Business Law 2026: Business Organisation and External Administration

Introduction to Business Structures

When choosing a business structure, several criteria must be considered to determine the most suitable form for the enterprise:

• Size: The current scale and projected growth of the business.
• Capital: Requirements for initial funding and the ability to raise future funds.
• Regulation: The level of government oversight and compliance required.
• Ease of Establishment: The complexity and cost of the setup process.
• Management and Control: Who holds the decision-making power.
• Risk (Liability): The extent to which owners are personally responsible for business debts.
• Type of Business: The nature of the industry and operations.
• Lifespan: Whether the business is intended to exist beyond the involvement of the current owners (perpetual succession).

Sole Traders

• Definition: A sole trader is an individual natural person who owns a business enterprise as principal.
• Characteristics:
  • Number of People: Consists of exactly $1$ natural person.
  • Capital: Sourced from the individual's personal assets or loans.
  • Management: Complete control rests with the individual owner.
  • Ease of Establishment: Very high; few formalities required.
  • Regulation: Governed by the $Business Names Registration Act 2011 (Cth)$ if trading under a name other than the owner's. There is no distinct 'body' of rules specially designed for sole traders, though universal business regulations apply.
• Legal Consequences:
  • The business is not a separate legal entity from the owner.
  • Unlimited Liability: The owner is personally responsible for all debts and legal obligations; personal assets can be seized to satisfy business debts.
  • Taxation: Income is treated as personal income for the owner.
  • Limited Lifespan: The business ceases to exist upon the death or bankruptcy of the owner.

Partnerships

• Definition: A partnership is the relation that subsists between persons carrying on a business in common with a view to a profit ($Partnership Act 1891 (SA), s 1$).
• Regulation:
  • $Partnership Act 1891 (SA)$.
  • Case law (Equity and Common Law).
  • $Corporations Act 2001 (Cth), s 115$, which generally limits partnerships to a maximum of $20$ members (with specific exceptions).
  • $Business Names Registration Act 2011 (Cth)$.
• Formation Methods:
  • Agreement: Formal written contracts (Partnership Deeds) or oral agreements.
  • Conduct: Parties acting in a way that implies a partnership.
  • Estoppel: Holding someone out as a partner to third parties.
• Legal Consequences:
  • A partnership is generally not a separate legal entity, though it is often referred to as a 'firm' and can be treated as an entity for certain litigation purposes.
  • Agency: Partners are agents of each other and can bind the firm in contracts.
  • Unlimited Liability: Partners are jointly and severally liable for the debts of the firm.
  • Contracting: A partner cannot contract with the partnership itself.
  • No Perpetual Existence: Generally dissolves upon the death or withdrawal of a partner unless otherwise agreed.

Joint Ventures

• Definition: A contractual arrangement where separate business entities conduct a combined project or venture, sharing the resulting products, not as a business in common, but as independent operators in their own right.
• Characteristics:
  • Parties own assets separately.
  • No common sharing of resources or profits; rather, they share the output or product.
  • Conduct business independently with very little mutuality.
  • Relationship is strictly regulated by the joint venture contract.
  • Venturers are not necessarily agents for each other.
• Distinction from Partnerships:
  • Usually involves a one-off, specific project rather than a continuous business.
  • Ability to sell a share in the enterprise to another party more easily.
  • Each venturer remains responsible for their own specific debts and liabilities.
  • Limited fiduciary obligations compared to the high level of trust required in partnerships.

Trusts

• Definition: A trust is an obligation imposed on a person or other entity (the trustee) to hold property (trust property) for the benefit of others (beneficiaries).
• Essential Elements:
  1. Settlor: The person who creates the trust.
  2. Trust Property: The specific assets held within the trust.
  3. Trustee: The legal owner who manages the property.
  4. Beneficiary: The person(s) for whose benefit the property is held.
• Types of Trusts:
  • Express Trusts: Created intentionally by the settlor.
  • Fixed Trusts and Unit Trusts: Beneficiaries have a fixed interest in the assets.
  • Discretionary Trusts: The trustee decides how much each beneficiary receives.
  • Implied, Resulting, and Constructive Trusts: Arise by operation of law or court order.
• Regulation:
  • Equitable principles.
  • $Trustee Act 1936 (SA)$.
  • Trust Deed (the governing document).
  • If there is a corporate trustee, the $Corporations Act 2001 (Cth)$ also applies.
• The Business (Trading) Trust:
  • Involves placing business assets into a trust to operate the business.
  • Often utilizes a corporate trustee (a Pty Ltd company) to achieve limited liability.
  • Advantages: Significant tax benefits (income splitting) and asset protection.

