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Table of Contents

CLASS 1 (2.8.16) ............................................................................................................................ 6

Corporate regulation and regulators ..................................................................................................... 6

Civil penalty provisions ......................................................................................................................... 6

Overview of business structures ............................................................................................................ 6

Associations .......................................................................................................................................... 6

Pre-class workThe following tasks should be undertaken by students before class: ................... 6

Key concepts .................................................................................................................................. 6

Key sections ................................................................................................................................... 6

Key cases ...................................................................................................................................... 6

Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378 ........................................................................ 6

Management ................................................................................................................................. 6

Facts ............................................................................................................................................... 6

Cameron v Hogan (1934) 51 CLR 358 .............................................................................................. 7

The association rules and their effect ............................................................................................. 7

Facts ............................................................................................................................................... 7

Summary ........................................................................................................................................ 7

Carlton Cricket and Football Social Club v Joseph [1970] VR 487 .................................................... 7

Smith v Yarnold [1969] 2 NSWR 410 ............................................................................................... 8

Think? ............................................................................................................................................ 8

Distinguish between tort and negligence and breach of contract? ................................................. 8

Start with contract, end with tort. .................................................................................................. 8

Short answer questions .................................................................................................................. 8

The ASIC Act requires ASIC to: ........................................................................................................ 8

Problem questions ....................................................................................................................... 10

Question 1 .................................................................................................................................... 10

(a) Who could the pub enforce the indemnity against? ............................................................ 10

(b) Is there anything the pub could have done to ensure that the indemnity could be adequately

enforced? .................................................................................................................................. 10

(c) Would your answer be any different if the Cignets were an incorporated association under

NSW law? .................................................................................................................................. 10

Question 2 .................................................................................................................................... 11

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What actions (if any) could ASIC take in this situation? Discussion questions ............................... 11

(a) Are incorporated associations public or private in nature? ................................................... 11

(b) Should public funds be used to enforce corporate laws relating to disputes involving companies which are essentially relationships concerning private property? .............................. 11

S49 – ASIC can begin proceedings civil .......................................................................................... 11

Up to examiner or judge to decide whats appropriate. ................................................................ 11

CLASS 2 (4.8.16) ........................................................................................................................... 12 Partnerships ......................................................................................................................................... 12 Partnership liability ............................................................................................................................... 12 Partnership property ............................................................................................................................ 12 Limited partnerships ............................................................................................................................. 12

Pre-class work .............................................................................................................................. 12

Key concepts ................................................................................................................................ 12

Key sections ................................................................................................................................. 12

Partnership Act 1898 (NSW) ss 1, 2, Pt 2 Div 1, Div 2 .................................................................... 12

Key cases ...................................................................................................................................... 12

Badeley v Consolidated Bank (1888) 38 Ch D 238 ......................................................................... 12

Birtchnell v Equity Trustee, Executors and Agency Co Ltd (1929) 42 CLR 384 ................................ 12

Facts ............................................................................................................................................. 12

Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd...................... 13

Cox v Hickman (1860) 8 HL Cas 268 .............................................................................................. 15

Dean v Macdowell (1878) 8 Ch D 345 ........................................................................................... 16

Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48 ....................................................................... 16

Polkinghorne v Holland (1934) 51 CLR 143 ................................................................................... 17

Sze Tu v Lowe [2014] NSWCA 462 ................................................................................................. 17

Short answer questions ................................................................................................................ 17

What is a partnership ................................................................................................................... 18

S1 – definition of partnership ....................................................................................................... 18

S2 – Rules for identification (s 2) .................................................................................................. 18

S5 – power of partner to bind a firm every partner is an agent of the firm. ............................. 18

S6 - Acts relating to the business of a firm’ ................................................................................... 18

S9 - Joint liability for debts and obligations ‘of the firm’ while the partner is a partner ................ 18

S12 – Liability joint and several .................................................................................................... 18

S10 - Liability for wrongs or omissions ‘in the ordinary course of the business of the firm ........... 18

S14 – person liable for holding out to 3rd party ............................................................................ 18

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S28 – Duty of partners to render accounts ................................................................................... 19

S29 - liability to account for misuse .............................................................................................. 19 PARTNERSHIP ACT 1892 - SECT 1 ............................................................................................................. 19 PARTNERSHIP ACT 1892 - SECT 2 ............................................................................................................. 19 PARTNERSHIP ACT 1892 - SECT 5 ............................................................................................................. 20 PARTNERSHIP ACT 1892 - SECT 9 ............................................................................................................. 20 PARTNERSHIP ACT 1892 - SECT 12 ........................................................................................................... 20 PARTNERSHIP ACT 1892 - SECT 28 ........................................................................................................... 20 PARTNERSHIP ACT 1892 - SECT 29 ........................................................................................................... 21 PARTNERSHIP ACT 1892 - SECT 30 ........................................................................................................... 21

Problem questions ....................................................................................................................... 21

Discussion question ...................................................................................................................... 22

THEN ............................................................................................................................................ 22

CLASS 3 (9.8.16) ........................................................................................................................... 24 Commercial trusts ................................................................................................................................. 24 Corporate trustees ................................................................................................................................ 24

Pre-class work .............................................................................................................................. 24

The following tasks should be undertaken by students before class: .......................................... 24

Key concepts ................................................................................................................................ 24

Key sections .............................................................................................................................. 24

Key cases ................................................................................................................................... 24

Short answer questions ............................................................................................................. 27

Problem questions ....................................................................................................................... 30

a) List in what different legal capacities Max and Mary have ..................................................... 31

b) Who is liable for the debts incurred to Avco and SupplyCo? ................................................... 31

c) Could either Avco or SupplyCo take exercise a right of subrogation against the trust property or beneficiaries? ............................................................................................................................... 31

Discussion questions .................................................................................................................... 31

CLASS 4 (11.8.16) .......................................................................................................................... 32

Corporations v companies .................................................................................................................. 32

Foreign companies ............................................................................................................................. 32

Types of companies ............................................................................................................................ 32

Pre-class work The following tasks should be undertaken by students before class: ............... 32

Key concepts ............................................................................................................................. 32

Key sections .............................................................................................................................. 32

