apart from vesting its property in the hand of the beneficiaries. Constituted and incompletely constituted trusts: a trust is incompletely constituted when the trust property as not completely vested in the trustee. Corporate Law: Law principles and practice Types of Trusts cont … Non-express trusts are created without any express and intentional declarations or communications by the settlor but arises by the operation of law. Non-express trusts include: • • Implied or presumptive trusts: there is an implied intention on the part of a person to create a trust in respect of a particular trust property. Resulting trusts: an implied trust in which the interest in the property returns to the trust creator. Corporate Law: Law principles and practice Types of trusts cont … • • Constructive trusts: arise out of the operation of law because it would be inequitable to allow a person to hold the property or interest for themself. Constructive trusts can be used in the following situations: • in de facto relationships • when there is a fiduciary relationship • when an outsider or stranger to a trust profits by getting involved in trust • when a stranger receives and deals with trust property in breach of trust • when vendors hold land as constructive trustee for the purchaser. Public and private trusts: can be for private individuals and or the benefit of the public. Corporate Law: Law principles and practice Aspects of a trust Fiduciary relationship A trust creates a fiduciary relationship between the trustee and the beneficiary. The trustee is required to exercise rights and powers, and act in good faith and in the beneficiary’s interest. Legal requirements for creating a trust Certain legal formalities must be complied with to make a valid trust. These are based on the English Statute of Frauds 1677, the Wills Act 1837 and the Property Law Act of each state. Certain transfers of property must be evidenced in writing. Corporate Law: Law principles and practice Aspects of a trust cont … Life and continuity of trusts Trust property is vested in the hands of the trustee. Whether it is a body corporate or a natural person, if the trustee dies another trustee can be appointed. A trust does not have perpetual succession and under the rule against perpetuities, the life of a trust must not exceed 80 years. Trustee companies Trustee companies are governed by specific legislation in each state or territory jurisdiction. Legislation specifically names the trustee companies to which it applies. Trustee companies can act as executors and administrators of deceased estates, and provide management, mortgage financing and similar services. Corporate Law: Law principles and practice Trustee’s duties A trustee has well-established duties imposed upon them by the law of equity and the legislation. The main duties are to maintain and improve the trust property for the benefit the beneficiaries. Some of the trustee’s duties are as follows: • Being familiar with the trust document and ensuring the economic wellbeing of the trust property for the beneficiaries. The trustee must comply with the law on authorised trustee investments. The trustee must make responsible and prudent investments with due care and diligence. Corporate Law: Law principles and practice Trustee’s duties cont … • • • • The trustee has a duty to act bona fide and in good faith in the interest of the beneficiaries. This means they have an obligation to avoid conflicts of interest and not profit from their position. The trustee has a duty to keep accounts and provide information to the beneficiaries. The trustee has a duty against delegation and the trustee must act in person, subject to certain exceptions. The trustee has a duty of care, loyalty, impartiality and fairness. Corporate Law: Law principles and practice Liability of trustee • • • • The trustee has no separate entity from the trust itself; the trustee is the legal owner of the trust property. Trustees are personally liable for all debts of the trust, though they can seek indemnity from the trust assets for legitimate expenses (perhaps with a clause in the deed). A trustee has the right to seek reimbursement for liabilities and expenses incurred in the proper administration of the trust. The trustee will also need to pay any tax liable on the trust if there is no beneficiary entitled. Corporate Law: Law principles and practice Trading trusts In a trading trust, a business and its goodwill and assets are transferred to the trustee, either on the death of the trader or during their lifetime. The business is then conducted by the trustee for the trust and its beneficiaries. Tax is imposed only on the trustee or on the beneficiary and not on both. However, with the introduction of the tax imputation system, which removed the double taxation imposed on the company and shareholders, the advantage for trusts has been diminished. Corporate Law: Law principles and practice Winding up of trusts A trust can be wound up in three ways: • • • by the release or variation of trust obligations by beneficiaries or the court by revocation of the trustee powers by a court order. If the trustee is a company, the trust may be wound up in accordance with the Corporations Act 2001 (Cth). Corporate Law: Law principles and practice Types of business trusts Unit trusts: collective and managed investments A unit trust is set up under a deed of trust, whereby ‘capital’ is invested or contributed by unit holders (investors, subscribers or beneficiaries). The units are of equal size so the number of units held determines the entitlement of the unit holder to an annual distribution of net income and to their interest in the assets of the trust. • Fund managers make the investment decisions. • The amount of capital contribution can be relatively small. • The units generally provide fixed annual entitlement to income. • The units represent a fixed entitlement to capital. • Unit holders have proprietary interest and right in the assets of the trust. Corporate Law: Law principles and practice Public unit trusts Public unit trusts are defined by the Income Tax Assessment Act 1997 (Cth) and are designated as such if the units are: • • • listed for quotation on the stock exchange held by more than 50 people are offered to the public. If a trust is classified as a public trust, it is treated as if it is a company and will pay company tax on dividends. Corporate Law: Law principles and practice Franchises A franchise is a contractual