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Contents TOPIC 1 – THE LAW OF PARTNERSHIP .................................................................................................. 18
DEFINITION OF PARTNERSHIP ........................................................................................................... 18
‘Carrying on a business’ .................................................................................................................... 18
Turnbull v Ah Mouy ....................................................................................................................... 18
Ballantyne v Raphael ..................................................................................................................... 18
Smith v Anderson .......................................................................................................................... 18
Canny Gabriel Castle Jackson Advertising v Volume Sales Pty Ltd ............................................... 19
Carrying on a business in common’ .................................................................................................. 19
Keith Spicer Ltd v Mansell ............................................................................................................. 19
Khan v Miah .................................................................................................................................. 19
Kanf-Kem v Paine .......................................................................................................................... 20
A ‘view of profit’................................................................................................................................ 20
Rule 1 – s2(1)(1) ............................................................................................................................ 20
Davis v Davis .................................................................................................................................. 20
Rule 2 – s2(1)(2) ............................................................................................................................ 20
Cribb v Korn ................................................................................................................................... 20
Rule 3 – S2(1)(3) ............................................................................................................................ 21
Cox v Hickman ............................................................................................................................... 21
FORMATION OF A PARTNERSHIP ...................................................................................................... 21
NATURE OF A PARTNERSHIP ............................................................................................................. 21
RELATIONS OF PARTNERS AND THIRD PARTIES ................................................................................ 21
Agency principle ................................................................................................................................ 22
Mercantile Credit Co Ltd v Garrod ................................................................................................ 22
Golberg v Jenkins .......................................................................................................................... 22
Construction Engineering (Aust) Pty v Hexyl Pty Ltd ( .................................................................. 22
Types of Liability ............................................................................................................................... 23
Liability in Contract ........................................................................................................................... 23
Liability in Tort .................................................................................................................................. 23
Hedley Byrne Co Ltd v Heller & Partners [ .................................................................................... 23
Liability of Non-Partners ................................................................................................................... 24
Australia Joint Stock Bank v Steele ............................................................................................... 24
Lynch v Stiff ................................................................................................................................... 24
Duke Group Ltd (in liq) v Pilmer .................................................................................................... 24
Other relevant sections for liability of partners ............................................................................... 25
2
RELATIONS BETWEEN PARTNERS INTERSE ....................................................................................... 25
Fiduciary Relations ............................................................................................................................ 25
Thompson’s Trustee v Heaton ...................................................................................................... 26
Birtchnell v Equity Trustees, Executors and Agency Co Ltd .......................................................... 26
Chan v Zacharia ............................................................................................................................. 26
United Dominions Corp Ltd v Brian Pty Ltd .................................................................................. 27
Fleming v McKechnie .................................................................................................................... 27
Partnership Property ......................................................................................................................... 28
Sharp v The Union Trustee Co of Australia Ltd ............................................................................. 28
Management Matters ....................................................................................................................... 28
TERMINATION (DISSOLUTION) OF A PARTNERSHIP ......................................................................... 29
CONSEQUENCES OF DISSOLUTION OR TERMINATION OF A PARTNERSHIP ..................................... 29
LIMITED PARTNERSHIPS AND INCORPORATED LIMITED PARTNERSHIPS ......................................... 29
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP ............................................................... 30
TOPIC 2 – AGENCY LAW ........................................................................................................................ 31
DEFINITION OF AGENT ...................................................................................................................... 31
International Harvester Co of Australia Pty Ltd v Carrigans Haxeldene Pastoral Co .................... 31
CREATION OF AGENCY ...................................................................................................................... 31
Agency by agreement ....................................................................................................................... 31
Lucken v Buckeye Parking Corporation ......................................................................................... 32
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd ................................................. 32
Soanes v London SW Ry ................................................................................................................ 33
Tooth v Laws ( ............................................................................................................................... 33
Panorama Development (Guildford) v Fidelis Furnishing Fabrics ................................................. 33
Crabtree-Vickers Pty v Australian Direct Mail Advertising & Addressing Co Pty Ltd .................... 34
Overbrooke Estates Ltd v Glencombe Properties Ltd ................................................................... 34
Agency by operation of Law ............................................................................................................. 35
Agency of necessity strictly so called ................................................................................................ 35
Great Northern Ry v Swafield ....................................................................................................... 35
Springer v Great Western Railway ................................................................................................ 35
Marriage and Cohabitation ............................................................................................................... 35
Pianta v Macro & Sons Pty Ltd ...................................................................................................... 35
Agency by Ratification ...................................................................................................................... 36
Agent must have acted as Agent ...................................................................................................... 36
Keighley Maxtead & Co v Durnat .................................................................................................. 36
The alleged principal must be in existence at the time of the transaction ...................................... 36
3
Kelner v Baxter .............................................................................................................................. 36
TYPES OF AGENTS ............................................................................................................................. 37
Universal Agent ................................................................................................................................. 37
General Agent ................................................................................................................................... 37
Special Agent ..................................................................................................................................... 37
Del Credere Agent ............................................................................................................................. 37
RELATIONSHIP BETWEEN PRINCIPAL AND AGENT............................................................................ 38
Duties of the Agent to the Principal (Principal’s duties) ................................................................... 38
Duty to obey principal’s instructions ................................................................................................ 38
Bertram, Armstrong v Godfrey ..................................................................................................... 38
Veljkovic v Vrybogen ..................................................................................................................... 38
Duty to exercise diligence, care and skill .......................................................................................... 38
Miltor Investments v General Accident and Fire and Life Insurance Corporation Ltd ................. 39
Keppel v Wheeler .......................................................................................................................... 39
Chaudhry v Prabhakar ................................................................................................................... 39
Agent has a duty to act personally ................................................................................................... 39
John McCann & Co v Pow ............................................................................................................. 40
Duty to avoid conflicts of interest ..................................................................................................... 40
Blackham v Haythorpe .................................................................................................................. 40
Duty of Agent to safeguard confidential information ...................................................................... 40
Duty to keep accounts and account to Principal for all benefits ...................................................... 40
Duties owed by the principal to the Agent (Agents rights) .............................................................. 40
Duty to pay remuneration ................................................................................................................ 41
Berben v Hedditch ........................................................................................................................ 41
Duty to indemnify ............................................................................................................................. 41
Agent’s right of lien ........................................................................................................................... 41
Right of stoppage in transit ............................................................................................................... 41
RELATIONSHIP BETWEEN THE PRINCIPAL AND THIRD PARTIES ....................................................... 41
A named principal ............................................................................................................................. 42
Schwalz v Avery ............................................................................................................................. 42
Kelner v Baxter .............................................................................................................................. 42
Disclosed but not named principal ................................................................................................... 42
Where neither the name nor existence of the principal is disclosed (undisclosed principal) .......... 43
Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd .............................................................. 43
Watteau v Fenwick ........................................................................................................................ 43
TERMINATION OF AGENCY ............................................................................................................... 44
4
Termination of agency by act of the parties ..................................................................................... 44
Termination of agency by operation of law ...................................................................................... 45
TOPIC 3 – COMPANY LAW & COMPANY FORMATION ......................................................................... 46
A company as a separate legal entity ............................................................................................... 46
Salomon v A Salomon & Co Pty Ltd ............................................................................................... 46
Macaura v Northern Assurance Co ............................................................................................... 47
Lee v Lee’s Air Farming Ltd ........................................................................................................... 47
Statutory provisions .......................................................................................................................... 48
Organic theory of corporations......................................................................................................... 48
Lennards Carrying Co Ltd v Asiatic Petroleum Co Ltd ................................................................... 48
HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd .............................................................. 49
Tesco Supermarkets Ltd v Nattrass ............................................................................................... 49
Lifting (Piercing the Corporate veil) .................................................................................................. 50
Statutory lifting of the corporate veil ............................................................................................... 50
Judicial Lifting of the corporate veil .................................................................................................. 52
Where a corporate form is used to avoid existing legal obligations ................................................ 52
Gilford Motors Co Ltd v Horne ...................................................................................................... 52
Creasey v Breachwood Motors Ltd ............................................................................................... 52
Jones v Lipman .............................................................................................................................. 52
Where the company is used as a vehicle for, or to perpetrate, fraud .............................................. 53
Re Darby; Ex Parte ......................................................................................................................... 53
Use of a company as an agent .......................................................................................................... 53
Re FG (Films) Ltd ........................................................................................................................... 53
Smith, Stone and Knight v Birmingham Corporation .................................................................... 54
Involvement in directors breach of duty .......................................................................................... 54
Green v Bestobell Industries Ltd ................................................................................................... 54
Groups of Companies and lifting the corporate veil – Separate legal entity in Corporate Groups .. 55
Walker v Wimborne ...................................................................................................................... 55
Industrial Equity v Blackburn ........................................................................................................ 55
Briggs v James Hardie & Co Pty Ltd ............................................................................................... 56
Quintex Australia Finance Ltd v Schroders Australia Ltd .............................................................. 56
FORMATION OF A COMPANY ........................................................................................................... 56
Types of companies .......................................................................................................................... 56
Proprietary companies ...................................................................................................................... 57
Public companies .............................................................................................................................. 57
Company registration and its effects ................................................................................................ 58
5
Company’s constitution and replaceable rules................................................................................. 58
PRE – INCORPORATION DEALINGS – PROMOTERS AND THEIR DUTIES ............................................ 59
Who is a promoter? .......................................................................................................................... 59
Twycross v Grant ........................................................................................................................... 59
Tracy v Mandalay Pty Ltd .............................................................................................................. 59
Duties of Promoters .......................................................................................................................... 59
Salomon v Salomon & Co Ltd ........................................................................................................ 60
Erlanger v New Sombrero Phosphate Co ...................................................................................... 60
Gluckstein v Barnes ....................................................................................................................... 60
