26 GSN412: Business Law 1
2.2 Companies
Additional readings
Griggs et al. (2nd edn) Ch 4 (pp 131-154).
Latimer (23rd edn), ch. 9 pp 641-671.
Turner 24th edn pp707-734and 742-754
Vermeesch & Lindgren (10th edn), ch. 21, Introduction, paras 21.1–21.21,
21.25–21.30, 21.31–21.35, 21.44, 21.59–21.60.
2.3 Partnerships
Additional readings
Griggs et al. (2nd edn) Ch 4 (pp 131-154).
Latimer (23rd edn), ch. 9 p630 and Ch 10 pp725-783.
Turner 24th edn pp675-706
Vermeesch & Lindgren (10th edn), ch. 20, paras 20.1–20.10, 20.11–20.32,
20.54, 20.65, 20.70, 20.116–20.127.
2.4 Partnerships v companies
Additional readings
Latimer (23rd edn), ch. 10 pp 729-730
Turner 24th edn pp680-681
Vermeesch & Lindgren (10th edn), ch. 20, paras 20.1–20.10, 20.11–20.32,
20.54, 20.65, 20.70, 20.116–20.127.
2.5 Joint ventures
Additional readings
Griggs et al. (2nd edn) Ch 4 (pp 131-154).
Latimer (23rd edn), ch. 9 pp 633-641.Vermeesch & Lindgren (10th edn), paras
[20.32]–[20.36].
2.6 Trusts
Additional readings
Griggs et al., (2nd edn) Ch 4 (pp 131-154)
Latimer (23rd edn), ch. 9 pp 682-713.Vermeesch & Lindgren (10th edn), ch. 29,
paras 29.33–29.49.
Module 2: Legal nature of business entities 27
2.1 Sole trader
Individuals who trade under their own name do not have to register a business
name. However, if an individual trades under a different name, then that
business name will need to be registered under the Business Names Act in
Queensland.
28 GSN412: Business Law 1
2.2 Corporations
2.2.1 Background
Prior to 15 July 2001 corporate law in Australia came under a national cooperative
scheme that primarily was comprised of the Corporations Law and
the Australian Securities and Investments Commission Act (‘ASIC’), and
Commonwealth Acts of the Australian Capital Territory adopted and applied by
each State through enabling legislation passed by each State Parliament.
The scheme was necessitated by limitations under s 51(xx) of the Australian
Constitution. However, because of uncertainty about the constitutionality of
this the ‘Co-operative Scheme’, the States formally referred constitutional power
to the Commonwealth, permitting the Commonwealth to pass the Corporations
Act 2001 (‘the Act’) with that Commonwealth Act commencing on 15 July 2001.
There are limitations on the referral, the most significant being that the referral
of powers terminates after five years unless the Commonwealth and the States
agree to an extension, and the referred power cannot be used for other
purposes, in particular, to further Commonwealth industrial relations
objectives.
2.2.2 Main features
The law recognises two legal persons, firstly a natural person (an individual)
and artificial legal person (corporation sole and corporation aggregate). An
example of a corporation sole is the Public Trustee or Public Defender. These
positions are incorporated and have perpetual succession even though the
person holding that position might change. An example of a corporation
aggregate is a registered company.
A corporation is an artificial legal person and is created by statute (e.g.
Corporations Act 2001). Once a corporation is incorporated it has the following
features:
• Perpetual succession (no matter how often the members change, the
incorporated body remains in existence).
• The incorporated body can sue and be sued in its registered name.
• The corporation can own property.
• The incorporated body is separate from its members (shareholders,
employees, directors and managers).
• The incorporated body being artificial must act through agents or organs
e.g. the board (an organ) or CEO (an agent).
• The incorporated body can commit crimes, torts and can enter and
breach a contract.
• A shareholder of the company does not own a share of the property and
assets of the company itself and thus is not a beneficial owner of the
company’s property. At common law, a shareholder has no insurable
interest in the property of the company (Macaura v Northern Assurance
Co. Ltd [1925] AC 619).
