323.

607 The Law of Business Entities

Assignment

The due date for this assignment is on the course outline. Submission is by emit turn-
it-in
If you have any problems with turn-it-in and cannot submit on time then email the
lecturer a copy before the due date. You can then submit via emit and/or contact the
lecturer for help in submitting.
Assignments should be handed in by the due date. Your name and/or student identity
number must be included on your assignment together with the (signed and scanned)
Assignment Cover Sheet.
Referencing should be in APA format for articles. Legal referencing for cases or legal
academic works may be used. If in doubt on legal referencing ask your lecturer. You
are NOT expected to convert legal referencing to APA.
Your business plan must provide a basic realistic plan but the main aim is to supply
sufficient facts to apply the law to. You do not need to produce detailed marketing
plans or operational structures.
The total word limit for ALL parts is 5000 words. This excludes references.

Faculty of Business & Information Technology

ASSIGNMENT COVER SHEET

This cover sheet must be completed and attached to your assignment otherwise the work will not be assessed.

Student Name (as enrolled): ___________________________________________________

Student ID Number: ___________________________________________________

Course Name and No.: ___________________________________________________

Lecturer Name: ___________________________________________________

Assignment Title: ___________________________________________________

Assignment due date: ___________________________________________________

DECLARATION
This assignment is my own original work of which I am the sole author.
I have acknowledged all sources of information used in the writing of this assignment by using the recognised
in-text APA referencing standard (Harvard method also acceptable).

1. I have made use of source references in the text of my assignment when e.g.
Quoting

 According to Kopy (2005) , plagiarism “is deemed as being a form of intellectual theft” (p.33)
 Plagiarism is regarded “as being a form of intellectual theft” (Kopy, 2005, p.33).
Summarising & paraphrasing

 Contemporary research has shown that students learn more and gain a greater sense of
achievement when they do their own original work (Demic, 2003).
 Demic (2003) showed that students learn more and gain a greater sense of achievement when they
do their own original work.
2. I have included a reference list at the end of my assignment that will enable a reader to retrieve the
sources cited in my assignment e.g.
BookKopy, N. O. (2005). Evaluating intellectual theft and academic dishonesty: cases and
consequences. (11th ed.). Auckland: Fictitious Publishers.

Journal article Jartic, I. M. (1997). Stress and studying. New Zealand Journal of Student Stress. 3. 15-
21.

Web page Stricte, A. (2002). Plagiarism solutions home page. Retrieved April 1, 2005, from
http://www.idonotexist.edu/plagiarism.html

3. I have not copied either partially or in full any work from another student or former student.
4. I have not submitted this assignment or any part thereof as an assessment for another course.
5. I understand that the Faculty of Business may make use of systems such as Turnitin.com to verify the
originality of my work.
6. I understand that the Faculty of Business may make use of systems such as Turnitin.com to store the
work I have submitted and make it available for possible anonymous peer review for academic
purposes.
7. I understand that non-compliance with the originality of work provisions of this declaration may
constitute misconduct in assessment and may subsequently result in disciplinary action being taken by
MIT.

I, ____________________________________________ (Full Name) hereby confirm that I have read and

understood the content of this declaration and that the work contained in this assignment is a result of my own
effort.

Signature:________________________________ Date:_________________________
 ASSIGNMENT

This assignment covers:

Learning Outcomes 1, 2,3 & 5. Elements of these Learning outcomes may also be in the
tests.

1. Write a short business plan. The plan should clearly set out

- The business model for a product or service. Set out the supply and distribution chain for
the business and identify which part of the chain your business operates in, where it makes its
money, whether retail or wholesale, manufacturer and/or distributor, etc.
- the market and customers
- a range of suppliers for inventory, capital goods, premises, transport etc as appropriate.
- The number of employees and their functions including authority levels of management.
- financing from an external source.
- Who owns the business. You MUST have at least 3 people.

NOTE: The business plan is a summary. It should NOT exceed 2 pages. However, as you
apply the law of partnership and company you MUST add facts to show how the law may
affect your business. This is essential in writing this assignment.

The aims of this assignment are:

 To show how the structures are formed,

 To show how the structures can be used to achieve commercial or personal objectives
 To understand how structure affects risk and the raising of capital.
 To understand how structure affects returns and exit options.

TO assist in this a list of commercial objectives is given below. You should use these in your
assignment. You may add to them if you wish.