Tracy v Mandalay Pty Ltd .............................................................................................................. 60
Remedies for breach of promoters duties ........................................................................................ 61
Cadence Asset Management Pty Ltd v Concept Sports Limited ................................................... 61
Pre-incorporation Contracts ............................................................................................................. 61
Kelner v Baxter .............................................................................................................................. 61
Black v Smallwood ( ...................................................................................................................... 62
Legislative control of promoters ....................................................................................................... 62
Prospectus and Incorporation: Misstatements in and Omissions from disclosure documents ....... 62
TOPIC 4 – COMPANY FINANCE I ............................................................................................................ 64
Commencement of a business and Powers of the company ............................................................ 64
Company constitution and replaceable rules ................................................................................... 64
Statutory requirements for internal administration of a company .................................................. 64
Registered office and operating hours .............................................................................................. 64
Name of the Company ...................................................................................................................... 64
Directors ............................................................................................................................................ 64
Morris v Kanssen ........................................................................................................................... 65
NRMA Ltd v Spragg ....................................................................................................................... 66
Other company officers – company secretary and managerial staff................................................ 66
Powers of the company .................................................................................................................... 67
Ashbury Railway Carriage and Iron Co v Riche ............................................................................. 67
Company’s relationship with outsiders (third parties) ..................................................................... 67
HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd .............................................................. 67
Tesco Supermarkets Ltd v Nattrass ............................................................................................... 68
Indoor Management Rule – 128-130 ............................................................................................... 68
Royal British Bank v Turquand ...................................................................................................... 68
Story v Advance Bank of Australia Ltd .......................................................................................... 69
Freeman & Lockyer v Buckhurst Part Properties (Mengal) Ltd .................................................... 69
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Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd .............. 70
When not entitled to rely on the indoor management rule ............................................................. 70
Northside Developments Pty Ltd v Registrar-General .................................................................. 71
Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd .......................................................... 71
COMPANY FINANCE .......................................................................................................................... 71
Share Capital ..................................................................................................................................... 71
Classes of shares ............................................................................................................................... 72
Payment for shares: cash or other consideration ............................................................................. 73
Re White Star Line Ltd ................................................................................................................... 73
TOPIC 5 – COMPANY FINANCE I (cont) ................................................................................................. 74
Doctrine of Maintenance of Share Capital........................................................................................ 74
Alteration of shares........................................................................................................................... 74
The doctrine of maintenance of share capital .................................................................................. 74
Trevor v Whitworth ....................................................................................................................... 74
Indirect self-acquisition..................................................................................................................... 75
Reductions of share capital ............................................................................................................... 76
Prohibition on a company’s assistance for the acquisition of its own shares – s 260A ................... 77
Darvall v North Sydney Brick & Tile Co Ltd ................................................................................... 77
Permissible capital reductions – s 258A-258E .................................................................................. 78
Permitted share buy-backs ss 257A-257H ........................................................................................ 78
Company Membership and Shareholding ........................................................................................ 79
The register ....................................................................................................................................... 79
Re Clifton Springs Hotel Ltd .......................................................................................................... 79
Rectification of the register .............................................................................................................. 79
Grant v John Grant & Sons Pty Ltd ................................................................................................ 80
McLaughlin v Daily Telegraph Newspapers Co (No 2) .................................................................. 80
Share certificates .............................................................................................................................. 80
Daily Telegraph Co v Cohen .......................................................................................................... 80
Re Bahia & San Francisco Rail Co Ltd ............................................................................................ 80
Transfer of shares ............................................................................................................................. 81
Disclosure of interest in shares ......................................................................................................... 81
Cessation of membership ................................................................................................................. 81
Dividends........................................................................................................................................... 82
What is profit? .................................................................................................................................. 82
Who may declare a dividend? .......................................................................................................... 82
Problems with the payment of dividends ......................................................................................... 83
7
Principles re the payment of a dividend ........................................................................................... 83
Verner v General Commercial Investment Trust .......................................................................... 83
Remedies for improper payment of dividend................................................................................... 84
TOPIC 6 – COMPANY FINANCE II – Debt Capital ................................................................................... 85
Borrowing Powers of a company ...................................................................................................... 85
Who has the power to borrow? ........................................................................................................ 85
Forms of security for borrowing – secured and unsecured loans .................................................... 85
Debentures ....................................................................................................................................... 85
Requirement of a Trustee ................................................................................................................. 86
Duties of the borrower company ...................................................................................................... 86
Trustee’s Duties ................................................................................................................................ 87
Register of debenture holders .......................................................................................................... 87
A debenture will become immediately payable when ... ................................................................. 87
Company Charges ............................................................................................................................. 87
Types of Charges ............................................................................................................................... 88
Fixed Charge ...................................................................................................................................... 88
Floating Charge ................................................................................................................................. 88
Illingworth v Houldsworth ............................................................................................................ 88
Distinction between fixed and floating charges ............................................................................... 89
United Builders Pty Ltd v Mutual Acceptance .............................................................................. 89
Crystallisation of Floating Charges .................................................................................................... 89
Fire Nymph Products Ltd v The Heating Centre Pty Ltd ............................................................... 89
Reynolds Bros (Motors) Pty Ltd v Esanda Ltd ............................................................................... 90
Priorities between fixed and floating charges – not registered ....................................................... 90
Re Borax Co ................................................................................................................................... 90
Torzillu Pty Ltd v Brynac Pty Ltd .................................................................................................... 91
Re Manurew Transport Ltd ........................................................................................................... 91
Re Bismarck Australia Pty Ltd ....................................................................................................... 91
Registration of Charges – Chapter 2K, Pt 2K.2 (ss 262-277) ............................................................. 92
Procedure for lodgement and registration of charges ..................................................................... 92
Registrable charges ........................................................................................................................... 93
Priority of registrable charges – Ch 2K, Pt 2K.3 (ss 278-282) ............................................................ 93
Time of registration ........................................................................................................................... 93
Rules for determining priority........................................................................................................... 93
Australian Central Credit Union v Commonwealth Bank ............................................................. 94
Prospective liability ........................................................................................................................... 94
8
Negative Pledges ............................................................................................................................... 95
Invalidation of Charges ..................................................................................................................... 95
TOPIC 7 – CORPORATE GOVERNANCE RULES IN THE MANAGEMENT OF THE COMPANY ................... 96
Division of Power within a company, board of directors ................................................................. 96
What is a director? ............................................................................................................................ 96
‘Officer’ – many of the duties applicable to directors are also applicable to officers of the company
.......................................................................................................................................................... 96
ASIC v Adler (No 3) ........................................................................................................................ 97
Functions of the Board of Directors and General Meeting............................................................... 97
Functions of the Director/Board of Directors .................................................................................... 97
Immunity of the Board from interference by the general meeting .................................................. 97
Automatic Self-Cleansing v Cunninghame .................................................................................... 97
John Shaw Ltd v Shaw ................................................................................................................... 98
Functions of the General Meeting .................................................................................................... 98
Appointment of Directors ................................................................................................................. 98
Operation of the Board of Directors ................................................................................................. 98
Poliwka v Haven Holdings Pty Ltd ................................................................................................. 99
Swiss Screens (Aust) Pty Ltd v Burgess ......................................................................................... 99
DUTIES OF COMPANY DIRECTORS .................................................................................................... 99
To whom are the duties owed? ...................................................................................................... 100
Greenhalgh v Arderne Cinemas .................................................................................................. 100
Re Smith & Fawcett Ltd ............................................................................................................... 100
Directors and officers do not owe duties to individual shareholders ............................................ 100
Percival v Wright ......................................................................................................................... 100
However, circumstances may arise in which an independent fiduciary duty may arise between a
particular director and a particular shareholder ............................................................................ 100
Coleman v Myers [ ...................................................................................................................... 100
Where a company acts as a trustee, directors of the trustee company may owe a duty to act in the
best interests of the beneficiaries of the trust ............................................................................... 100
Hurley v BGH Nominees Pty Ltd (No 2) ....................................................................................... 100
Duty to act bona fide in the interests of the company ................................................................... 101
Mills v Mills ................................................................................................................................. 101
Walker v Wimborne .................................................................................................................... 101
Duty to exercise powers for a proper purpose ............................................................................... 102
Mills v Mills ................................................................................................................................. 102
Howard Smith Ltd v Ampol Petroleum Ltd ................................................................................. 102
Harlowe’s Nominees Pty Ltd v Woodside (lake entrance) Oil Co NL .......................................... 103
9
Duty to retain discretion ................................................................................................................. 103
Duty to avoid conflict of interests ................................................................................................... 103
Phipps v Boardman ..................................................................................................................... 103
Contracting with the company ....................................................................................................... 104
Aberdeen Railway Co v Blakie Bros ............................................................................................. 104
Queensland Mines Ltd v Hudson ................................................................................................ 104
Transvaal Lands Co v New Belgium (Transvaal) Lands and Development Co ............................. 104
Deriving personal profit from acting as director ............................................................................ 105
Regal (Hastings) Ltd v Gulliver .................................................................................................... 105
Taking up a corporate opportunity ................................................................................................. 105
Cook v Deeks ............................................................................................................................... 105
Canadian Aero Service Ltd v O’Malley ........................................................................................ 106
Peso Silver Mines Ltd v Cropper ................................................................................................. 106
Queensland Mines Ltd v Hudson ................................................................................................ 106
SEA Food International Pty Ltd v Lam ......................................................................................... 106
Green v Bestobell Industries Pty Ltd ........................................................................................... 106
Duty of Disclosure ........................................................................................................................... 107