• A shareholder in a company is usually not responsible for the company’s
own debts.
Module 2: Legal nature of business entities 29
2.2.3 Types and classes of companies
1. Introduction
A corporation is an artificial legal person and is created by statute (Corporations
Act).
If the company trades under a name other than its registered name then that
other name must be registered under the Business Names Act in Queensland.
For example Acme Pty Ltd trading as Acme Cleaning Services would have to
register the latter name under the Business Names Act whereas if the company
traded simply under the name Acme Pty Ltd it would not have to register that
name under the Business Names Act.
2. Types of companies
The type of company (proprietary or public) is determined by the nature and
number of members.
There are currently four types of company:
Proprietary Limited by shares and Unlimited with share capital.
Public Limited by shares, No liability, Limited by guarantee, Unlimited
with share capital.
The registered name of a company will indicate the nature of the company. For
instance:
Acme Pty Ltd is a private company limited by shares and is the most common
form of company with more than 1,200,000 proprietary companies
incorporated in Australia today.
A proprietary company must, pursuant to s113:
(a) be limited by shares or be an unlimited company with share capital;
(b) have no more than 50 non-employee shareholders;
(c) not do anything that would require disclosure to investors under Chapter
6D eg issue a prospectus (other than for excluded issues under s708 or
rights issues or employee offers).
Proprietary companies can further be categorised into large or small, which
categorisation is determined by attributes of size.
A large proprietary company is a company that must satisfy 2 out of 3 of the
following criteria (s45A):
(a) total annual operating revenues at the end of the financial year and any
entities of the company and any entities which it controls, of million
or more;
(b) consolidated gross assets of the company and any entities which it
controls at the end of the financial year of million or more;
(c) 50 or more employees of the company and any entities which it controls
at the end of the financial year.
An advantage of a small proprietary company is limited financial disclosure
whereas large proprietary companies must lodge full audited financial
statements. The word ‘limited’ in the registered name indicates that the liability
of members (shareholders) is limited to the unpaid value of their shares.
30 GSN412: Business Law 1
Acme Ltd. This registered name indicates a public company in which the
liability of the shareholders is limited to the unpaid value of their shareholding.
All companies listed on the Australian Stock Exchange Limited must be public
companies (subject to overseas entities status exceptions). Public companies
must make full financial disclosure by lodging audited financial statements and
the directors are subject to more restrictions regarding the taking of financial
benefits from the company under Chapter 2E of the Act.
Acme Ltd can also connotes a company limited by guarantee, which does not
have a share capital. Members are only liable to contribute in the event of
winding up where the company is insolvent and only then, to the amount of the
guarantee set out in the company constitution, which is always a small,
nominal amount such as .00. This class of company is usually only suitable
for clubs and associations.
Acme Proprietary. This registered name indicates a private company in which
the shareholders have unlimited liability. However, the liability of members is
contingent on a winding up of the company and the assets not being adequate.
If the company has a share capital, calls can be made on the unpaid capital but
if this does not satisfy the debts of the company ultimately each member’s
liability is several and this means that each member could be called upon to
contribute the full amount required to meet the debts of the company. However,
a member is entitled to contribution from other members. A member of an
unlimited company may of course be a limited company. Again, this is an
unusual type of company.
Acme Corporation. This registered name indicates a public company in which
the liability of members is unlimited. This is a very unusual type of company.
Acme NL. This registered name applies to a mining company and the initials NL
refer to ‘No Liability’. The shareholders in such a company have no liability to
meet the debts of the company and if called upon to meet the unpaid value of
their shareholding, can refuse to pay and simply forfeit their shares. This type
of company is restricted to the mining industry and a company’s constitution
must set out objects that are confined to mining objects.