Corporations Act 2001 (Cth) ss 9, 45A, 45B, 57A, 112, 113, 114, 148, 149, 292, 293, Pt 5B.2 ......... 32

Key cases - ............................................................................................................................... 32

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Short answer questions ................................................................................................................ 32

How can you become a company? ............................................................................................... 32

Problem questions .................................................................................................................... 34

(a) an application for reinstatement is made to the Court by: ..................................................... 35

(b) the Court is satisfied that it is just that the company's registration be reinstated. ................. 35

Discussion question ...................................................................................................................... 35

CLASS 5 (16.8.16) ......................................................................................................................... 36

Setting up a company ......................................................................................................................... 36

Internal capital structure .................................................................................................................... 36

Overview of corporate officers ........................................................................................................... 36

CLASS 6 (18.8.16) .......................................................................................................................... 42

Overview of corporate insolvency ...................................................................................................... 42

Winding up companies ....................................................................................................................... 42

Effect of insolvency on the company and its officers .......................................................................... 42

An overview of insolvent trading liability ........................................................................................... 42

Class 7 (23.8.16) ........................................................................................................................... 53 Corporate legal personality Salomon's case and its application Corporate groups ................................. 53

Class 8 (25.8.16) ........................................................................................................................... 61

Veil piercing ........................................................................................................................................ 61

Principles of corporate liability ............................................................................................................ 61 Individual v corporate liability (introduction) ........................................................................................ 61

Class 9 (30.8.16) ........................................................................................................................... 69 Individual v corporate liability (continued) ............................................................................................ 69 Corporate criminal liability .................................................................................................................... 69

Class 10 (1.9.16) ........................................................................................................................... 73 Corporate authority .............................................................................................................................. 73 Corporate contracting ........................................................................................................................... 73 Delegation of authority ......................................................................................................................... 73

CLASS 11 (6.9.16) ......................................................................................................................... 78

Internal governance ........................................................................................................................... 78

The corporate constitution ................................................................................................................. 78

Replaceable rules ............................................................................................................................... 78

Shareholder agreements .................................................................................................................... 78 ‘Outsider Rights' ................................................................................................................................... 79

CLASS 12 - 8.9.16 .......................................................................................................................... 82 Company meetings ............................................................................................................................... 82 Corporate decision making organs ........................................................................................................ 82

(role of constitution (divides up decision making power between different organs— board of directors, members passing a resolution in members meeting, could be others— governor director, outsider) ... 82

CLASS 13 - 20.9.16 ........................................................................................................................ 87

Corporate fundraising ........................................................................................................................ 87

Equity fundraising .............................................................................................................................. 87

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Debt fundraising ................................................................................................................................ 87

CLASS 14 - 22.9.16 ........................................................................................................................ 90

Directors and officers ......................................................................................................................... 90 Appointment, resignation and removal ................................................................................................. 90

Disqualification .................................................................................................................................. 90

CLASS 15 - 27.9.16 ........................................................................................................................ 92

To whom are directors' duties owed? ................................................................................................. 92

Directors' duties: good faith and proper purpose ............................................................................... 92 Shareholder ratification: Definition ....................................................................................................... 96

CLASS 16 - 29.9.16 ........................................................................................................................ 99 Directors' duties: duties within a corporate group ................................................................................ 99

CLASS 17 – 4.10.16 ..................................................................................................................... 102

Directors' duties: conflicts of interest ................................................................................................ 102 CORPORATIONS ACT 2001 - SECT 191 + ( s 195 ) ................................................................................... 104

CLASS 18 – 6.10.16 ................................................................................................................... 111

Statutory regulation of conflicts .......................................................................................................... 111

Related party transactions ................................................................................................................ 111

CLASS 19 – 11.10.16 ................................................................................................................... 116 Directors duties: the duty of care and diligence .................................................................................. 116

CLASS 20 – 13.10.16 ................................................................................................................... 128 Members’ remedies 1 ......................................................................................................................... 128

CLASS 21 – 18.10.16 ................................................................................................................... 142 Members’ remedies 2 ......................................................................................................................... 142

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CLASS 1 (2.8.16) Corporate regulation and regulators

Civil penalty provisions

Overview of business structures

Associations

Pre-class workThe following tasks should be undertaken by students before class:

• Reading: Harris, Ch 2 and supplementary reading on UTSonline

• Listen to Podcast 1: ASIC and other regulators

• Watch Video 1: An overview of civil penalties

• Listen to Podcast 2: An overview of business structures (including associations)

• Review seminar questions in the seminar guide

Key concepts

• The role and powers of ASIC as the corporate regulator

• The operation of the civil penalty regime in the Corporations Act

• The different legal structures available for running a business

• Advantages and disadvantages of different business structures

• The legal regulation of incorporated associations

Key sections

Australian Securities and Investments Commission Act 2001 (Cth) ss 1, 13, 14, 19, 28, 29, 30, 33, 49, 50

Associations Incorporation Act 2009 (NSW) Corporations Act 2001 (Cth) Pt 9.4, Pt 9.4B

Key cases

Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378

Management

- Although there is no set management structure that must be adhered to, unincorporated non-profit

associations are usually administered by a committee comprising certain members of the association.

Where a committee is formed, it is the committee members who are often personally responsible for

debts incurred and torts which are committed in the name of the association (see Bradley Egg Farm v

Clifford [1943] 2 All ER 378) and they may have no right to indemnity from the general body of

members.

- Where such committee members acting within their authority have entered into a contract purportedly

on behalf of the association, they will be personally liable to the party that they made the contract with.

Facts

- In Bradley Egg Farm v Clifford [1943] 2 All ER 378, a poultry farmer had his poultry tested by an

‘employee’ of an unincorporated society which was formed to provide various technical services to its

members. The test was carried out negligently, with the result that the poultry farmer’s fouls had to be

destroyed. The farmer attempted to sue the ‘employer’ — that is, the committee of the association —

for breach of contract. A central issue before the court was identifying the employer.

- The majority of the Court of Appeal held that the committee was liable as the employer.

- CA notes committee may be indemnified.

- The Court of Appeal stressed the need to ascertain the ‘real agreement’ between the parties. Sharing of

profit is not enough, the court said, to infer a partnership. The formal document signed by the parties

expressed the real truth, namely, that this was a contract of loan upon security. There was no

participation in loss on the part of the lender.