Associations

• Definition: A body of two or more persons who form a social or cultural organization that does not share profits among its members.
• Types:
  • Unincorporated Association: Typically small clubs; lacks legal personality. There is significant uncertainty regarding who is liable for debts ($Bradley Egg Farm v Clifford [1943]$; $Peckham v Moore [1975]$).
  • Incorporated Association: Incorporated under the $Associations Incorporation Act 1985 (SA)$. It is a separate legal entity with limited liability and must include 'Inc.' in its name.

Companies and the Salomon Principle

• Core Characteristics:
  • Separate Legal Entity: The company exists as a distinct legal person.
  • Limited Liability: Shareholders are only liable for the amount unpaid on their shares.
  • Perpetual Succession: The company continues to exist despite changes in membership or management.
  • Free Transferability of Interests: Shares can generally be sold or transferred.
  • Separation of Ownership and Control: Shareholders own the company, but directors manage it.
• Salomon v Salomon & Co Ltd [1897]:
  • Facts: Aaron Salomon, a boot maker, formed a company with his family as shareholders ($7$ in total). He sold his business to the company and took debentures (secured debt) as payment. When the company failed, unsecured creditors claimed the company was a sham and Salomon should be personally liable.
  • Ruling: The House of Lords held that as long as the company was validly incorporated, it was a separate person. Salomon was a secured creditor and entitled to be paid before unsecured creditors. The company was not an agent or trustee for its controller.
• Classification by Liability:
  • Limited by Shares: Liability limited to the amount unpaid on shares (Proprietary or Public).
  • Limited by Guarantee: Members guarantee an amount upon winding up (Public only).
  • No Liability (NL): Specific to mining companies; shareholders can walk away from calls on shares without being sued for the debt (Public only).
  • Unlimited Company: No limit on member liability (Proprietary or Public).
• Proprietary (Pty) vs. Public Companies:
  • Proprietary: $1$ to $50$ non-employee shareholders; Minimum $1$ director (resident); cannot seek public funding (except crowd-sourced funding since Sept $2018$).
  • Public: Minimum $1$ shareholder (no limit); Minimum $3$ directors ($2$ residents); can seek public funds via disclosure (prospectus); can be listed on the $ASX$.

Company Establishment and Governance Structures

• Registration Process:
  • Register under $s 117$ of the $Corporations Act$.
  • ASIC assigns an Australian Company Number (ACN) and issues a certificate ($s 118$).
  • Companies must also apply for an Australian Business Number (ABN) for GST purposes.
  • Names: Must be unique and not prohibited (e.g., 'University', 'Royal', 'Chamber of Commerce' are restricted).
• Director Identification: All directors must have a unique, lifelong Director ID registered with the Australian Business Registry Services to prevent fraudulent identities.
• The Constitution and Replaceable Rules:
  • A company can adopt its own Constitution or rely on 'Replaceable Rules' provided in the $Corporations Act$.
  • $Section 140(1)$: The constitution acts as a contract between: 1) the company and each member; 2) the company and each director/secretary; and 3) the members themselves.
  • $Gambotto v WCP Ltd (1995)$: To expropriate property rights via constitutional amendment, it must be for a proper purpose and fair (procedural and substantive fairness).

