Australian Business Text Book Sample

AUSTRALIAN BUSINESS LAW
6
CHAPTER 1 III
th edition
COMPLIANCE AND PRACTICE

Roger Vickery Wayne Pendleton with contributions by MaryAnne Flood
The legal system: legal foundations, the Constitution and statue law
Copyright Pearson Education Australia (a division of Pearson Australia Group Pty Ltd) 2009 Pearson Education Australia Unit 4, Level 3 14 Aquatic Drive Frenchs Forest NSW 2086 www.pearsoned.com.au The Copyright Act 1968 of Australia allows a maximum of one chapter or 10% of this book, whichever is the greater, to be copied by any educational institution for its educational purposes provided that that educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited, telephone: (02) 9394 7600, email: info@copyright.com.au All rights reserved. Except under the conditions described in the Copyright Act 1968 of Australia and subsequent amendments, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. Senior Acquisitions Editor: Andrew Brock Project Editor: Loretta Barnard Production Coordinator: Barbara Honor Copy Editor: Kathryn Lamberton Proofreader: Loretta Barnard Indexer: Jo Rudd Cover and internal design by designBITE Cover illustration by Wendy Bayliss Typeset by Midland Typesetters, Australia Printed in China 1 2 3 4 5 13 12 11 10 09 National Library of Australia Cataloguing-in-Publication entry Author: Vickery, Roger. Title: Australian business law : compliance and practice / Roger Vickery, Wayne Pendleton ; with contributions by MaryAnne Flood. Edition: 6th ed. ISBN: Notes: 9780733991622 (pbk.) Includes index.
Subjects: Business lawAustralia. Commercial lawAustralia. Other Authors/Contributors: Pendleton, Wayne. Flood, MaryAnne 346.9407 Every effort has been made to trace and acknowledge copyright. However, should any infringement have occurred, the publishers tender their apologies and invite copyright owners to contact them.
An imprint of Pearson Education Australia (a division of Pearson Australia Group Pty Ltd)
CONTENTS
Preface About the authors What is compliance? List of abbreviations How to use your textbook How to study law xiv xvi xviii xxi xxii xxiv Guidance questions Review questions Compliance activities 39 40 42
The legal system: the courts, case law and dispute resolution
43
44 49 49 51 53 53 54 57 57 59 60 64 65 65 66 66 68 70 71 71 71 72 73 76 77 78
PART 1
LEGAL FOUNDATIONS
1 The legal system: legal foundations, the Constitution and statute law 3
4 4 5 6 8 9 10 14 15 17 18 21 22 22 22 23 24 24 26 28 29 32 33 34 36
The court system in the states and territories State and federal tribunals The federal court system The appeal system Cross-vesting: when can federal courts hear state cases? Self quiz Precedent Self quiz How to use a law report The adversary system of trial The main participants in the adversary system The standard of proof in criminal and civil trials Class actions in Australia Typical stages in a civil trial Alternatives to courts Government tribunals and related bodies Tribunals for investigation and enforcement Arbitration Mediation Government ombudsman Industry dispute resolution schemes Self quiz Summary Guidance questions Review questions Compliance activities
What are laws? The major sources and categories of law What is business law? The development of British law Self quiz Was Australia settled legally? Landmark developments in native title From penal colony to independent nation Three levels of government Separation of powers under the Australian Constitution Division of powers: exclusive, concurrent and residual The ACT Human Rights ActAustralias rst bill of rights Charter of Human Rights and Responsibilities for Victoria How can the Constitution be changed? Ways of increasing federal powers Commonwealth dominance over state powers Self quiz How is legislation passed? Understanding an Act of Parliament How to interpret an Act Common law rules of statutory interpretation Delegated legislation International law Self quiz Summary
VI
PART 2
TORT LAW
3 Civil liability: tort of negligence 83
What is a tort? 84 Criminal, contract and tort actions 84 The impact of negligence on business life 85 The Ipp Report: radical statutory reforms to negligence law 86 Common law negligence actions 87 1. Does the defendant owe a duty of care? 88 2. Did the defendant breach the duty of care? 92 3. Did the defendants breach harm the plaintiff? 96 What are the defences to negligence? 98 Self quiz 100 Tort actions absorbed by negligence law 102 Special categories of negligence 104 Self quiz 115 Overview of the civil liability reforms 115 Self quiz 118 Summary 119 Guidance questions 121 Review questions 122 Compliance activities 124
Partnerships Self quiz Companies Self quiz Reporting and disclosure External administration Self quiz Corporate governance Trusts Franchises Self quiz Associations Protection for business names and company names Compliance Self quiz Summary Guidance questions Review questions Compliance activities
155 156 156 164 168 171 172 172 173 175 180 181 183 186 191 191 196 198 199
Agency law
201
202 203 203 204 209 209 212 212 213 214 215 217 217 218 219 222 223 226 227 229
What is agency? Agency distinguished from other relationships Types of agents
Civil liability: intentional torts and defamation
125
126 130 133 134 134 140 143 143 144 144 145 145 145 147 148 150
Creation of agency Self quiz Duties of an agent to the principal Remedies of the principal Relevance of the law of agency to companies and partnerships Rights of an agent against the principal Liability of the principal to third parties Liabilities of an agent Self quiz Termination of agency Common types of commercial agents Statutory controls on real estate agencies Self quiz Summary Guidance questions Review questions Compliance activity
Direct (intentional) torts Defences to intentional torts A new tort of privacy? Self quiz The tort of defamation Defences to defamation actions Alternative dispute resolution: offers of amends and apologies Remedies for defamation Role of juries in defamation trials Criminal libel Injurious falsehood Self quiz Summary Guidance questions Review questions Compliance activities
PART 3
BUSINESS ENTITIES
5 Business structures 153
154 154 Choosing a business structure Sole traders
Partnerships and joint ventures
230
231 231 233
Nature of a partnership What is a partnership? Determining when a partnership exists
CONTENTS
VII
Self quiz Relationship between partners and outsiders Relationship between the partners Self quiz Dissolution of a partnership Distribution of assets on dissolution Limited partnerships Drafting a partnership agreement What is a joint venture? Self quiz Summary Guidance questions Review questions Compliance activity
235 236 239 241 241 241 242 242 243 246 246 249 250 252
10 Agreement
Essential element no. 2: agreement Rules regarding offers Self quiz Rules of acceptance Rules of offer and acceptance by post Rules on revocation of offers Rejection of offers When will an offer lapse? Alternatives to the offer and acceptance approach Self quiz Summary Guidance questions Review questions
276
277 277 285 286 290 290 291 291 292 293 294 295 296
PART 4
CONTRACT LAW
8 Introduction to contracts 255
256 256 256 257 259 260 262 262 263 Tips for studying contract law What is a contract? Formal contracts Simple contracts Essential elements of a valid contract What happens when a contract is invalid? Self quiz Different types of contracts Quasi-contracts What are the differences between formal and simple contracts? Self quiz Summary Guidance question Review questions 263 265 265 266 267
11 Consideration
Essential element no. 3: consideration What is consideration? Three main categories of consideration Rules of consideration Self quiz Part payment of debts Promissory or equitable estoppel Self quiz Summary Guidance questions Review questions
299
300 300 300 301 306 306 308 311 311 312 313
12 Capacity
Essential element no. 4: capacity Minors under common law What types of contracts with minors lack capacity? Valid contracts Voidable contracts with minors Void contracts with minors Minors under New South Wales legislation Minors under South Australian legislation Self quiz Mentally unsound and intoxicated persons Companies (corporations) Bankrupts Self quiz Summary Guidance question Review questions
315
316 316 316 316 318 320 322 323 324 324 326 326 326 327 328 328
Intention to create legal relations
268
269 269 269 270 272 272 273 273 274 274
Essential element no. 1: intention The test for intention is objective Two presumptions about legal intentions Domestic and social agreements Self quiz Business agreements Self quiz Summary Guidance question Review questions
VIII
AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE
13 Genuine consent
Essential element no. 5: genuine consent Mistake Misrepresentation Self quiz Duress Undue inuence Unconscionable (unjust) conduct Self quiz Summary Guidance questions Review questions
330
331 331 337 339 340 340 342 345 346 348 349
Self quiz Summary Guidance questions Review questions
396 396 398 399
17 Remedies for breach of contract

Main types of remedies Damages Self quiz What types of damages are available? Self quiz Equitable remedies Statutory limitations Self quiz Summary Guidance question Review questions Compliance activities
401
402 402 404 405 407 407 412 412 413 414 415 416
14 Legality
Essential element no. 6: legality What are the effects of illegal and void contracts? Four types of unlawful contracts Restraint of trade Self quiz Self quiz Summary Guidance question Review questions
351
352 352 352 353 358 360 360 362 362
PART 5
REAL ESTATE LAW
18 Property law: real property and mortgages
Legal meaning of property Distinction between property and personal rights Distinction between legal and equitable property interests Property (ownership) and possession Personal property Real property Estates in land Self quiz Other interests in land Claims for adverse possession Title systems Caveats Strata title Community, precinct and neighbourhood title Company title Self quiz Mortgages over land Legal and equitable mortgages What are the rights of the mortgagor? Unconscionable mortgage contracts What are the remedies of the mortgagee? Power of sale: mortgagees duty of good faith Statutory requirements for the sale of corporate property Security interests in personal property Self quiz
421
422 422 423 424 425 425 428 430 430 432 432 436 437 437 437 438 438 438 439 440 442 442 444 445 446
15 Terms of a contract
What are terms? When does a representation qualify as a term? Collateral contracts Extrinsic documents are not usually valid The parol evidence rule Is a term a condition or a warranty? Intermediate terms Implied terms Uncertain terms Meaningless terms Condition precedent Condition subsequent Self quiz Exclusion clauses Self quiz Summary Guidance questions Review questions
364
365 365 366 367 368 369 371 371 373 373 373 374 374 375 380 380 382 384
16 Transfer and termination

Privity of contract Assignment Self quiz Transfer of rights in personal property Discharge of a contract
386
387 388 389 389 389
CONTENTS
IX
Summary Guidance questions Review questions Compliance activities
446 450 451 453
Regulation of pre-contractual matters Pre-contractual key requirements Requirements regarding statements of account Notication of variations to credit contracts Debtors in defaultwhen can providers take legal action? Related transactions: mortgages and guarantees Liability of a linked credit provider for a suppliers contract Civil penalties and remedies Self quiz Privacy protection in credit reporting Anti-Money Laundering and Counter-Terrorism legislation Extensive powers of AUSTRAC Self quiz Summary Guidance questions Review questions Compliance activities
502 503 504 504 504 505 505 506 508 508 508 513 514 515 518 520 521
19 Leases and transfer of real property

What is a lease? Residential tenancies Major differences between residential and commercial tenancies Retail leases Self quiz Transfer of land Sale of real property by auction Self quiz Summary Guidance questions Review questions Compliance activity
454
455 459 461 461 463 464 473 475 476 478 479 480
22 Bankruptcy and debt recovery

What is bankruptcy? Scope and purpose of the Bankruptcy Act Requirements for a sequestration order Main act of bankruptcy: failure to comply with a bankruptcy notice Other important acts of bankruptcy Self quiz What are the rights of secured creditors? What property is available to creditors? What property is not available? Recovery of property from third parties: ve main powers Self quiz Powers of the trustee Restrictions on a bankrupt Order of payment of debts: which creditors are paid rst? Discharge of bankruptcy Alternative to bankruptcy: Part X agreements New Alternatives: Personal Insolvency Agreements (PIAs) Alternatives to bankruptcy: Part IX agreements Self quiz Debt recovery Self quiz Summary Guidance questions Review questions Compliance activities
522
523 523 525 525 525 527 527 527 527 528 533 533 534 534 535 535 536 536 537 538 541 542 546 548 550
PART 6
FINANCE LAW
20 Negotiable instruments and electronic funds transfers 483
Negotiable instruments Bills of exchange Self quiz Cheques Duties of a paying (drawee) institution Duties of the customer Defences of a paying institution Duties of a collecting institution Other forms of transferring money Self quiz Summary Guidance questions Review questions Compliance activities 484 484 484 485 488 488 490 491 492 493 494 496 496 498
21 Credit law and the Anti-Money Laundering and Counter-Terrorism Financing Act 499
The National Consumer Credit Code What essential criteria must be satised? What types of credit are excluded? Self quiz 500 500 501 502
What types of credit contracts are regulated by the Code? 500
PART 7
CONSUMER PROTECTION AND COMPETITION LAW
23 Sale of goods
What are Sale of Goods Acts? What are goods? Can the supply of work and materials be a sale of goods? Sales and agreements to sell Types of goods When does ownership pass from seller to buyer? The nemo dat rule: a non-owner cannot transfer good title Self quiz Duties of sellers and buyers Implied terms Implied warranties Remedies for breach of contract Self quiz Summary Guidance questions Review questions Compliance activities
9. Liability of manufacturers and importers 10. Strict liability of manufacturers 11. Protection against price exploitations 75AV Remedies for breaches of consumer protection provisions
605 607 609 609 611 612 613 616 616 621 622 625
553
554 554 554 555 555 556 559 562 562 563 567 568 569 570 573 574 575
Legislation to protect consumers against unfair contracts Self quiz Small claims or consumer tribunals Self quiz Summary Guidance questions Review questions Compliance activities
25 Restrictive trade practices

Constitutional limitations on the TPA Australian Competition and Consumer Commission Australian Competition Tribunal National Competition Council Federal Court Developments in competition reform Self quiz What restrictive trade practices are prohibited? 1. Anti-competitive arrangementss 45 2. Price xings 45A 3. Primary boycottss 45(2), 4D 4. Secondary boycottsss 45D45E 5. Misuse of market powers 46 6. Exclusive dealings 47 7. Resale price maintenances 48 8. Mergers and takeoverss 50 Self quiz Statutory exceptionss 51 Authorisationss 88 Notications 47 Enforcement and remedies Self quiz Summary Guidance questions Review questions Compliance activity
626
627 627 627 628 628 628 629 630 630 631 633 634 635 637 638 639 640 641 641 641 641 643 643 645 646 648
24 Consumer protection
The main aims of the Trade Practices Act Why the need for consumer protection legislation? The constitutional basis of the TPA The Fair Trading Acts Who is most likely to take action under the TPA Australian Competition and Consumer Commission Australian Competition Tribunal Bodies responsible for consumer affairs in the states and territories Jurisdiction of trade practices disputes Self quiz What are the main consumer protection provisions? Who is a consumer? 1. Unconscionable conductss 51AA, 51AB 2. Unconscionable conduct against a small business s 51AC 3. Misleading or deceptive conducts 52 How do you prove a breach of s 52? Self quiz 4. False representationss 53 5. Other false or misleading statements 6. Other prohibited practices Self quiz 7. Protection for implied terms in consumer contracts 8. Product safety and information
577
578 578 578 578 579 579 580 580 582 582 582 584 584 586 587 588 594 594 599 601 602 603 604
PART 8
MARKETING, E-COMMERCE AND PRIVACY LAW
26 Privacy and e-commerce law
Privacy Federal regulation of private information
651
652 652
CONTENTS
XI
National Privacy Principles Role and powers of the Privacy Commissioner Main types of private information regulated under federal law State and territory privacy legislation No statutory privacy protection for business What privacy protection is available to businesses? Surveillance in the workplace New federal powers to monitor Internet communications Self quiz E-commerce law 1. Equality of electronic transactions with written documents 2. Contractual negotiations 3. Compliance with consumer protection laws 4. Defamation 5. Intellectual property rights 6. Obligations of Internet and electronic communication providers 7. Privacy rights 8. Spamming 9. Cybercrime offences 10. Statutory limits on access to pornography 11. Interactive Gambling Act Self quiz Summary Guidance questions Review questions Compliance activiities
652 653 654 657 657 658 658 659 659 660 661 661 662 664 664 666 667 667 668 668 669 669 670 671 671 672
Trading stamp promotions Loyalty schemes and frequent yer points Labels and packaging Trade measurement legislation Poisons and dangerous goods Drugs, therapeutic goods and cosmetics Self quiz Marketing ethics Special areas of ethical concern Self-regulation in the marketing industry Self-regulation in the advertising industry Mass media regulation Self quiz Summary Guidance questions Review questions Compliance activities Reference material
686 686 687 688 688 688 688 689 691 692 695 696 697 698 700 701 703 704
PART 9
INTELLECTUAL PROPERTY
28 Intellectual property: copyright, designs, patents, trademarks and other types of protection
What is intellectual property? Specic protection under federal statutes Copyright Self quiz Designs Patents Trademarks The Trade Marks Act International protection for intellectual property Self quiz Alternative statutory and common law protection Self quiz Summary Guidance questions Review questions Compliance activities
707
708 708 709 720 721 723 725 726 730 731 731 735 736 740 741 743
27 Marketing law and ethics

Marketing law: the four Ps Product Promotion Price Place Special areas of concern in marketing and advertising Intellectual property Section 52 and passing-off actions Defamation Comparative advertising Disclaimers: conditions apply When can advertising agencies be liable? Ambush marketing may be legal Ten commandments of marketing law Self quiz Trade lotteries, competitions and promotions
673
674 674 674 675 676 676 676 677 678 678 680 681 681 682 683 684
PART 10
INSURANCE LAW
29 Insurance law
Two main types of insurance contracts Main sources of insurance law
747
748 748
XII
Regulation and voluntary codes of practice How is an insurance contract formed? The four common law doctrines of insurance law 1. Insurable interest 2. Utmost good faith Self quiz Self quiz 3. Indemnity 4. Subrogation Insurance agents and brokers Insurance cover for business organisations Self quiz Summary Guidance question Review questions Compliance activity
748 749 749 750 750 751 755 756 757 758 758 759 760 763 763 765
Key features of state and territory industrial relations systems Summary Guidance questions Review questions Compliance activity 794 794 798 800 802
31 Occupational Health and Safety

How dangerous is the workplace? Who is responsible for workplace safety? Occupational Health and Safety legislation Main aims of the NSW OHS Act Duties of employers Penalties for breaches Criminal penalties for workplace deaths in ACT and NSW Duties of manufacturers, designers, suppliers and users of machinery Registration and regulation of plant and equipment Hazardous and dangerous substances
803
804 804 805 806 807 809 811 812 813 813 814 814 815 816 816 817 818 818 818 822 823 823 825 826 827
PART 11
WORKPLACE ENVIRONMENT LAW
30 Employment law and industrial relations
Legal rights and obligations of employers and employees Categories of employment Self quiz Common law duties of employers Common law duties of employees Termination of a contract of employment Remedies for breaches of employment contracts Unfair dismissal Self quiz Statutory regulation in the workplace Equal opportunity legislation Self quiz Industrial relations Trade unions and employer organisations Inuential High Court decisions Self quiz Workplace Relations Act 1996 (Cth) Key legislative provisions of the Workplace Relations Act What alternative employment agreements are available? Independent Contractors Act 2006 Self quiz
769
770 772 775 775 775 776 777 777 780 780 781 784 785 786 787 787 788 789 791 793 793
Construction work Self quiz Duty to consult Duties of employees to take reasonable care Industry codes of practice and standards Powers of inspectors Accident notications Self quiz Workers compensation Occupational rehabilitation Self quiz Summary Guidance question Review questions Compliance activity
Answers to self quizzes Glossary Table of Cases Table of Statutes Acts of the British Parliament Index
828 838 846 853 857 858
CONTENTS
XIII
PREFACE
The new cover design of Australian Business law (ABL) underscores its abiding purposeto help our users to navigate successfully through the shoals and the often bewildering otsam and jetsam of business law. The sixth edition also includes several innovations. The new title Australian Business Law: Compliance and Application points to ABLs strong focus on assisting organisations and individuals to comply with their legal obligations. A key element in this fresh direction is MaryAnne Flood, who has become the rst new co-author of ABL in its 15 year existence. Since 1998 Roger Vickery has been prime author of ABL and the update material, with Wayne Pendleton acting in an advisory/reviewer role. MaryAnne brings many years experience as law teacher, solicitor and writer to the team and most importantly, a very strong interest in compliance matters. She re-wrote Part 3 Business Entities (Chs 57) and Part 5 Real Estate Law (Chs 1819) and has been an active reviewer of most other chapters.
The importance of legal compliance