Southern Cross Mines Management Pty Ltd v Ensham Resources Pty Ltd ................................ 107
Duty of Care, Skill and Diligence ..................................................................................................... 107
Re City Equitable Fire Insurance Co ............................................................................................ 107
AWA Ltd v Daniels ....................................................................................................................... 108
Daniels v Anderson ..................................................................................................................... 108
Other important cases .................................................................................................................... 109
Permanent Building Society (in liq) v Wheele ............................................................................. 109
ASIC v Vines ................................................................................................................................. 109
Vines v ASIC ................................................................................................................................. 109
Duke Group v Pilmer ................................................................................................................... 109
ASIC v Macdonald ....................................................................................................................... 110
ASIC v Healey............................................................................................................................... 110
Defence to breach of duty to act with care, skill and diligence – Business Judgment Rule ........... 110
ASIC v Adler ................................................................................................................................. 111
ASIC v Rich ................................................................................................................................... 111
Duty to prevent insolvent trading ................................................................................................... 111
Defences ......................................................................................................................................... 111
Statewide Tobacco Services Ltd v Morley ................................................................................... 112
Commonwealth Bank Ltd v Friedrich .......................................................................................... 112
10
ASIC v Vizard ............................................................................................................................... 113
Duty not to misuse position ............................................................................................................ 113
Other statutory duties .................................................................................................................... 113
Disclosure of material personal interests in contract, property, offices – s 181 and s 192. .......... 113
Approval of benefits to directors of public companies .................................................................. 113
Duties in relation to corporate groups ........................................................................................... 114
REMEDIES FOR BREACH OF DIRECTORS DUTIES ............................................................................. 114
General Law .................................................................................................................................... 114
Civil and Criminal penalties for contravention ............................................................................... 114
Exoneration and relief from liability for breach of duty ................................................................. 115
TOPIC 8: MEETINGS & RESOLUTIONS – MAJORITY RULE AND MINORITY PROTECTION .................... 116
Types of Meetings ........................................................................................................................... 116
Who may convene a general meeting? .......................................................................................... 117
Board of directors ........................................................................................................................... 117
Individual Director .......................................................................................................................... 117
The Court ........................................................................................................................................ 117
Members of the company............................................................................................................... 117
Humes Ltd v Unity APA Ltd ......................................................................................................... 118
National Road & Motorists’ Association v Parker ....................................................................... 118
Postponement or adjournment of meetings .................................................................................. 118
Notice of a meeting......................................................................................................................... 118
Statutory validation of PROCEDURAL irregularities in meetings .................................................... 119
Australian Hydrocarbons NL v Green .......................................................................................... 119
Scullion v Family Planning Association of Queensland ............................................................... 120
Bell Resources Ltd v Turnbridge Pty Ltd...................................................................................... 120
Resolutions – Ordinary and Special Resolutions ............................................................................. 120
Majority Rule and Minority Protection ........................................................................................... 121
Foss v Harbottle ( ........................................................................................................................ 121
Macdougall v Gardiner ................................................................................................................ 121
Pavlides v Jensen ......................................................................................................................... 122
Exceptions to the rule in Foss v Harbottle ...................................................................................... 122
Fraud on the minority – minority oppression ................................................................................. 122
Daniels v Daniels [ ....................................................................................................................... 123
Allen v Gold Reefs of West Africa Ltd ......................................................................................... 123
Gambotto v WCP Ltd ................................................................................................................... 123
Enforcement of members’ personal rights ..................................................................................... 125
11
Hickman v Kent or Romney Marsh Sheep Breeders Association ................................................ 125
Eley v Positive Government Security Life Assurance Co Ltd ....................................................... 125
Altering the class rights of members – statutory constraints ......................................................... 126
STATUTORY REMEDIES OF MINORITY MEMBERS ........................................................................... 126
Derivative Actions ........................................................................................................................... 126
Swansson v RA Pratt Properties Pty Ltd (2002 ........................................................................... 127
Minority Oppression ....................................................................................................................... 127
Examples of unfair/oppressive conducts ........................................................................................ 128
Re Spargos Mining NL ................................................................................................................. 128
Re R Harmer ................................................................................................................................ 129
Director misconduct........................................................................................................................ 129
Jenkins v Enterprise Gold Mines NL ............................................................................................ 129
Ebrahimi v Westbourne Galleries ............................................................................................... 130
Hogg v Dymock ........................................................................................................................... 130
Kotovich Constructions Pty Ltd v Wallington .............................................................................. 130
Stapp v Surge Holdings Pty Ltd ................................................................................................... 130
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd & Ors ........................................................................ 130
GSF Management Services Pty Ltd v Ground & Foundation Supports Pty Ltd ........................... 131
Campbell v Backoffice Investments Pty Ltd ................................................................................ 131
Winding up ...................................................................................................................................... 131
Statutory injunction ........................................................................................................................ 131
Other remedies ............................................................................................................................... 132
TOPIC 9: FINANCIAL REPORTING AND AUDIT REQUIREMENTS .......................................................... 133
Financial Records ............................................................................................................................ 133
Statutory requirement to keep financial records ........................................................................... 133
Annual financial reports .................................................................................................................. 133
Manner of keeping financial records .............................................................................................. 134
Kenna & Brown Pty Ltd v Kenna ................................................................................................. 134
Van Reesema v Flavel .................................................................................................................. 134
Access to Financial Records ............................................................................................................ 134
Members ......................................................................................................................................... 135
Auditors and receivers .................................................................................................................... 135
ASIC ................................................................................................................................................. 135
Obligation to prepare annual financial report ................................................................................ 135
Contents of a financial report for a financial year .......................................................................... 136
Australian Securities and Investments Commission v Healey .................................................... 136
12
True and Fair View .......................................................................................................................... 136
CAC v Barton ............................................................................................................................... 137
Odeon Associated Theatres Ltd v Jones...................................................................................... 137
Audit Requirements ........................................................................................................................ 137
Functions of an auditor ................................................................................................................... 137
Fomento (Sterling Area) v Selsdon Fountain Pen ....................................................................... 137
Appointment of an Auditor ............................................................................................................. 138
Qualifications for appointment ....................................................................................................... 138
Auditor’s duties to the company ........................................................................................................ 139
Duty to report to members ............................................................................................................. 139
Duty to report to ASIC ..................................................................................................................... 140
Duty to carry out an audit ............................................................................................................... 140
Pacific Acceptance Corp Ltd v Forsyth ........................................................................................ 140
Duty to detect and report irregularities ......................................................................................... 140
Daniels v Anderson ..................................................................................................................... 141
AWA Ltd v Daniels ....................................................................................................................... 141
Duty to be independent .................................................................................................................. 141
Prescribed conflict of interest situations ........................................................................................ 142
Retiring partners becoming officers during an audit ...................................................................... 143
Auditor independence declaration ................................................................................................. 143
Auditor Rotation requirements ...................................................................................................... 143
ASIC relief powers ........................................................................................................................... 143
Re Transplanters (Holding Co) Ltd .............................................................................................. 143
Duty to exercise reasonable care and skill ...................................................................................... 144
Re Kingston Cotton Mills ............................................................................................................. 144
Re Thomas Gerrard & Sons Ltd ................................................................................................... 144
Standard of care and skill ................................................................................................................ 144
Pacific Acceptance Corp Ltd v Forsyth ........................................................................................ 144
Daniels v Anderson; Hooke v Daniels; Daniels v AWA Ltd .......................................................... 145
Arthur Young & Co v WA Chip & Pulp Co Pty Ltd ........................................................................ 146
Segenhoe Ltd v Akins .................................................................................................................. 146
Internal control systems ................................................................................................................. 146
Causation ........................................................................................................................................ 146
Daniels v Anderson; Hooke v Daniels; Daniels v AWA Ltd .......................................................... 147
Other aspects of Auditors liability .................................................................................................. 147
Indemnification from liability ......................................................................................................... 147
13
Contributory Negligence ................................................................................................................. 147
Daniels v Anderson ..................................................................................................................... 147
Auditor’s duty to third parties – liability of auditors to individual shareholders and third parties 148
Chandler v Crane, Christmas & Co .............................................................................................. 148
Hedley Byrne Co Ltd v Heller & Partners .................................................................................... 149
Shaddock & Associates Pty Ltd v Parramatta City Council ......................................................... 149
Scott Group Ltd v McFarlane ...................................................................................................... 149
Caparo Industries Plc v Dickman ................................................................................................. 150
Recent Australian Decisions ............................................................................................................ 150
R Lowe Lippmann Figdor & Frank v AGC (Advances) Ltd ............................................................ 150
Columbia Coffee & Tea Pty Ltd v Churchill t/as Nelson Parkhill ................................................. 150
Esanda Finance Corp Ltd v Peat Marwick Hungerfords .............................................................. 151
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd............................... 152
Auditors prospectus liability ........................................................................................................... 152
Proportionate Liability of Auditors ................................................................................................. 152
TOPIC 10 – COMPANIES IN DISTRESS – External Administration........................................................ 154
ASIC Investigations .......................................................................................................................... 154
ASIC Investigations .......................................................................................................................... 154
Information gathering by ASIC ........................................................................................................ 154
Bell v ASC ..................................................................................................................................... 155
Use of information obtained during investigation ......................................................................... 156
Review of ASIC decisions by regulators .......................................................................................... 156
John David Rich v ASIC ................................................................................................................ 157
Receivership (ss 416-434C) ............................................................................................................. 157
Meaning of a receiver ..................................................................................................................... 157