Significant differences arise between proprietary companies and public
companies, particularly in relation to:
• means of fundraising;
• directors’ and members’ requirements;
• meeting requirements;
• disclosure of financial records.
3. Directors and shareholders
Proprietary companies may form and operate with only one director and
shareholder.
Public companies must have a minimum of three directors but also can also
form and operate with a sole shareholder.
4. Membership of a company
A company may seek to bring an action against a member to enforce a right, or
a member may seek to bring an action against the company to enforce a right.
To be able to do so there must be a basis for bringing such actions.
Module 2: Legal nature of business entities 31
Shareholders and the company (and vice versa) have a contractual relationship
as do the company and its directors and secretary, and each of the members
with each other (s 140(1) of the Act).
The company constitution is deemed to be a statutory contract that determines
the rights of the parties and a good understanding of the constitution by the
directors, shareholders and outsiders, such as creditors, is critical. Where there
is a conflict between the constitution and the Act then the Act will prevail.
Often major shareholders in a company may enter into separate contracts
(Shareholder Agreements). These documents usually deal with, amongst other
things, pre-emptive rights, rights of first refusal, quorums and voting powers.
Such agreements may affect significantly the rights to transfer and allot shares
of shareholders and create interests in shares that can trigger a breach of the
takeovers provisions under the Act under Ch. 6. It is important to always find
out if a shareholders agreement exists (note, shareholder agreements do not
have to be lodged with Australian Securities and Investments Commission
(ASIC), and usually are not).
5. Division of power within companies
The company, being an artificial legal entity, relies on natural persons to make
decisions. These are:
• the shareholders (also called the members) making decisions at a general
meeting
• the board of directors
• other agents of the company.
The control of the affairs of a company is determined by how powers are divided
between the members in general meeting and the board of directors.
The members in general meeting and the board of directors are known as
‘organs’ of the company. They are more than mere agents — an act of one of
these organs is considered an act of the company itself, hence, this is known as
the ‘organic theory’ of companies.
The general meeting of members is one organ of the company. The board of
directors, which is commonly granted wide management powers under the
constitution (replaceable rules — RR, s 198A of the Act), is the other organ of
the company.
There are matters within the affairs of a company that are not subject to
external control under the Act and constitute the internal business of the
company. The constitution (replaceable rules) will set out how these powers are
divided. Generally, the board of directors is given full power to manage the
company and the members cannot generally interfere in these powers. This
power is granted to the board as a collective decision making body and not to
individual directors unless the board has delegated this power (e.g. to the Chief
Executive Officer).
The Act sets out specific matters that may only be dealt with by the members
including:
• change of company type — s 162
• reduction of capital — s 256 B,C
• alteration of rights of members (by class) — ss 246B–E
• conflict of interest without a directors’ quorum — s 195(4)
32 GSN412: Business Law 1
• benefits from loss of office — ss 200B–E
• financial benefit to a related party — s 208(1)
Summary
Managers need to consider who is a ‘person’ at law—a ‘person’ can encompass
not only natural persons but also legally created entities such as companies
and statutory bodies and the Crown. Always check the interpretation clauses of
agreements and deeds to see if and how a ‘person’ has been defined. If
necessary, refer to the Acts Interpretation Acts.
Module 2: Legal nature of business entities 33
2.3 Partnerships
Partnerships are controlled in Queensland under common law and under
statutory law, namely, the Partnership Act. Another name for a partnership is
an unincorporated profit association. Under the Corporations Act, where 20
persons or more carry on a business for profit they must incorporate a
company. Some professional associations are exempt from this requirement
(see pp 534 – 535 G & F).
A fundamental difference between partnerships and companies is that in the
partnership no separate legal entity exists apart from the persons who are the
partners. While a partnership might trade under a firm or business name, this
is merely the registered business name and is not a separate legal entity.
Neither in the case of a company nor a partnership can either be sued in its
business name. If you sue a company you would be required to sue the
company in its registered corporate name. If you are suing a partnership you
are actually suing each individual partner, as the business name or firm name
is not a separate legal person apart from the partners.