arrangement between separate business proprietors whereby the franchisor allows another individual (or individuals), the franchisee, to sell or distribute goods and services that were created, registered or marketed under some scheme by the owner, the franchisor, of the original idea. Franchises can take a number of forms, including: • product franchises—the franchisee acts as a distributor using the franchisor’s trademarks, goods and services • product manufacture franchises—the franchisee buys the know-how, and/or the ingredients for the manufacturing of a product • system franchises—the franchisor sells to the franchisee an entire system for the carrying on of a business to sell good and services. Corporate Law: Law principles and practice Business Organisations Different business organisations (entities) suit different types of businesses. Consider: • • • • whether the business is designed for profit making or for another purpose the complexity of a business entity (a company being the most complex) the risks attached to the owners and operators of the enterprise other factors such as taxation and regulation of an entity. Corporate Law: Law principles and practice Non-Corporate Business Organisations Non-corporate business organisations are business entities which are not companies. Sole traders A ‘sole trader’ is an individual undertaking a business activity or enterprise for profit. Corporate Law: Law principles and practice A sole trader’s characteristics No separate legal entity exists from the owner An enterprise conducted by a natural person Unlimited personal liability Sole Trader Limited access to capital Responsible for management and risk Corporate Law: Law principles and practice Other characteristics of a sole trader • • • A sole tradership often has a limited life because it depends on the owner. The owner operator pays tax because of a lack of a separate entity. A sole tradership is the riskiest form of business. Corporate Law: Law principles and practice The law applying to Sole traders Sole traders are the least regulated form of enterprise entity. • • Sole traders must pay tax (personally). Licence requirements, name registrations (Business Names Act), GST and ABN registration may be required, and consumer legislation may apply where goods and services are provided. Corporate Law: Law principles and practice Associations Unincorporated Associations An unincorporated association may be formed by two or more persons to promote some interest, either for public or private purposes. An unincorporated association may be a religious body, sporting body, cultural organisation or educational body. An unincorporated association is not recognised as having any particular legal entity existing separately from its members. Corporate Law: Law principles and practice An unincorporated association’s characteristics No separate legal entity exists from the owner An enterprise conducted by a natural person Unlimited personal liability Unincorporated Association Limited access to capital Responsible for management and risk Corporate Law: Law principles and practice Unincorporated Associations cont … An unincorporated association is basically a group of people who form a club or society, but, having no registration, are not recognised as having any legal entity. Having no recognised entity, unincorporated associations cannot own property or enter into contracts, nor sue on behalf of a recognised entity. Cameron v Hogan (1934) 51 CLR 358 Corporate Law: Law principles and practice Unincorporated Associations cont … Due to a lack of legal status, unincorporated bodies have certain legal limitations, such as: • • an inability to accept a gift or a bequest (with some exceptions) (Leahy v Attorney-General (NSW)  2 All ER 300 (PC); Bacon v Pianta  ALR 1044) an inability to hold property and enter into contracts or leases (though trustees might be appointed to overcome this) (Freeman v McManus  VR 15; Carlton Cricket and Football Social Club v Joseph  VR 487). Corporate Law: Law principles and practice Liability of committee members Because of a lack of legal entity, the committee or managers may find themselves personally liable for contracts made on behalf of the unincorporated association. Bradley Egg Farm v Clifford  2 All ER 378 Peckham v Moore  1 NSWLR 353 It is quite difficult to bring a legal action collectively against an unincorporated association, though there are some exceptions. Bailey v Victorian Soccer Federation  VR 13 Corporate Law: Law principles and practice Legal requirements of franchising Franchising is regulated in Australia by the Franchising Code of Conduct under the Competition and Consumer Act 2010 (Cth) and the Australian Consumer Law, as well as through the law of contract (e.g. the area of obligations, undue pressure and unconscionability). Consumer Law prohibits: • unconscionable conduct (ss 20–22) • misleading conduct (s 18) • false representations (ss 29–38). Corporate Law: Law principles and practice Legal requirements of franchising cont … The franchisor must disclose certain relevant information to the franchisee prior to entering into a contract to purchase a franchise under the Franchising Code of Conduct (e.g. marketing information, earnings and market area). Corporate Law: Law principles and practice Cooperatives A cooperative is a collection of individuals who join a trading enterprise designed to give each member special benefits rather than merely a share of profits. Cooperatives are formed under special state legislation, which is generally uniform throughout Australia. Members of a cooperative have limited liability and must comply with some regulations, such as conducting an annual audit. Corporate Law: Law principles and practice Business names When an individual or a business entity wishes to trade under a name other than the name of the individual or entity, there is a requirement to register under the Business Names Act of the particular state or territory jurisdiction. A business chooses and registers its name. The certificate of registration must be conspicuously displayed in the principal place of business and the name must be renewed every three years. The National Names Index (NNI) is an index of Australian business and company names registered within the states and territories. It is administered by ASIC and provides free access to information on Australian Business Numbers, Australian Company Numbers and Australian Registered Body Numbers.