Re Manchester & Milford Railway Co ......................................................................................... 158
Who may be appointed as a receiver? ........................................................................................... 158
Appointment of receivers ............................................................................................................... 158
Bond Brewing Holdings Ltd v National Australia Bank Ltd ......................................................... 159
Privately appointed receivers ......................................................................................................... 159
Duffy v Super Centre Development Corp Ltd ............................................................................. 159
Re North City Developments Pty Ltd; Ex Parte Walker ............................................................... 160
Effect of appointment of a receiver ................................................................................................ 160
Deangrove Pty Ltd v Commonwealth Bank of Australia [ ........................................................... 160
Powers of a Receiver ....................................................................................................................... 160
Duties of Receiver and manager ..................................................................................................... 161
14
Expo International Pty Ltd v Chant ............................................................................................. 161
Example: Receivers exercising power of sale (s420A) .................................................................... 161
Forsyth v Blundell ........................................................................................................................ 162
Duty for priority debts .................................................................................................................... 163
Duty to report breaches .................................................................................................................. 163
Liability of Receivers to third parties .............................................................................................. 163
Termination of receivership ............................................................................................................ 164
Voluntary Administration (Part 5.3A – ss 436A, 436B, 436C, 437A) ............................................... 164
Who may be an administrator ........................................................................................................ 165
Independence ................................................................................................................................. 165
Re Monarch Gold Mining Co Ltd ................................................................................................. 165
Investigation of company................................................................................................................ 166
Powers of the Administrator ........................................................................................................... 166
Suspension of rights of claimants against the company ................................................................. 167
Exceptions ....................................................................................................................................... 168
Administrators liabilities ................................................................................................................. 168
Re Heesh ..................................................................................................................................... 168
Administrators Indemnity ............................................................................................................... 169
Removal and replacement of administrators ................................................................................. 169
Meetings of creditors ...................................................................................................................... 169
Administration under a Deed of Company Arrangement ............................................................... 169
Powers of the court ........................................................................................................................ 170
Australasian Memory Pty Ltd v ................................................................................................... 170
Schemes of Arrangement and Reconstructions (Pt 5.1 CA; ss 411 and 415) ................................. 170
Types of Schemes ............................................................................................................................ 170
Appointment of a scheme administrator ....................................................................................... 171
Procedures for adoption and approval of a scheme ...................................................................... 171
TOPIC 11 – TAKEOVERS & REGULATION OF SECURITIES & FINANCIAL SERVICES .............................. 172
Takeovers (Ch 6 CA) ........................................................................................................................ 172
General Prohibition for takeovers .................................................................................................. 172
Exceptions to the General Prohibition ............................................................................................ 173
‘Relevant Interest’ ........................................................................................................................... 174
North Sydney Brick and Tile Co Ltd v Darvall .............................................................................. 174
Common directorships .................................................................................................................... 175
Clements Marshall Consolidated Ltd v ENT Ltd .......................................................................... 175
Interposed Companies .................................................................................................................... 175
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NCSC v Brierley Investments Ltd ................................................................................................. 175
Takeover procedure (Pt 6.5 CA) ...................................................................................................... 176
Variation of offers ........................................................................................................................... 177
Withdrawal of offers ....................................................................................................................... 177
Escalation Clauses or Agreements .................................................................................................. 177
Collateral benefits ........................................................................................................................... 177
Aberfoyle Ltd v Western Metals Ltd ........................................................................................... 178
Compulsory Acquisition (Pt 6A.2 – 661A-665C) .............................................................................. 178
Offences and Sanctions ................................................................................................................... 178
False and misleading statements .................................................................................................... 178
Re Pine Vale Investments ............................................................................................................ 179
Misleading or deceptive conduct .................................................................................................... 180
Administrative Powers of the ASIC and Takeovers Panel ............................................................... 180
Role of ASIC ..................................................................................................................................... 180
ASIC v DB Management Pty Ltd .................................................................................................. 180
The Takeovers Panel ....................................................................................................................... 180
Declaration of Unacceptable circumstances .................................................................................. 181
Re Pinnacle VRB Ltd (No 5) ......................................................................................................... 182
Role of the Court ............................................................................................................................. 182
REGULATION OF THE FINANCIAL (SECURITIES) MARKET ................................................................ 182
Regulation of Market Offences – Market Misconduct ................................................................... 184
National Exchange Pty Ltd v ASIC ................................................................................................ 184
Insider Trading ................................................................................................................................ 185
R v Hannes ................................................................................................................................... 186
Information “generally available” ................................................................................................... 186
R v Firns ....................................................................................................................................... 186
R v Rivkin ..................................................................................................................................... 187
Material effect on price .................................................................................................................. 187
Possession of inside information .................................................................................................... 187
Hannes v DPP .............................................................................................................................. 187
Exceptions/defences to Insider Trading Provisions ........................................................................ 188
Penalties for breach of s 1043A/remedies for those suffering damage as a result of an individual’s
breach ............................................................................................................................................. 188
CRIMINAL ........................................................................................................................................ 188
CIVIL ................................................................................................................................................ 189
Role of ASIC ..................................................................................................................................... 189
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TOPIC 12 – WINDING UP OF A COMPANY (Part 5.4 CA) ..................................................................... 191
Compulsory winding up in insolvency by the court (s 459A) .......................................................... 191
Prospective and contingent creditors ............................................................................................. 191
Community Pty Ltd v Engwirda Construction Co ........................................................................ 191
Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd .................................. 192
Before the court can order winding up in insolvency it must appear that the company is insolvent.
........................................................................................................................................................ 192
What is insolvency? ........................................................................................................................ 192
Sandell v Porter ........................................................................................................................... 192
Downey v Aira Pty Ltd ................................................................................................................. 192
Statutory demand ........................................................................................................................... 193
Compulsory winding up for grounds other than insolvency........................................................... 193
Re William Brooks & Co Ltd ........................................................................................................ 194
Ebrahimi v Westbourne Galleries Ltd ......................................................................................... 194
Re Dalkeith Investments Pty Ltd ................................................................................................. 195
Voluntary Winding up ..................................................................................................................... 195
Voluntary Winding up by members ................................................................................................ 195
Voluntary Winding up by creditors ................................................................................................. 196
Liquidators ...................................................................................................................................... 196
Who may be appointed as a liquidator? ......................................................................................... 196
Powers of the liquidator ................................................................................................................. 196
Recovery of company funds for voidable transactions (Part 5.7B Div 2 – ss 588FA-588FJ) ........... 197
Unfair preferences .......................................................................................................................... 198
Uncommercial transactions ............................................................................................................ 198
Unfair loans ..................................................................................................................................... 198
Unreasonable director-related transactions .................................................................................. 199
Duties of Liquidators ....................................................................................................................... 199
Effect of winding up ........................................................................................................................ 199
Proof of Debts – payment of secured creditors in winding up ....................................................... 200
Priority on payments of unsecured debts....................................................................................... 200
Payment of Member debts ............................................................................................................. 201
Houldsworth v City of Glasgow Bank .......................................................................................... 201
Sons of Gwalia Ltd v Margaretic ................................................................................................. 201
Division of surplus assets ................................................................................................................ 202
De-registration ................................................................................................................................ 202
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TOPIC 1 – THE LAW OF PARTNERSHIP
DEFINITION OF PARTNERSHIP
A partnership is one of the oldest forms of unincorporated business association.
The definition of ‘partnership’ can be found in Partnership Act 1892 (NSW) s1(1) o Partnership is the relation which exists between persons carrying on a business in
common with a view of profit and includes an incorporated limited partnership.
The ‘view of profit’ is a distinguishing feature of a partnership that helps to differentiate a partnership from other unincorporated associations e.g. not for profit associations.
There are three key elements of a partnership o Carrying on a business o In common o With a view of profit
There are three core elements of a partnership that assist in distinguishing it from other business associations such as a joint venture (which is an association of persons for particular commercial endeavours (e.g. development of land) with a view of mutual profit no business in common) and a unit trust (which is a trust in which the beneficial interest in the trust property is divided in the trust instrument into fractions which are typically offered to the public). These elements are the carrying on of a business, in common, with a view of profit.
‘Carrying on a business’
Turnbull v Ah Mouy (1871) 2 AJR 40 Facts
A & T entered into a contract for the sale of rice which stated that A was to have ¼ interest in T’s remaining stocks of rice and A was to receive a 2.5% commission on all rise sold.
The agreement was signed by both A and T and T lost several 000 pounds of rice and A sued for the price of the rice that was lost.
It was argued that there was no right to sue as they were in a partnership (NOTE: IN A PARTNERSHIP ALL PARTNERS MUST SHARE THE PROFITS AND LOSSES UNLESS OTHERWISE AGREED)
Decision
It had previously been held in other courts that a single venture could not constitute a partnership because partnership required consistent acts
the majority found that a partnership did not exist the agreement was one of sale, there was no business in common with a view of profit but rather a single venture and a single venture does not constitute the carrying on of a business.
Ballantyne v Raphael (1889) 15 VLR 538 Facts
Court had to consider whether or not a syndicate comprising of more than 20 members formed for the single purposes of purchasing a block of land and subdividing it and reselling for profit was a partnership.
Decision
It was held that the syndicate was not an association for the purpose of carrying on any business since there was not a ‘series of acts’ being done. The syndicate was a single venture and there was a need for continuity in acts and thus no partnership existed.
Smith v Anderson (1880) 15 Ch D 247 Facts
unit trust (a trust in which the beneficial interest in the trust property is divided in the trust instrument into fractions which are typically offered to the public) which had more than 20 members who subscribed to purchase shares in a number of companies. The shares were held by trustees and income from the shares was used to pay interest to subscribers and the
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balance was used to redeem shares from members.
On completion of redemption of the shares the balance was shared among the members. Decision
It was held that no partnership existed
There was only a single venture – the subscribers simply put money in to purchase the shares and then awaited interest without really participating in managing the venture
held that in order for a partnership to be found there must be a series of acts to constitute the carrying on of a business
Canny Gabriel Castle Jackson Advertising v Volume Sales Pty Ltd (1974) 131 CLR 321 Facts
This case represents a contrast to Smith v Anderson which found that a partnership cannot be formed where the association is for one act.
The case concerned an agreement, joint venture, between a promoter and financer (Volume Sales) to operate a tour involving two singers (one was Elton John)
It was agreed that the profit was to be shared equally and if the venture failed then the loan would be repaid to the financer and an equitable charge was granted over the box office receipt to Canny Gabriel. The agreement also contained an arbitration clause for the settlement of disputes.