The definition of ‘partnership’ involves under s3 of the Partnership Act:
(a) carrying on a business;
(b) in common;
(c) with a view to a profit.
A partnership is a business enterprise carried on by two or more persons.
Those persons may be individuals or corporations. The partnership may be
formed to carry on a business or for a single undertaking.
The fundamental hallmark of partnerships is that each partner is an agent and
principal for each other partner in the business of the partnership. This means
that partnerships are a dangerous entity unless you can trust and have full
faith in the other partners in your partnership. Under the Partnership Act in
Queensland the acts of one partner can bind the other partners providing those
acts are in the business of the partnership (s12 of the Partnership Act at pp541
– 544 of G & F). For instance, if a partner enters a contract or commits a tort or
crime in the business of the partnership, the other partners can be responsible
for that tort or for that crime.
The Partnership Act operates differently from say the Corporations Act in many
respects. Under the former, the agreed contractual provisions of a partnership
agreement (whether in writing or oral) apply and only in the absence of such
provisions will the Partnership Act apply to ‘fill the gaps’ left by the failure to
agree or the lack of forethought as to matters to be included in an agreement.
For a list of matters which will be implied into a partnership agreement
(whether in writing or orally formed), in the absence of agreement between the
parties, see ss 27 – 28 of the Act (see Gibson and Fraser at pp 545 – 556).
34 GSN412: Business Law 1
2.4 Company vs Partnership
2.4.1 Advantages of companies
There are a number of legal advantages that the company structure offers over
the partnership structure. There advantages are as follows:
Limited liability of members and controllers. Members or shareholders and
directors in a company enjoy limited liability whereas the liability of partners in
a partnership is unlimited with respect to the debts of the partnership.
Increasingly, members of proprietary companies are often required, along with
the directors, to give personal guarantees to creditors that lift the ‘corporate
veil’.
Perpetual succession. No matter how often the membership of the company
changes the separate legal entity has continued existence whereas in a
partnership the retirement or death of a partner will usually mean the
termination of the partnership.
Ability to transfer shares. Shareholders in a company usually can transfer
shares and this will not in any way affect the company. However, in a
partnership, if a partner transfers his or her interest in the partnership this will
normally mean the termination of the partnership or such transfer can only
take place with the consent of all other partners.
This ‘advantage’ is, however, often illusory as a company constitution (other
than that of a listed public company) invariably includes significant restrictions
on the ability of members to transfer shares (e.g. pre-emption provisions where
an existing shareholder must offer their shares to existing shareholders before
offering them to outsiders) and gives the directors almost absolute power to
determine who can become and stay a member (subject to remedies under the
Corporations Act eg for oppression pursuant to which a member may be able to
seek to be bought out).
Control and management. While shareholders have control of the company
through the election of the board of directors they do not have responsibility for
the day-to-day management of the company. However, in a partnership both
control and management resides in each partner who is responsible for the
day-to-day management in the partnership, unless varied by agreement. An
exception would be a silent partner.
In a sole director/sole shareholder company, the director and member is the
same person. This type of company has the appearance of a sole trader but
managers must be careful to understand when debts and obligations are
incurred by the corporate entity rather than by the individual and take
appropriate steps to protect the interests of their organisation when dealing
with such bodies e.g. taking personal guarantees or TP mortgages from the sole
director.
Liability for acts of members. The company is not responsible for the acts of
shareholders per se, since the company is a separate legal entity. The company
will only be responsible for the acts of agents of the company and shareholders
are not agents of the company. However, in the case of a partnership each
partner will be liable for the acts of other partners when those acts occur in the
course of the partnership business since each partner is a principal and agent
for each other partner in the business of the partnership.