- Members of this society were not liable, as they had no rights or interest in the funds or property of the

society and they had entrusted management to a committee. According to Goddart LJ at 381:

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Cameron v Hogan (1934) 51 CLR 358

The association rules and their effect

- In relation to the association’s rules, there is a general assumption that members of unincorporated non-

profit associations do not intend to be contractually bound by the association’s rules. The courts assume

that there are no legal obligations between members unless the rules actually make it clear that there

are. This means that in most situations members cannot maintain a court action alleging a breach of the

rules.

- This assumption was affirmed in Australia by the High Court in Cameron v Hogan (1934) 51 CLR 358.

Facts

- This case concerned an expulsion from the Australian Labor Party, an unincorporated non-profit

association. The expelled member sued for damages for breach of contract, and also claimed an

injunction so as to restrain the association from expelling him. It was claimed that the expulsion was

not in accordance with the rules. However, in order to obtain a remedy, the member had to establish

that the rules of membership of the Labor Party amounted to a contract.

- The High Court, after examining the nature of such an association, concluded that the rules did not have

contractual force. The court questioned whether, in the absence of some right of a proprietary nature, a

member has a contractual right under the association’s rules to complain when ‘unjustifiably excluded’

from the association. Their Honours thought that, due to the general character of such associations, a

member has no such right. It was held (at 371) that, if a member of such an association complains of

failure to observe the rules by the committee, then the member must show that the rules conferred upon

them:

o a contractual right to the performance of the particular duty upon which he insists ... [as] such

associations are established upon a consensual basis but, unless there were some clear positive

indication that the members contemplated the creation of legal relations inter se, the rules

adopted for their governance would not be treated as amounting to an enforceable contract.

- In such circumstances there can be no recovery from either the committee or the members for a breach

of contract. However, the court stated that, if the effected member asserts rights arising out of

membership and these assertions are ignored, then those ignoring the member may be liable in tort.

Summary

- Need to establish a contract – it leaves open that the rules of the association need to say that their was

a contractual right.

Carlton Cricket and Football Social Club v Joseph [1970] VR 487

- This is particularly so where the members of a committee enter into a contract which is intended to last

beyond that committee’s term of office. In such cases it has been held that the committee in force at

the time the contract was entered into could not be regarded as undertaking personal liability for a long

period of time in respect of that contract. This was the case in Carlton Cricket & Football Social Club

v Joseph [1970] VR 487 where Gowans J distinguished Bradley Egg Farm v Clifford [1943] 2 All ER

378 on the basis that the contract in that case concerned a single act whereas in Joseph the contract was

for a lease expressed to last for 21 years.

- In Joseph, a document purporting to give rights to occupy land for a specific purpose over a long period

was entered into between a company and an unincorporated association. In particular, the Fitzroy

Football Club, an unincorporated association with a fluctuating membership, purported to agree to play

certain football matches on the sports ground owned by the plaintiff for a 21 year period. The agreement

was signed by two officers of the association as ‘being duly authorised by the members’, but it was

on terms expressed to be made with the association itself. The plaintiff alleged that after this agreement

was entered into the President and Secretary of the unincorporated association negotiated with another

party, the St Kilda Cricket Club, to play the matches on St Kilda’s sports ground. The plaintiff sought

injunctions to restrain the procuring of a breach of its contract. The basic issue before the court was

whether there was a contract at all between Fitzroy Football Club and the plaintiff. The Supreme Court

of Victoria held that there was no contract.

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- According to the court, the company was purporting to enter into contractual relations with an

association as it was constituted from time to time, not with the members of the association at the time

the document was executed. This meant that, as there was no legal entity in existence, there could be

no contract.

Smith v Yarnold [1969] 2 NSWR 410

- In Smith v Yarnold [1969] 2 NSWR 410, Smith was a spectator at a greyhound race meeting and was

injured when the grandstand collapsed. The race meeting was run by the Taree Greyhound Racing Club,

an unincorporated association, and Smith sued the committee of which Yarnold was secretary. The

action was grounded in both tort (occupiers’ liability) and contract (purchase of a ticket), and the main

issue was whether Yarnold and the other members of the committee were the proper parties to be sued.

- The New South Wales Court of Appeal found the committee liable as occupiers of premises.

According to Herron CJ at 414–15

Think?

Distinguish between tort and negligence and breach of contract?

What should have been signed so they are not personally liable.?

Start with contract, end with tort.

Short answer questions

1. What is ASIC’s role in regulating companies?

S 1 ASIC Act – (2)(a) maintain, facilitate and improve the performance of the financial system and

the entities within that system in the interests of commercial certainty, reducing business costs, and

the efficiency and development of the economy; and

(b) promote the confident and informed participation of investors and consumers in the financial

system; and

To ensure appropriate info is disclosed and ensure law is being complied with and take enforcement

action and admin action to work with companies to ensure law is complied with.

The ASIC Act requires ASIC to:

• maintain, facilitate and improve the performance of the financial system and entities in it

• promote confident and informed participation by investors and consumers in the financial system

• administer the law effectively and with minimal procedural requirements

• enforce and give effect to the law

• receive, process and store, efficiently and quickly, information that is given to us

• make information about companies and other bodies available to the public as soon as practicable.

2. What powers does ASIC have to gather information for investigations?

Enforcement powers – under ASIC AND corporations act – under corporations act Power to grant an

exemption or modification of a particular rule extensive power – can bring civil or criminal

proceedings… leaves criminal cases to DPP.

Consumer protection in relation to financial services (Pt 2)

Part 3 investigations and information gathering

s13 commence an investigation

s19 examination

Inspect books (s29)

Notice to produce books (ss30-33); warrant to seize books (ss35,36)

Cause prosecution to be begun (s49) or civil proceedings to recover $ or property (s50)

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Hold their own appearance in public or private (s51)

Surveillance.