Compliance is a new label for the age old requirement that organisations and individuals must comply with (follow) the laws that apply to their business areas. The main drivers for best practice in compliance areas in recent years have been government regulators, such as the Australian Securities and Investment Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC). However, there are many other motivators and rewards for establishing good compliance strategies, including proven savings in time, money, stress and brand image that arise from identifying and avoiding key areas of risk. The sixth edition has been written specically to meet the requirements of all the relevant law based national competencies, including the units FNSCOMP601B: Interpret and manage statutory, legislative and regulatory obligations for organisational compliance. We have tried to address key compliance issues in more detail in the section that follows on from this Preface, What is compliance?
Compliance features in ABL

One of the greatest challenges to good compliance is how to identify the key risks in business areas that matter. (Many people are afraid of things that are not real threats but relaxed about things that should keep them awake at night.) The other is how to locate relevant and valuable examples of templates, policy guides, case studies etc. The chief features in ABL that address these needs include: Website links and references: several hundred of them that cover nding the law, compliance guidelines and manuals, industry and professional codes of conduct as well as compliance training packages and templates.
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Over 90 Compliance Checks that sum up key danger areas and direct readers to websites that offer detailed self-assessment content. Over 60 Compliance Activities, mostly web-based, that offer a range of self-directed assessments that are equally suitable for groups and individuals. We have tried to emphasise practical and attainable skills. This feature continues ABLs long held emphasis on self-paced, self-directed learning activities for exible delivery situations.
Other changes to ABL

Adding compliance content and updating the law are comparatively easy. The challenge is how to t this new material into the previous page length while trying to maintain a clear and lively writing style. We achieved this through the following strategies: Every sentence/paragraph/margin note/self quiz etc has been evaluated and trimmed down wherever possible. Several new cases have been added and some less relevant ones have been shed or condensed with the full versions being available on the ABL website, <www.pearsoned.com.au/vickery>. The use of more clutter-free layout and design features, including scores of improved gures and ow charts.
Updates and improvements

Apart from the compliance features the main new content areas are outlined below: Part 1: Legal foundations: various updates including a new table on equity versus common law; the Victorian Human Rights Act; native title claims; increased federal Constitutional powers; jurisdictions of courts and tribunals; judicial procedures and the new Financial Services Ombudsman Service. Part 2: Torts: updates on civil liability reforms, improved gures, a revised approach to negligent misstatement; new post Cook v Cook precedent; developments in common law action for privacy and a major re-write on national defamation laws. Part 3: Business entities: Ch 5: new material on different structures; tax aspects; new cases on corporations law; internal governance and reporting; role of auditors, reporting requirements of ASIC; trusts, associations and franchises as well as nine compliance checks. Ch 6 Agency: new cases and new material on real estate agents (also followed up in Ch 19); stockbrokers and duty not to accept secret commissions. Ch 7 Partnerships and joint ventures: new cases and amplied coverage on the Partnership Act. Part 4: Contract law: re-written to provide more condensed explanations and range of compliance sources; some new cases, including Smythe v Jones (the new important eBay case) and more on standard contracts and unfair contract legislation. Part 5: Real estate law: Ch 18: extended sections on types of property; legal and equitable rights; easements; prots prendre; new cases; security interests in personal property and residential and commercial leases. Ch 19: signicantly amplied explanation of conveyancing, new cases and gures; new statutory obligations in auctions and the sale of real property.
PREFACE
XV
Part 6: Finance law: new coverage on payday loans and Anti-Money Laundering/Counter Terrorism Financing legislation; updates on bankruptcies; revised section on recovery of assets from third parties; updates on personal insolvency agreements and Part IX Agreements and a new section on avoiding credit risks. Part 7: Ch 24 Consumer protection: updates on personal liability of employees (Houghton v Arms); unfair contracts; restrictions on negligence and consumer protection tribunals. Ch 25 Restrictive trade practices: new cases, especially ACCC v Visy; anti-cartel proposed legislation and proposed legislative changes. Part 8: Marketing, e-commerce and privacy law: new Victorian workplace surveillance laws; case on Internet auctions; updated table on lotteries and labelling of loose food; new outline of Do not call register and rst ACCC action on meta stufng. Part 9: Intellectual property: criminal prosecutions and a case on moral rights. Part 10: Insurance law: replacement of Insurance (Agents and Brokers) Act 1984 with the Corporations Act 2001; s 21A of the Insurance Contracts Act. Part 11: Workplace environment law: Ch 30: Employment law: new federal constitutional powers; important post-Work Choices legislationactual and proposed and reforms to administrative, judicial and compliance bodies. Ch 31 Industrial relations: reforms under the Victorian OH&S Act 2007 and extended liability for senior executives, including international CEOs.
Acknowledgements
The sixth edition continued to draw upon the work of previous contributors and in particular, Barry Wall. We are also grateful to Kim Vickery and Mark Vickery for their assistance with research and general administrative support. Three professionals bore the brunt of the inevitable delays with impeccable skills. Andrew Brock, the publishing editor has been his usual cool, calm, and unfailingly pleasant self. Loretta Barnard, the best production editor in Australia, ignored the canny advice of her family and again agreed to take on the task of steering ABL through our legal Sargasso seas. Loretta, we could not do it without you. Kathryn Lamberton, our new copy editor, x-rayed every sentence with intelligent diligence. Thank you also to the skills and expertise of the design team designBITE and to Wendy Bayliss for the cover design . . . And thanks too for the hard work of our long standing typesetter, Midland Typesetters, Australia. To the best of our knowledge the law in this edition is accurate as of 18 August 2008.
About the authors

Roger Vickery is a Senior Head Teacher, Marketing, Property and Law with NSW TAFE. He also lecturers in commercial law and corporations law with various universities. Prior to obtaining a law degree and being admitted as a barrister in the Supreme Court of NSW, Roger gained extensive commercial experience in training, marketing and human resource management. He is a Fellow of the Australian Institute of Management (NSW). Roger has scripted and directed
XVI
documentaries and is an award-winning ction writer. He has co-written and presented a television series on marketing law, Navigating the Maze! Wayne Pendleton is a lecturer at James Cook University, Brisbane Campus, specialising in Business Law and Management Accounting. His academic qualications include Master of Applied Law, Certicate of Specialisation in Dispute Management Law, Bachelor of Commerce and Business Administration, and Bachelor of Education in Vocational Education. Wayne has extensive experience in Queensland with private and public educational providers in the VET, university and secondary sectors. MaryAnne Flood has enjoyed teaching business and property law in Sydney TAFE colleges for 15 years. She has also written learning materials for external students, and collaborated on other writing projects for the Department of Education and Training. MaryAnne came to teaching from legal practice in the corporate world as well as small business and property areas, and brings the benet of this experience to both her teaching and writing. MaryAnne has a special interest in the needs of students from a non-English speaking background, and in addition to her legal and general education qualications holds university qualications in this area.
PREFACE
XVII
WHAT IS COMPLIANCE?
All business organisations operate within an increasingly complex legal and regulatory framework. Legal and regulatory requirements originate from a range of sources including legislation, government regulations and the common law, as well as industry codes of conduct and other self-regulatory arrangements. Compliance is what an organisation does to ensure that it meets the legal and regulatory requirements applicable to its business activities. This applies equally to the individuals within the organisation. Compliance with externally imposed law and regulation, i.e. law and regulation administered and enforced by government regulators, industry associations and other outside bodies, is sometimes described as regulatory compliance. Not all compliance activity however, is concerned with external regulatory requirements. Contracts for instance, are the basis of commercial transactions and underpin the viability and security of any business organisation, large or small. Identifying the major issues in relation to its contracts and avoiding the major pitfalls, is very much a part of an organisations compliance management. Effective proactive management of contracts should also have the added benet of preventing the possible intervention of regulators, such as the Australian Competition and Consumer Commission (ACCC), over alleged unconscionable conduct or misleading provisions. Similarly, these same proactive compliance standards should reap signicant commercial benets in terms of savings in time, money, stress, brand image, good customer relations . . . the list goes on. Compliance also extends to the organisations internal rules, policies and procedures including those regulating the relationships between individuals within the organisation. The basic concept behind compliance therefore is simplecompliance is a new label for the age old idea that an organisation must, in its day-to-day business operations, comply with the law. The sticking point for many organisations is working out how to do this. It is not the purpose of Australian Business Law to provide a how to on the management of compliance. Although there is some overlap in the roles of lawyer and compliance professional, they perform different functions in ensuring organisations comply with the law. Lawyers are engaged for their legal knowledge and skills, and act in both an advisory and representative capacity. Lawyers draw up contracts and other legal documents and represent parties in negotiations and legal proceedings. They identify, and provide legal advice on, the laws that govern an organisations business operations and relationships. Compliance professionals then develop systems and procedures, internal controls and monitoring, to ensure the organisation complies with these laws. It is the role of the compliance professional, more so than the lawyer, to provide the how to on the management of compliance. The website of the Australasian Compliance Institute <www.compliance.org.au> provides a useful introduction to the compliance profession and the role of lawyers in compliance.
XVIII
Readers will nd a link to this website, and many others relating to legal compliance, on the ABL website for Ch 5. The rst step in compliance clearly involves identifying the laws that apply to the business, the regulators who have jurisdiction in specic areas, the risks the business faces and legal issues that may arise. And it is not just a matter of putting together a one-off compliance program. Regular reviews, tracking changes to law and ongoing effective education of staff about their legal obligations is essential for legal compliance and building a culture of compliance. Building a compliance culture is a central theme in the compliance publications available from regulators such as the Australian Taxation Ofce, the ACCC and ASIC. (See the links to these publications on the ABL website for Ch 5.) Despite its growing prole the concept of a compliance culture is still difcult to dene. The ACCC sees the culture of an organisation as a system of values, attitudes and beliefs that affect the way the individuals, at all levels within the organisation, behave. And a good compliance culture, according to the Commission, is reected in individuals adopting a positive attitude to compliance, and proactively seeking to understand and comply with the legal obligations affecting their work. To achieve this it is important that individuals working in business have some understanding of: the Australian legal and regulatory system government regulators and industry bodies the main areas of business law and regulation, and the legal environment in which particular businesses operate. Everyone who is in business life, whether public, private or semi-public, must also have some skills in nding the law and regulations affecting their business and recognising legal situations and issues. Armed with this knowledge and awareness they can seek legal advice when necessary, and ask the questions that need to be asked. The purpose of Australian Business Law is to introduce readers to these areas of knowledge and provide the opportunity to start developing these skills.
WHY IS THERE SUCH A STRONG INCREASED INTEREST IN COMPLIANCE?

From the 1980s onwards the major political parties supported the de-regulation of many business sectors, such as the banking and nancial sector, and the introduction of self-regulation. By the 1990s the number of insolvencies and cases involving misleading or fraudulent conduct occurring under self-regulation, led to increased concern about how effectively businesses were complying with government regulations and self-regulatory arrangements. Government regulators, in particular the Australian Securities and Investment Commission (ASIC) and the ACCC became more proactive in investigations and the nes for breaches were signicantly increased. The regulators also invested effort and resources into assisting businesses meet their compliance obligations and build a culture of compliance. In 1996 the Association of Compliance Professionals of Australia (now the Australian Compliance Institute) was formed and two years later, following a request by the ACCC, an Australian Standard AS 3806 was introduced to provide guidance on the development and operation of effective compliance systems. AS 3806 was revised in 2006. The Standard is
WHAT IS COMPLIANCE?
XIX
generic and can be applied in any regulatory setting. It has become a benchmark for regulators including the ACCC and ASIC, when considering an organisations compliance program. Readers will nd links to publications relating to the Standard on the ABL website for Ch 5. It is now recognised that effective compliance systems are an integral aspect of good governance and that compliance also results in other benets, including building good business reputations and ensuring satised customers. In addition, compliance is beginning to demonstrate its value as a defence against regulatory breaches. Organisations that neglect compliance can expect greater penalties. In the recent groundbreaking restrictive trade practices decision in ACCC v Visy Industries (see Chs 5 and 25), one of the factors taken into account by the court in deciding the penalty was whether the company had a corporate culture conducive to compliance with the Trade Practices Act. And what did the court determine about this culture? The much quoted view of the trial judge was: The Visy Trade Practices Compliance Manual might have been written in Sanskrit for all the notice anybody took of it. The ACCCs new tagline sums it up: Compliance is common sense and good business.
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HOW TO USE YOUR TEXTBOOK

The 6th edition of Australian Business LawCompliance and Practice contains a number of features that highlight concepts and illustrate how these apply to business situations. The new design of the text makes these features easy to identify. Learning objectives focus students on important issues and are tied to outcomes.
BUSINESS STRUCTURES
5
LEARNING OBJECTIVES
After successfully completing this chapter, you will be able to: state the characteristics of sole traders, partnerships, limited liability companies, trusts, incorporated associations; outline the legal requirements for each type of organisation and the conditions imposed by law on the individuals who comprise the organisation; identify the extent of liability of the parties involved in each type of business organisation; explain the reasons for, and the importance of, business name registration and the legal restrictions placed on the use of a business name; identify regulatory compliance issues on starting a business.
Chapter
Setting the scene are examples from business where compliance issues are brought into focus.
SETTING THE SCENE

Marley is married to Bella, and they have two childen. Marley is a licensed property agent and Bella is an accountant. Conor, who has various business qualications, is their best friend. The three friends are thinking about going into business for themselves. Marley is talking about buying into a real estate franchise, which also interests Conor. Bella likes the idea of a homebased investment advice business. Each is keen to learn something about the choice of business structure and the legal issues that may arise.
Law in action describes how the law works in practice, using real examples. Case examples are real examples from case law. These provide students with a summary of the facts of the case and the issues involved. Self quiz allows students to check their progress at each stage; answers are found at the end of the book.
LAW IN ACTION
Business judgment rule: test case
In early 2007 ASIC began civil proceedings against the former and current directors and former executives of James Hardie for breach of the duty of care (s 180). ASIC is asking the court to consider imposing nes and banning these individuals from managing companies. Former HIH directors Rodney Adler and Ray Williams were banned, as was former Telstra director Steve Vizard. In these cases, however, the directors acted dishonestly or misused their positions. In the case against the James Hardie directors negligence alone is alleged. See James Hardie leMedia Releases <www.asic.gov.au>.
ASIC v Adler (2002) CASE

In 2000, $10 million was transferred from a subsidiary of HIH Insurance Ltd to a unit trust controlled by Rodney Adler, who was a non-executive director of HIH. The money was used to buy $4 million of HIH shares (to prop up their value), acquire unlisted investments from an Adler-associated company and make loans to Adler-associated companies. After the collapse of HIH, ASIC took action against Adler, Williams (HIH chairman and chief executive ofcer) and Fodera (executive director and nance director of HIH and the subsidiary involved) for breaches of ss 180183. All three relied on the business judgment rule defence. The Federal Court held: All three directors had breached their duties. Adler was personally liable for 101 breaches, including: failing to act with reasonable care and diligence (s 180); acting without good faith (s 181); and misusing his position to gain a personal advantage or to cause detriment to the company (s 182). Re penalties: Adler and Williams were ordered to repay civil penalties of $8 million in total to the companies involved (now in liquidation), ned $900 000 and $250 000, respectively, and disqualied from managing a company for 20 and 10 years, respectively. Re business judgment rule: Justice Santow rejected their business judgment rule defence on several grounds, including: Williams as a major HIH shareholder had a material personal interest in encouraging the purchase of its shares; Foderas failure to declare the transfer to the HIH board was an omission, not an act, and therefore did not qualify for consideration under the rule. ASIC v Adler, Williams & Fodera (2002) 42 ACSR 80
SELF QUIZ
Indicate whether each of the following statements is true or false.