Module 2: Legal nature of business entities 35
Raising capital. A company may issue shares to raise capital whereas a
partnership cannot issue shares but must raise capital by borrowing through
normal financial channels. Companies, especially proprietary limited
companies, are subject to considerable restrictions when raising capital. All
companies must produce a disclosure document, usually called a prospectus,
which satisfies the requirements of Chapter 6D (amongst other provisions)
unless the issue of securities comes within an exception under s 708 of the Act
e.g. 20/12/2 rule i.e. a company may raise not more than million in one
year from no more than 20 issues of securities (‘securities’ includes not only
shares but also debentures: s 9). Proprietary companies are prohibited from
doing anything that would require the issue of a disclosure document and thus
are restricted in their fund raising to excluded issues.
Membership. A public company has no limitation on the number of members it
may have, whereas a partnership is normally limited to 20 persons (but
significant exceptions apply to many professional partnerships). A proprietary
company must have no more than 50 non-employee shareholders.
2.4.2 Disadvantages of companies
In addition to issues mentioned above, the following disadvantages apply:
Informality A partnership has one major advantage over the corporate
structure – the informality of a partnership. There are no statutory reporting
requirements or annual statements required by any registering authority with
respect to partnerships. However, heavy fines apply for late company
lodgements.
Reporting. The Corporations Act places significant annual reporting
requirements on public companies and large proprietary companies. Listed
companies and other disclosing entities have significant on-going continuous
disclosure obligations under the ASX Listing Rules and the Corporations Act.
Tax. Although beyond the scope of this course, generally each partner in a
partnership is taxed at higher marginal rates than a company which is taxed at
the lower company rate and the benefit of dividend imputation means that
income is not taxed both in the hands of the company and the ultimate
shareholders.
Exposure of directors and the company to liability. The Commonwealth
Corporate Criminal Code 1995 which commenced in December 2001 now
imposes corporate criminal liability on a body corporate where an officer,
employee or agent of a body corporate breaches offences which arise under
many Commonwealth criminal statutes. The mental element can be satisfied by
the prosecution establishing that the body corporate has failed to establish or
maintain a ‘culture of compliance’.
The Corporations Act provides for large fines, disqualification from management
for breaches of statutory provisions dealing with failure by officers of a
corporation to act with due care and diligence, failure to act in good faith and
for a proper purpose and conflict of interest provisions e.g. ss 180–183 (civil
penalty provisions) and 184 (criminal penalties) (breach of duties of directors)
and s 588G (personal liability for insolvent trading).
Succession. Upon change of partners or the retirement or expulsion from the
partnership, a new partnership is formed unlike a company that has perpetual
succession until winding up or deregistration.
36 GSN412: Business Law 1
2.5 Joint ventures
2.5.1. What is a joint venture?
A joint venture is neither a company nor a partnership but a creature of
contract formed to undertake a commercial activity for joint profit. However,
joint venturers are not carrying on a business with a view to profit.
A joint venture is common in the mining industry, commercial property
development, publishing and entertainment industries where two or more
parties come together and share the product of the project. Mining joint
ventures are common for tax reasons as there is a different tax treatment for
each party and more flexibility as there is no joint and several liability. Mostly,
joint ventures are established as unincorporated joint ventures but also
incorporated joint ventures are used, in which the constitution and a
shareholders agreement will set out the rights and obligations of the parties.
Joint ventures are creatures of contract with no statute law governing them
although a growing body of case law does apply.
A joint venture spreads risk and costs in respect of a particular area e.g. with
respect to mining tenements. It is often a government requirement, e.g. in Malaysia,
South America, that the exploration company must involve a local company and
consequently, a joint venture arrangement is often utilised.
2.5.2 Distinction between partnerships and joint ventures
A joint venture may be found to be a partnership notwithstanding wording used
by the parties in any agreement (see Canny Gabriel Castle Advertising Pty Ltd v
Volume Sales (Finance) Pty Ltd (1974) in G & F at 536 – 537).