Directions from ministers

The laws we administer give us the facilitative, regulatory and enforcement powers necessary for us

to perform our role. These include the power to:

- register companies and managed investment schemes

- grant Australian financial services licences and Australian credit licences

- register auditors and liquidators

- grant relief from various provisions of the legislation which we administer

- maintain publicly accessible registers of information about companies, financial services licensees

and credit licensees

- make rules aimed at ensuring the integrity of financial markets

- stop the issue of financial products under defective disclosure documents

- investigate suspected breaches of the law and in so doing require people to produce books or answer

questions at an examination

- issue infringement notices in relation to alleged breaches of some laws

- ban people from engaging in credit activities or providing financial services

- seek civil penalties from the courts

- commence prosecutions – these are generally conducted by the Commonwealth Director of Public

Prosecutions, although there are some categories of matters which we prosecute ourselves.

3. What does ASIC need to do in order to obtain a court order disqualifying a person from taking part in

the management of corporations under s 206C?

- They need to make a declaration that there was a breach under s 1317E CA (Civil Penalty Provision)

(s206C(1)(a)(i)), on application by ASIC s1317

- ASIC may apply for declaration s1317J CA

- The court need to be satisfied that that the disqualification is justified.

4. What are 3 differences between a cooperative and an incorporated association?

Cooperative Incorporated Association

- Registered under the Cooperatives National

Law (Registrar of Cooperatives)

- National

- Registered under Associations

Incorporations Act 2009 (NSW)

- State

- Managed by board of directors:

- Secretary also appointed

- Legal duties similar to company directors

- Management committee:

- Conflicts of interest (ss31-33);

insolvent trading (s68)

- Financial gain - For profit but different

because not purely for profit – it’s a

membership body meant to benefit the

members by participation.

- Distributing

-

- Trading or non-trading – with or

without shares

- It is likely that for locally focused

non-profit community groups wanting

to operate

- More expensive

-

Cheaper

- Min of 7 members Min of 5 members

- Model rules constitution

- Benefit member Cannot be used to make money

5. What internal rules are used to regulate the operation of cooperatives,incorporated associations,

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companies and partnerships?

- Cooperative - Must be conducted in accordance with the cooperatives principles (see s10 CNL)-

model rules

- Association – constitution

- Companies –constitution

- Partnerships – partnership agreement

6. Can a company be a partner?

- Yes – A company is a separate legal entity and can enter into an agreement to form a partnership (s

124 of the Corps Act).

Problem questions

Question 1

Max and Mary have been long-time friends since high school. They are are both passionate supporters of the

Sydney Swans AFL team and they have a large group of friends who are equally passionate supporters. They

watch games at a local pub and the numbers have grown to more than 50 so that they now fill the pub’s

function room. They call themselves ‘The Pyrmont Cignets’ and have voted for an executive committee that

includes Max and Mary and 3 others. Max has always taken a leading role in this group and he typically books

the function room and organises the catering and a live band for half time entertainment. The other committee

members are advised of the costs involved, but Max signs all of the paperwork ‘for and on behalf of the

Pyrmont Cignets’. The hire agreement with the local pub includes an exclusion clause which provides that the

pub licensee and its agents and employees are not liable for any injury or damage caused to any person

attending a private function at the pub. Furthermore, the client hiring the room shall indemnify the pub for all

costs, losses or damage arising during the period of hire.

Unfortunately, during a tense game, a member of the Pyrmont Cignets slips on the floor due to beer spilled by

other members and suffers a bad fall. The member (Ariadne) suffers injuries and needs expensive surgery. She

makes a claim against the pub licensee who then claims on their indemnity.

(a) Who could the pub enforce the indemnity against?

Smith - committee liable as occupiers of premises.

Members not liable because they put trust in committee. Never liable unless specifically stated in rules.

(Bradley Egg Farm v Clifford [1943] per Godart LJ)

Smith – at a matter of principle – someone has to be liable due to tort and injury.

Exclusion clause fine – not too wide.

Bradley – 1 contract not multi contract – unincorporated breach of contract link? Capacity to enter into

binding contact as not a separate legal entity.

what is duration? 1 off or multi (Bradley or Carlton)

executive committee with elected members

who was the contact between – committee or members what are the rules of the association? What

is in writing? look to internal rules of association – contract between executive committee and pub

(b) Is there anything the pub could have done to ensure that the indemnity could be adequately

enforced?

got everyone to sign the indemnity

(c) Would your answer be any different if the Cignets were an incorporated association under NSW

law?

An unincorporated association is a separate legal entity, separate from the individual members.

However, members or officers are not protected from liability from their own negligence or other illegal acts

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committed by them.

They are their own legal entity – thus can be sued.

Question 2

Acme Ltd is a large manufacturing company based in Sydney. Its directors are Eric, Jane and Abdul. Eric the

CEO has a number of family companies that do business with Acme, but Eric has not disclosed any of this to

the company or the members. Jane discovers Eric’s conduct and realises that Eric’s companies are charging

above market rates for the services delivered to Acme. However, Eric owns 75% of the shares in Acme and he

therefore can’t be voted out. Eric has recently proposed to change the company’s constitution to provide that

such conduct would not be a conflict of interest under the company’s internal rules.

What actions (if any) could ASIC take in this situation? Discussion questions

(a) Are incorporated associations public or private in nature?

Mostly public in nature but can have a private purpose

(b) Should public funds be used to enforce corporate laws relating to disputes involving companies which are

essentially relationships concerning private property?

Private theory

S49 – ASIC can begin proceedings civil

S1330 CA.

Seek statutory injunction (s1324)

Seek mareva orders or receiver appointment (s1323)

Civil penalty order provision = X?

Continuous disclosure

Infringement notice regime Pt 9.4AA

Banning order

Turns criminal if reckless - Criminal proceedings may be brought after civil penalty proceedings

(s1317P) i.e. Adler.

Up to examiner or judge to decide whats appropriate.

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CLASS 2 (4.8.16) Partnerships

Partnership liability

Partnership property

Limited partnerships

Pre-class work

The following tasks should be undertaken by students before class:

Reading: Harris, Ch 3 pp 73-112 and supplementary reading from Harris, Hargovan and Adams,

Australian Corporate Law, 5th ed LexisNexis Australia

Listen to Podcast 3: Identifying a partnership

Listen to Podcast 4: Relations between partners

Review seminar questions in the seminar guide

There will be a practical task in this class involving reviewing a partnership agreement.