Decision
It was held that a partnership did exist.
The joint venture was established with a view of profit to be shared and the agreement contained concern for each party just like partners – there were clauses pertaining to the sharing of profits and the settlement of disputes the parties were acting like partners.
NOTE: after Canny Gabriel it is now established that a single venture can constitute a
partnership and emphasis is not necessarily placed on continuity or continuation of acts it
depends on the circumstances of each particular case.
The term joint venture is expressly contained in s32(b) of the Partnership Act which pertains
to the dissolution of partnerships the legislation expressly recognises that a single
venture can constitute a partnership.
Carrying on a business in common’
The partners must not be seen to be each carrying on their own individual business for
mutual benefit. Carrying on a business in common refers to the fact that the alleged
business of partnership must have been carried out by or on behalf of all parties.
Keith Spicer Ltd v Mansell [1970] 1 All ER 462 Facts
A & B were in the process of setting out a restaurant business. Prior to incorporation A ordered products from a third party P and the goods were not paid for. P sued B arguing that B was the partner of A.
Decision
It was held that there was no business being carried out with a view of profit because the business was not open at that stage, it was merely being set up.
Therefore there was no partnership as there was no business in common.
Khan v Miah [2000] 1 WLR 2123 Facts
Contrast to Keith Spicer Ltd
The parties agreed to a joint venture. According to the agreement the parties were to find, acquire and fit out premises as a restaurant and run the business with a view of profit. One partner left before the restaurant opened.
Decision
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Tthe agreement between the parties clearly stated what was required in order to run the business with a view of profit.
the HOL held that the rule was that an individual who agreed to carry on business activity in a joint venture did not become a partner until they actually embarked on the activity in question
The mutual rights and obligations of partners did not depend on whether the partnership broke up on the day before or the day after opening but rather in whether It was before or after they embarked on the activity stated in the agreement.
The activities of setting up the restaurant were expressly part of the agreement and thus a partnership existed.
Kanf-Kem v Paine [2004] NSWSC 3 Facts
P ran 2 restaurants and dealt with all financial matters regarding the restaurants including the proceeds. His de-facto partner D was involved as an ‘investor’ in the restaurant and not a proprietor.
P broke up with D and D sued P for the alleged amount invested in the restaurant. Decision
Barrett J held that there was no mutuality, neither party acted in the interests of the business at the agent of the others. The rights and obligations arising from the business were not mutual, they were separate and several.
Even though each party played a role in the totality both the P and D had an interest in seeing the business succeed but the interest was not an interest in common the D had an investment interest to protect. Therefore there was no partnership and D was entitled to sue.
A ‘view of profit’
In order to be a partnership the business must be run with a view of profit. There are several
necessary requirements
o The intention of the parties
o Whether there is sharing of the profits; and
o Whether there is an agency relationship between the parties.
These requirements are confirmed in the statutory rules for determining the existence of a
partnership
Rule 1 – s2(1)(1)
Joint tenancy, tenancy in common, joint property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.
Davis v Davis [1894] CH 393 Facts
Father left his business to his sons who continued to run the business and derived equal shares as pocket money from the profit of the business
Decision
Was held that a partnership relationship did exist because there was mutual interest in carrying on the business in common.
Rule 2 – s2(1)(2)
The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.
Cribb v Korn (1911) 12 CLR 205
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Facts
P was employed by A as a farm worker and sued B, lessee of part of A’s land, for injuries P sustained.
Decision
Was held that there was no partnership relationship between A and B and therefore P could not sue B
Rule 3 – S2(1)(3)
The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but the receipt of such a share, or of a payment contingent on, or varying with the profits of a business does not of itself make the person a partner in the business
Cox v Hickman (1860) 11 ER 431 Facts
A partnership business was assigned to a trustee who was also creditors of the partnership. When the firm dishonoured a bill the drawer sued C (one of the trustees) on the ground that C was a partner in the business.
The HOL had to determine whether the trustees, including C, held themselves out as parties by accepting the bill of exchange on behalf of the partnership.
Decision
It was held that no partnership existed as the trustees had not held themselves out to be partners in the organisation by accepting the bill of exchange but rather acting in their capacity as trustees.
FORMATION OF A PARTNERSHIP
Anyone without a legal disability can form a partnership
Exceptions:
o Infants (generally capable but may not be personally liable)
o Person of unsound mind (generally has no contractual capacity)
o Bankrupts (can form a partnership but not a corporation)
o Corporation (can enter into a partnership as they are a separate legal entity)
Method of forming a partnership
o Partnerships can be formed in many ways both formal and informal, including:
Deed
Express agreement
Written contract
Oral contract
Implied agreement
Deduced form the conduct of the parties
NATURE OF A PARTNERSHIP
Unlike a corporation a partnership has no separate legal personality meaning that individual
partners can be liable for business acts.
Under the Corporations legislation (s115) the size of a partnership is limited to 20 persons
with some exceptions contained in regulations (e.g. 1000 individuals for an accounting firm,
400 for a legal practice).
RELATIONS OF PARTNERS AND THIRD PARTIES
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Agency principle
Under s5(1) of the Partnership Act o Every partner in a partnership other than a firm that is a limited partnership or
incorporated limited partnership is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member, binds the firm and the other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner.
The above section has 2 limbs o Actual authority – every agent is an agent of the firm for the purposes of the
partnership (unless varied in accordance with s19 of the Act) o Ostensible authority: (based on estoppel) – an act of a partner of the firm may bind
the firm within the scope of the kind of business carried on by the firm in the usual way unless the partner has no authority or the third party does not believe or know that the partner is a partner.
A third party may sue any partner for acts of another partner in the usual course of business unless:
o The partner had no authority o The third party did not believe or know that the individual was a partner (s5(1)).
Mercantile Credit Co Ltd v Garrod [1962] 3 All E 1103 Facts
A partner in a garage business sold a car that he did not own to a finance company (Mercantile Credit)
Decision
It was held that the action was conducted in the usual way of business of the firm and thus the other partners were liable for the actions of one partner
Golberg v Jenkins (1889) 15 VLR 36 Facts
Contrast to Mercantile Credit Co
A partner borrowed on behalf of the firm at 60% interest when the usual interest was between 6 and 10%.
Decision
Was held that this was not an action done in the usual way and thus the firm was not liable.
Construction Engineering (Aust) Pty v Hexyl Pty Ltd (1985) 155 CLR 541 Also - Liability of partners in contract Facts
H was an undisclosed partner successful in resisting an attempt by a building contractor to involve H in an arbitration arising from a dispute with an active partner (Tanbull Ltd) who entered into a contract as a sole principle with the building company and the contract described T and the proprietor.
Decision
The HC held that T as partner had the authority to buy the building firm but the liability of H was negated in the case in the partnership did which did not at the time of contract know of the existence of the partnership with H.
The case fell into the exception contained in s 5(1) of the Act the building contractor did not know that H was a partner and thus the contract was not binding on the firm
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Types of Liability
Liability in Contract
Liability of partners in contract is joint liability(referring to liability of partners for debts and obligations of the partnership of a contractual nature). This means that the partners must be sued together in only legal action
Contained in s9(1) of the Partnership Act: o Every partner in a firm other than an incorporated limited partnership is liable jointly
with the other partners for all debts and obligations of the firm incurred while the partner is a partner; and (if the partner is an individual) after the partner’s death the partner’s estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of the partner’s separate debts.
Liability in Tort
Liability is joint and several under s10(1) for acts committed by a partner in the course of ordinary business of the firm
o Subject to subsection (2), where by any wrongful act or omission of any partner in a firm other than an incorporated limited partnership acting in the ordinary course of the business of the firm, or with the authority of the partner’s co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act.
o (2) For the purposes of subsection (1), a partner in a firm other than an incorporated limited partnership who commits a wrongful act or omission as a director of a body corporate, within the meaning of the Corporations Act 2001 of the Commonwealth, is not to be taken to be acting in the ordinary course of the business of the firm or with the authority of the partner’s co-partners only because of any one or more of the following:
(a) the partner obtained the agreement or authority of the partner’s co-partners, or some of them, to be appointed or to act as a director of the body corporate, (b) remuneration that the partner receives for acting as a director of the body corporate forms part of the income of the firm, (c) any co-partner is also a director of that or any other body corporate.
Hedley Byrne Co Ltd v Heller & Partners [1964] AC 465 Facts
The defendant bank was asked about the financial stability of a bank’s customer. A favourable reference was issued by the bank, with disclaimer of responsibility.
Relying on the reference, the plaintiffs extended credit to the bank’s customer who subsequently defaulted.
The bank was held not to be liable because of the disclaimer. Decision
It was noted (in obiter) by Lord Morris that, in the case of liability for negligent misstatements:
o It should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies on such skill, a duty of care will arise
Approved the dissenting judgment of Lord Denning in Chandler v Crane, Christmas & Co [1951] 2 KB 164 where it was noted:
o Accountants owe a duty of care of course to their employer or client; and also I think to any person to whom they themselves show the accounts or to whom they know
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their employer is going to show the accounts, so as to induce him to invest money or take some other action. But I do not think the duty can be extended still further so as to include strangers of whom they have heard noting and to whom their employer without their knowing may choose to show their accounts. The test of proximity in these cases is: Did the accountants know that the accounts were required for submission to the plaintiff and for use by him.
Liability of Non-Partners
The liability of non-partners is governed by s14(1) of the Partnership Act: o (1) Every one who by words spoken or written, or by conduct represents himself or
herself, or who knowingly suffers himself or herself to be represented as a partner in a particular firm that is a firm other than a limited partnership or incorporated limited partnership, is liable as a partner to any one who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.
It is referred to partnership by estoppel anyone who knowingly represents themselves as a partner then becomes liable as a partner to third parties.