TRUE ^
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
14 Companies come into existence when they are registered by ASIC. 15 The corporate veil separates the company from its shareholders, 16 17 18 19 10 11
FALSE ^
^
COMPLIANCE CHECK
Bella is the accountant for the new family company. What records must she set up to comply with s 286? ASIC, with help from professional associations, has compiled a schedule of appropriate books and records. See What Books and Records Should My Company Keep? at <www.asic.gov.au> or go to the ABL website.
Who has to prepare an annual nancial report and directors report? Public companies and large proprietary companies must prepare a nancial report and a directors report: s 292. A small proprietary company need only prepare these two reports if requested to do so by at least 5% of its members or by ASIC, or if it is controlled by a foreign company and it is not consolidated in that companys nancial statements. Small proprietary companies under foreign company control are generally treated by the Act as if they are large proprietary companies. What is included in the nancial report and the directors report? Under s 295 a companys annual nancial report must comply with the standards set by the Australian Accounting Standards Board (AASB). These standards, which are made under s 334, are available at <www.aasb.com.au>. Currently, the annual nancial report must include: the nancial statements: a statement of nancial position (balance sheet) a statement of comprehensive income a statement of cash ows a statement of changes in equity (share of ownership) the notes to the nancial statements (disclosures required by the accounting standards and regulations and any other notes required to give a true and fair view); the directors declaration (about the statements and notes and solvency of the company). See Financial ReportsThe Basics at <www.asic.gov.au>. The nancial statements must comply with the accounting standards and the corporations regulations and must give a true and fair view of the nancial position and performance of the company: ss 296297. ASIC has power under Part 2M.6 to exempt individual companies, or classes of companies, from some or all of the nancial reporting and audit requirements in the Act. Mazda Australia Pty Ltd & Ors v ASC (1992) 8 ACSR 613 concerned an application for relief from compliance with certain requirements of the accounting standards. The Administrative Appeals Tribunal relied on AASB Statement of Accounting Concepts SAC 2 to deny Mazdas application for relief from compliance with an accounting standard concerning related party transactions. SAC 2 sets out the objective of general-purpose nancial reporting. See the ABL website. The directors report must contain (i) the general information about the operations and activities set out in s 299, and (ii) the specic information about such matters as dividends, details of directors, options granted over shares set out in s 300.
directors and other ofcers. The corporate veil may be lifted if a company is formed so that someone could avoid legal obligations. Directors are personally liable for the companys debts. Every company must have a company secretary. Only directors owe duciary duties to the company. A public company must have at least three directors and one shareholder. A proprietary company must have at least one director and one separate shareholder.
Public and large proprietary companies must prepare a nancial report
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Compliance checks sum up key danger areas and direct readers to websites that offer detailed self-assessment content. Key terms with a specic legal meaning are highlighted in the text. All terms and denitions are consolidated in the Glossary at the end of the text. Websites point students to legal and business websites relevant to the chapter. This gives students the opportunity to explore the web and use it for research. It also guides students to the website for this book at <www.pearsoned.com.au/vickery>.
Mazda Australia Pty Ltd & Ors v ASC (1992)
Audit and audit report

With some exceptions, all companies that must prepare nancial reports are required by s 301 to have the nancial reports audited by a registered company auditor, and to obtain an audit
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XXII
In ACCC v Kyloe Pty Ltd [2007] FCA 1522 the court decided that a drink machine distribution arrangement and trade mark licence was not a franchise agreement as it did not incorporate the system or marketing plan determined, controlled or suggested by the franchisora necessary element of the denition in clause 4 of the Code. The ACCC failed in its action for breach of the Code and was ordered to pay Kyloes legal costs. Requirements of the Code prior to the making of a franchise agreement Full disclosure. Prospective franchisees must be given a disclosure document that includes details of directors and associates, their business experience, commissions they have been paid, trademarks, franchise territory details, and nancial statements including the last two years of prot and loss accounts and balance sheets. A full account of any marketing or cooperative fund, including an audit report, must also be included. The document must also clearly set out the obligations of franchisor and franchisee. It must not contain any promotional material. Following amendments to the Code on 1 March 2008, details of the history of the franchise site and territory (including why the previous franchisee ceased to operate) must also be provided to the franchisee.
ACCC v Kyloe Pty Ltd [2007]
Margin notes focus students attention and provide a running reference to the main points within the chapter. Examples are ctitious and have been written to illustrate points of law.
TABLE 5.8
ENTITY
Disclosure document must be provided to the franchisee
Legislative requirements for record keeping, nancial reporting and audits

REGISTERS AND MINUTE BOOKS FINANCIAL RECORDS FINANCIAL REPORTING AGM AUDIT LODGE
Ketchell CASE v Master of Education Services Pty Ltd [2007]

Failure to comply with Code makes franchise agreement illegal. The franchisor failed to obtain the franchisee a statement in accordance with clause 11(1) of the Code. Under this clause the franchisor must obtain a written statement that the franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code, before entering into the agreement. The NSW Supreme Court of Appeal held: Non-compliance with clause 11(1) made the franchise agreement illegal and unenforceable. As a result the franchisor was unable to claim money owed to it by the franchisee under the franchise agreement. Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161
Sole trader Partnership
No legislative requirement for record keeping, nancial reporting or audit other than compulsory records under tax, workers compensation, workplace or industry specic laws.
Corporations Act 2001 (Cth) Public company Large proprietary company Small proprietary company Yes Yes Yes Yes Yes Yes Yes Yes Only if directed by ASIC or members* Yes No No Yes Yes Only if directed by ASIC or members* Yes Yes No*
Associations Incorporations Act 1984 (NSW) Incorporated Association Trust Yes Yes Yes Yes No Yes
EXAMPLE
Non-disclosure of vital information by a franchisor
The Will Writers Guild Pty Ltd sold will-writing franchises across Australia for $65 000 per territory. Its directors failed to disclose that the business could only be carried on by a qualied legal practitioner. They were ned $105 000, ordered to pay over $360 000 in compensation and permanently restrained from offering franchises that did not comply with the Franchising Code. ACCC Media Release, 14 April 2003
No legislative requirement for record keeping, nancial reporting or audit, other than compulsory records under tax, workers compensation, workplace or industry specic laws.
* Or the company is controlled by a foreign company and is not consolidated in that companys nancial statements.
Franchisees must receive the disclosure document at least 14 days before they enter or renew the contract or pay a non-refundable deposit. They are also entitled to a seven-day cooling-off period. Proof of independent advice. The agreement is not valid unless the franchisor receives a signed statement from the franchisee saying they have received or have waived independent advice from a legal, business or accountant adviser. Copies of a retail lease must be provided if the landlord is the franchisor or an associate of the franchisor.
Disclosure document 14 days before contract
Summaries provide a concise picture of what the chapter covered.
SELF QUIZ

TRUE FALSE
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
23 The senior ofcers of an unincorporated association could be personally
liable for its debts and legal obligations.

24 An incorporated association has limited liability. 25 An incorporated association can return prots to members. 26 A business name must be displayed at each place of business. 27 If a business name is registered in Queensland it is automatically registered
in all jurisdictions.
28 Legal compliance applies only to large businesses.
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Compliance
Compliance refers to an organisations obligations to comply with the law. This involves identifying the law that applies to the business and the areas of risk, and then developing a compliance program. There is no generic compliance program as each organisations circumstances are different. Australian Standard AS 3806 has been developed to assist business in developing compliance programs. Regulatory compliance issues on starting a business include compulsory registrations (including taxation), recording keeping, business licences and permits, and local government approvals.
SUMMARY
Guidance questions and answers illustrate how the law is applied in everyday situations.
The main types of business entities or structures are: sole trader partnership company
GUIDANCE QUESTIONS
Question 1
Allan Megson is unmarried and has no living family. He has dedicated the past ten years to his soletrader computer-software business that specialises in software to control pattern-making equipment. Allan realises that his long-term success now depends on attracting and keeping the right employees. Advise Allan which business structure would best serve his purpose. ANSWER Allan has three main options. 1. To form a partnership with one or two people with the types of skills Allan lacks. Allans personal assets would be at risk from any bad debts or unwise decisions made by the other member(s) of the rm. 2. To form a trust. A trust (discretionary or xed) would not attract and keep employees and Allan does not have family members to whom he could distribute the prots of the business. 3. To form a company. Allan could offer shares to employees, which would grow in value as the company prospered. Later, Allan could raise capital by selling shares. Provided Allan remains the majority shareholder, he can control who is selected for key management positions. A company is more expensive to establish than a partnership and is subject to more restrictions and scrutiny by ASIC. CONCLUSION Both a partnership and a company would suit Allans plans fairly well. The company provides better long-term advantages and allows him to protect his personal assets from creditors should his business fail. However, he will probably be required at times to give a personal guarantee to lenders, which will, once more, place his personal assets at risk.
could seek nes (for breaches apart from ss 52 and 51AA) and orders such as corrective advertising, injunctions and compliance programs. See ACCC v Top Snack Foods (1999).
REVIEW QUESTIONS
Sole traders
1. List the key characteristics of a business operated on a sole-trader basis. 2. Compare and contrast the advantages and disadvantages of a sole trader.
Partnerships
3. List the key characteristics of a business operated as a partnership.
Question 2
Allan Megson wants to convert his sole-trader software business into a company, but he is not sure what kind. He would like to include his own name in the company name and wonders if he should register a separate business name for trading purposes. Advise Allan. ANSWER Allan should form a proprietary company. He can name himself as the sole shareholder and director and thereby avoid unnecessary meetings and paperwork. If the company qualies as a small proprietary company, it will not have to lodge an audited nancial report with ASIC.
Review questions allow students to consolidate their learning.
4. What are the advantages and disadvantages of a partnership? Give examples.
Companies
5. Dene a company and list its advantages and disadvantages. Give examples. 6. What is the meant by the corporate veil? Describe three situations where the courts may lift the
veil to establish whether company members have breached common or statutory laws.
7. What are the differences between a small and a large proprietary company? How many sharehold-
ers and directors are required to form (a) a private company and (b) a public company?
Duties of directors
8. List and briey explain six common law or statutory duties of a director. 9. Megson Software Pty Ltd appointed Nicholas Jones as a director responsible for marketing.
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Nicholas persuaded customers of Megson Software to take their business to NPJ Electronic Patterns, which Nicholas controls through his parents. What common law or statutory duties has Nicholas breached? What remedies are available?
Trusts
15. Dene a trust and list its key characteristics. 16. Give three examples of occasions when it is likely a trust would be created.
Raising capital
10. Explain the ways in which companies can raise capital by (a) equity nance and (b) debt nance. 11. Explain the differences between xed charges and oating charges. Give an example of each.
Associations
17. Are members of an association liable for the debts of the association? Why or why not? 18. David operates a basketball club for underprivileged teenagers in an inner-city suburb. Each player
Franchises
12. Dimitri, a retired school teacher, is interested in becoming a franchisee with Perfect Score Educa-
pays a membership fee or a service club pays it. The treasurer disappears with all the funds, leaving the club with debts of $12 000. Who is liable for this debt? Would your answer be different if the club was an incorporated association?
tion Centres Pty Ltd which runs a high school tutoring business. The franchisor claims Dimitri will earn $60 000 per year within two years. Advise Dimitri about what should be included in a franchise agreement and how he can best protect his interests.
13. See the facts in Question 12. Dimitri entered a franchise agreement with Perfect Score. After one
Business name protection

19. How could the names of the following types of businesses be protected?
(a) a sole trader; (b) a partnership; (c) a company.

20. Greg the Moose promotes kick boxing in Queensland under the registered business name of Kick
year in business Dimitri has learned that Perfect Scores prot projections were highly inated and it was badly in debt when Dimitri bought the franchise. What remedies are available to Dimitri and what are his chances of success?
14. Explain, giving examples where possible, what possible conicts could arise between a franchise
Start. Greg wants to form a company using the same name. When he searches the ASIC website for company and business names he nds the following registered names. (a) Kick Start, a business name registered in Victoria that is used by a kick-boxing promoter; (b) Kick Starter, a business name registered in New South Wales; (c) Kick Static Pty Ltd, a company name registered to a company based in Western Australia. Explain, giving reasons, whether each name could prevent Greg from registering his preferred company name.
agreement and Part IV of the Trade Practices Act.
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COMPLIANCE ACTIVITIES
21. Remember Marley and Bella from the introduction to this chapter? Bella will operate from home as
a sole trader under the name, Camelot Financial Planners. Marley has registered a proprietary limited company with his friend, Conor, and bought into the real estate franchise known as LJ Winger. They employ a receptionist and one salesperson. (a) Do a search of the National Names Index at <www.asic.gov.au> and nd out whether the name Camelot Financial Planners is available. (b) Make a checklist of any (i) licences and permits, (ii) industry codes of conduct, and (iii) basic tax registrations that may apply to each business. (c) Bella has looked at the publication, What Books and Records Should My Company Keep? at <www.asic.gov.au> (see Compliance Check). Make a list of the records she must set up in order that Marleys company complies with s 286. 22. Marley and Connor are having problems with their franchisor LJ Winger. They claim Winger: refuses supply of essential products to them; competes with them within their franchised territory; requires them to buy items from Winger that they could buy cheaper elsewhere. Locate the Best & Fairest compliance training package on the website of the ACCC. Go to Module 6 and then answer the following questions:
Compliance activities offer a range of selfdirected assessments, equally suitable for groups and individuals, that emphasise practical and attainable skills.
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BUSINESS ENTITIES
3
153 201 230
part
5 6 7
Business structures Agency law Partnerships and joint ventures
BUSINESS STRUCTURES
5
LEARNING OBJECTIVES
After successfully completing this chapter, you will be able to: state the characteristics of sole traders, partnerships, limited liability companies, trusts, incorporated associations; outline the legal requirements for each type of organisation and the conditions imposed by law on the individuals who comprise the organisation; identify the extent of liability of the parties involved in each type of business organisation; explain the reasons for, and the importance of, business name registration and the legal restrictions placed on the use of a business name; identify regulatory compliance issues on starting a business.
Chapter
SETTING THE SCENE

Marley is married to Bella, and they have two childen. Marley is a licensed property agent and Bella is an accountant. Conor, who has various business qualications, is their best friend. The three friends are thinking about going into business for themselves. Marley is talking about buying into a real estate franchise, which also interests Conor. Bella likes the idea of a homebased investment advice business. Each is keen to learn something about the choice of business structure and the legal issues that may arise.
153
When setting up a new business or taking over an existing one, there are six main business structures to choose from: sole trader partnership company trust franchise association. This chapter outlines the nature of each structure, and its relative advantages and disadvantages. We start with a sketch of the factors to consider when choosing a structure and, as the choice of structure dictates how the law will affect the business, we nish with an outline of some basic legal compliance issues. Supplementary notes and cases, as well as links to the websites referred to in this chapter, are also provided.
CHOOSING A BUSINESS STRUCTURE

Some of the factors to consider when choosing the structure are: Liability: the extent of the personal liability of the owner to third parties, and capacity to protect personal assets. Management and control: the extent to which the owner desires to retain managerial and administrative control of the business, and the knowleldge, skill and experience of the owner. Capital: the nancial resources available to the business including start-up capital, capacity to raise nance, availability of assets to use as security. Prots and taxation: the ownership and division of prots, calculation of and different rates of tax, legitimate tax minimisation, income splitting, superannuation contributions, payroll and other state taxes. Fees and costs: set-up fees and ongoing costs. Restructuring/retirement/admission of extra people: exibility to restructure in changing circumstances, retire and/or admit new people, saleability of the business. Family needs and estate planning: distribution of prots, income splitting, impact of structure on eligibility for social security or other government support, ease of transferring ownership interests, succession (business bequeathed in a will). Regulation: complexity of regulation, costs of compliance, penalties for breach, and extent of mandatory disclosure and reporting affecting privacy of business. The business owner is not locked into the structure chosen for the life of the business. The structure can be changed as the business grows or changes. A successful sole trader might, for instance, register a company to reduce taxation or gain access to capital for expansion. Change of business structure might, however, raise other legal issues such as stamp duty and capital gains tax liabilities. A comparative table of the advantages/disadvantages of the different business structures can be found on the ABL website.
Sole traders own and operate their own business
SOLE TRADERS
Sole traders are people who own and operate their own business enterprise for prot.
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About 95% of businesses in Australia are small businesses and most of them are sole trader operations. They cover every type of business, occupation and profession. This form of business ownership operates under the control and management of one person, though the proprietor can have employees like any other type of business structure. For legal purposes there is no distinction between the owner and the business. On the death of the owner, the business may be sold by the executor of the sole traders will, but this may be difcult if all goodwill attaches to the owner. The advantages and disadvantages of the sole trader business structure are outlined in Table 5.1.
TABLE 5.1
ADVANTAGES
A sole traders liability is unlimited
Advantages and disadvantages of the sole trader

DISADVANTAGES
1. Relatively easy and cheap to set up and run 2. Retains ownership and control 3. Keeps all prots 4. Maximum privacy 5. Flexibility in changing business 6. Legal compliance relatively simple
Unlimited liability Lack of management skills or expertise Limitation of business life Limited access to funds Inability to split income with family Limited opportunity for tax minimisation
PARTNERSHIPS
A partnership is the relationship that exists between two or more people carrying on a business in common with a view to making a prot. Partnership is the business structure frequently used by some professions such as accountants and lawyers, and is also popular with small family businesses. The partners share the prots and losses according to an agreed percentage. Disputes can be substantially reduced by a clear, detailed written partnership agreement. Where there is no clear arrangement between the partners, the Partnership Act in each state and territory regulates the rights and obligations of the partners. A partnership is not a separate legal entity, and all assets of the partnership are owned jointly by the partners. Each partner is fully liable to third parties for debts and liabilities of the rm (despite any agreement among the partners). Each partner is a principal and an agent for the other partners, and therefore they are equally liable for each others business conduct. The advantages and disadvantages of a partnership are outlined in Table 5.2. Partnerships are covered in detail in Ch 7.
TABLE 5.2
ADVANTAGES
Partners should have a written partnership agreement
Partners are liable for each others business conduct
Advantages and disadvantages of the partnership structure

DISADVANTAGES
1. Relatively cheap and easy to set up 2. Sharing of responsibility 3. Additional assets, expertise and input 4. Relative exibility to make changes 5. Less stringent legal compliance
Unlimited liability Difculties in transferring ownership No continuity when the partners split Potential for conict Limits on maximum number of partners
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SELF QUIZ
1 2 3

TRUE ^ ^ ^ FALSE ^ ^ ^
If a sole trader dies the business comes to an end. A partners personal assets cannot be taken by a creditor of the partnership. Partners are liable for each others business conduct.
COMPANIES
A company is a separate legal person
Reforms by Financial Services Reform Act 2001
The Small Business Guide summarises rules for private companies
A company is a separate legal person with all the legal capacity of an individual (that is, a human person). This means the company does business in its own right, and it holds assets, borrows money and enters into contracts in its own name. Also, unlike a sole trader or a partnership, a company has a continuous life. There is no limit on how long a company can carry on operating, provided it pays its creditors and complies with its major statutory requirements. The owners of the company are the members (shareholders) and the company is managed by the directors. In small business, it is not unusual for the members and directors to be the same people. There are usually greater legal and taxation compliance issues involved in using the company structure. This drawback, however, may often be offset by the advantages offered by companies, such as tax benets, limited liability and asset protection. In Australia companies are governed by the Corporations Act 2001 (Cth) and the Australian Securities & Investment Commission (ASIC) administers and enforces the Act. In recent years there have been numerous amendments to the legislation aimed at reforming and modernising corporate regulation. The most recent reforms stem from the Corporate Law Economic Reform Program (CLERP) which was initiated in 1997 as a program for simplifying company operations and imposing higher standards of corporate governance. The Corporations Act was substantially amended in 2001 by the Financial Services Reform Act 2001 and related legislation. This established a standard of conduct for nancial sevices providers and a new disclosure regime. It also brought various nancial services under the one licensing scheme. All businesses that offer nancial services must now hold an Australian Financial Services Licence. In 2004 the CLERP 9 package extensively expanded the rules relating to audit and corporate disclosure. A very useful resource is the Small Business Guide in Part 1.5 of the Corporations Act. This guide summarises the main rules in the Act that apply to proprietary companies limited by sharesthe most common type of company used by small business. The guide gives a general overview of the law as it applies to those companies and directs readers to the applicable sections in the Act. A detailed examination of the Corporations Act is beyond the scope of this book, but supplementary material, case studies and links are provided on the ABL website. The advantages and disadvantages of the company structure are outlined in Table 5.3.
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TABLE 5.3
ADVANTAGES
Advantages and disadvantages of the company structure

DISADVANTAGES
1. Separate legal entity 2. Limited liability of members 3. Continuous life 4. Transferability of shares 5. Taxation benets 6. Easier access to capital
Signicant set-up and maintenance costs Limited management role for members Control of the company can change Strict reporting and disclosure requirements Penalties imposed on defaulting ofcers More onerous legal compliance issues
Concept of incorporation
The principle that a company is a separate legal person is a cornerstone of company law. This was rmly established in the landmark case of Salomon v Salomon & Co. Ltd in 1897. A veil of incorporation or corporate veil is said to separate the company from its shareholders, ofcers and employees. This veil means the shareholders and directors should not be held personally responsible for the debts of the company. Once a company is registered, the courts usually do not look behind the veil to enquire why the company was formed or who really controls it.
Salomons Case [1897] CASE