Key concepts

The legal definition of a partnership and the identification of partnerships

Types of partnerships

The role, powers and liabilities of partners

Fiduciary duties of partners

The liability of partners to third parties

The identification and use of partnership property

Key sections

Partnership Act 1898 (NSW) ss 1, 2, Pt 2 Div 1, Div 2

Key cases

Badeley v Consolidated Bank (1888) 38 Ch D 238

In Badeley, where a lender (plaintiff) advanced money to a borrower and took security over certain

plant owned by the borrower. Further the lender was to receive interest and a share of the net profits.

The borrower agreed to apply the loan moneys to the carrying out of work associated with his business

and the lender had a right to enter the property if the borrower became bankrupt.

The Court of Appeal stressed the need to ascertain the ‘real agreement’ between the parties. Sharing of

profit is not enough, the court said, to infer a partnership. The formal document signed by the parties

expressed the real truth, namely, that this was a contract of loan upon security. There was no

participation in loss on the part of the lender. This made it different from Delhasse's case.

Birtchnell v Equity Trustee, Executors and Agency Co Ltd (1929) 42 CLR 384

Facts

- In Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, Birtchnell, Porter

and others were land agents in partnership. After Porter died, the other partners found out that Porter,

without disclosure, had profited from land speculation with clients of the firm. The other partners

claimed that Porter’s executor should account for the profit made. The High Court agreed, as Porter

profited as a result of his connection with the firm and the type of work was in the course of the firm’s

business.

In Birtchnell (1929), Birtchnell, Porter and others were land agents in partnership. After Porter died,

the other partners found out that Porter, without disclosure, had profited from land speculation with

clients of the firm. The other partners claimed that Porter’s executor should account for the profit made.

The High Court agreed, as Porter profited as a result of his connection with the firm and the type of

work was in the course of the firm’s business.

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According to Dixon J, ‘he [Porter] pursued his separate interests, where the joint interests should have

been consulted, and excluded the partnership from a benefit or chance of benefit which arose out of the

connection of the firm’.

Dixon J – “a stronger case of fiduciary relationship cannot be conceived than that which exists between

partners. ‘Their mutual confidence is the life-blood of the concern. It is because they trust one another

that they are partners in the first instance; it is because they continue to trust one another that the

business goes on’ (per Bacon VC in Helmore v Smith (1886) 35 Ch D 436 at 444.). The relation is

based, in some degree, upon a mutual confidence that the partners will engage in some particular kind

of activity or transaction for the joint advantage only. In some degree it arises from the very fact that

they are associated for such a common end and are agents for one another in its accomplishment ... The

subject matter over which the fiduciary obligations extend is determined by the character of the venture

or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express

agreement of the parties, whether embodied in written instruments or not, but also from the course of

dealing actually pursued by the firm. Once the subject matter of the mutual confidence is so determined,

it ought not to be difficult to apply the clear and inflexible doctrines which determine the accountability

of fiduciaries for gains obtained in dealings with third parties.

NOTE:

• Partner’s interest is a chose in action-right to a share of the profits is inherent to the partner’s interest-

FCT v Everett (1980) 143 CLR 440

• Section 24 states that all partners are entitled to share equally in capital and profits and contribute

equally towards losses.

Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd

(1974) 131 CLR 321

a company named Fourth Media Management Pty Ltd (“FM”) entered into contracts with singers Elton

John and Cilla Black for performances in Australia. Volume Sales (Finance) (“VS”) agreed to finance

the contracts. Later, an agreement was made between FM and VS:

o that FM assign to VS a one half interest in the contracts with the singers;

o that the arrangement between FM and VS was to performed as a ‘joint venture’;

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o that VS was to finance the contracts by way of a loan and that this loan was described as a ‘loan

to the joint venture’ which was repayable prior to the distribution of profits;

o that the accounts show that the money advanced was a loan;

o that all profits were to be shared equally between the parties;

o that all policy matters were ‘to be agreed upon by the parties hereto’;

o that a bank account of VS be opened and be operated ‘in such manner as VS sees fit’;

o that the money loaned would be repaid if the contracts with the singers failed.

One day after this agreement was made, FM granted an equitable charge over its undertaking and

property including its interest in the box office proceeds of the contracts to Canny Gabriel Castle

Jackson Advertising Pty Ltd, the appellant. The question was whether VS’ interest would prevail over

the later equitable charge. If the arrangement between FM and VS was a partnership, then VS would

have a beneficial interest which would prevail over the charge. The High Court held that there was a

partnership.

Factors which led the court to the conclusion that a partnership existed were stated by McTiernan,

Menzies and Mason JJ at 326 as follows:

1. the parties became joint venturers in a commercial enterprise with a view to profit;

2. profits were to be shared;

3. the policy of the joint venture was a matter for joint agreement and it was provided that

differences relating to the affairs of the joint venture should be settled by arbitration;

4. an assignment of a half interest in the contracts for the appearances of Cilla Black and Elton

John was attempted, although, we would have thought, unsuccessfully;

5. the parties were concerned with the financial stability of one another in a way which is common

with partners.

The finding by the High Court that the arrangement between the parties was a partnership implicitly

acknowledged that a single commercial venture could be a ‘business’ in order to satisfy the

requirements set out in the Partnership Act.

Canny Gabriel

Issue: this case concerned whether or not a single venture could constitute ‘carrying on a business’ to satisfy

the definition of a partnership under s 20 of the PA.

Facts:

[Re: partnership]

- CG entered into a joint venture with VS

- The agreement provided that VS would be firstly repaid its loan, but otherwise they would:

o Share profits

o Conduct themselves based on mutual agreement

o Resolve disputes by arbitration

- In making the agreement, they made covenants relating to each others financial stability

[Re: dispute]

- CG granted another business an interest in profits from ticket sales, VS sought a declaration that they

had priority to the profits as the JV amounted to a partnership.

Held: CG and VS’s joint venture was a partnership, even though it was a single venture.