Australia Joint Stock Bank v Steele (No 2) (1890) 11 LR (NSW) Eq 328 Facts
Alex Brown (AB) and Tim Brown (TB) carried on a partnership business. When AB retired his son AH Brown (AHB) succeeded AB in the business. The bank account of the business was heavily overdrawn after AB and TB had retired and AB had passed away and a representation was made by AHB that AB was still a partner in the firm.
Decision
It was held that AB Executors and AHB were jointly liable based on the estoppel principle because the third party was unaware of the retiring or passing away of AB and he was represented as a partner in the firm.
Lynch v Stiff (1943) 68 CLR 428 Facts
Two employees from a legal partnership were misrepresented as partners in the law firm on the firm’s letterhead. A real partner in the legal partnership misappropriated a client’s funds.
The issue was whether the individuals misrepresented as partners on the letterhead were liable as partners for the misappropriation of funds
Decision
It was held that the firm did give a holding out that the two employees were partners.
As the employees knowingly allowed themselves to be represented as partners they were liable for the misappropriation as partners in the legal partnership in accordance with s14(1).
Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 Facts
A company (Kia Ora renamed as Duke Group) completed a successful takeover bid for another company (Western United), relying on an independent report prepared by a firm of accountants in Perth (NWP) which was part of a national group. NWP advised that the proposed takeover price was “fair and reasonable”.
But in fact the bid price was excessive by some $50 million. Kia Ora was successful in proceedings against the partners of NWP in Perth but its action against non-Perth partners of the national group, based on a representation (under s14 of the Partnership Act) was unsuccessful.
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Decision
The full court held that s14 does not permit reliance only on the fact that there is a partnership, but that a particular partner or persons is or are apparently a member or members of it. If the third party knows that there is a partnership but has no idea of the identity or standing of the partners it is difficult to see how he could place any reliance on the identity of the parties or the fact that they are partners in giving credit to the firm.
It is not adequate to say the name of the firm. Reliance must be placed on the identity of apparent members of the firm by the third party and not just upon the existence of a partnership.
Other relevant sections for liability of partners
Liability for incoming and outgoing partners (s17) (1) A person who is admitted as a partner into an existing firm other than a limited partnership or incorporated limited partnership does not by that admission alone become liable for anything done before the person became a partner. (3) A partner who retires from a firm other than a limited partnership or incorporated limited partnership does not by that retirement alone cease to be liable for partnership debts and obligations incurred before the partner’s retirement. (5) A retiring partner in a firm other than a limited partnership or incorporated limited partnership may be discharged from any existing liabilities by an agreement to that effect between the partner and the members of the firm as newly constituted and the creditors, and this agreement may be either expressed or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.
Rights of a person dealing with a firm against apparent members of firm (s36) (1) When a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent members of the old firm as still being members of the firm until the person has notice of the change. (2) An advertisement in the Gazette and in at least one newspaper circulating in Sydney and one newspaper circulating in the district in which the firm carries on business shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised.
Note that a retiring partner does not automatically cease to be liable to debts and obligations incurred when s/he was a partner but may be released by an agreement between her/him and the new partners and the creditors (s17)
RELATIONS BETWEEN PARTNERS INTERSE
Fiduciary Relations
Key fiduciary duties of a partner include o Utmost good faith – partners must act in good faith in their relationship o Act with utmost honesty o Make full disclosure about all matters relating to the firm o Partners must preserve confidential information – preservation of confidence o Partners must avoid conflict of interest o Partners must render account for any benefit obtained in breach of a duty –
accountability for secret profit made by a partner without the consent of other partners.
Some of the fiduciary duties are expressly contained in the Partnership Act – s28 (duty of disclosure), s29 (avoid conflict of interest by not using partnership connection, partnership
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property, partnership name for personal gain without the consent of other partners), s30 (duty not to compete with the firm, good faith)
Thompson’s Trustee v Heaton [1974] 1 All ER 1239 Facts
T & H acquired the leasehold interest in a farm for their partnership which was later dissolved by mutual consent. Without T’s consent, the executors of H’s estate purchased and then sold for profit the freehold reversion in the property after the dissolution of the partnership but before the completion of the winding up.
Issue:
were the executors accountable to T for the profits resulting from the sale of the title without the consent of T.
Decision
Was held that until the final winding up of the company is completed the fiduciary duties among partners continue. The executors sold partnership property for their own personal benefit without the consent of the other partner.
Was held that the executors were accountable to T for the profits made from the sale (as partners share profits) as the duty to make full disclosure and the duty not to make secret profit had been breached (s28, s29 PA).
Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 Facts
P, a partner in a real estate firm, without disclosure to the other partners, shared the profits of a land development project promoted by a client of the firm. When the other partners became aware of this arrangement, they sued the executors of P’s estate for an account of that income.
Property development is not an activity within the ordinary course of business of real estate agents; their function is to introduce purchasers to vendors of property in return for a commission on resultant sales. However, enquiry revealed that the partners in this firm of real estate agents had engaged in 33 land speculations either on their own account or in association with others.
Decision
The majority in the HC recognised that by a course of conduct the firm had expanded its business to include land speculation.
As a result the partner was in breach of a fiduciary duty by taking up the opportunity and using partnership connection (s29 PA) to make a personal gain without the consent of the other partners
Chan v Zacharia (1984) 154 CLR 178 Facts
2 Drs practicing in a location as a partnership. Dr Z wished to leave the partnership and it was agreed that the partnership would be dissolved and an accountant was appointed to administrate the winding up.
After the dissolution of the partnership but prior to the completing of the winding up Dr C purchased a new lease over the same property in his own name. Dr Z had previously instructed his solicitor to seek an agreement with Dr C to renew the lease in the partnership. Dr C refused the new lease for the partnership and secretly negotiated a new lease in his own name
Decision
The lease and the goodwill of the location is partnership property so it should be sold and distributed evenly between the partners.
Dr C had breached his duty for full disclosure and to obtain consent – s28 and 29 PA
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He had also used his position as a partner to make personal gain through the lease (which was part of the partnership assets.
The court held that whilst after dissolution partners’ positive duties are limited to steps necessary to wind up the business, their obligation not to benefit themselves from partnership opportunities remains fiduciary duties do not end until the final winding up of the partnership is completed.
There are three broad headings of fiduciary duty contained in the partnership act o S28 – Duty of partner to render accounts o S29 – Duty of a partner to account for use of partnership
assets/property/connection o S30 – Duty of a partner not to compete with the firm
United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 Facts
Brain, a member of a Redcliffe property development partnership, obtained an account of its share of the profits of the project from the mortgagee, United, notwithstanding a collateralisation clause in the mortgage given by Security Projects Ltd, the manager of the development, to secure finance for the project.
This permitted the mortgagee, to hold such proceeds in satisfaction of any present, future or contingent liabilities of the mortgagor to the mortgagee. Security had executed this mortgage, before final settlement of the terms of the partnership agreement, without informing the participants other than United, which provided part of the equity finance in addition to mortgage funds.
Decision
The HC recognised that fiduciary duties of joint venturers may arise between individuals negotiating a partnership agreement even before a formal partnership is formed.
A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who never reach, agreement upon the consensual terms which are to govern the arrangement between them... a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled ... Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.
The fiduciary relationship between partners concludes with the final settlement of accounts but may arise before the commencement of the partnership business.
Fleming v McKechnie (1906) 25 NZLR 216 Facts
The plaintiff notified the defendant s by letter that he did not wish them to enter into any further contracts which would be binding on him he wished to suspend the partnership.
Subsequent to receipt of the letter the defendants entered into a number of building contracts in their joint names but not in the name of the firm.
Decision
It was held that the effect of the plaintiff’s letter was to suspend the business operations of the partnership so that, in consequence, although the subsequent contracts were within the scope of the partnership, they could not be in competition with it during the suspension as there was no business to be competed with.
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However, the partners that entered into the contracts did utilise the partnership office and as a result they were accountable for the use of partnership assets to make their own personal benefits during the suspension of the firm (s29 PA).
It is important to note that relations between partners are a matter of agreement between the parties. Therefore, these relations can be varied by them, whether they are contained in the act of agreement. 19 Variation by consent of terms of partnership
The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing.
Partnership Property
Use of Partnership property is regulated by s20 of the PA o Such property must be used exclusively for the purposes of the partnership
according to the partnership agreement (s20(1)) o Every partner is entitled to have the partnership property applied in payment of
partnership debts (s39).
The meaning of partnership property was considered by Rich J in Sharp v The Union Trustee Co of Australia Ltd (1944) 69 CLR 539
Sharp v The Union Trustee Co of Australia Ltd (1944) 69 CLR 539 Facts
The testator carried on business in partnership with his brother John Brown Sharp and John Edmond Taylor, referred to as his friend in his will. There was no evidence of any formal partnership agreement, but the books and records of the partnership showed that the capital contributions of the partners to the partnership were always unequal and the amounts of the capital contributions have varied from time to time. All profits and all losses of the partnership were shared and borne equally by the partners.
The will contained a provision giving an option of purchase over the testator's share in the partnership assets.. Taylor died after the testator, and. Sharp claimed that he alone was entitled to exercise the option.
Decision – Rich J on the meaning of partnership property
Business partners own between them the whole of the partnership assets, and each partner has a proprietary interest in each and every item.
Partnership property includes assets of the partnership.
Management Matters
The management of partnership is governed by s24 of the PA which provides that all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.
Basically in managing a partnership: o Partners are entitled to equal sharing of capital and profits of the business o There is equal right to indemnity for expenses incurred on partnership business o There is an entitlement to interest at 7% for excess payments made by a partner o There is no entitlement to return of subscribed interest before ascertainment of
profit o There is an equal right to manage partnership business o There is no right to remuneration for managing partnership business o There is no right for a partner to introduce a new member without the consent of all
existing members
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o Decisions regarding the partnership are to be taken by a majority vote on the change of the nature of partnership business in which all members must consent
o There is equal access to partnership books which must be kept at the place of business of the partnership.