A company is separate from the person who controls it. Aaron Salomon sold his sole-trader boot-making business to Salomon and Co. Ltd, a limited company in which he was the major shareholder. Members of his family owned the remaining shares. As part of the purchase price Salomon received a debenture (see p. 165), which made him a secured creditor to his own company. Salomon continued to run the business. When the company went into liquidation during the depression of the 1890s, the liquidator argued that Salomons debenture should not be paid out before the unsecured creditors. Since Salomon controlled the company, the company should be treated as his agent, and its debts were effectively Salomons personal debts. The House of Lords held: Salomon and the company were separate legal persons according to the law. Even though Salomon controlled the company, the company was not his agent. The company operated the business in its own right, and consequently Salomon was not personally liable for the companys debts. He had the right to be paid ahead of the unsecured creditors. Salomon v Salomon and Co. Ltd [1897] AC 22
Despite criticism of the decision in Salomons Case, the principle that a company is a separate person has been conrmed and applied in many important cases, including Lee v Lees Air Farming Ltd [1961], which is explained on the next page. Lifting the veil under common law In some exceptional circumstances such as fraud or where a company is established to avoid an existing obligation, the courts will lift or pierce the corporate veil. This means the court
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Lee v Lees Air Farming Ltd [1961] CASE

A company can employ its main shareholder and director. Mr Lee was employed to y crop-duster planes in New Zealand by a company in which he was a director and the controlling shareholder. When he was killed in a plane crash the Workers Compensation Board claimed that Lee had effectively been self-employed and refused to pay compensation to his wife, Catherine. The Privy Council held: Since Lee and the company were separate legal persons he could have a dual role as director and an employee of his company. Therefore, his wife was entitled to compensation. Lee v Lees Air Farming Ltd [1961] AC 12
Gilford Motor Co v Horne [1933]: forming a company for fraudulent purposes
Artedomus v Del Casale [2006]
will treat the company and a director and/or shareholder as the same person. See, for example, Gilford Motor Co v Horne [1933] Ch 935. Hornes employment contract with Gilford Motor Co provided that he would not solicit (contact) any of their customers if he left their employment. Horne resigned and began working for a rival company run by his wife. The court looked behind the veil and found that Horne was its true controller. It granted an injunction to restrain Horne as the company was competing with Gilford Motors. The principle from Gilford Motor Co v Horne was applied in the recent case of Artedomus v Del Casale [2006] NSW 146 where the NSW Supreme Court found that the defendant had used a company as a cloak or sham to breach his contract with the plaintiff. See the case study on the ABL website. Lifting the veil under statute lawinsolvent trading Several provisions in the Corporations Act have the effect of lifting the veil, most importantly s 588G which imposes personal liability on directors for insolvent trading by the company. A director will be liable if he or she fails to prevent the company incurring a debt when there are reasonable grounds for suspecting the company is insolvent. Directors have a defence if they can prove they (i) reasonably believed the company was solvent, or (ii) expected on the basis of information provided by a competent and reliable person that the company was solvent, or (iii) did not take part in management because of illness or some other good reason, or (iv) they took reasonable steps to prevent the company incurring the debt: s 588H. Cases on insolvent trading Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827 Mrs Morley was the director of a family company run by her son. She took no part in the management apart from signing the annual returns. When the company became insolvent she was made liable for its debts as she had indirectly approved the insolvent trading. DFC of T v Clark (2003) 21 ACLC 1063 In 2003 the New South Wales Court of Appeal conrmed that a director, such as the wife of the managing director of a family company, could not escape liability for insolvent trading although she took no part in company affairs and relied on advice from her husband who was the active director.
Directors can be personally liable for the insolvent trading of their company
Statewide Tobacco Services Ltd v Morley (1990)
DFC of T v Clark (2003)
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ASIC v Plymin & Ors (2003) 21 ACLC 700 John Elliott, a former non-executive director of Water Wheels Pty Ltd, was liable for the companys insolvent trading. Elliott unsuccessfully argued he had relied on information supplied to him by the managing director. Given his extensive experience as a director and business person, it was not reasonable that he had relied on the skill and expertise of the ofcers who ran the company. Elliott was disqualied from managing corporations for four years, ned $15 000 and ordered to pay $1.43 million compensation.
ASIC v Plymin & Ors (2003)
LAW IN ACTION
Insolvent trading: bad odds for directors
Once a case goes to court the odds are stacked against the director. Of the 103 insolvent trading cases from 1961 to 2003, 75% resulted in ndings against the directors. Of these companies, 91% were private companies. The median amount of compensation ordered was $110 600 and the largest was $96.7 million. See Insolvent trading odds stacked against directors, 16 June 2004, Clayton Utz (law rm) <www.claytonutz.com>.
LAW IN ACTION
Phoenix companies: fraudulent misuse of the corporate veil
Phoenix activity involves individuals using a company to accumulate large debts, then go into liquidation only to rise from the ashes and carry on business through a newly formed company. In a media release in January 2007 ASIC announced it had banned 40 directors who have engaged in repeat phoenix activity for a total of 144 years. Phoenix activity, which amounts to tax fraud, can also result in lengthy prison terms for directors.
Formation of a company
The Corporations Act provides a one-step procedure for registering a company by lodging a form with ASIC. The form sets out certain information, including details of every person who has consented to be a member, director or secretary of the company and the address of its proposed registered ofce. The company comes into existence when ASIC issues a Certicate of Registration and gives the company an ACN (a nine-digit Australian Company Number). See the ASIC publication How to Register a Company on the ABL website.
A company comes into existence when ASIC issues a Certicate of Registration
COMPLIANCE CHECK
Marley has just registered his new family company. ASIC (the company law watchdog) now expects him to get to know his legal obligations. Compliance is not optional. See ASIC publications, Get to Know Your Legal Obligations and Your Company and the Law at <www.asic.gov.au> or go to the ABL website.
Types of companies
Most companies can be classied as shown in Figure 5.1.
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FIGURE 5.1
Types of companies
By liability Extent of members liability
By membership Private or public?
Limited by shares
Limited by guarantee
Unlimited
No liability Large
Proprietary
Public
Small
The company limited by shares is the most common form of company
Companies by liability There are four main types of companies in this classication. 1. A company limited by shares. The liability of members for the companys debts is limited to any amount unpaid on their shares. This is the most common type of company. 2. A company limited by guarantee. The liability of members is limited to the amount each one has agreed to contribute if the company is wound up. NRMA Motoring & Services is a company limited by guarantee, as is the Australian Society of Certied Practising Accountants. Non-prot bodies, such as sporting associations with signicant assets, may also form this type of company. Smaller organisations are more likely to form an incorporated association (see p. 181). Unless exempted by ASIC, a limited liability company must include Limited or Ltd in its name. 3. Unlimited companies. The members have no limit on their liability. Unlimited companies have been used as mutual funds (investment companies) and professional rms where the rules of the profession do not permit limitation of liability. Otherwise unlimited companies are generally not used for trading purposes. 4. No liability companies. The members have no liability to pay calls made on their shares, but the shares can be forfeited. Only a mining company can be a no liability company and it must have No Liability or NL in its name. Public and proprietary companies Companies are formed for many different purposes and exist in many different sizes. At one end of the scale is the small family proprietary company (which may be a one person company). At the other end are large public companies engaged in large-scale trading operations. The shareholders in these large companies represent a cross-section of the community and often include institutional investors such as nance corporations. 1. A proprietary company must: be limited by shares (or be an unlimited company with a share capital); have at least one shareholder (but no more than 50 non-employee shareholders) and one director, who may be the same person; not do anything that would require disclosure to investors (except in limited circumstances). This means there are restrictions on the company raising funds from the public. The Act distinguishes between large and small proprietary companies for nancial reporting purposes. A company is a small proprietary company, and has reduced
PART 3 Business entities
Proprietary companies need only one shareholder and one director A proprietary company must not engage in activity that requires a prospectus
Distinction between small and large proprietary companies for reporting purposes
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reporting requirements, if it satises at least two of the following at the end of its nancial year: gross operating revenue is less than $25 million; consolidated gross assets are less than $12.5 million; group employees total less than 50 full-time equivalent employees. 2. A public company is any company other than a proprietary company. A public company: need not have a share capital, so it may be a company limited by guarantee; must have at least one member (with no upper limit) and at least three directors; can raise funds from the public (subject to the disclosure provisions in the Act); may be listed on the stock exchange (not all public companies choose to be listed). A listed company is a public company whose shares and debentures (and other securities) can be bought and sold on the stock exchange. The company enters into an agreement with the ASX and must comply with the ASX listing rules. There are also special rules in the Corporations Actfor example, a listed company is a disclosing entity for the purposes of the Act and must prepare a nancial report and a directors report each half year. The special rules for listed companies are not detailed in this chapter.
A public company must have at least one member and three directors
Internal governance rules

Reforms in 1998 abolished the requirement for a company to have a formal constitution and allowed a company instead to rely on replaceable rules. These rules are set out in the Act and relate to such matters as the appointment and power of directors, inspection of books, directors meetings, members meetings, members rights and transfer of shares. A company may, if it chooses, adopt a constitution which can modify or replace the replaceable rules, or it may rely entirely on the rules to regulate its internal management. The replaceable rules do not apply to sole director/shareholder proprietary companies. The replaceable rules and constitution have the legal effect of a contract between the company and the members, member and member, and the company and its ofcers. The constitution can be altered by passing a special resolution, but alterations that are oppressive or made for an improper purpose under common law are invalid. Some companies still require a constitution: for example, no liability mining companies and a company limited by guarantee that wishes to omit Limited from its name. Public companies wanting to list on the ASX must adopt a constitution that is consistent with the ASX listing rules.
Companies may choose a constitution or the replaceable rules. These rules do not apply to sole director/ shareholder Pty Ltd companies
Directors
Who is a director? Under the denition in the Corporations Act, a director is not just a person appointed to that role. A person who has not been formally appointed will also be regarded as a director if they act in the position of director, or the directors act in accordance with their instructions. These people are sometimes called de facto or shadow directors. In any company there may be different types of directors, although the Act does not distinguish between directors in relation to duties and management of the company. One of the main distinctions is between executive directors and non-executive directors. Executive
Business structures CHAPTER 5
Executive directors are full-time employees
161
The company secretary is the chief administrative ofcer
directors are employees of the company and devote their working time to managing the company. A non-executive director is not an employee and attends board meetings on a part-time basis. Non-executive directors are sometimes called independent directors and in Australia it is considered good corporate governance for directors to be non-executive and independent, especially in listed companies. See Roles, Duties and Responsibilities <www.companydirectors.com.au>. All public companies must have a company secretary. A person can be both a director and a secretary. The secretary is responsible for important administrative and reporting functions, while the directors are responsible for management of the company. Directors power of management Company constitutions (and the replaceable rules) give to the board of directors the power to manage the business of the company. The directors are given wide powers to exercise all the powers of the company, except any powers that are reserved to (left with) the members by the Act or the companys constitution. Because of their extensive powers, the law imposes duties on directors, including the duty to exercise their powers for a proper purpose. The members cannot override a management decision of the board if the decision comes within the power of the board. If the members are dissatisifed with management, they may be be able to alter the companys internal governance rules to restrict the directors powers. In public companies the members can remove directors from ofce. If directors act improperly and control the majority of votes at the general meeting, the members might obtain a remedy under the oppressive conduct provisions. See pp. 167168. Duties of directors Directors and other senior executives are in a duciary relationship with the company. This means they are expected to act in the best interests of the company and owe a common law duty of loyalty and good faith. This can be divided into four specic duties: the duty to act in good faith (honestly) in the interests of the company; the duty to act for a proper purpose; the duty to retain discretions; the duty to avoid conicts of interest. Under the common law, directors also owe: the duty of care, skill and diligence. Executive directors may also owe specic duties under their contracts with the company. The companys remedies include damages, injunctions, rescission of contracts and accounting to the company for prots made from the directors breach of duty. The Corporations Act also imposes duties on directors and other ofcers, including the company secretary and senior executives. The main statutory duties are: the duty to act with reasonable care and diligence: s 180; the duty to act in good faith in the best interests of the company and for a proper purpose: s 181; the duties not to make improper use of position or information: ss 182 and 183, the duty to disclose any signicant personal interest in a matter that relates to the affairs of the company (applies only to directors): s 191; the duty to prevent insolvent trading (applies to directors only): s 588G.
The company delegates management power to the board of directors
Directors owe duciary duties to the company
Statutory duties of directors
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To some extent these duties overlap with the common law duties. The statutory duties, however, are enforced by ASIC. An action for breach of a statutory duty may result in: Civil Penalty Ordersdisqualication from management of companies, civil penalties up to $200 000 or compensation to the company. The standard of proof in a civil penalty action is the balance of probabilities. Criminal Penaltiesif dishonesty is found to be a factor in an ofcers breach of any of the duties to act in good faith, for a proper purpose and not to misuse the ofcers position or information, then the ofcer has committed an offence: s 184. Similarly, if a directors failure to prevent the company from trading while insolvent is dishonest, the director has committed an offence: s 588G(3). Criminal penalties include nes of up to $220 000 and/or imprisonment for up to ve years. The issue of directors duties and liabilities has gained importance over the past few years with the high-prole cases around the collapse of such companies as HIH Insurance Ltd and One.Tel Limited. In separate cases during 2005, Rodney Adler and Ray Williams were each sentenced to four and a half years imprisonment after pleading guilty to several criminal charges brought by the Director of Public Prosecutions (DPP). The respective charges related to their conduct as directors of HIH and in each case included a charge under s 184: ASIC v Adler [2005] NSWSC 274, ASIC v Williams [2005] NSWSC 315. In ASIC v Rich (2003) 21 ACLR 672 civil proceedings were brought against the executive directors of One.Tel (Jodee Rich, Brad Keeling and Mark Silbermann), for breach of the statutory duty of care and diligence under s 180(1) of the Act. Proceedings were also brought against the non-executive chairman, John Greaves, with ASIC arguing that Greavess duties were greater than those of the other non-executive directors. ASICs views on the duties of the chairperson are outlined in the media release, Landmark decision on chairmans duties in ASICs One.Tel le <www.asic.gov.au>. In September 2004 ASIC reached an agreement with Greaves, and the court ordered that Greaves be prohibited from managing a company for four years, pay compensation of $20 million to One.Tel and pay ASICs costs of $350 000. As part of the agreement, Greaves admitted he failed to ensure that he and the board of One.Tel properly monitored management and were aware of the true nancial position of the company. Defences of directors Under the business judgment rule in s 180(2) directors or other ofcers will satisfy the statutory duty of care and diligence regarding a decision if they can prove that they: made a judgment in good faith (honestly) for a proper purpose; did not have a material personal interest in the subject matter; informed themselves about the subject matter to the extent they reasonably believed to be appropriate; and rationally believed the decision to be in the best interests of the company. This rule, which was only introduced in 2000, is consistent with the long-standing common law view that courts should leave business judgments to business people.
Civil Penalty Orders and Criminal Penalties for breach of statutory duty
ASIC v Rich (and Greaves) (2003) Duties of company chairman
A director cannot be found to have broken the law because a company loses money if the director was using reasonable commercial judgment.
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LAW IN ACTION
Business judgment rule: test case
In early 2007 ASIC began civil proceedings against the former and current directors and former executives of James Hardie for breach of the duty of care (s 180). ASIC is asking the court to consider imposing nes and banning these individuals from managing companies. Former HIH directors Rodney Adler and Ray Williams were banned, as was former Telstra director Steve Vizard. In these cases, however, the directors acted dishonestly or misused their positions. In the case against the James Hardie directors negligence alone is alleged. See James Hardie leMedia Releases <www.asic.gov.au>.
ASIC v Adler (2002) CASE

In 2000, $10 million was transferred from a subsidiary of HIH Insurance Ltd to a unit trust controlled by Rodney Adler, who was a non-executive director of HIH. The money was used to buy $4 million of HIH shares (to prop up their value), acquire unlisted investments from an Adler-associated company and make loans to Adler-associated companies. After the collapse of HIH, ASIC took action against Adler, Williams (HIH chairman and chief executive ofcer) and Fodera (executive director and nance director of HIH and the subsidiary involved) for breaches of ss 180183. All three relied on the business judgment rule defence. The Federal Court held: All three directors had breached their duties. Adler was personally liable for 101 breaches, including: failing to act with reasonable care and diligence (s 180); acting without good faith (s 181); and misusing his position to gain a personal advantage or to cause detriment to the company (s 182). Re penalties: Adler and Williams were ordered to repay civil penalties of $8 million in total to the companies involved (now in liquidation), ned $900 000 and $250 000, respectively, and disqualied from managing a company for 20 and 10 years, respectively. Re business judgment rule: Justice Santow rejected their business judgment rule defence on several grounds, including: Williams as a major HIH shareholder had a material personal interest in encouraging the purchase of its shares; Foderas failure to declare the transfer to the HIH board was an omission, not an act, and therefore did not qualify for consideration under the rule. ASIC v Adler, Williams & Fodera (2002) 42 ACSR 80
SELF QUIZ

TRUE ^
^ ^ ^ ^ ^ ^ ^
14 Companies come into existence when they are registered by ASIC. 15 The corporate veil separates the company from its shareholders,
FALSE ^
^ ^ ^ ^ ^ ^ ^
directors and other ofcers.