- The court looked to the agreement and found it exhibited the indicia of a partnership

o JV was a commercial enterprise for profit

o Profits were to be shared (PA s 2(iii))

o Agreement specified conduct was by mutual agreement

o Partners were concerned with the financial stability of one another common to partnerships

as a business built on mutual trust

- Further, VS’s loan was made out ‘to the joint venture’

o Paid to a joint bank account

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o In the event of the contract not being proceeded with the advance was to be repaid to VS from

the account in accordance with s 44 of the Partnership Act

Chan v Zacharia (1984) 154 CLR 178

Facts : In Chan v Zacharia, the High Court considered whether the fiduciary obligations imposed on partners

continue after the cessation of the partnership business. Chan and Zacharia were in a partnership which

included a commercial lease. The lease contained an option for renewal but Dr Chan refused to renew the

lease with his partner and the partnership was eventually terminated. Dr Chan then obtained the lease in his

own name.

ISSUE: Was the lease an asset of the partnership, despite the ongoing dissolution of the partnership business?

Decision: The rights arising under the lease were partnership property and included the right to exercise the

option to renew the lease. The court issued a constructive trust over the new lease for the partial benefit of Dr

Zacharia.

Principle:

Fiduciary obligations are based upon the relationship between the parties and do not cease simply when the

business stops trading.

Cox v Hickman (1860) 8 HL Cas 268

- Facts: B and J Smith traded in partnership under the name ‘Stanton Iron Company’ and encountered

financial difficulties. A deed of arrangement with creditors was entered into, whereby their business

and partnership property was assigned to trustees. The trustees were empowered to carry on the

business under a new name and future income was to be divided rateably between all the creditors. As

part of the arrangement, it was provided that, if the creditors were paid off, the business was to be

returned to the Smiths. Cox and Wheatcroft were two of the creditors who were appointed as trustees;

however, Cox never acted as a trustee, and Wheatcroft did so for a very short time. After Wheatcroft

had ceased to act, the remaining trustees incurred debts to Hickman, and they gave him certain bills of

exchange drawn on the partnership. Hickman sought to make both Cox and Wheatcroft liable on these

bills.

- Held: that there had been no holding out of Cox and Wheatcroft as partners and Hickman had no

knowledge of them or of the deed of arrangement. Both Cox and Wheatcroft could deny liability

notwithstanding that they, as creditors, were entitled to share rateably in the profits. This was not

enough to make them partners. According to Pollock LCB at (HL Cas) 301; (ER) 445:

o ...this arrangement to apply future profits (if any) in payment of the old debts, the creditors

being willing to give up their right to be paid out of capital and to take the chance of any profits,

appears to me not to constitute a partnership as to third parties, who know nothing of the deed...

- Further according to Wightman J at (HL Cas) 296; (ER) 443:

o It is said that a person who shares in net profits is a partner; that may be so in some cases, but

not in all; and it may be material to consider in what sense the words, ‘sharing in the profits’

are used. In the present case, I greatly doubt whether the creditor, who merely obtains payment

of a debt incurred in the business by being paid the exact amount of his debt, and no more, out

of the profits of the business, can be said to share the profits. If in the present case, the property

of the Smiths had been assigned to the trustees to carry on the business, and divide the net

profits, not amongst those creditors who signed the deed, but amongst all the creditors, until

their debts were paid, would a creditor, by receiving from time to time a rateable proportion

out of the net profits, become a partner? I should think not.

- This, then, is the general rule. Section 2(3)(a) – (e) of the Partnership Act also provides five cases where

this presumption does not arise:

- The first rule is embodied in the decision of Cox and Hickman in that a receipt by a person of a debt or

other liquidated demand by instalments or otherwise out of the accruing profits of a business does not

of itself make him a partner in the business or liable as such.

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- However, if there are circumstances showing that the relationship is in fact a partnership, the lender

may be regarded as a partner regardless of the stated intentions of the parties: see Re Ruddock (1879) 5

VLR 51 (IP & M) 51 at [3.5]: compare also Moore v Slater (1863) 2 W & W (L) 161, a case concerning

an absolute assignment of a debtor's business coupled with the ability of the assignee to dispose of the

business for their own benefit.

- Legal Principles:

- The mere fact that creditors had actually shared in the profits of the business did not make them

partners in that business or liable for its debts. They had not been “carrying on the business in

common” in the required sense.

Dean v Macdowell (1878) 8 Ch D 345

- Has to be in the same course of business- here is wasn’t.

Facts

Macdowell was a partner in a firm of salt merchants and brokers with Dean and others. The firm is called

Dean Brothers and the partners agreed that it would last seven years. The partnership agreement states:

i. Diligently and faithfully employ themselves in and about the business of the partnership, and

carry on and conduct the same to the greatest advantage of the partnership

ii. Prohibited from engaging directly/indirectly in any trade or business except upon the account

and for the benefit of the partnership

iii. Allowed D to trade as he sees fit

After partnership expired, they found that M was part of a profitable business

D sought an account of profits from M for breach of partnership agreement

Judge first instance held that partnership agreement did not provide for account and only remedy was only

injunction or a dissolution of claims

Appeal dismissed: agreed with first judge

- Vastly different businesses

- Whether action was within the scope of partnership and whether it triggers fiduciary duties

Breach of partnership agreement? Yes

Entitle the former partners to share in M’s profit? No

Breach entitle the former partners to claim M’s interest in the other partnership? No

Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48

A law firm engaged in fraudulent transactions by drafting sham contracts for clients

A client improperly obtained substantial commissions from another company

The case considered the operation of section 10 PA o In particular the term 'any wrong act'

Court held that the term 'any wrongful act' is not limited to the commission of a tort but extends to

equitable fraud

In particular, in terms of assessing what connection is required of the conduct and the scope of the

partnership business.

Harvey v Harvey (1970) 120 CLR 529

Facts: Case involved 2 brothers. Elder brother who owned land, allowed said land to be used as part

of a partnership with his brother. The partnership lasted many years and the brother made a number of

improvements installed on the land on the basis that he had an interest in the land as a partner.

However the elder brother had maintained throughout the duration of the partnership that he was

going to leave the land to this son.

Key issue: Was the land partnership property? No

It was specifically included in the accounts and so it wasn't noted as a contribution by the elder brother

when he joined the partnership/firm

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There was an issue of unjust enrichment. The younger brother was able to receive some recompense for

the improvements he made to the property

Polkinghorne v Holland (1934) 51 CLR 143

- similar to Dubai Aluminium

Facts :

- One of the partners of a firm gave poor investment advice to a client.