The main differences between the two are:
(a) Although participants in a joint venture hold in common their interests in
the assets committed to the venture, their liability is individual (‘several’);
(b) The parties normally create a written charter called a joint venture
agreement, which would normally include the following terms:
• Neither of the parties are agents for each other with the exception of
any manager who may be appointed;
• Share in the rights to the product of the undertaking rather than
monetary profit;
• Appointment of a manager;
• Relations are not those of partners;
• Fiduciary relations may arise by express agreement and the Courts
are increasingly implying into such agreements the obligation to act
with good faith. Also, contractual provisions usually provide that a
party must not act in bad faith and must not do anything, for
example, to forfeit mining tenements.
(c) The activity undertaken is not usually the principle activity of the joint
venturers but has been established for a particular purpose.
Module 2: Legal nature of business entities 37
2.5.3 Incorporated joint ventures
Incorporated joint ventures are not popular mainly for the following reasons:
(a) directors’ duties apply;
(b) insolvent trading provisions apply and other statutory obligations and
liabilities under the Corporations Act;
(c) the operator is often a separate company and participants have shares in
the operator company – this creates the potential for the loss of control.
However, advantages include certainty of terms, limiting liability to the vehicle
used and the ease of selling off the separate entity to third parties.
38 GSN412: Business Law 1
2.6 Trusts
Introduction
Trusts are recognised by equity but not by the common law. A trust comprises
a creator (‘settlor’) of the trust, a trustee, and beneficiaries of the trust. The
settlor creates the trust by transferring some property that the settlor owns into
the hands of a trustee to be held on trust for the benefit of beneficiaries named
in the trust (however, compare the position of ‘beneficiaries’ under a family
discretionary trust) .
While the trustee becomes the legal owner of the trust property, at common
law, the beneficiaries become the equitable owners of that property. Since
equity overrides the common law when they are inconsistent the equitable
rights of the beneficiaries will override any inconsistent right of the trustee.
Trusts usually provide for the trustee to disperse any income from the trust
property to the beneficiaries of the trust. The trustee has fiduciary obligations
towards the beneficiaries and must act with utmost good faith. Beneficiaries
usually can take action against a trustee who breaches the trust.
Trusts can be created by deed of settlement as explained above, or under a will,
or by declaration. A declaration refers to a situation where a person owns
property and declares that they hold such property in trust for certain
beneficiaries. It would not be unusual when a declaration is made for the
person making such a declaration to be a settlor, trustee and beneficiary in
that trust. It is not possible for a trustee to be also the sole beneficiary of that
trust. Providing there are other beneficiaries, the settlor may be both trustee
and a beneficiary.
There are three main types of trusts namely, express trusts, implied trusts and
constructive trusts.
(a) Express trusts
The term ‘express trusts’ refers to a trust created by words. Such an express
trust would be created by deed of settlement, declaration or will. The unit trust
is an example of an express trust.
(b) Implied trusts
Under this form of trust, the court implies or reads into the circumstances, an
intention to create a trust even though no words expressly create such a trust.
For example, if a person uses their own monies to buy property, but title to that
property is given over to another person, the court may infer or presume an
intention to create a trust unless there is evidence that the buyer intended to
make a gift to the legal owner.
In other words, the court will presume an intention that the owner of the
property holds the property on trust for the buyer, as beneficiary.
(c) Constructive trusts
This type of trust is created by the courts no matter what was the intention of
the legal owner of the property.
Module 2: Legal nature of business entities 39
An example of the situation where the courts could construct a trust would be
a situation where a mortgagee lender exercises a power of sale of the mortgaged
property upon default of the mortgagor borrower. If there is any excess from the
proceeds of the sale of the mortgaged property after the mortgage debt and all
expenses have been met, then the monies left over would be deemed by the
court to be held in trust by the mortgagee as trustee for the mortgagor as
beneficiary.
The constructive trust is used to do justice where it would be unconscionable
not to create such a trust.
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