16 The corporate veil may be lifted if a company is formed so that someone
could avoid legal obligations.

17 Directors are personally liable for the companys debts. 18 Every company must have a company secretary. 19 Only directors owe duciary duties to the company. 10 A public company must have at least three directors and one shareholder. 11 A proprietary company must have at least one director and one separate
shareholder.
164
Companies can raise capital (funds) through equity nancing or debt nancing.
Equity nancingshares
A company can raise funds by selling shares. Shares can be issued fully paid or partly paid, and the directors determine the issue price. A shareholder is a member of the company, and the capital contributed by the members is referred to as equity capital. Many companies choose to issue shares of two classesordinary shares and preference shares. Ordinary shareholders typically have a right to vote at general meetings, to receive a dividend after preference shareholders, to be repaid their capital on a winding up (after all other claimants have been paid) and to share in any surplus assets on a winding up (after all other claimants have been paid). Preference shareholders usually have a right to a xed dividend (dividend at a xed percentage of the issue price of the shares) and to be repaid their capital ahead of the ordinary shareholders on a winding up, but they have only limited voting rights and no right to share in any surplus on a winding up. A company may also issue redeemable preference shares. These are shares the company can buy back from the shareholders at a specied date. Maintenance of capital rule and dividends The maintenance of capital rule, established in Trevor v Whitworth (1887), prohibits a company from reducing its equity capital while the company is in operation. The Corporations Act s 254T, which states that dividends may only be paid out of prots of the company, is a modern application of this rule. There are some circumstances where a company is permitted to reduce its capital, for example, the provisions dealing with permitted share buy-backs. Transfer of shares Shares are personal property and, subject to the companys constitution, they may be sold, bequeathed (left in a will) and used as security like other items of property. The Corporations Act no longer requires that a proprietary company have a restriction on the right to transfer shares, but many proprietary companies still require approval of the board of directors to a transfer of shares.
Rights of shareholders
Two classes of shares ordinary shares, preference shares
Dividends may only be paid out of prots
Debt nancing
For many companies the most important source of nance is money borrowed from nancial institutions, members of the investing public or its own shareholders. The capital a company raises by borrowing is known as debt or loan capital. Debentures Companies can issue debentures. The common law denes debenture as any document which is evidence of a debt. The Corporations Act no longer uses the term document, instead dening a debenture as a legally binding undertaking by a company to repay a debt. This takes into account electronic commerce where there may be no document. Under both denitions, a debenture may be secured or unsecured. Secured means that the debenture holder (creditor) has rights over specic assets of the borrower company. If the company defaults in repaying the loan, the debenture holder can seize the assets and sell them to recover the amount of the loan. Unsecured means that if there is a default, the
A debenture may be secured or unsecured
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A charge is a security
A xed charge applies to specic assets, such as land A oating charge oats over a class of assets, such as stock
debenture holder can sue the borrower company for breach of contract, but cannot directly seize the companys assets. In company law, the term charge is used to describe a security given by a company over its assets in favour of a debenture holder (creditor). A charge may be a legal mortgage or something less than this. Charges are either xed or oating. A xed charge attaches to specic assets, for example, a charge over land, plant and equipment, or motor vehicles. The borrower company cannot dispose of the assets without the lenders consent. A oating charge does not attach to specic assets but oats over a particular class of assets such as stock-in-trade, inventory, or raw materials. The benet of a oating charge is that security can be given over assets that are constantly changing, and the company is free to dispose of the assets in the ordinary course of business. If the company defaults under the terms of the loan, the oating charge is said to crystallise. This means the charge stops oating and becomes xed on all the assets within the class of assets that is the subject of the charge. Once crystallisation occurs, the company is unable to dispose of the assets without the lenders consent.
EXAMPLE
A oating charge
Racing Motors Pty Ltd (RM) borrows $100 000 from Eversure Finance Ltd (EF) and the loan is secured by a oating charge over the cars owned from time to time by RM. If RM defaults on the interest payments or allows the total value of the stock to fall below a minimum value of $150 000, the charge will crystallise and attach to all RMs cars. EF runs the risk that the combined value of the vehicles at the time of the crystallisation may be worth far less than $100 000.
Creditors should ensure their charges are registered
Registration to protect creditors A company is required under the Act to register certain charges (including oating charges) within 45 days. An unregistered charge is still valid, but if the company goes into liquidation or voluntary administration the charge will be unenforceable as a security against the liquidator or administrator. This means the charge will rank with the ordinary unsecured creditors. Priority between competing charges (charges over the same assets) is also generally determined according to the dates of registration. For these reasons it is important for the creditor to ensure that its charges are registered at ASIC. Anybody dealing with a company is deemed to be aware of any registered charges. Additional rights of creditors Lenders often also require directors to give a personal guarantee, which makes them personally liable if the company defaults.
Directors must often give a personal guarantee
Fundraising and disclosure

Under Chapter 6D of the Act a company wishing to raise funds by offering shares or debentures usually must provide investors with a disclosure document (usually a prospectus). The disclosure rules are intended to ensure that potential investors have adequate and accurate information about the company. False or misleading statements in prospectuses could result in nes, damages and other remedies against the company and other persons involved. One of the charges that resulted in a jail sentence for Ray Williams, former head of HIH
166 PART 3 Business entities
Insurance Ltd, was that he had authorised the issue of a prospectus that contained a material omission. R v Williams [2005] NSWSC 315. Except if it is raising funds from its own employees or shareholders, a proprietary company must not engage in any fundraising activity that would require disclosure to investors under Chapter 6D. It may, however, raise funds from its own employees or shareholders. Disclosure is not required in relation to several exempt offersfor example, an offer to an individual person to invest at least $500 000 or an offer to a professional investor, such as a person who holds a nancial services licence. A proprietary company could take advantage of these exemptions to raise funds.
There are restrictions on fundraising by a proprietary company
Insider trading
Insider trading involves the use of price sensitive information which is not generally available to buy or sell shares (or other securities). Price sensitive information is information that would be likely to affect the value of the shares or debentures if it were known to the public. A person does not need to have a connection with the company (be an ofcer or employee, for example) to be guilty of insider trading. If a person contravenes the prohibitions on insider trading, civil and criminal penalties may apply.
Insider trading is prohibited
Rivkins CASE Case (2004)

Mr Rivkin was found guilty of insider trading in relation to the purchase of 50 000 Qantas shares by his company, Rivkin Investments. The jury found that Mr Rivkin bought the shares after being told by Mr McGowan (the CEO of Impulse) of a proposed merger between Impulse and Qantas. McGowan warned Rivkin that he should not trade in Qantas shares as the information was not available to the market, it was condential. Rivkin was ned $30 000 and sentenced to nine months periodic detention. He was also banned from managing companies for ve years, except with the permission of the court. Rivkins conviction and the sentence were both upheld by the NSW Court of Criminal Appeal. R v Rivkin (2004) NSWSC 447
In 2000, when he was a director of Telstra, Steve Vizard used condential information to buy shares in three dot.com companies, in an attempt to gain an advantage for himself. ASIC brought civil proceedings against him under s 183(1). Vizard admitted his guilt and was disqualied from managing companies for ten years, and ordered to pay pecuniary penalties of $390 000. At the time, ASIC was criticised for its soft treatment of Vizard and its decision not to bring criminal proceedings under s 184 and/or the insider trading prohibitions in the Act. ASIC v Vizard [2005] FCA 1037
ASIC v Vizard [2005]
Protection of minority members

The members in general have little power to interfere with the management decisions of the directors. The directors may also be the majority shareholders. In this situation they are in a position to pass resolutions which are in their own interests, and also use their voting power to prevent the company taking any action against them. The Corporations Act provides the following remedies where there is an abuse of power. Oppression remedy: ss 232233where the conduct of the company is oppressive, unfairly discriminatory or unfairly prejudicial, a member can make an application to the
Minority shareholders are protected against oppression
167
Courts broad powers could include replacing elected board
court. The court has very broad powers including making orders to regulate the future conduct of the company, to buy out the shareholder, modify the company constitution or wind up the company. So broad are the powers that in Re Spargos Mining NL (1990) 3 ACSR the judge ordered the replacement of the elected board of the company with a board of his own choosing. The oppression remedy is commonly used in family disputes, or other disputes in small companies over management issues. Compulsory winding up: s 461(k)the court can order the company be wound up if the court is of the opinion that it is just and equitable to do so. Statutory derivative action: ss 236242members can sue on behalf of the company (for a wrong done to the company) where the company is either unwilling or unable to start the legal action.
REPORTING AND DISCLOSURE

This section outlines the reporting and disclosure requirements in the Corporations Act. Penalties for non-compliance may be imposed on company ofcers. Registers and minute books Every company must maintain: Registers of (i) members (ii) option holders (iii) debenture holders and (iv) charges. Minute books in which it records within one month, resolutions (decisions) passed by the members and resolutions passed by the directors. What nancial records must companies keep? Every company is required by s 286 to keep written nancial records that: correctly record and explain its transactions and nancial position and performance; and would enable true and fair nancial statements to be prepared and audited. The denition of nancial records includes invoices, receipts, documents of prime entry, working papers, other documents needed to explain the methods by which nancial statements are made up, and adjustments to be made in preparing nancial statements. A director who fails to take all reasonable steps to ensure the company complies with s 286 contravenes the Act. Civil penalty orders may be made against the director and, if the contravention was dishonest, criminal penalties may be imposed: s 344. In addition, for the purposes of an insolvent trading case, the director of the company is presumed to have been insolvent during any period it failed to keep nancial records: s 588E(4). In ASC v Fairlie (1993) 11 ACLC 669 the managing director was successfully prosecuted for failing to take reasonable steps to ensure the company kept proper accounting records. The company was having problems in changing from a manual to a computerised accounting system and a number of senior staff left the accounts department. The director employed new accounting staff and outside consultants to assist them put the accounts department in order. The Supreme Court of Tasmania held that this action was not sufcient, and that the director should have taken more interest and further action to resolve the accounting problems.
All companies must keep registers, minute books and nancial records
ASC v Fairlie (1993): new accounting staff did not exempt director
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COMPLIANCE CHECK
Bella is the accountant for the new family company. What records must she set up to comply with s 286? ASIC, with help from professional associations, has compiled a schedule of appropriate books and records. See What Books and Records Should My Company Keep? at <www.asic.gov.au> or go to the ABL website.
Who has to prepare an annual nancial report and directors report? Public companies and large proprietary companies must prepare a nancial report and a directors report: s 292. A small proprietary company need only prepare these two reports if requested to do so by at least 5% of its members or by ASIC, or if it is controlled by a foreign company and it is not consolidated in that companys nancial statements. Small proprietary companies under foreign company control are generally treated by the Act as if they are large proprietary companies. What is included in the nancial report and the directors report? Under s 295 a companys annual nancial report must comply with the standards set by the Australian Accounting Standards Board (AASB). These standards, which are made under s 334, are available at <www.aasb.com.au>. Currently, the annual nancial report must include: the nancial statements: a statement of nancial position (balance sheet) a statement of comprehensive income a statement of cash ows a statement of changes in equity (share of ownership) the notes to the nancial statements (disclosures required by the accounting standards and regulations and any other notes required to give a true and fair view); the directors declaration (about the statements and notes and solvency of the company). See Financial ReportsThe Basics at <www.asic.gov.au>. The nancial statements must comply with the accounting standards and the corporations regulations and must give a true and fair view of the nancial position and performance of the company: ss 296297. ASIC has power under Part 2M.6 to exempt individual companies, or classes of companies, from some or all of the nancial reporting and audit requirements in the Act. Mazda Australia Pty Ltd & Ors v ASC (1992) 8 ACSR 613 concerned an application for relief from compliance with certain requirements of the accounting standards. The Administrative Appeals Tribunal relied on AASB Statement of Accounting Concepts SAC 2 to deny Mazdas application for relief from compliance with an accounting standard concerning related party transactions. SAC 2 sets out the objective of general-purpose nancial reporting. See the ABL website. The directors report must contain (i) the general information about the operations and activities set out in s 299, and (ii) the specic information about such matters as dividends, details of directors, options granted over shares set out in s 300.
Public and large proprietary companies must prepare a nancial report
Mazda Australia Pty Ltd & Ors v ASC (1992)
Audit and audit report

With some exceptions, all companies that must prepare nancial reports are required by s 301 to have the nancial reports audited by a registered company auditor, and to obtain an audit
The nancial report must be audited by a registered company auditor
Pacic Acceptance Corporation v Forsyth (1970)
Arthur Young & Co v WA Chip & Pulp Co Pty Ltd (1989)
report. Under ASIC Class Order CO 98/1417 large proprietary companies are exempted from an audit if that decision has the unanimous approval of the directors and shareholders not to hold an audit. Certain conditions apply. A small proprietary company preparing a report at the direction of members need only have it audited if directed to do so by the members. The role of the auditor is to act as an independent safeguard of the interests of the members. Auditor independence is fundamental to an effective audit. The rules and standards governing audit independence have been tightened following recent corporate collapses. An auditor has a common law duty (in contract and tort) to use reasonable care and skill. See Ch 3 p. 111. The judgment in Pacic Acceptance Corporation v Forsyth (1970) 92 (NSW) 29 analyses the auditors duty of care and skill in the conduct of a company audit. Justice Moftt held that while auditors are not insurersthat is, they are not expected to detect any and all errors and fraud that may occur in company nancial statementsthe auditor must, in planning and carrying out an audit, pay due regard to the possibility of error or fraud. The auditor has a duty to go behind the companys books and determine the true nancial position of the company. This involves designing and carrying out procedures which have a reasonable expectation of detecting a substantial or material error or fraud in the companys affairs. In Arthur Young & Co v WA Chip & Pulp Co Pty Ltd (1989) 7 ACLC 496 it was held that an auditor will breach their duty of care if, having detected a possible irregularity not amounting to a suspicion of fraud, the auditor fails to investigate further. The auditor must also report the matter to the appropriate ofcers of the company. Auditors statutory function In carrying out the audit, the auditor has a statutory duty to form an opinion about: whether the nancial report complies with the accounting standards, and gives a true and fair view of the nancial position of the company; whether the auditor has been given all necessary information and assistance; whether the company has kept sufcient nancial records to enable a nancial report to be prepared and audited; and whether the company has kept the other records and registers required by the Act and to report these matters to the members. If the auditor is not of the opinion that the nancial reports comply, the audit report must state the reasons for this opinion. The audit report must also describe any defect or irregularity in the nancial reports, and any deciency, failure or shortcoming in relation to the other matters listed above. Auditors also have a statutory duty to notify ASIC if they have reasonable grounds to suspect that a company has contravened the Act, and they believe that the contravention will not be adequately dealt with by bringing it to the attention of the directors. Auditing standards The Auditing and Assurance Standards Board (AUASB) has authority to make auditing standards for the purposes of the Corporations Act s 336. The auditing standards are available from the AUASB <www.auasb.gov.au>.
The auditor has a statutory duty to report to members
Annual nancial reporting to members

The nancial report, the directors report and the audit report must be sent to the members at least 21 days before the AGM or four months after the end of the nancial year, whichever is earlier: ss 314315. A public company must lay the reports before the AGM for consideration.
Lodging reports and information with ASIC

1. The nancial report, directors report and audit report must be lodged with ASIC within four months of the end of the companys nancial year. Certain large proprietary companies (companies that were formerly exempt proprietary companies under the earlier Act) are exempted from lodgment under Class Order CO98/99. A small proprietary company which has prepared a nancial report in response to a shareholder direction or a direction from ASIC also need not lodge the report. 2. CLERP 7 replaced company annual returns with a new annual review process. On the review date (the anniversary of the companys registration) ASIC now sends an annual statement to the company. The annual statement includes an invoice and a statement of the companys details for review by the company. If the information is correct, no further action is required. If any information is incorrect, the company must notify ASIC of the necessary changes within 28 days. Directors of companies which do not have to lodge nancial reports with ASIC must, within two months of the review date, pass a resolution that in their opinion the company is solvent. If the directors are not able to do this, they must inform ASIC. 3. Companies must keep ASIC informed of certain events in the companys life, such as change of registered ofce, change of ofcers or issue of new shares. See Keep Us Informed of Changes in Your Companys Details at <www.asic.gov.au>.
Every company is subject to an annual review process
COMPLIANCE CHECK
Companies must comply with their nancial reporting obligations under the Corporations Act 2001. Uncertain of what needs to be done? See Whats New in Financial Reporting at <www.asic.gov.au>.
EXTERNAL ADMINISTRATION
Companies are sometimes taken over by an outsider controller. This may happen, for example, when the company is insolvent. The three main types are: 1. Receivership. A receiver is a person appointed to take control of some or all of a companys assets. A receiver may be appointed by a court or a secured creditor. 2. Voluntary administration. The aim of voluntary administration is to see if the company and its creditors can work out a solution to the companys nancial problems. A voluntary administrator may be appointed by the company, a liquidator or a substantial secured creditor. Within 21 days of the administration beginning, a meeting of creditors is called to decide whether the company should (i) sign a deed of company arrangement, (ii) be wound up, or (iii) control returned to the directors. 3. Winding up. A winding up involves a liquidator selling off the companys assets and distributing the proceeds among the creditors and, if there is anything left, among the members. The company is then deregistered and its existence comes to an end. The liquidator may be appointed by order of a court or voluntarily by the shareholders passing a special resolution. Until recently, shareholders were ranked below unsecured creditors when a company became insolvent and was wound up. They were not entitled to receive any payment unless the unsecured creditors had been paid in full. In 2007 the High Court ruled that shareholders would enjoy equal ranking with unsecured creditors if they were induced (persuaded) to purchase their shares as a result of misleading or deceptive conduct by the company. See Sons of Gwalia Ltd v Margaretic [2007] HCA 1
Aim of voluntary administration is to maximise the chances of the company surviving
Sons of Gwalia Ltd v Margaretic [2007]
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SELF QUIZ

FALSE ^ ^ ^ ^
TRUE ^ 13 A oating charge crystallises and becomes xed when a company defaults. ^ 14 A company must always lodge a prospectus before fundraising. ^ 15 Every company must prepare and audit a nancial report. ^
12 A company can issue fully paid or partly paid shares.
CORPORATE GOVERNANCE
Corporate governance is about how a company is managed and directed
The danger of a tick a box attitude
What is corporate governance? Corporate governance is interconnected with management. Management is concerned with the day-to-day affairs and procedures in running a company. Corporate governance concerns how a company is directed and controlled. Issues in corporate governance include (but are not limited to): the systems by which the business of the company is run, including the board of directors duty to ensure that the business is properly and honestly managed; the relationship between the directors, management, shareholders and other stakeholders, and the balance of power between these groups (stakeholders may include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large); the legal duties of directors and executives, including duciary duties (to act in good faith for a proper purpose and to avoid conicts of interest); the composition of the board, including the need for an effective chairman and for the management of issues relating to directors independence; the maintenance of condence in the companys nancial integrity; risk management and internal control systems, and an effective audit committee; auditor independence and the appearance of independence. Regulators stress that corporate governance is not just about setting up a corporate governance model, ticking boxes and adding further pages to the annual report. Good governance is about behaviour and relationships, values and ethics, and the integrity with which directors and management go about the business of running the company. Commissioner Owen in the inquiry into the collapse of HIH wrote of the danger of a tick in a box mentality. HIH did have a corporate governance model. The problem was that the board did not periodically assess the effectiveness of the companys governance practices. Where they did exist they were ignored. There were relatively few clearly dened and recorded policies and guidelines. Commissioner Owen considered that there was a clear causal link between poor corporate governance and mismanagement. See Phillip Lipton, The demise of HIH: corporate governance lessons, Keeping Good Companies, June 2003, <www.australian-corporate-governance.com.au>.
ASX Corporate Governance Principles

The Australian Securities Exchange Corporate Governance Council (ASX CGC) rst released its Principles of Good Corporate Governance and Best Practice Recommendations in March 2003. After two years an extensive review was undertaken and in August 2007 the Council released revised Corporate Governance Principles and Recommendations. The CGC denes corporate governance as:
the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance inuences how the objectives of the company are set and achieved, how risk is monitored and how performance is optimised. Its revised Principles and Recommendations are: Principle 1 Lay solid foundations for management and oversight Principle 2 Structure the board to add value Principle 3 Promote ethical and responsible decision making Principle 4 Safeguard integrity in nancial reporting Principle 5 Make timely and balanced disclosure Principle 6 Respect the rights of shareholders Principle 7 Recognise and manage risk Principle 8 Remunerate fairly and responsibly These Principles and Recommendations apply only to listed companies, but it is the view of the CGC that other smaller organisations can also benet from the underlying philosophy. The documents are available from the ASX website at <www.asx.com.au>.
LAW IN ACTION
In the shadow of the coporate veil*: James Hardie corporate governance
The consumer lawyers association has strongly criticised the corporate governance style of Australias biggest asbestos products manufacturer: If James Hardie is able to avoid its responsibilities to the thousands of Australians it injured by ignoring clear warnings of the lethal nature of the asbestos products it manufactured, it will go down in history as Australias worst example of morally disgraceful corporate governance. It has also called for a review of the circumstances in which companies could use the protection of limited liability to avoid providing for their future liabilities. See media release, Lawyers call for end to Pty Ltd protection in wake of James Hardie asco, 31 October 2003, <www.lawyersalliance.com.au>.
* P. Prince, J. Davidson and S. Dudley, In the Shadow of the Corporate Veil: James Hardie and Asbestos Compensation, 2004, <www.aph.gov.au/library>.
TRUSTS
A trust, unlike a company, is not a separate legal entity. A trust is an arrangement whereby an individual or entity (the trustee) holds property (the trust property) on behalf of others (the beneciaries). It can be used as a business structure with a trustee (usually a company) carrying out the business on behalf of the members of the trust (the beneciaries). Trusts are often used in connection with small family businesses. The owner of the business establishes the trust to distribute income or assets or both from the business to family member beneciaries. Once distributed the income/assets belongs entirely to the beneciaries who receive it.
A trust is a structure recognised by equity law. The trustee is the legal owner of the trust property; beneciaries are the equitable owners.
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Duties of the trustee