- Investment failed.

- Client tried to sue the firm.

Issue:

- Are the partners liable for the advice?

Held:

- Yes because the advice was given in the course of the business of the partnership.

Sze Tu v Lowe [2014] NSWCA 462

Facts:

- A partner bought a residential property with trust funds of the partnership

Issue:

• - Does s21 presumption apply – ‘Property bought with firm money is partnership property’ (s21)

Held:

The question is whether the evidence establishes an intention of the partners that the acquisition should be, in

one of the ways to which Turner LJ referred (or otherwise), an acquisition not for the account of the

partnership. If such an intention of the partners is not established, the statutory presumption operates.

Short answer questions

1. Can a company be a partner?

A company is a independent legal entity, whilst a partnership is not a separate legal entity.

A partnership is the relationship which exists between persons carrying on a business in common with

a view to profit. It involves an agreement between two or more parties to enter into a legally binding

relationship and is essentially contractual in nature.

If the firm is not carried on for profit, it may be established as a company (such as a company limited

by guarantee) or as an incorporated association.

2. Must a partnership business involve repetition of activities in order to be held as ‘carrying on a business’?

Whilst the phrase ‘carrying on a business’ contains an element of continuity or repetition in contrast

with an isolated transaction which is not to be repeated, the decision of this court in Canny Gabriel

Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 suggests

that the emphasis which will be placed upon continuity may not be heavy.

Although doesn’t have to have repetition, only more than just an agreement. There needs to be

evidence of a partnership or that it is a business rather than just the plans to make one, thus looks to

other factors as well.

Section 1 of the Partnership Act provides that three elements must be satisfied in order to establish the

existence of a partnership. These elements are:

o the carrying on of a business;

o in common;

o with a view to profit.

If one of these elements is missing, the relationship is not one of partnership.

3. What is the difference between a joint venture and a partnership?

A joint venture there is no mutual obligation. It is 2 separate firms working together. No fiduciary

duty

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The court noted that although the parties became joint venturers with a view to profit and

provided for the sharing of these profits, there was no agreement for the sharing of losses and,

importantly, the respective obligations contained in the parties’ agreement were regarded as

separate obligations. Further evidence for the lack of a partnership was found in the fact that

employees were regarded as employees of the defendant and not as employees of the parties

jointly

4. What does it mean to say that partners are fiduciaries to each other?

Partnership is a branch of agency law and is characterised by a mutuality of rights and

obligations. Each partner is agent and principal of the others and owes fiduciary obligations to

the others. Partners can bind each other and be bound by the actions of their partners.

Unlimited liability – utmost trust and obligation.

Relationships between partners is classified as fiduciary based on the mutual trust and confidence

that partners place in each other and on the consequential vulnerability they have in relying on

their partners to conducts themes in the best interests of the partnerships over and above their own

private interests

A partnerships are a presumed category of fiduciary relationships.

5. Does sharing profits make two people partners?

Liability of accounts s29 Accountability of partners for private profits

6. How do you determine if something is partnership property?

S20 – bring property in when setting up partnership then presumed, if buying with partnership

money then partnership property, or using for purpose of property then assumed partnership.

S21- Property bought with firm money is partnership property

What is a partnership

S1 – definition of partnership

- Carrying on business in common with the view of profit.

S2 – Rules for identification (s 2)

- Ownership of property

- Sharing of gross returns

- Sharing of profits

Profit alone is not enough – cases:

Failure to specify loss sharing does not prevent a partnership but there needs to be evidence of a

common enterprise: see eg AM Marketing [2010] NSWSC 803

The essence of partnership is a relationship of mutual obligation-carrying on a business in common

(Birtchnell (1929) 42 CLR 384)

Exceptions: creditor, employee receiving right to return.

S2(1)(3)[d] – does not of itself make the lender a partner.

S5 – power of partner to bind a firm every partner is an agent of the firm.

S6 - Acts relating to the business of a firm’

S9 - Joint liability for debts and obligations ‘of the firm’ while the partner is a partner

S12 – Liability joint and several

S10 - Liability for wrongs or omissions ‘in the ordinary course of the business of the firm

S14 – person liable for holding out to 3rd party

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S28 – Duty of partners to render accounts

S29 - liability to account for misuse

s30 - Duty of partner not to compete with firm

PARTNERSHIP ACT 1892 - SECT 1

Definition of partnership

1 Definition of partnership

(1) Partnership is the relation which exists between persons carrying on abusiness in common with a view of

profit and includes an incorporated limited partnership.

(2) But the relation between members of any company or association which is:

(a) incorporated under the Corporations Act 2001 of the Commonwealth, or

(b) Formed or incorporated by or in pursuance of any other Act of Parliament or Letters Patent or Royal

Charter,

is not a Partnership within the meaning of this Act.

PARTNERSHIP ACT 1892 - SECT 2

Rules for determining existence of partnership

2 Rules for determining existence of partnership

(1) In determining whether a partnership does or does not exist, regard shall be had to the following rules:

(1) Joint tenancy, tenancy in common, joint property, or part ownership does not of itself create

a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits

made by the use thereof.

(2) The sharing of gross returns does not of itself create apartnership, whether the persons sharing such returns

have or have not a joint or common right or interest in any property from which or from the use of which the

returns are derived.

(3) The receipt by a person of a share of the profits of a business is prima facie evidence that the person is

a partner in the business, but the receipt of such a share, or of a payment contingent on, or varying with the

profits of a business does not of itself make the person apartner in the business; and in particular:

(a) The receipt by a person of a debt or other liquidated demand by instalments or otherwise out of the

accruing profits of a business does not of itself make the person apartner in the business or liable as such:

(b) A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the

profits of the business does not of itself make the servant or agent a partner in the business or liable as such:

(c) A person being the widow, widower or child of a deceased partner, and receiving by way of annuity a

portion of the profits made in the business in which the deceased person was a partner, is not by reason only

of such receipt a partner in the business or liable as such:

(d) The advance of money by way of loan to a person engaged or about to engage in any business on a

contract with that person, that the lender shall receive a rate of interest varying with the profits, or shall

receive a share of the profits arising from carrying on the business, does not of itself make the lender

a partner with the person or persons carrying on the business or liable as such: Provided that the contract is in

writing and signed by or on behalf of all the parties thereto:

(e) A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of

the sale by the person of the goodwill of the business is not by reason only of such receipt a partner in

thebusiness or liable as such.