Directors and Officers

• Definition of Director ($s 9$):
  • De Jure: Formally appointed.
  • De Facto: Not formally appointed but acts in the position ($Corporate Affairs Commission v Drysdale$).
  • Shadow: A person in accordance with whose instructions the directors are accustomed to act ($Standard Chartered Bank of Australia Ltd v Antico$).
• Types of Directors: Managing Director (CEO), Chair of the Board, Executive (internal/employee), Non-executive (external), Independent, Nominee (represents a specific interest), and Alternate.
• Qualifications ($s 201B$): Must be an individual, at least $18$ years old, and must give consent ($s 201D$). Must not be disqualified (e.g., undischarged bankrupts, those convicted of certain management-related offences).
• Definition of Officer ($s 9$):
  • Includes directors and secretaries.
  • Includes persons who make/participate in decisions with substantial effect on the business or financial standing.
  • ASIC v King [2020]: The High Court confirmed a person can be an officer without formally holding an 'office' if they have significant capacity to affect the company's standing.
• Company Secretary: Responsible for administrative compliance (registered office, lodging notices, member registers). Public companies must have at least one secretary.

Directors' Duties: Good Faith and Proper Purpose

• Fiduciary Nature: Directors are in a fiduciary relationship with the company, requiring high standards of loyalty ($Hospital Products Ltd v US Surgical Corp$).
• Statutory Duty ($s 181(1)$): A director or officer must exercise powers and discharge duties:
  • (a) In good faith in the best interests of the corporation; and
  • (b) For a proper purpose.
• Interests of the Company: Usually defined as the "general body of shareholders" ($Greenhalgh v Arderne Cinemas Ltd$).
  • Wholly-owned Subsidiaries ($s 187$): Directors may act in the interests of the holding company if the subsidiary's constitution expressly authorizes it and the subsidiary is solvent.
  • Creditors: Directors must consider creditor interests when a company is insolvent or nearing insolvency ($Walker v Wimborne$; $Spies v R$).
• Proper Purpose ($s 181(1)(b)$):
  • Howard Smith v Ampol Petroleum Ltd: A two-step test determines if a purpose is improper: 1) What was the legal purpose of the power? 2) What was the actual purpose of the director?
  • Whitehouse v Carlton Hotel Pty Ltd: If there are mixed purposes, the 'but for' test applies—compliance is breached if the improper purpose was the dominant reason for the action.

Directors' Duties: Conflict of Interest

• General Rule: Directors must avoid both direct and indirect conflicts between personal interests and company interests ($Aberdeen Railway Co v Blaikey Bros$).
• Disclosure ($s 191$): Directors must give notice of any 'material personal interest' in a matter relating to company affairs.
• Consequences by Company Type:
  • Proprietary ($s 194$): Replaceable rule; if disclosed, the director might still vote and retain benefits.
  • Public ($s 195$): Strictly prohibited from being present or voting on the matter unless other directors approve or ASIC grants an order ($s 196$).
• Specific Prohibitions:
  • Misuse of Position ($s 182$): Cannot use position to gain an advantage or cause detriment to the company.
  • Misuse of Information ($s 183$): Cannot use information obtained via the role for personal gain or company detriment ($Regal Hastings Ltd v Gulliver$).
  • Diversion of Opportunities: Taking a business opportunity that belongs to the company ($Cook v Deeks$; $Industrial Development Consultant Ltd v Cooley$).

Directors' Duties: Care and Diligence

• Statutory Duty ($s 180(1)$): Requires directors to exercise the degree of care and diligence that a reasonable person would exercise in the same position and circumstances.
• Standard of Care (The Modern Approach - $Daniels v Anderson$):
  • Directors must have a basic understanding of the business.
  • Ongoing obligation to stay informed about company activities.
  • Cannot claim ignorance if they 'shut their eyes' to misconduct.
  • Must monitor corporate affairs and financial status regularly.
  • 'Sleeping' or passive directors are not legally acceptable.
• Defences:
  • Business Judgment Rule ($s 180(2)$): A safe harbor if the judgment is made: 1) In good faith for proper purpose; 2) With no material personal interest; 3) After becoming reasonably informed; and 4) With a rational belief it is in the company's best interest.
  • Reasonable Reliance ($s 189$): Reliance on employees, advisers, or other directors is acceptable if made in good faith and after independent assessment.
  • Responsibility for Delegates ($s 190$): Directors are responsible for the acts of delegates unless they believed on reasonable grounds/good faith the delegate was competent and reliable.