A trustee is a duciary and controls property for the benet of others
A trustee does not own the trust property in its own right. It holds the assets on behalf of the beneciaries. The primary duty of the trustee is to carry out the terms of the trust. Other duties include: Duty of loyalty and good faith. A trustee is a duciary and owes duties to act honestly in the best interests of the beneciaries, and not make prots out of the trust. Duty to administer the trust personally. The trustee must not delegate its duties. Duty of care. The standard of care is that of the ordinary prudent business person. Duty to preserve the trust property and to invest in accordance with the trust deed, and any applicable legislation such as the Trustee Act. If the trust has been formed for superannuation purposes, it must also comply with the federal Superannuation Industry (Supervision) Act 1993 (the SIS Act) and other legislative requirements. Duty to keep accounts and provide information to beneciaries as required. Proper records are also essential so that it is possible to determine which part of the trust property and income the trustee is entitled to, and which part the beneciaries are entitled to. This is necessary in order to properly calculate the amount of tax the trustee and beneciaries are required to pay.
COMPLIANCE CHECK
A trustee must ensure investments comply with the trust deed and the Trustee Act. The trustee of a self-managed superannuation trust must comply with the SIS Act and Regulations. A Compliance Checklist is provided in the publication, Role & Responsibilities of Trustees, at <www.ato.gov.au>.
Limited liability company as trustee

Company trustee gains benet of limited liability
In discretionary trusts the trustees decide how to distribute the assets or income
The trustee is personally liable for all the liabilities of the trust. Therefore, a company is commonly used as trustee to gain the benet of limited liability, as well as the other advantages such as continuity of existence. The trustee usually has an indemnity (cover for costs and damages) payable from the trust assets for liabilities properly incurred in managing the trust. Under s 197 of the Corporations Act the directors of a trustee company may be personally liable for debts of the trust. This applies if the trustee company is not entitled to an indemnity from the trust assets because it has breached the trust, or the trust deed removes or limits the right to an indemnity. Most trusts relating to business are express trusts which means they are intentionally set up in a written document, such as a will or a trust deed. Many are created for the purpose of superannuation funds. Commonly used express trusts include: Discretionary trusts where the trustee has discretion (choice) when distributing income or assets to the beneciaries. The trustee has the choice of distributing in a way that will split and reduce the income tax paid by the trust and/or the beneciaries. See Figure 5.2. Unit trusts where unit holders have a number of units in the trust. Distribution from the trust is on the basis of the number of units held. This type of trust is often used for large shared investments and by public companies that offer units to investors. Fixed entitlement trusts where the trustee has no discretion regarding the distribution of prots and assets. Each beneciary is entitled to a xed equal share. Any trust that carries on a business is a trading trust. The business is the trust property. Trading trusts are normally discretionary trusts. Sometimes a trading trust may be a unit trust.
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Table 5.4 outlines the advantages and disadvantages of trading trusts.

FIGURE 5.2
Discretionary trust
Broadwater Auto Sales (run by Tony Wilder) Placed in trust e.g. Wilder Family Trust Managed by trustee e.g. AP Wilder Pty Ltd Profits distributed to beneficiaries e.g. family members and charities
Tony Wilder
Tracy Wilder (Tonys wife) 10%
Ben Wilder (son) 30%
Eunice Cullen (daughter) 30%
Nicholas Cullen (grandson) 10%
Fred Hollows Foundation 15%
Salvation Army 5%
Note: The size of the profit distribution to each member could vary from year to year.
TABLE 5.4
ADVANTAGES
Advantages and disadvantages of trading trusts

DISADVANTAGES
1. Flexibility of prot distribution 2. Possible tax minimisation 3. Asset structure survives death of members 4. Limited liability (if trustee is a company)
Establishment and ongoing costs Limited rights of beneciaries Laws regarding trusts may be complex Higher compliance costs
FRANCHISES
A franchise is not a separate business entity but a licence to operate a business. It is a business arrangement in which a franchisee contracts to market the product, process, service or system that is the intellectual property of the franchisor. The franchisee pays a licence fee and continuing royalties for the right to use and/or sell the subject matter of the franchise. In a franchise, there is the same choice of ownership structure as there is in operating any other business. There are two main types of franchise: (i) Product and trade name franchises, where the franchisee distributes a special product line, such as a brand of motor vehicles; and (ii) Business concept franchises, where the franchisee operates a packaged business concept, such as fast food restaurants like McDonalds and Hungry Jacks. Franchising is very popular in Australia. The Franchise Council of Australia <www.franchise.org.au> estimated in 2006 that there were about 960 franchisors in Australia, up from 850 in 2004.
A franchise can be operated as a sole trader, partnership, company or trust
Main features of a franchise agreement

The main terms usually outlined in a franchise agreement are: the key intellectual property, such as a recognised name or product line;
the rights and obligations of each party; the franchisors degree of control over marketing, equipment and xtures; the duration of the agreement and the geographical location; the rights of the franchisor to inspect the accounts of the franchisee; the conditions of termination.
Franchising Code of Conduct

The Franchising Code of Conduct is a mandatory (compulsory) industry code prescribed under the Trade Practices Act 1974 which applies to all franchise agreements, including foreign franchisors. The ACCC administers and enforces the Code. Valuable resources available from its website at <www.accc.gov.au> include: The Franchisee Manual, a plain English guide to the Code designed to provide simple guidance material for franchisees on their rights and obligations; Checklist for buying a franchise; Franchising Code of Conduct Compliance Manual (available in CD ROM), which provides guidance on how to comply with the Franchising Code and the Trade Practices Act. It assists businesses to establish a framework for an effective compliance program and satisfy minimum business conduct and disclosure requirements. The ACCC has also set up a new section on its website explaining its role in relation to franchising complaints and investigations and detailing some matters the ACCC has investigated and taken to the courts.
ACCC administers and enforces the Franchising Code of Conduct
COMPLIANCE CHECK
Do not assume an arrangement is simply a licence or merchandise supply agreement. Check to see if the arrangement may be dened as a franchise agreement in the Franchising Code of Conduct. The ACCC is increasingly checking these types of agreements for compliance with the Code. Penalties apply for non-compliance.
When does a licence to use intellectual property or a supply agreement become a franchise? The following case demonstrates that the Franchising Code applies to all commercial agreements that operate as franchises, including businesses that claim to be issuing licences for the use of intellectual property.
ACCC CASEv Ewing [2004]

Any business operating like a franchise must conform with the Franchising Code. The Synergy company sold a business training and development program to 31 people who each paid $20 000 for ve days of training and a workshop kit. Synergy claimed its licensees would become accredited business development specialists and implied they could earn more than $100 000 a year without experience. The licensees signed an agreement that they were not entering a franchise relationship. The Federal Court held: Synergy had marketed and controlled a franchise. Its directors were ordered to (i) cease marketing their system as a franchise, (ii) give clients a 14-day cooling-off period in which they were entitled to a full refund, (iii) implement a compliance program, and (iv) pay the ACCCs costs. ACCC v Ewing [2004] FCA 5
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In ACCC v Kyloe Pty Ltd [2007] FCA 1522 the court decided that a drink machine distribution arrangement and trade mark licence was not a franchise agreement as it did not incorporate the system or marketing plan determined, controlled or suggested by the franchisora necessary element of the denition in clause 4 of the Code. The ACCC failed in its action for breach of the Code and was ordered to pay Kyloes legal costs. Requirements of the Code prior to the making of a franchise agreement Full disclosure. Prospective franchisees must be given a disclosure document that includes details of directors and associates, their business experience, commissions they have been paid, trademarks, franchise territory details, and nancial statements including the last two years of prot and loss accounts and balance sheets. A full account of any marketing or cooperative fund, including an audit report, must also be included. The document must also clearly set out the obligations of franchisor and franchisee. It must not contain any promotional material. Following amendments to the Code on 1 March 2008, details of the history of the franchise site and territory (including why the previous franchisee ceased to operate) must also be provided to the franchisee.
ACCC v Kyloe Pty Ltd [2007]
Disclosure document must be provided to the franchisee
Ketchell CASE v Master of Education Services Pty Ltd [2007]

Failure to comply with Code makes franchise agreement illegal. The franchisor failed to obtain the franchisee a statement in accordance with clause 11(1) of the Code. Under this clause the franchisor must obtain a written statement that the franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code, before entering into the agreement. The NSW Supreme Court of Appeal held: Non-compliance with clause 11(1) made the franchise agreement illegal and unenforceable. As a result the franchisor was unable to claim money owed to it by the franchisee under the franchise agreement. Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161
EXAMPLE
Non-disclosure of vital information by a franchisor
The Will Writers Guild Pty Ltd sold will-writing franchises across Australia for $65 000 per territory. Its directors failed to disclose that the business could only be carried on by a qualied legal practitioner. They were ned $105 000, ordered to pay over $360 000 in compensation and permanently restrained from offering franchises that did not comply with the Franchising Code. ACCC Media Release, 14 April 2003
Franchisees must receive the disclosure document at least 14 days before they enter or renew the contract or pay a non-refundable deposit. They are also entitled to a seven-day cooling-off period. Proof of independent advice. The agreement is not valid unless the franchisor receives a signed statement from the franchisee saying they have received or have waived independent advice from a legal, business or accountant adviser. Copies of a retail lease must be provided if the landlord is the franchisor or an associate of the franchisor.
Disclosure document 14 days before contract
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Franchisors are prohibited from inserting into their franchise agreements general waivers (exclusion clauses) regarding written or verbal pre-contract representations. A term that gives the franchisor the unilateral right to vary or terminate the agreement may, under the Code, indicate unconscionable conduct. Requirements of the Code during the life of the franchise agreement Free association. Franchisees cannot be prevented from forming an association or meeting other franchisees for a lawful purpose. Mandatory mediation. Franchisors must set up a complaints handling procedure. If the parties cannot resolve a dispute within 21 days, either of them may refer it to a mediator or ask the Franchising Code Mediation Adviser (see below) to appoint one. Parties have the right to take legal action at any time. Notication of changes and litigation. The franchisor must notify the franchisees of any changes in the ownership of the franchise and any litigation it faces. Marketing funds must be audited. Most franchisees are required to make regular payments into a fund that is used to pay for the costs of advertising and special promotions. Notice of termination. A franchisor who wishes to terminate the franchise must give reasonable notice. If the termination is based on a breach by the franchisee, the franchisor must notify that person and give them 30 days to rectify the problem. Franchisors cannot refuse to approve the transfer of a franchisees interest to another person without reasonable grounds. This is an important protection, as approximately 72% of franchisees exit by selling to a new franchisee.
Parties retain the right to take legal action
Franchisor cannot terminate without giving notice
Remedies for breaches of the Code

The main remedies available for breaches of the Code are orders for damages, corrective advertising and other appropriate orders, such as compliance programs.
Protection for franchisees under common law

In addition to any rights they might have under the Code and contractual remedies, franchisees may have remedies under the equitable doctrines of undue inuence or estoppel, or the common law doctrines of unconscionable conduct or misrepresentation. See Ch 13.
Protection for franchisees under consumer protection legislation

Wide range of remedies for franchisees
Franchisees have primarily taken action under the Trade Practices Act or the state and territory Fair Trading Acts. The main grounds have been unconscionable conduct, misleading and deceptive conduct (s 52) and false representations (ss 53, 59). Franchisees may also take action under s 51AC which prohibits unconscionable conduct by a big business against a smaller one. See Ch 24. Franchise cases under the Trade Practices Act 1. The Simply No Knead Case [2000] In 2000 the Federal Court ruled that a Melbourne-based franchisor Simply No Knead (Franchising) Pty Ltd (SNK) had breached the new s 51AC of the Trade Practices Act by acting unconscionably towards its franchisees. Breaches by SNK included refusing to deliver
The Simply No Knead Case [2000]
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products to the franchisees, producing advertising material that omitted their names and addresses, and competing against the franchisees by selling SNK products in areas controlled by them. See ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365 2. ACCC v Top Snack Foods (1999) ATPR 41-708 Top Snack Foods Pty Ltd sold franchises to distribute boxes of snack food to commercial and industrial sites. It was held to be in breach of ss 52 and 59 of the Trade Practices Act as it had no reasonable basis for certain prot projections it had given to franchisees. The company was ordered to cease advertising its current franchises and pay damages of over $400 000. It was held not to be in breach of s 51A as there was insufcient evidence to prove its conduct was deliberate and systematic. 3. Poulet Francais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131 The franchisees entered a franchise agreement to operate a retail poultry outlet. After the business failed they took action against the franchisor claiming breach of s 52 of the Trade Practices Act in relation to pre-agreement representations about possible turnover and prot. The full Federal Court held that the franchisor was not liable as the franchisees had been made aware from disclaimers in the agreement that the projections were not to be relied upon.
ACCC v Top Snack Foods (1999)
The Poulet Francais Case [2005]
COMPLIANCE CHECK
Franchisors are at particular risk of breaching the Trade Practices Act. The Franchising Code of Conduct Compliance Manual has been designed by the ACCC to help franchisors understand and comply with their obligations under the Act and the Code, and to establish a framework for an effective compliance program. Go to <www.accc.gov.au> or the ABL website.
Possible conicts with the Trade Practices Act 1974 (Cth)

Since franchisors control the supply, marketing and distribution aspects of a franchise they also run the risk of breaching Part IV of the Trade Practices Act. Part IV prohibits restrictive (anticompetitive) practices. See Ch 25. Possible conicts include: Anti-competitive agreements: s 45. A franchise agreement which substantially lessens competition in a market is unenforceable. The purpose of this section is to ensure there is effective competition in markets. Section 45A prohibits price xing, and in relation to franchises would prohibit a supplier who was also a distributor from entering into a franchise agreement. This is because the parties would be in competition with each other. Misuse of market power: s 46. This section prohibits franchisors from controlling the production and distribution of a substantial part of a market by using their market power to lessen competition. Exclusive dealing: s 47. This occurs when suppliers attempt to restrict the freedom of their customers to buy or sell, or vice versa. Exclusive dealing is a big issue for franchises because a large part of a franchises operation is based on agreements to keep all businesses in identical form. It is prohibited only if it would substantially lessen competition. Third line forcing, however, is prohibited outright. See Ch 25.
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ACCC can authorise restrictive trade practices
Resale price maintenance: s 48. This occurs where a distributor sets or enforces minimum retail prices for goods or services. A franchisor is only allowed to recommend retail prices to its franchisees. In theory, a McDonalds franchisee may set lower prices for Big Macs than those of other McDonalds operators. If a franchisor gives notication to the ACCC that it is engaging in exclusive dealing it cannot be held liable for breach of the Act unless the ACCC takes further action. See the Notication Register at <www.accc.gov.au>. The ACCC can also grant an authorisation (that is, authorise conduct that would otherwise breach the Act). Breaches of Part IV could result in severe nes for corporations and for individuals, as well as the usual range of remedies under the Trade Practices Act. See Ch 25. The advantages and disadvantages for the franchisee are outlined in Table 5.5.
Advantages and disadvantages for the franchisee
DISADVANTAGES
TABLE 5.5
ADVANTAGES
1. Product name is established, and there is an immediate entry into the market 2. Established marketing and organisational expertise, sharing of advertising costs 3. Business site, area and layout provided, also ongoing training and technical support 4. Innovative marketing Table techniques 5.5 can thrive in the franchise environment
Operational and marketing structure is often rigid and inappropriate for some areas Reliance on the expertise and assurances of the franchisor Few opportunities to inuence the business system and agreements often favour the franchisor Increased nancial risk if franchisee must provide a personal guarantee to franchisor or lender
A comprehensive list of advantages and disadvantages is available from the website of the Franchising Council of Australia <www.franchise.org.au>.
SELF QUIZ

TRUE FALSE
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
16 A trustee has a duty to obey the terms of a trust deed and to act in good
faith and in the best interests of the beneciaries.

17 In a discretionary trust the trustee must distribute the income in the same
way each nancial year.

18 A trading trust is one that imports or exports goods and distributes the
income to its beneciaries.

19 A franchise is an agreement in which the franchisor contracts to market
the product, process, service or system of the franchisee.

20 The Franchising Code applies to all franchises in Australia. 21 A disclosure statement by a franchisor to a franchisee may contain
promotional material provided it is in plain English.