(2) This section does not apply to or in respect of an incorporated limited partnership.

a member, bind the firm and the other general partners, unless:

(a) the general partner has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom the general partner is dealing either knows that the general partnerhas no authority,

or does not know or believe the general partner to be a general partner.

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PARTNERSHIP ACT 1892 - SECT 5

Power of partner to bind firm

5 Power of partner to bind firm

(1) Every partner in a partnership other than a firm that is a limited partnership orincorporated limited

partnership is an agent of the firm and of the other partnersfor the purpose of the business of the partnership;

and the acts of every partnerwho does any act for carrying on in the usual way business of the kind carried on

by the firm of which the partner is a member, binds the firm and the otherpartners, unless the partner so acting

has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is

dealing either knows that the partner has no authority, or does not know or believe the partnerto be a partner.

(2) Every general partner in a limited partnership or incorporated limited partnership is an agent of the firm

and of the other general partners for the purpose of the business of the partnership, and the acts of

every general partnerwho does any act for carrying on in the usual way business of the kind carried on by the

firm of which the partner is a member, bind the firm and the other general partners, unless:

(a) the general partner has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom the general partner is dealing either knows that the general partner has no authority,

or does not know or believe the general partner to be a general partner.

PARTNERSHIP ACT 1892 - SECT 9

Liability of partner

9 Liability of partner

(1) Every partner in a firm other than an incorporated limited partnership is liable jointly with the

other partners for all debts and obligations of the firm incurred while the partner is a partner; and (if

the partner is an individual) after thepartner’s death the partner’s estate is also severally liable in a due course

of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior

payment of the partner’s separate debts.

(2) Every general partner in an incorporated limited partnership is liable jointly with the incorporated limited

partnership for all debts and obligations of thepartnership incurred while the general partner is a general

partner, and (if thegeneral partner is an individual) after the general partner’s death the general partner’s estate

is also severally liable in a due course of administration for such debts or obligations so far as they remain

unsatisfied but subject to the prior payment of the partner’s separate debts.

(3) Despite subsection (2), a general partner in an incorporated limited partnership is only liable for any debts

or obligations of the incorporated limited partnership:

(a) to the extent the incorporated limited partnership is unable to satisfy the debts and obligations, or

(b) to a greater extent provided by the partnership agreement.

PARTNERSHIP ACT 1892 - SECT 12

Liability for wrongs joint and several

12 Liability for wrongs joint and several

(1) Every partner in a firm other than an incorporated limited partnership is liable jointly with the partner’s co-

partners and also severally for everything for which the firm while the partner is a partner therein becomes

liable under either of the two last preceding sections.

(2) Every general partner in an incorporated limited partnership is liable jointly with the other general

partners in the partnership and also severally for everything for which the firm becomes liable under section

10 (3) or 11 (2) while the general partner is a general partner in the firm.

(3) Despite subsection (2), a general partner in an incorporated limited partnership is only liable for

any liability of the incorporated limited partnershipreferred to in that subsection:

(a) to the extent the incorporated limited partnership is unable to satisfy the liability, or

(b) to a greater extent provided by the partnership agreement.

PARTNERSHIP ACT 1892 - SECT 28

Duty of partners to render accounts

28 Duty of partners to render accounts

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(1) Partners in a firm other than an incorporated limited partnership are bound to render true accounts and full

information of all things affecting the partnership to anypartner or the partner’s legal representatives.

(2) An incorporated limited partnership is, subject to thepartnership agreement, bound to render true accounts

and full information in respect of all things affecting thepartnership to any partner or the partner’s legal

representatives.

PARTNERSHIP ACT 1892 - SECT 29

Accountability of partners for private profits

29 Accountability of partners for private profits

(1) Every partner must account to the firm for any benefit derived by the partner without the consent of the

otherpartners from any transaction concerning thepartnership, or for any use by the partner of thepartnership

property, name, or business connexion.

(2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of

apartner, and before the affairs thereof have been completely wound up, either by any surviving partner or by

the representatives of the deceased partner.

(3) This section does not apply to or in respect of anincorporated limited partnership.

PARTNERSHIP ACT 1892 - SECT 30

Duty of partner not to compete with firm

30 Duty of partner not to compete with firm

(1) If a partner, without the consent of the otherpartners, 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

the partner in that business.

(2) This section does not apply to or in respect of anincorporated limited partnership.

Problem questions

Max and Mary have been close friends for a long time and decide that they want to start a business together.

Max has a great deal of experience in running businesses but due to a recent business failure he has little

money to put into the new venture. Mary has little business experience but considerable personal assets due to

the death of her beloved husband, a wealthy mining tycoon. Mary is concerned about exposing her fortune to

a new business venture but does want to have an opportunity to invest in Max’s new venture. The business

would involve a substantial capital outlay.

Max and Mary come to you for advice as to how they might structure their new business.

1. Draw up a list of at least 5 questions that you would want to ask Max and Mary before giving

your opinion.

- Outline of duties

- Limitation of authorities

- Capital structure

- Ownership of property

- Restrictive covenant – non-compete

2. Give advice to Max and Mary as to the legal differences between running their business through

a partnership compared with a corporation.

Max and Mary decide to investigate the business idea further. Mary suggests that Max undertake preliminary

investigations for a suitable site and that he starts working on a draft business plan.

Max decides that he should search for a suitable site for the cafe, and he finds one in Chippendale which he

believes is well suited to the new venture. Without talking to Mary (who is overseas on holiday in Africa and

can’t be reached for 2 weeks) Max signs up for a 3 year lease in his own name. Max said nothing to the

landlord about any other business partners. Max also enters into leasing arrangements for plant and

equipment, furniture for the cafe and he orders 200 kilos of premium coffee beans imported directly from

Venezuela under the name of ‘Sydney Jazz Cafe’ which is what he has discussed calling the business with

Mary. Max also enrolls in a ‘master barista’ course that costs $3000.