TERMINATION (DISSOLUTION) OF A PARTNERSHIP
there are several ways in which a partnership can be terminated including: o expiration of time (s32) o operation of law (s 33) e.g. death o supervening illegality (s 34) o the court (s35), when a partner is incapable of managing the affairs, there is conduct
prejudicial to the business, wilful or persistent breaches of the partnership agreement, the business had only be carried on at a loss, or any other circumstances in which the court thinks it is just and equitable that the partnership be dissolved.
CONSEQUENCES OF DISSOLUTION OR TERMINATION OF A PARTNERSHIP
the consequences and requirements pertaining to termination of a partnership are contained in s36 of the PA. 36 Rights of persons dealing with firm against apparent members of firm
(1) When a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent members of the old firm as still being members of the firm until the person has notice of the change. (2) An advertisement in the Gazette and in at least one newspaper circulating in Sydney and one newspaper circulating in the district in which the firm carries on business shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised. (3) The estate of a partner who dies, or who becomes bankrupt, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, bankruptcy, or retirement respectively.
Additionally note ss37-44: o 37 Right of partners to notify dissolution o 38 Continuing authority of partners for purposes of winding-up o 39 Rights of partners to application of partnership property o 40 Apportionment of premium when partnership prematurely dissolved o 41 Rights where partnership dissolved for fraud or misrepresentation o 42 Right of outgoing partner in certain cases to share profits made after dissolution o 43 Retiring or deceased partner’s share to be a debt o 44 Rule for distribution of assets on final settlement of accounts
LIMITED PARTNERSHIPS AND INCORPORATED LIMITED PARTNERSHIPS (governed by
pt 3 Div 2 PA)
A limited partnership is one consisting of one or more general partners who are personally liable for all the debts and contractual obligations of the firm, and one or more limited partners whose liability extends only to the extent of their capital contribution (s49 PA)
Limited partnerships have two types of members: o General partners – manage the limited partnership and face unlimited liability jointly
and severally for all the debts of the firm o Limited partners – investors who do not normally participate in the management ad
their liability to contribute to the firm’s debts is limited by their contribution to the capital of the firm.
Limited partnerships are required to disclose their status by adding ‘A Limited Partnership’ after their names on all documents.
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Incorporated limited partnerships are limited partnerships which, upon registration, become a separate legal entity like a corporation (s53 PA).
The general partners of ILP are responsible for the management of the corporation and owe their duties to the corporation but not to the limited partners. The limited partners, however, are not liable for the breach of duties committed by the general partners (ss53C PA)
There are several sections of the PA relevant to the regulation of Limited Partnerships and Incorporated Limited Partnerships:
o The formation of limited partnerships is governed by s 50A of the PA o The composition of a limited or incorporated limited partnership is governed by s 51 o The size of a limited partnership or incorporated limited partnership is regulated by
s 52 o The separate legal entity status of an ILP is provided in s 53 o The powers of an ILP are provided in s 53A o The requirement of a written partnership agreement is contained in s 53B o The relationship between partners in an Incorporated limited partnership is
contained in s 53C
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
The advantages of a partnership include: o Simplicity o Flexibility o Taxation implications o Confidentiality
The disadvantages of a partnership include o Unlimited liability not a separate legal entity like a corporation and thus
individual partners can be liable o Lack of permanence o Transfer of interests from partners is difficult o There can be problems with contracting with the firm o There is a limitation on numbers (20 – as noted above) and this can have
implications in raising capital for the firm as the limit on the number of partners effectively restricts the amount of capital that the firm will have available or be able to raise.
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TOPIC 2 – AGENCY LAW REMEMBER A DIRECTOR OF A COMPANY OR MEMBER OF PARTNERSHIP CAN ACT AS AN AGENT FOR
THE COMPANY OR FIRM
DEFINITION OF AGENT
In legal terms an agent is a person who is authorised expressly or impliedly to act for a
‘principal’ so as to create or affect legal relations between the principal and a ‘third party’
– International Harvester Co of Australia Pty Ltd v Carrigans Haxeldene Pastoral Co.
Three parties are involved – agent, principal and third party
International Harvester Co of Australia Pty Ltd v Carrigans Haxeldene Pastoral Co (1958) 100 CLR 644 Distinction of Agent in legal sense and ‘selling agent’ Facts
Case concerned an action brought by a firm of farmers for breach of warranty on the sale of an agricultural machine (hay bailer) against the defendant (Carrigans).
In buying the machine the plaintiff did not purchase from the defendant (manufacturer ) but rather from another company Hansel Co. The defendant company manufacturer denied that any contractual relation existed with the plaintiff, rather maintaining that the selling company (Hassel) sold the machine as Principals and not as an agent for the defendant.
Decision
The selling agent could not act on behalf of the manufacturer as an agent in the legal sense because they dealt with the customer as owner/proprietor of the machine and not as an agent.
A selling agent who has the exclusive right to resell the goods of a manufacturer is not an agent in the legal sense. They actually run their own business and resell for profit and as such have no authority to contract on behalf of the principal.
The transaction was carried through on the basis that the selling agent sold the machine to the plaintiff company and the defendant was not a contractual party as they were not authorised to sell on behalf of the defendant but rather sold as a vendor there was nothing in any letters etc which could permit the reaching of another conclusion.
The principal is bound in law by acts of his agent as a result of, and generally only to the
extent of, the authority given to the agent.
CREATION OF AGENCY
The agency relationship is largely based on the Principal giving the agent authority to act
The relationship of Principal and Agent may arise from agreement, express or implied,
between the Principal and Agent, operation of law as under the doctrine of agency of
necessity or retrospectively by a Principals ratification of acts done by an Agent purportedly
as agent for the Principal but in fact without the Principals authority.
Agency by agreement
The essential element in agency created by agreement between Principal and Agent is that
the Principal confers, and the Agent accepts, authority to affect the Principals legal
relations with the Third Party.
There are two main types of authority that can be conferred on an Agent by a Principal:
o Actual authority –
Can be oral, written or implied
Implied authority is measured by what is usual authority in the
circumstances.
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Note – there must first be actual/express authority before authority
can be implied e.g. an agent has authority as a company secretary to
hire and fire staff, it will be implied that they will also have authority
to place an advertisement for recruitment.
o Ostensible authority/apparent authority
Also called agency by estoppel
Means that there is no actual authority, but based on estoppel the Agent
will have apparent authority.
In this sense the Principal expressly or by conduct holds out another person
to be his or her agent.
To establish apparent or ostensible authority the TP must show that he
relied on a ‘holding out’ by P.
Lucken v Buckeye Parking Corporation 68 N.E. 2nd 217 (1945) American case – agency by estoppel (apparent authority), not binding precedent in Australia Facts
Case involved a dispute between a car-owner and the owner of a car park.
The car-owner usually parked in a car park run by the Buckeye Parking Corporation (at least once a week). The car park was recently closed but the owner of the car was unaware of this and thought that the car park was still open for business. There were cars already parked in the lot and there was no sign saying that the parking lot had closed. The entrance of the park was open and unobstructed and more than 2 dozen cars were already in the park when the plaintiff arrived.
The car owner went to park her car and saw an individual who appeared to be the parking attendant (but who was actually an imposter). When the owner returned to the car park she found that her car was completely wrecked and sued the owner of the car park.
Plaintiff argued that the company held the imposter out to be a car park attendant (an agent for the car park owner).
Decision
Held that the owners were liable for the damages to the car on the principle of agency by estoppel.
As there were cars already parked in the lot and there was no sign saying that the parking lot had closed. The entrance of the park was open and unobstructed and more than 2 dozen cars were already in the park when the plaintiff arrived implied that the park was still open
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Facts
K, an unappointed managing director, to the knowledge of the Board engaged a firm of architects on behalf of the company.
The company failed to pay the architect’s fees. Decision
Held that there was a holding out by the unappointed managing director.
The TJ found that K had, to the knowledge of the other directors, been employing agents, trying to find a purchaser and generally conducting the affairs of the company on his own. It was held that the company was liable to pay fees to the plaintiffs because the directors had held out K as a managing director and K’s act in engaging the plaintiffs was within the authority usually enjoyed by a managing director.
The COA affirmed the decision:
K had no actual authority to employ a third party (the architects) on behalf of the company. However, K did have the apparent authority of a managing director (the usual authority of a managing director). The company was estopped from denying K’s agency.
The case was one of apparent authority rather than implied actual authority because the
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facts did not justify a finding that the board’s acquiescence amounted to a conferring of actual authority.
Diplock LJ stated 4 conditions that must be met in determining whether an officer of the company has ostensible (or apparent) authority:
1. A representation must have been made to the third party that the Agent had authority to enter into a contract of the kind sought to be enforced on behalf of the Company.
2. The representation must have been made by an individual who had actual authority to manage the business of the company generally or in respect of the matter to which the contract relates.
3. The third party was induced by the representation to enter into the contract – i.e. he relied upon it.
4. Under the constitution of the Company it was not restricted from entering into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.
Note – the 4th condition appears to be overridden by the current provision of the Corporations Act (s125(2)) which gives the company the capacity to act as an individual. This case was approved in Australia by the High Court in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72.
Soanes v London SW Ry (1919_ 88 LJ KB 524 Facts
S, at the defendant’s station, saw a porter (off duty) who was wearing the uniform of the defendant company and entrusted his luggage to the man. The luggage was stolen
When sued by S the company endeavoured to avoid liability by proving that the porter had been off duty.
Decision
Court ruled that by allowing the porter to act as he did in the company’s uniform the company had held out the porter as a person authorised to receive the luggage on its behalf and was wherefore liable to S for its loss.