22 A franchisee agreement is not valid unless the franchisee receives
independent advice or hands the franchisor a written waiver (rejection) of independent advice. ^
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ASSOCIATIONS
An association is a group of people organised for a common purpose, such as sporting, cultural, religious or trade, usually for non-prot purposes. It may, however, make a prot. For example, a sporting association may conduct fundraising activities. Associations may be incorporated or unincorporated. If they choose a company structure, charitable or not-for-prot organisations will generally be registered as a public company limited by guarantee.
An association is a group of people organised for a common purpose
Incorporated associations
An association may operate with limited liability by qualifying for incorporation under the Associations Incorporation Act of its state or territory. An association carried on for the object of trading or pecuniary gain for its members is not eligible for incorporation under this legislation. An association with more than 20 members formed for trading purposes will probably have to incorporate under the Corporations Act 2001 (Cth). A key advantage of incorporation is that individual ofce holders, such as the president or the treasurer, are not personally liable for the associations debts and other liabilities. For example, a sailor who is injured in a race organised by an unincorporated club could successfully sue the ofce holders for negligence. If the clubs insurance cover is not sufcient to cover the damages, they could be personally liable. The advantages and disadvantages of incorporated associations are outlined in Table 5.6.
TABLE 5.6
ADVANTAGES
Personal liability of unincorporated association
Advantages and disadvantages of an incorporated association

DISADVANTAGES
1. It is a separate legal entity 2. Members have limited liability 3. It can sue and hold assets in its own name 4. It can enter into contracts in its own right 5. It has perpetual succession (continuous life)
Prots cannot be distributed to members Compliance with statutory obligations Penalties may be imposed on ofcers Criminal penalties for insolvent trading Stricter nancial reporting requirements
The state and territory consumer affairs agencies provide information about incorporation and post-incorporation obligations. For a list of these agencies see Table 19.1 on p. 460, or go to the ABL website. In the Australian Capital Territory this information is provided by the Registrar Generals Ofce <www.rgo.act.gov.au>. Incorporated associations in New South Wales In New South Wales the relevant legislation is the Associations Incorporation Act 1984 and the Associations Incorporation Regulation 1999. The Registry of Co-operatives & Associations is responsible for the administration of the Act. Steps for incorporation Five or more people must approve a set of objectives and rules, nominate at least two people to be the rst committee members and then authorise a person to apply for incorporation with the Ofce of Fair Trading (OFT). Unless the rules say something different, that
Minimum number of members is ve
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person will become the Public Ofcer and will be responsible for lodging documents. The minimum number of members is ve. There is no maximum. An association will be refused incorporation or directed to transfer its incorporation if the OFT believes that incorporation is inappropriatebecause of the scale or nature of its activities or property, or its dealings with the public. (The amount of $500 000 as a measure of assets, income or expenditure is the guide used by the OFT to determine whether it is appropriate for the proposed association to be incorporated.)
Rules of the association

An association may rely on Model Rules contained in the Regulations or draft its own rules. Certain items must be covered: for example, the rules must allow members to inspect the books and records of the association. If an association does not cover these items when drafting its own rules, the corresponding rule in the Model Rules applies by default.
General statutory obligations

Associations must not distribute prots to members
Penalties apply for insolvent trading
Important obligations imposed under the Associations Incorporation Act include: The association must not distribute any prots or assets to members or engage in trade that is prohibited by the Act. The associations full name must appear in legible characters on all ofcial documents. If the position of Public Ofcer becomes vacant, the OFT must be notied of the vacancy and the details of the new Public Ofcer within 14 days. The association must not incur debts if there are reasonable grounds to expect that the association will not be able to pay all its debts as and when they fall due. Criminal penalties (a ne of up to $5500 and/or imprisonment for up to one year) can be imposed on members of the committee. The association must not do any act with intent to defraud creditors or any other person. Any document addressed to the association, which is received by the Public Ofcer or a member of the committee, is to be brought to the attention of the committee as soon as practicable. Documents lodged with the Commissioner or to a meeting of members must not be false or misleading in any material particular. The association must have a common seal.
Dispute resolution
The Registry of Co-operatives & Associations has power to deal with complaints about matters that involve a breach of the Act, such as insolvent trading, but does not have authority to deal with internal disputes, for example, a dispute between two members. The associations management committee has the task of administering the affairs of the association, including handling internal disputes. If the associations rules do not have a mechanism for dispute resolution, then Model Rule 10 applies. This says that internal disputes are to be referred to a community justice centre for mediation in accordance with the Community Justice Centres Act 1983.
COMPLIANCE CHECK
Members of an incorporated association may enjoy limited liability, but the committee must ensure that the association complies with its statutory record-keeping and nancial reporting obligations. Penalties apply.
Record-keeping and nancial reporting obligations

Financial records must be kept which correctly record and explain the transactions of the association and its nancial position: s 28. Minutes of all committee and general meetings must be kept: s 28. A register of committee members must be maintained and kept by the Public Ofcer and made available for inspection by any person at all reasonable hours. This register must be kept for at least two years after the association is wound up. (The legislation does not set out a period for retention in relation to other records.) A register of members must be kept. An annual general meeting must be held in each calendar year. At the AGM a nancial statement which gives a true and fair view of: the income and expenditure of the association the assets and liabilities of the association the mortgages and other securities affecting the associations property must be submitted to the members. A penalty for non-compliance of up to $110 can be imposed on committee members. An annual statement, a copy of the nancial statement and any resolution passed at the AGM in relation to the nancial statement must be lodged with the OFT. A penalty for non-compliance of up to $220 can be imposed on the Public Ofcer.
A nancial statement must be submitted to members at the AGM
Trading and obtaining monetary benets

Breach of the prohibition on trading or making monetary gain for members may result in prosecution and penalties. The association may also have its incorporation cancelled. However, associations are allowed to undertake certain types of activities without these being considered as trading or making monetary gainfor example, charging an admission fee to an event organised for the promotion of the objects of the association. See Trading and obtaining monetary benets <www.fairtrading.nsw.go.au>.
PROTECTION FOR BUSINESS NAMES AND COMPANY NAMES

A business name is a name or title under which a person, or other legal entity, may conduct its business. Most businesses must register their business name(s) in every state or territory in which they operate. Each jurisdiction has an almost identical Business Names Act. The aim of the legislation is: to ensure that customers know who runs the businesses they deal with; to provide a public record that is easily accessible; to protect the public from being misled or confused by the use of similar names.
Most businesses must register their names
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A business name that closely resembles one already registered is likely to be rejected, especially if the applicant is in a similar line of business to the established one. Registering a name does not give the business ownership of the name, nor the exclusive right to use the name or part of the name.
How to nd business and company names

ASIC keeps details of all current company names and business names throughout Australia on the National Names Index. This data can be easily accessed free of charge at <www.asic.gov.au>. You will have to pay a small fee to ASIC or a private search company if you want more extensive details.
COMPLIANCE CHECK
Before spending money on printing, stationery or advertising, check your business name does not infringe a registered trade mark. See Ch 28. The owner of a trade mark has exclusive rights, and can take legal enforcement action
Which businesses need not register?

Businesses do not have to register a business name if they operate under: the surname and rst name or initials of the business owner; or the name of a registered company (corporation). In some states, such as New South Wales, you do not have to register and display a business name if your business trades only via the Internet.
EXAMPLE
Registration and disclosure of trading names
Xavier DAmato is a sole-trader electrician who operates under the name Xavier DAmato Services. He also advertises in the local Yellow Pages directory as Instant Call Electrics. Xavier must register both business names in his state or territory and indicate on letterheads, invoices and websites that he is Xavier DAmato Services, trading as Instant Call Electrics. This applies even if he only occasionally uses each business name.
Display of a business name

The business name must be displayed at each place where the business is carried on under the business name. The owner of the business name must notify the consumer affairs agency, such as the Ofce of Fair Trading in New South Wales, of any changes in ownership, addresses and so on. Failure to do this may result in penalties and cancellation of registration. Registering and using your business name fact sheets are available from the websites of the state and territory consumer agencies. See Table 19.1 on p. 460, or go to the ABL website. The business gateway <www.business.gov.au> also provides summaries and links to the state and territory business name agencies.
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Additional protection of a business name

Businesses can further protect their name and image through: registration of trademarks over their goods or services (see Ch 28). It is a good idea to search the Register of Trade Marks before registering a business nameto check that the name has not been registered by someone else as a trade mark. Trade mark registration gives the owner exclusive rights to use or control the mark. Searches can be done free of charge on the IP Australia website <www.ipaustralia.gov.au>; consumer protection laws, principally s 52 of the Trade Practices Act 1974 (Cth), which prohibits misleading or deceptive conduct (see Ch 24); passing off actions, to protect the goodwill an operator has built up in a well-established business name (see Ch 28). You are likely to rely on this tort action if a rival begins to take customers from you by using an identical or similar name to yours. This type of action is difcult to prove if the rival has managed to register the business name in dispute. However, as the following case demonstrates, registered owners may lose their rights if there is a stronger claim, especially from an Australia-wide user of a similar name.
Budget CASE Rent A Car Case (1977)

A business operator could not use the same name as a well-known car rental company even though he had registered it as a business name. In 1968 BM Auto Sales Pty Ltd (BM) registered the business name of Budget Rent A Car under the Business Names Ordinance 1963 (NT) and began operating a car hire business in Darwin. BM had no connection with the high-prole national car rental company (the Budget company) of the same name. In fact, the Budget companys name and number had been listed in the Darwin telephone directory before BM registered its business name. In 1971 the Budget company began operating in Darwin. In 1973 it sued BM for the tort of passing off (see Ch 28). The High Court held: BMs registered business name did not give it the right to pass itself off as being associated with the well-known Budget company. It was signicant that the Budget company was well established and listed in the Darwin telephone directory before the registration occurred. BM was prohibited by injunction from trading under the Budget name. BM Auto Sales Pty Ltd v Budget Rent A Car System Pty Ltd (1977) 51 ALJR 254
COMPLIANCE CHECK
A proprietor must notify the Ofce of Fair Trading within one month of changes to the particulars of a business name. Non-compliance may result in penalties or cancellation of registration.
Restrictions on company names

A company name cannot be registered if: it is identical to another registered company name or to any other registered business name in any state or territory; or it is deemed unacceptable. Names that are specically excluded include protected words, such as trustee, consumer and bank, and names that suggest a connection with government, the Olympic Games or the British royal family.
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The following Victorian case illustrates the legal issues that arise when companies have similar names and operate in the same business area.
The Inner City Case (2003) CASE

A minor variation in a business name will usually mean the most recent name is valid. Melbourne Inner City Management Pty Ltd (MICM) was incorporated in 1993. Melbourne Inner City Developments Pty Ltd (MICD) was incorporated nine years later. It developed apartment buildings and marketed them under the business name Dominion Lifestyle Tower Apartments. After MICM received a letter addressed to MICD it sought an injunction barring MICD from using the name Melbourne Inner City to market, develop or sell residential apartments. MICM argued that MICDs conduct had been misleading and deceptive under s 52 of the Trade Practices Act (Ch 24) and constituted passing off (see Ch 28). The Victorian Supreme Court held: The company names were distinguishable because the fourth word in each of them was different. Melbourne Inner City Management Pty Ltd v Melbourne Inner City Developments Pty Ltd [2003] VSC 226 924 June 2004 Comment: MICM would probably have succeeded if it had been able to register a trademark that included the name Inner City Management. See Ch 28.
Domain names
When you apply for a business or company name you may also register an Internet domain name which guarantees no one else in Australia (or countries that recognise your domain system) can use it. Domain names are usually only granted to applicants who have a registered business or company name identical or similar to the chosen domain name. See Everything you need to know about domain names, <www.auda.org.au>. Domain names are covered in more detail in Ch 26.
COMPLIANCE
Compliance refers to an organisations obligation to comply with the law
The compliance process
Compliance is dened as an organisations obligation to comply with the law. It has long been recognised that business planning is vital to any businessnot just at the outset but also throughout its existence. A business plan provides an internal operating plan for the business, strategies relating to key areas like management, marketing, nance and people, and so on. Today it is just as important to develop a strategic plan for compliance. Regulators are increasingly watchful for breaches of the law and there have been signicant increases in penalties. Whether or not an organisation has taken steps to ensure compliance will be taken into account by courts as to the severity of the penalty imposed: see for example ACCC v Visy Industries [2007] on pp. 632633. The compliance process involves identifying: the laws and regulations that apply to the business the areas where the business may be at risk of breaching those laws and then developing systems and procedures to ensure that the business meets its obligations and complies with the law. This means putting in place a compliance program. In order to satisfy the regulators requirement that business organisations achieve a culture of compliance,
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compliance really needs to be built into the business operations of the organisation, and education and training of employees is essential. Legal obligations may originate from a range of sourcesfrom federal and state legislation to industry codes of conduct. Some laws apply to all business organisations. Other regulations are specic to a particular profession, occupation or industryfor example, the legislation and codes of conduct governing real estate agents or the regulations governing people working within the nancial services sector, product safety legislation and prescribed standards governing the supply of certain types of goods and so on. Various regulatory authorities are responsible for administering and enforcing the laws regulating business. These authorities exist at federal, state and local government levels. The main federal regulatory bodies, and the laws they administer, appear in Figure 5.3. Go to the ABL website for more detailed information. Core areas of legislation common to most businesses include: contract and e-commerce; civil liability, and mandatory insurances (if applicable); trade practices, fair trading and consumer protection; revenue, including income tax, superannuation and state taxes; employment, anti-discrimination and privacy; industry codes, licensing and standards. Corporations and partnership legislation will apply to those specic business structures. Business name legislation, intellectual property and local government laws will be an issue, at least when setting up a business.
Core areas of law common to most businesses
Compliance programs
There is no generic (general) compliance program as each organisations circumstances are different. Australian Standard AS 3806 has been developed to assist business in developing compliance programs. AS 3806 is not compulsory but it is a standard the regulators and courts are familiar with. See the ABL website. Trade practices compliance programs The Trade Practices Act (or fair trading legislation) applies to just about every aspect of a businessincluding advertising and dealings with consumers and other businesses. In its Guide to Trade Practices Compliance Programs for Small Business the ACCC recommends the following minimum procedures for implementing an effective small business program: regular trade practices training for all employees who may place the business at risk of a trade practices breach; a complaints handling system; a product safety and recall program (if applicable); the appointment of a compliance ofcer who will be responsible for ensuring that the business is up to date and complies with its regulatory obligations, and for staff training; regular compliance reviews. A trade practices compliance program may stand alone, or be part of a companys overall legal compliance strategy to assess and minimise risk. Other resources available from the ACCC include a free CD, TPA Matters for Small
Trade Practices compliance programs for small business
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Business and Best & Fairest Compliance Manual (a training package designed to help business comply with the Act), and industry specic publications such as Fair and SquareA Guide to the Trade Practices Act for the Real Estate Industry: <www.accc.gov.au>; see links on ABL website.
FIGURE 5.3
Federal regulatory bodies
Federal Regulators
ACCC Australian Competition & Consumer Commission

Commonwealth laws competition fair trading consumer protection
ASIC Australian Securities & Investment Commission
APRA Australian Prudential Regulation Authority
ATO Australian Taxation Office
Office of the Privacy Commissioner
companies, financial markets financial services (including investor and consumer protection)
prudential standards and practices of deposit takers (e.g. banks), insurance companies superannuation funds
Taxation, excise and superannuation systems
Commonwealth privacy protection
Regulatory compliance issues on starting a business

The following matters need to be considered when setting up a business. Compulsory registrations Compulsory business registrations include: Taxation registrationsee Table 5.7; Business name registrationsee p. 183; Industrial agreements (if applicable)see Ch 30. Record keeping The record-keeping regulation requires businesses to comply with: Regulations specic to different structuressee Table 5.8; Taxation record keepingsee Table 5.7; Time and wage records that are required under industrial relations laws, as well as the insurance documents, records, accident and injury registers required by workers compensation laws; Industry specic recordsfor example, trust account records under the Property Stock & Business Agents Regulation 2003 NSW. Business licences and permits A business licence or permit is often required to carry on a particular business. The Business Licence Information Service (BLIS) is a free service that provides details of all licences and permits that may be required, including Commonwealth, state/territory and local government requirements. The gateway website to the BLIS in each state and territory is <www.bli.net.au>. Another useful resource is business.gov.au, a whole of government
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188
service providing information on planning, starting and running a business: <www. business.gov.au>. Local government (councils) Local councils are among the various regulatory authorities that regulate how a business may be conducted. Local councils manage and enforce such areas as: zoning, planning and environmental controls over the land on which the business is situated, including the grant of development approvals for the use of the premises; and compliance in relation to re safety, health, building, factories and shops legislation; and the council may also issue licences and permits relating to specic types of businesses. Again, depending on the nature of the business, approvals may be required from a water authority (e.g. Sydney Water) for removal of sullage, installation of a grease trap, or metering of excess water usage. Links to each local council within all states and the Northern Territory can be found on Councils on the WebAustralian Local Government Association <www.alga.asn.au/links/obc.php>.
TABLE 5.7
OBLIGATION
Basic business tax registrations

WHO MUST REGISTER? WHERE TO GO#
Tax File Number (TFN) A unique once only identication number issued for each taxpayer. It is a condential tax identication number. It is used for identication purposes by the ATO and other government agencies.
Sole tradermay use their own individual TFN for Tax Basics for Small both business and personal ATO dealings. Business Partnershipmust apply for a separate TFN for the <www.ato.gov.au> partnership. If a partner retires or a new partner enters, the existing partnership ceases and a new TFN issues. Companymust apply for a separate TFN. Trustmust apply for a separate TFN. The trustee applies in its capacity as trustee of the trust. Sole trader, partnership, company and trusteach one is entitled to apply for an ABN, which is essential to register for GST purposes. It must be displayed on business documents, particularly invoices, otherwise other businesses must withhold 46.5% from any payment. The ABN issued to a company is the companys ACN plus two extra digits at the start of the number. Companies do not need to display both the ABN and the ACN. Sole trader, partnership, company and trustmust each register for GST if: it is carrying on an enterprise and expects to have annual sales of $75 000 or more; or it operates a taxi or hire car business.
Australian Business Number (ABN) A public registration number for GST purposes. The Australian Business Register is a central collection/verication system for identity information about businesses with an ABN.
Goods & Services Tax (GST) Broad-based tax of 10% on most goods and services sold or consumed in Australia.
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TABLE 5.7
OBLIGATION
Basic business tax registrations (continued)

WHO MUST REGISTER? WHERE TO GO#
Pay As You Go (PAYG) Withholding System under which amounts are deducted from payments made to workers directly involved in a business, and sent to the ATO.
Sole trader and partners are not employees; they are paid through drawings not wages. No need for a sole trader or partnership to register for PAYG Withholding unless they make payments to employees or contractors. Company and trust must register for withholding of PAYG for payments made to employees (including directors) and contractors. Sole trader and partnershipsole traders and partners are not employees and must arrange their own superannuation. Superannuation contributions must be paid for their employees. Companysuperannation contributions must be paid for the companys employees, including the company directors. Trustmay need to pay superannuation contribution for the trustee/s if they are also employed by the trust. Contributions must also be paid for other employees of the trust. * Businesses must identify eligible employees and register with acomplying employee (or employer) nominated superannuation fund. Sole trader, partnership, company and trust must each keep records required to comply with revenue legislation. Records must be kept for ve years and include records relating to income and GST (e.g. sales records, purchase expense records, year-end income tax records), records relating to payments to employees and records relating to PAYG Withholding. Superannuation Guaranteethere is no required form of record keeping for this, but a business must keep records that adequately explain its Superannuation Guarantee transactions, including the method of calculation for each eligible employee. Additional record-keeping obligations may apply under relevant awards or other workplace regulations.
Overview of business income <www.ato.gov.au>
Superannuation Guarantee Employers must pay compulsory superannuation contributions to a complying superannuation fund or retirement savings account for eligible employees. (The superannuation guarantee is currently 9% additional to wages or salary.)
Superannuation A Guide for Small Business <www.ato.gov.au>
Record keeping
Record-keeping for Small Business <www.ato.gov.au>
Superannuation Guarantee records
# Links to applicable ATO Information Sheets
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TABLE 5.8
ENTITY
Legislative requirements for record keeping, nancial reporting and audits

REGISTERS AND MINUTE BOOKS FINANCIAL RECORDS FINANCIAL REPORTING AGM AUDIT LODGE
Sole trader Partnership
No legislative requirement for record keeping, nancial reporting or auditother than compulsory records under tax, workers compensation, workplace or industry specic laws.
Corporations Act 2001 (Cth) Public company Large proprietary company Small proprietary company Yes Yes Yes Yes Yes Yes Yes Yes Only if directed by ASIC or members* Yes No No Yes Yes Only if directed by ASIC or members* Yes Yes No*
Associations Incorporations Act 1984 (NSW) Incorporated Association Trust Yes Yes Yes Yes No Yes
No legislative requirement for record keeping, nancial reporting or audit, other than compulsory records under tax, workers compensation, workplace or industry specic laws.
* Or the company is controlled by a foreign company and is not consolidated in that companys nancial statements.
SELF QUIZ

TRUE FALSE
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
23 The senior ofcers of an unincorporated association could be personally
liable for its debts and legal obligations.