Duty to Avoid Insolvent Trading

• Duty ($s 588G(1)$): Applies if a person is a director when the company incurs a debt, the company is insolvent (or becomes so by the debt), and there are reasonable grounds for suspecting insolvency.
• Failure to Prevent ($s 588G(2)$): Contravened if the director was aware of such grounds or a reasonable person in their position would have been aware.
• Presumptions of Insolvency ($s 459C(2)$): Examples include failure to comply with a statutory demand, execution of judgment returned unsatisfied, or appointment of a receiver.
• Safe Harbour ($s 588GA$): Protection if directors, upon suspecting insolvency, develop a course of action reasonably likely to lead to a better outcome than immediate winding up.
• Defences ($s 588H$):
  • Reasonable grounds to expect solvency.
  • Reasonable reliance on information from others regarding solvency.
  • Absence from management due to illness or other good reason.
  • Taking all reasonable steps to prevent the debt.

Shareholders' Remedies

• Statutory Derivative Action (Part 2F.1A): Allows members or officers to bring proceedings in the company's name with court leave ($s 237$). Criteria includes: 1) Company unlikely to sue; 2) Good faith; 3) Best interests of the company; 4) Serious question to be tried.
• Oppression Remedy ($s 232$): Granted if company conduct is 'oppressive to, unfairly prejudicial to, or unfairly discriminatory against' a member. Court can order winding up, share buy-backs, or modifications to the constitution ($s 233$).
• Winding Up ($s 461$): Members can seek a court-ordered winding up on grounds including directors acting in own interests, oppression, or where it is 'just and equitable' (e.g., deadlock or breakdown of trust).
• Statutory Injunction ($s 1324$): Allows a person whose interests are affected to apply for an injunction against a person contravening the $Corporations Act$.
• Access to Information ($s 247A$): Court may authorize an inspection of books if the member is acting in good faith and for a proper purpose.
• Variation of Class Rights ($s 246B-D$): Members with at least $10 \%$ of votes in a class can apply to court to set aside a variation of rights if it causes unfair prejudice.

Auditors' Duties

• Role: To provide an independent assessment of the company's financial position for the members.
• Statutory Duties ($ss 308-313$): Form an opinion on whether financial reports comply with accounting standards; report to members and ASIC.
• General Law Duty: Duty to exercise reasonable care and skill. 'An auditor is a watchdog, but not a bloodhound' ($Kingston Cotton Mill Co [1896]$).
• Liability to Third Parties: Established in $Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997)$. Duty is only owed to third parties if the auditor knew or should have known the report would be communicated to them for a specific purpose that would likely lead to a transaction in reliance on the report.

External Administration and Insolvency

• Receivership: A secured creditor appoints a 'receiver' or 'controller' to realize assets ($s 420A$ requires 'all reasonable care' to sell for market value).
• Schemes of Arrangement (Part 5.1): A court-approved compromise between a company and its creditors ($75 \%$ in value and majority in number required for approval).
• Voluntary Administration (Part 5.3A): Objective ($s 435$) is to maximize the chances of company survival or provide a better return to creditors than immediate winding up. A moratorium prevents creditors from taking action while the administrator investigates.
• Small Business Restructuring (Part 5.3B): For companies with liabilities under $1,000,000$. It is 'debtor-in-possession' model where directors stay in control but a practitioner helps develop a debt restructuring plan.
• Liquidation (Winding Up):
  • Voluntary: By members or creditors via special resolution.
  • Compulsory: Court-ordered, usually for insolvency ($s 459A$).
  • Statutory Demand ($s 459E$): A demand for a debt over the threshold; if not paid or set aside within $21$ days, the company is presumed insolvent.
  • Simplified Liquidation: A streamlined process for small businesses with debts under $1,000,000$ and up-to-date tax lodgements.

Regulatory Bodies

• ASIC (Australian Securities and Investments Commission): The corporate watchdog. Role includes administering the law, enforcement, registration, and investigation.
  • Powers: Can grant exemptions (Class Orders), conduct investigations ($ASIC Act ss 13, 14$), and bring civil or criminal proceedings.
• Other Regulators: ASX (market operator), ATO (tax), AUSTRAC (anti-money laundering), APRA (prudential), ACCC (competition), RBA (reserve bank), FIRB (foreign investment).