Tooth v Laws (1888) 9 LR (NSW) 154 Facts
Laws was a licensee of a hotel who sold the business. Although Laws no longer had any interest in the business he allowed his name to be kept up over the hotel door.
The person’s who carried on the business were supplied with liquor in bulk by Tooth & Co which eventually sued Laws for the cost of the liquor
Decision
It was held that since Laws had not advised Tooth and Co that he was not carrying on the business, he was estopped from denying that the persons who were in fact carrying it on were doing so as his agents.
Laws was liable for the cost accordingly.
Panorama Development (Guildford) v Fidelis Furnishing Fabrics [1971] 3 WLR 440 Facts
The secretary (Agent) of a company (Principal) signed, on behalf of his company, contracts with a hire-car company (Third Party) to hire expensive cars, purportedly for the purpose of transporting clients visiting the Principal, between Heathrow Airport and the Principals office.
In fact the secretary had no authority to hire the vehicles. The TP sued the P to recover the hiring charges of the car
Decision
In a land mark decision (it had previously been generally held that a company secretary had no ostensible authority by reason of his holding of that position to commit his company to contracts), the English COA ruled that such hirings lay within the usual authority possessed
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by modern company secretaries and therefore within the ostensible authority of the secretary in question
Accordingly P was held to be liable for the fees.
Crabtree-Vickers Pty v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72. Facts
Plaintiff sued the defendant for damages for breach of contract arising out of the sale from the plaintiff to the defendant of a printing machine. The alleged contract consisted of the acceptance of an order form, however the order form was signed by an employee who had no actual authority, Peter on behalf of the managing director, Bruce, who only had apparent authority and no knowledge of what Peter did.
Decision
Held that the managing director had only apparent authority because the actual authority belonged to the board. As such he could not hold another out as having apparent authority – a person with apparent authority cannot hold another out as having apparent authority.
Following the principles set out in Freeman and Lockyer the company cannot be liable as the representation that is made must be made by a person with actual authority – not an individual with apparent authority.
Note - to protect the third party dealing with company s 192(2) of the CA. Under the ‘in the role of management rule’ – under this rule the third party can assume that anyone held out by the company as an agent has authority to deal with the third party.
Where the Third Party knows that an Agent has only restricted authority or where the
Principal has informed the Third Party of the restriction the Third Party cannot rely on
ostensible authority of the Agent – Overbrooke Estates Ltd v Glencombe Properties Ltd
[1974] 3 All ER 511.
Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 3 All ER 511. Facts
Overbrooke instructed auctioneers. The catalogue for the auction set out particulars of the property and the general conditions of sale including a condition that stated – the vendors do not make or give and neither the auctioneers not any person in the employment of the auctioneers has any authority to make or give any representation or warranty in relation to the property.
Prior to the auction the auctioneers informed Glencombe that neither the Greater London Council nor the local authority had any schemes or plans for the property or was interested in the property for compulsory purchase or for any other purchase.
At the auction Glencombe made the successful bid and gave the auctioneers a cheque for the deposit and the auctioneers signed the contract as its agents. Glencombe then learned of facts which showed that the auctioneer’s representation was false.
Decision
Brightman J held that, even assuming that the auctioneers had ostensible authority to make such a representation, on the evidence Glencombe was in possession of the printed particulars of sale before the representation was made or the contract was entered into and so it knew or ought to have known when it bid for the property that nothing which the auctioneers had told it amounted to a representation or a warranty binding on Overbrooke.
Note
o S128 and 129 CA permit a person dealing with a company registered under the Act
to make a number of assumptions including the proper authority of the company
officer and its agent – e.g. TP can assume that the officer was duly appointed and
has authority to exercise the powers customarily exercised or performed by that
kind of officer.
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o However, if a Third Party knew or suspected that the assumption was incorrect the
person is not entitled to make an assumption under s 129 (128(4)).
Agency by operation of Law
The law recognises that in exceptional circumstances Agency can arise without the consent
of the parties concerned
There are two main types of Agency of necessity:
o Agency of necessity strictly so called
o Marriage and cohabitation
Agency of necessity strictly so called
Agency of necessity has three main elements
o There must be a need to preserve property of the principal
o It must be impossible to communicate with the Principal
o It must be an honest endeavour to serve the interest of the Principal.
Great Northern Ry v Swafield (1874) LR 9 EXCH 132 Classic case law on agency of necessity Facts
Case involved consignment of a horse that needed caring for at the destination. The horse was to be transported by the railway to a particular destination but on arrival it was not collected by the owner.
The railway had to use a stable to look after the horse and charged the fees to the owner of the horse.
Decision
There was no way for the station master to contact the horse owner and as a result there was an agency of necessity.
Springer v Great Western Railway Company (1921) 1 KB 257 Contrast to Great Northern Ry v Swafield Facts
Case involved the delivery of a consignment of tomatoes that was to be delivered by a railway company. A strike delayed the delivery of the consignment of the tomatoes and the railway company decided to sell the ripening tomatoes locally before they spoiled.
The owner of the tomatoes took action for the tort of conversion. Decision
The action was successful because the railway company could have communicated with the consignee to obtain instructions and was therefore not authorised to sell the tomatoes as an agent of necessity.
Marriage and Cohabitation
At common law a spouse or de facto partner is presumed to have a right to pledge credit for
household necessaries.
o Note the term necessaries has been defined as things which are really necessary and
suitable to the party’s lifestyle.
Note that authority of spouses to act as an agent of necessity has been reversed by
legislation in NSW, SA and NT e.g. s104 Land and Property Act 1906 (SA), s7 Married Person
(Equality of Status) Act 1986 (NSW).
Pianta v Macro & Sons Pty Ltd (1925) 27 WALR 99 Facts
A miner’s wife, whose husband earned 10 pound per fortnight pledged his credit for a
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diamond ring worth 11 pound and 15 shilling.
There was an issue as to whether there was an agency of necessity. Decision
Court held that it is idle to suggest that to people who live under those conditions, a diamond ring is a necessary
So the diamond ring was found to be an article of luxury and thus the wides authority could not be presumed to have arisen in this case.
Agency by Ratification
Agency by ratification represents occurs when the Principal effectively adopts a transaction
entered into by an agent without authority.
Agency by ratification has three elements
o Agent must have purported to act as Principal’s agent
o The Principal must have existed at the time when the Agent contracted for the
Principal and must have had contractual capacity at that time and at the time of
ratification.
o The ratification itself must meet certain requirements
At the time of the ratification the Principal must know all the essential facts
relating to the making of the contract (Taylor v Smith)
The Principal may ratify a contract either expressly or by implication (e.g.
adopting the benefits)
To constitute a ratification the Principal’s conduct must show that the Principal adopts or
recognises the contract – silence or acquiescence can constitute ratification when the
Principal has been informed of all the material facts and takes no steps to repudiate.
Agent must have acted as Agent
The Agent must name or identify the Principal.
Keighley Maxtead & Co v Durnat [1901] AC 240 Facts
A corn merchant, in excess of his authority, purchased wheat in his own name, although he intended to buy it for the Principal. Principal instructed the Agent to purchase weed at a specified price and the Agent purchased the weed at a higher price in his own name without disclosing the existence of the principal.
Decision
The fact that he did not contract as Agent prevented the subsequent conduct form the Principal amounting to a ratification and so the Third Party failed in an action against the Principal after the Agent failed to pay the price
The High Court of Australia applied this principle in Howard Smith & Co v Varawa (1907) 5 CLR 68
The alleged principal must be in existence at the time of the transaction
Kelner v Baxter (1886) LR 2 CP 174 Facts
A pre-registration contract entered into by the promoters on behalf of a company to be formed. The promoters or the purported agent were held personally liable when the company wished to ratify any pre-registration contracts.
Decision
Court held that at the time of the transaction the company was not in existence and so the company could not retrospectively ratify the contract.
Held that a company, after incorporation, could not ratify a contract which had been made
37
prior to its incorporation, purportedly on its behalf.
The decision set out several common law principles: - The alleged principal must have full contractual capacity at the time of the
transaction - The Purported principal must have full knowledge of the transaction at the
time of ratification - Ratification must be of the whole transaction - Ratification must be within a reasonable time.
Important to note s131(1) of the CA overrides the common law principle established in Kelner v Baxter. This section permits retrospective ratification of pre-registration contracts within a reasonable time. S 131(2) makes the company liable to damages if the contract is not ratified within a reasonable time of registration.
TYPES OF AGENTS
There are four main types of agents that sit in a hierarchy according to the amount of power
the agent has. These include
o Universal agent
o General agent
o Special agent
o Del credere agent
Universal Agent
A universal agent is one who has authority to act for the Principal in all matters whatever.
Generally a universal agent has unrestricted authority to act for the principal.
General Agent
Has lesser powers that a universal agent. An agent who has authority to do acts within the
ordinary course of the agents business or profession or who is authorised to act generally in
transactions of a particular kind or incidental to business – Marriott v General Electric Co Ltd
(1935) 53 CLR 409.
Ostensible authority only arises in the case of general agents and not in the case of special
agents.
Special Agent
A special agent has power only for a specific purpose of to perform a specific function not
within the course of A’s usual business e.g. instructing a real estate agent to sell a car when a
real-estate agent’s usual business is selling houses. Refers to Agents who are authorised to
make a specific contract only.
Del Credere Agent
Refers to an agent who, in return for an extra commission, agrees to indemnify a principal
against loss should the people with whom the agent contracts on the Principal’s behalf fail
to honour their agreements – Campbell v Kitchen & Sons Ltd (1910) 12 CLR 513.
o Since a relationship of guarantee is not involved, a del credere agency need not be
evidenced in writing; it may be implied from the conduct of the parties where it can
be shown that the agent was charging an additional commission for the risk –
Anthoness v Melbourne Malting and Brewing Co (1888) 14 VLR 916.
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