- Formation
o how the structure is created
o issues in formation (how, cost, other)
o Formation is not normally an objective, but sometimes speed, confidentiality,
and cost are a factor.
- Return on investment
o how can the owners obtain a ROI
o Short term, cash flow, long term return. This relates to exit.
- Profit
o how is profit shared
o How is the profit distributed?
o who gets paid first
- Risk
o to the owners of the business for business activities
 o Risk to the business related to the structure
o Risks relating to contribution to the business (you may consider loans or leases
by principals (versus contribution of capital)
o Risk from other actions of your partners (what if one is bankrupt, divorces,
dies, breaks their legs, stays in bed for a year, etc)
- Control
o Who controls the business – when is control lost?
o where are the rules written
o You MUST show how you change the default rules. Provide examples of
doing this in following the worksheets.
- Growth
o does the structure allow for growth
o Can the structure prevent growth?
o Note how capital input and control can conflict.
- Duration of the business and Exit
o Continuity – this applies to partnership in particular
o how to exit, what to do on exit,
o options for exit
 how to end the business
 how to exit but not end the business
o return of capital on exit - how to pay out exiting principals
o the effect on the business
TAX

- This is NOT a tax course. We do not specifically cover tax. That does not mean you
should not consider tax in a business plan. You should. However, you should structure
first, then decide the tax implications and possibly make changes. You are NOT
required to consider tax for the purposes of this course as an objective.
- If you have tax issues you can ask in class and we will address the issues.
- Tax can be one of your regulatory issues affecting the business. In this regard you
may consider the question of who is liable to pay the business tax as this is different
in a company or a partnership. In companies you may take this a bit further and look
at the liability of directors if the company doesn’t pay its GST or Income tax or
PAYE. (You do NOT have to use this example)

Administration

- In the company section

o note the meetings you must hold
o when you must hold them
o How you can avoid holding meetings.
o Note whether you will need an auditor.
o Briefly what accounting records must be kept?

NOTE:
a. Risk is to the business AND to the owners. In partnership this can be the same thing. In
company it is a different question. Risks include liability to third parties like suppliers,
customers, and other persons. Risk to the principals is the risk of being sued for the
actions of the business and its employees and the debts of the business.
b. Growth is about bringing in new finance. How do you increase the capital of the
business?
c. Control includes
a. Who are the management and who makes the decisions
b. How do you control the actions of people e.g. partners, directors, and employees.
Cover partners and directors and how these controls affect third parties.
c. Control and growth often conflict. New capital means new partners, shareholders
and directors.

Step 1: Business plan and regulatory controls

AIM: To understand the liability that arises outside or, an irrespective of, the structure
uses.

Identify regulatory controls applying to this business. List five, and in more detail provide
TWO examples with an explanation of why they apply and how they affect the business.(they
can be from the list of five). The detailed examples MUST be where the principals may incur
personal liability (e.g. as offences or damages). . These should NOT be from the Companies
Act 1993 or the Partnership Act 1098.

This website is useful

http://compliancematters.business.govt.nz/compliancematters/desktop/#/

NOTE: You can also use this resource for meeting and compliance.

This is not an exhaustive list of compliance issues. Local councils have a range of rules.
Criminal law may also apply. For a good example see the rules on running a sales promotion
under the Gambling Act 2003. If you do not meet the rules the promotion is illegal gambling.

Step 2

1. Discuss how a partnership structure will operate.

a. Follow the worksheets provided. Answer the questions in the worksheet for your
business. Attach the worksheets to the assignment as an appendix.
b. Provide examples using facts from your business plan and any additional facts
needed to illustrate the application of the law.
c. Use the table below. Complete this table as below. You will need to add rows and
commercial objectives.
d. Risk is a separate heading
Objectives Explain the aims you Outline the law that Outline any personal How will you deal with this
(headings only) have with reference to the applies and any issues issues that arise issue:
facts of the business. - Set out the - Set out how this - Changes to default
- These are your implications for affects the rules
business aims or the business principals - Rules that cannot be
needs avoided should be
identified and the risk
or problem explained.
- Will this change fully
protect (e.g. third
parties)

RISK Will you accept risk? The sections of the act

- The risk to you personally from the How much risk – put a applying is explained
business for debts $value on the risk you
- The risk related to actions of your will accept. The implications for
partners Personal risk? this type of business
- See list above are explained.