24 An incorporated association has limited liability. 25 An incorporated association can return prots to members. 26 A business name must be displayed at each place of business. 27 If a business name is registered in Queensland it is automatically registered
in all jurisdictions.
28 Legal compliance applies only to large businesses.
SUMMARY
The main types of business entities or structures are: sole trader partnership company
trust franchise association.
Sole traders
Sole traders own and operate a business on their own. Advantages Relatively easy and cheap to set up and run Retains ownership and control Keeps all prots Maximum privacy Flexibility in changing business Legal compliance relatively simple Disadvantages Unlimited liability Lack of management skills or expertise Limitation of business life Limited access to funds Inability to split income with family Limited opportunity for tax minimisation
Partnerships
A partnership is the relationship that exists between two or more people carrying on a business in common with a view to making a prot. Advantages Relatively cheap and easy to set up Sharing of responsibility Additional assets, expertise and input Relative exibility to make changes Less stringent legal compliance Disadvantages Unlimited liability Difculties in transferring ownership No continuity when the partners split Potential for conict Limits on maximum number of partners
Companies
A company is a separate legal entity with all the legal capacity of an individual. A company is registered under the Corporations Act 2001 (Cth) at the Australian Securities and Investments Commission (ASIC) and given an Australian Company Number (ACN). Company operations are regulated and enforced by ASIC. On registration a corporate veil comes into existence. The veil protects the members from the companys debts. See Salomon v Salomon & Co Ltd [1897], p. 157 Advantages Separate legal entity Limited liability of members Continuous life Transferability of shares Taxation benets Easier access to capital Disadvantages Signicant set-up and maintenance costs Limited management role for members Control of the company can change Strict reporting and disclosure requirements Penalties imposed on defaulting ofcers More onerous legal compliance issues
TYPES OF COMPANIES (SEE FIGURE 5.1) 1. A company limited by shares. 2. A company limited by guaranteemembers undertake to contribute a specic sum if the company is wound up.
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3. Unlimited Company. 4. No liability companiesfor mining companies only.
A proprietary company must: be limited by shares (or be an unlimited company with a share capital); have at least one shareholder (but no more than 50 non-employee shareholders) and one director, who may be the same person; not do anything that would require disclosure to investors. A proprietary company can be classied as small and has reduced reporting requirements if it passes two out of three tests each nancial year: (i) a consolidated gross operating revenue of less than $25 million; (ii) consolidated gross assets of less than $12.5 million; (iii) fewer than 50 full-time equivalent employees. A public company is any company other than a proprietary company. A public company must have at least one member and three directors, and it may list on the ASX. LIFTING THE CORPORATE VEIL Under common law the veil will be lifted if the company was formed for fraudulent or improper purposes. See Gilford Motor Co v Horne [1933], p. 158. Under s 588G of the Act, the veil can be lifted for insolvent trading and personal liability imposed on directors for the debts of the company. Directors can avoid liability if (i) they reasonably believed the company was solvent; (ii) a competent and reliable person was advising them; (iii) illness or other good reasons prevented them taking part in management; or (iv) they took reasonable steps to prevent the debt: s 588H. INTERNAL GOVERNANCE A company may rely on the replaceable rules in the Act or adopt its own constitution. The management of the company is vested in the board of directors. Minority shareholders have remedies if the company is managed in an oppressive manner. DUTIES OF COMPANY DIRECTORS Common law duties. The main common law duties are to act in good faith (honestly) and in the best interests of the company, to maintain condentiality, not to make secret prots or commissions, to exercise their powers for a proper purpose and to exercise a duty of care, skill and diligence. Statutory dutiescivil and criminal law. The civil duties overlap those owed under common law. Criminal offences include dishonest use of information, and voting without disclosing a material interest. The main defence is the business judgment rule. The director must prove they acted rationally and honestly, without personal gain, and believed that the decision was in the companys best interests. INSIDER TRADING Insider trading is prohibited. It involves the use of price sensitive information which is not generally available to buy or sell shares (or other securities). FUNDRAISING Companies raise capital through equity (shares) or debt, which could involve secured or unsecured debentures, xed charges or oating charges. A public company cannot invite public subscriptions unless it issues a prospectus, which must make a full and honest disclosure on specic matters.
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Reporting and disclosure

Every company must keep prescribed registers, minute books and nancial records. Public and large proprietary companies must prepare and audit an annual nancial report and a directors report. The nancial report must comply with the Act and the accounting standards. The auditor must report to members as to whether the nancial report gives a true and fair view of the companys nancial position and performance. The audit must comply with any applicable auditing standards.
External administration
An insolvent company may be placed in receivership, voluntary administration or wound up.
Corporate governance
Corporate governance refers to how a company is directed and controlled. The ASX Corporate Governance Principles and Recommendations apply to listed companies.
Trusts
A trust is a business structure where a trustee (usually a company) carries out the business on behalf of the members of the trust (the beneciaries). Trustees have a duciary duty to act honestly and in the best interests of the beneciaries. Beneciaries, as equitable owners of the trust property, may take legal action to protect their rights. EXPRESS TRUSTS These are set up intentionally in a written will or trust deed. They include: Discretionary trust. Generally used in a small to medium family business. The trustees have discretion (choice) as to how they will distribute the trust income. Fixed entitlement trust. Each beneciary shares equally in the distribution of prots and assets. The trustee has no discretion as to distribution of prots and assets. Unit trust. The beneciarys entitlement to prots and asset distribution depends on the number of units held by that person. Any trust that carries on a business is a trading trust. Advantages of trading trusts Flexibility of prot distribution Possible tax minimisation Asset structure survives death of members Limited liability (if trustee is a company) Disadvantages of trading trusts Establishment and ongoing costs Limited rights of beneciaries Laws regarding trusts may be complex Higher compliance costs
Franchises
A franchise is an agreement in which the franchisee contracts to market the product, process, service or system of the franchisor. All franchises are regulated by the Franchising Code of Conduct. MAIN REQUIREMENTS PRIOR TO THE FRANCHISE AGREEMENT Full disclosure, including all major obligations, nances and structure, in a non-promotional document the franchisee must receive 14 days before making the contract. There is a seven-day cooling-off period.
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Written proof that the franchisee received or waived independent advice.
MAIN REQUIREMENTS DURING THE LIFE OF THE FRANCHISE AGREEMENT Franchisees may form associations. Mandatory dispute resolution system based on mediation. Franchisors must give notice about ownership changes and litigation. Marketing funds must be audited if franchisees contribute to them. Reasonable notice of termination and 30 days notice to rectify breaches. Advantages for franchisee Product name is established Established marketing, sharing of costs Business site, training and support Innovative marketing techniques can thrive in franchise environment Disadvantages for franchisee Rigid operational and marketing structure Reliance on the expertise of the franchisor Few opportunities to inuence the business system Increased nancial risk if franchisee must provide a personal guarantee to franchisor or lender
PROTECTION AND LIABILITIES UNDER CONSUMER PROTECTION LEGISLATION Franchisees can take action for breaches of the federal Trade Practices Act 1974, usually for unconscionable conduct or misleading and deceptive conduct.
Incorporated associations
A group of people may form an association under the Associations incorporation legislation. A set of Model Rules for the internal governance may be adopted. Advantages It is a separate legal entity Members have limited liability It can sue and hold assets in its own name It can enter into contracts in its own right It has a continuous life Disadvantages Prots cannot be distributed to members Compliance with statutory obligations Penalties may be imposed on ofcers Criminal penalties for insolvent trading Stricter nancial reporting requirements
Protection for business names and company names

A business must register its business name(s) unless it is a sole trader or partnership operating under the name(s) of the business owner(s). The business name must be registered in each state and territory where the business trades. Businesses can further protect their name and image through: registration of trademarks; consumer protection laws, mainly s 52 of the Trade Practices Act; passing-off actions, to protect the goodwill an operator has built up in a well-established business name. See The Budget Rent A Car Case (1977). There are restrictions on company names. Companies cannot register a company name that is already registered as a company or a business name in any state or territory.
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Compliance
Compliance refers to an organisations obligations to comply with the law. This involves identifying the law that applies to the business and the areas of risk, and then developing a compliance program. There is no generic compliance program as each organisations circumstances are different. Australian Standard AS 3806 has been developed to assist business in developing compliance programs. Regulatory compliance issues on starting a business include compulsory registrations (including taxation), recording keeping, business licences and permits, and local government approvals.
GUIDANCE QUESTIONS
Question 1
Allan Megson is unmarried and has no living family. He has dedicated the past ten years to his soletrader computer-software business that specialises in software to control pattern-making equipment. Allan realises that his long-term success now depends on attracting and keeping the right employees. Advise Allan which business structure would best serve his purpose. ANSWER Allan has three main options. 1. To form a partnership with one or two people with the types of skills Allan lacks. Allans personal assets would be at risk from any bad debts or unwise decisions made by the other member(s) of the rm. 2. To form a trust. A trust (discretionary or xed) would not attract and keep employees and Allan does not have family members to whom he could distribute the prots of the business. 3. To form a company. Allan could offer shares to employees, which would grow in value as the company prospered. Later, Allan could raise capital by selling shares. Provided Allan remains the majority shareholder, he can control who is selected for key management positions. A company is more expensive to establish than a partnership and is subject to more restrictions and scrutiny by ASIC. CONCLUSION Both a partnership and a company would suit Allans plans fairly well. The company provides better long-term advantages and allows him to protect his personal assets from creditors should his business fail. However, he will probably be required at times to give a personal guarantee to lenders, which will, once more, place his personal assets at risk.
Question 2
Allan Megson wants to convert his sole-trader software business into a company, but he is not sure what kind. He would like to include his own name in the company name and wonders if he should register a separate business name for trading purposes. Advise Allan. ANSWER Allan should form a proprietary company. He can name himself as the sole shareholder and director and thereby avoid unnecessary meetings and paperwork. If the company qualies as a small proprietary company, it will not have to lodge an audited nancial report with ASIC.
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A proprietary company is classied as small and has reduced reporting requirements if it passes two out of three tests at the end of the nancial year: (i) a consolidated gross operating revenue of less than $25 million; (ii) consolidated gross assets of less than $12.5 million; (iii) fewer than 50 full-time equivalent employees. Allan could incorporate as Megson Software Pty Ltd. The company would be given an ACN. There are special rules in the Corporations Act 2001 for sole person companies (the replaceable rules in the Act do not apply). The company could register and trade under a specic business name/s, such as Megson Electronic Patterns, provided this is disclosed on its ofcial documentation. All business names must be registered in each state or territory where the company operates. If the business prospers, it could be converted to a public company. Invitations to invest in the company must be in the form of a prospectus or a disclosure document.
Question 3
Kate Ewen bought a City Day Park franchise from Celia Day Pty Ltd (CD), which leases vacant warehouses, converts them into parking stations and subleases them back to the franchisees. CDs disclosure material included statements that: Our operation is the best franchise opportunity in Australia since McDonalds and is a proven concept; We have been operating for eight years and have a current net worth of $14 million; Our stations are surveyed, retted and maintained by structural engineers; The marketing budget for each station is at least $120 000 per year. Two years after Kate became a franchisee her car park sees very few customers because CD has only spent about $20 000 on marketing her station, and it has often been closed for repairs to advanced concrete cancer. The expensive maintenance company she is required to use is run by tradesmen, not engineers, and it is paying CD a 5% commission. Kate now knows CD had only been operating for three years when she bought her franchise and had debts of $2 million. (a) What possible breaches of the Franchising Code and the Trade Practices Act have occurred? (b) What remedies are available to Kate? ANSWER (a) CD appears to have breached the Franchising Code by: including promotional material in its disclosure statement (the best franchise opportunity since McDonalds claim); and making false statements about the duration and nancial state of the company. CD appears to have breached the following consumer protection provisions of the Trade Practices Act: s 52misleading or deceptive conduct, through the statements about its duration and nancial status, the qualications of its maintenance team and possibly its claim to be a proven concept. Failure to discover or prevent the concrete cancer could constitute another breach of s 52. CD has probably also breached s 47 of the Trade Practices Act, which prohibits exclusive dealing, by requiring Kate to use the services of an apparently uncompetitive third party. (b) Kate could take legal action to recover damages and seek orders to terminate or rewrite the franchise agreement. She could also complain to the ACCC (or the Fair Trading Ofce in her jurisdiction) and see if it could take action on her behalf. As well as the remedies referred to above, the ACCC
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could seek nes (for breaches apart from ss 52 and 51AA) and orders such as corrective advertising, injunctions and compliance programs. See ACCC v Top Snack Foods (1999).
REVIEW QUESTIONS
Sole traders
1. List the key characteristics of a business operated on a sole-trader basis. 2. Compare and contrast the advantages and disadvantages of a sole trader.
Partnerships
3. List the key characteristics of a business operated as a partnership. 4. What are the advantages and disadvantages of a partnership? Give examples.
Companies
5. Dene a company and list its advantages and disadvantages. Give examples. 6. What is the meant by the corporate veil? Describe three situations where the courts may lift the
veil to establish whether company members have breached common or statutory laws.
7. What are the differences between a small and a large proprietary company? How many sharehold-
ers and directors are required to form (a) a private company and (b) a public company?
Duties of directors
8. List and briey explain six common law or statutory duties of a director. 9. Megson Software Pty Ltd appointed Nicholas Jones as a director responsible for marketing.
Nicholas persuaded customers of Megson Software to take their business to NPJ Electronic Patterns, which Nicholas controls through his parents. What common law or statutory duties has Nicholas breached? What remedies are available?
Raising capital
10. Explain the ways in which companies can raise capital by (a) equity nance and (b) debt nance. 11. Explain the differences between xed charges and oating charges. Give an example of each.
Franchises
12. Dimitri, a retired school teacher, is interested in becoming a franchisee with Perfect Score Educa-
tion Centres Pty Ltd which runs a high school tutoring business. The franchisor claims Dimitri will earn $60 000 per year within two years. Advise Dimitri about what should be included in a franchise agreement and how he can best protect his interests. 13. See the facts in Question 12. Dimitri entered a franchise agreement with Perfect Score. After one year in business Dimitri has learned that Perfect Scores prot projections were highly inated and it was badly in debt when Dimitri bought the franchise. What remedies are available to Dimitri and what are his chances of success? 14. Explain, giving examples where possible, what possible conicts could arise between a franchise agreement and Part IV of the Trade Practices Act.
198
PART 3
Business entities
Trusts
15. Dene a trust and list its key characteristics. 16. Give three examples of occasions when it is likely a trust would be created.
Associations
17. Are members of an association liable for the debts of the association? Why or why not? 18. David operates a basketball club for underprivileged teenagers in an inner-city suburb. Each player
pays a membership fee or a service club pays it. The treasurer disappears with all the funds, leaving the club with debts of $12 000. Who is liable for this debt? Would your answer be different if the club was an incorporated association?
Business name protection

19. How could the names of the following types of businesses be protected?
(a) a sole trader; (b) a partnership; (c) a company.

20. Greg the Moose promotes kick boxing in Queensland under the registered business name of Kick
Start. Greg wants to form a company using the same name. When he searches the ASIC website for company and business names he nds the following registered names. (a) Kick Start, a business name registered in Victoria that is used by a kick-boxing promoter; (b) Kick Starter, a business name registered in New South Wales; (c) Kick Static Pty Ltd, a company name registered to a company based in Western Australia. Explain, giving reasons, whether each name could prevent Greg from registering his preferred company name.
COMPLIANCE ACTIVITIES
21. Remember Marley and Bella from the introduction to this chapter? Bella will operate from home as
a sole trader under the name, Camelot Financial Planners. Marley has registered a proprietary limited company with his friend, Conor, and bought into the real estate franchise known as LJ Winger. They employ a receptionist and one salesperson. (a) Do a search of the National Names Index at <www.asic.gov.au> and nd out whether the name Camelot Financial Planners is available. (b) Make a checklist of any (i) licences and permits, (ii) industry codes of conduct, and (iii) basic tax registrations that may apply to each business. (c) Bella has looked at the publication, What Books and Records Should My Company Keep? at <www.asic.gov.au> (see Compliance Check). Make a list of the records she must set up in order that Marleys company complies with s 286. 22. Marley and Connor are having problems with their franchisor LJ Winger. They claim Winger: refuses supply of essential products to them; competes with them within their franchised territory; requires them to buy items from Winger that they could buy cheaper elsewhere. Locate the Best & Fairest compliance training package on the website of the ACCC. Go to Module 6 and then answer the following questions:
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(a) What are the options available to Marley and Conor? (b) Could Wingers conduct be seen as unconscionable? (c) Can Marley and Conor take legal action against the directors of Winger? If you have difculty locating information go to the ABL website for directions. Note: The case assignments and research assignments that appeared at the end of each chapter in previous editions are now located in the Instructors Manual.
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PART 3
Business entities

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AUSTRALIAN BUSINESS LAW

COMPLIANCE AND PRACTICE

What is agency? Agency distinguished from other relationships Types of agents

Civil liability: intentional torts and defamation

Partnerships and joint ventures

Nature of a partnership What is a partnership? Determining when a partnership exists

Intention to create legal relations

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

Self quiz Summary Guidance questions Review questions

396 396 398 399

17 Remedies for breach of contract

16 Transfer and termination

Summary Guidance questions Review questions Compliance activities

446 450 451 453

19 Leases and transfer of real property

22 Bankruptcy and debt recovery

What types of credit contracts are regulated by the Code? 500

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

25 Restrictive trade practices

27 Marketing law and ethics

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

31 Occupational Health and Safety

828 838 846 853 857 858

The importance of legal compliance

Compliance features in ABL

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

Other changes to ABL

Updates and improvements

About the authors

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

WHY IS THERE SUCH A STRONG INCREASED INTEREST IN COMPLIANCE?

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

HOW TO USE YOUR TEXTBOOK

SETTING THE SCENE

Business judgment rule: test case

ASIC v Adler (2002) CASE

Indicate whether each of the following statements is true or false.

Public and large proprietary companies must prepare a nancial report

Mazda Australia Pty Ltd & Ors v ASC (1992)

Audit and audit report

AUSTRALIAN BUSINESS LAWCOMPLIANCE AND PRACTICE

ACCC v Kyloe Pty Ltd [2007]

Disclosure document must be provided to the franchisee

Legislative requirements for record keeping, nancial reporting and audits

Ketchell CASE v Master of Education Services Pty Ltd [2007]

Sole trader Partnership

Non-disclosure of vital information by a franchisor

Disclosure document 14 days before contract

Summaries provide a concise picture of what the chapter covered.

Indicate whether each of the following statements is true or false.

23 The senior ofcers of an unincorporated association could be personally

liable for its debts and legal obligations.

Review questions allow students to consolidate their learning.

4. What are the advantages and disadvantages of a partnership? Give examples.

Business name protection

(a) a sole trader; (b) a partnership; (c) a company.

agreement and Part IV of the Trade Practices Act.

HOW TO USE YOUR TEXTBOOK

Business structures Agency law Partnerships and joint ventures

SETTING THE SCENE

CHOOSING A BUSINESS STRUCTURE

A sole traders liability is unlimited

Advantages and disadvantages of the sole trader