Commercial Objectives
- Return on investment (do you want a
dividend, capital growth, to be paid
first, a fixed amount, a salary?)
- Is there a way to make sure you
receive a return on the amount you
invest as a contribution or as a loan?

- Profit
 - This is profit sharing. Who gets how
much of the profit. Who gets paid
first. This is not the same as ROI.
- Control
o Can you maintain control
o Who controls the business –
when is control lost?
o where are the rules written
You MUST show how you change the
default rules. Provide examples of doing this
in following the worksheets
- Growth
o does the structure allow for
growth
o Can the structure prevent
growth?
o Note how capital input and
control can conflict.
o
- Duration of the business and Exit
o Continuity – this applies to
partnership in particular
o how to exit, what to do on
exit,
o options for exit
 how to end the
business
 how to exit but not
end the business
o return of capital on exit - how
to pay out exiting principals
the effect on the business
Step 3

2. Discuss how a Company structure will operate.

e. Follow the worksheets provided. Answer the questions in the worksheet for your
business. Attach the worksheets to your assignment as an appendix.
f. Provide examples using facts from your business plan and any additional facts
needed to illustrate the application of the law.
g. Use the table below.
a. You may use foot notes to the table to explain or add detail to avoid
excessive words in the table.
b. You will need to show changes to the constitution in your table to achieve
the commercial objectives.
c. Risk is a separate heading – you will add risks to the list.
d. Include a list or table of the meetings you will hold and the procedure to
follow before the meeting and discuss the value of this meeting. In some
cases you may want to conclude it is purely procedural, BUT, there will be
a reason and circumstances where it is necessary.
Objectives Explain the aims you Outline the law that - What are the This is the practical application
(headings only) have with reference to applies and any issues options for this of the theory in the column to
the facts of the - Set out the objective? the left.
business. implications for - This can
- These are your the business include classes How will you deal with this
business aims or of shares, using issue:
needs a shareholders - Changes to default rules
agreement, – put in what change to
constitutional the constitution you
changes, or would make.
other. - Rules that cannot be
- NOTE when avoided should be
this option identified and the risk or
conflicts with problem explained.
an option for - Will this change fully
another protect (e.g. third party
objective e.g. liability)
control vs - If a shareholders
growth. agreement will assist
include in this column.

Commercial Objectives
- Return on investment (do you want a
dividend, capital growth, to be paid first,
a fixed amount, a salary?)
- Is there a way to make sure you
receive a return on the amount you
invest as a contribution or as a loan?

- Profit
- This is profit sharing. Who gets how
 much of the profit. Who gets paid
first. This is not the same as ROI.
- Control
o Can you maintain control
o Who controls the business –
when is control lost?
o where are the rules written
You MUST show how you change the
default rules. Provide examples of doing this
in following the worksheets
- Growth
o does the structure allow for
growth
o Can the structure prevent
growth?
o Note how capital input and
control can conflict.
o
- Duration of the business and Exit
o Continuity – this applies to
partnership in particular
o how to exit, what to do on
exit,
o options for exit
 how to end the
business
 how to exit but not
end the business
o return of capital on exit - how
to pay out exiting principals
the effect on the business
RISK

RISK Try to quantify the The sections of the act applying is explained
- The risk to you personally from the risks. This is largely a
business for debts guess but should have - How does this risk arise?
- The risk related to actions of your some reason for the - When could it arise for you in your business as a company?
other directors amount give. Estimate - Include when the company is liable
- See list above and the issues related what this means in Include when the director / shareholder can be liable
to personal liability of directors and $value given the size
shareholders. of your business.
- Consider the risk as a director and a
shareholder. - Risk to the
business
- Risk to you as
a shareholder
- Risk to you as
a director.
List the risks (risks include areas such as
failure to pay creditors, insolvency,
contracts entered into, breach of duties.

MEETINGS
Heading of meeting Why and when – refer Procedure – include What is the value of this meeting to the company
sections any options for how and/or shareholders?
the meeting
requirement is met.
Step 4

Clearly state your preferred structure for your business with reasons. Relate your
decision to the commercial objectives by setting out which are the more important
and therefore which structure to use.
Clearly compare Partnership and Company structures in this section. A table may
be used.

Step 5: Research question – Maximum 1500 words in this section.

Using statistical references discuss the importance of the SME (small to medium enterprise)
to the NZ Economy.

Discuss which sector of the economy your business is part of. Its size relevant to others, and
therefore the business you will compete with.

Discuss the major causes of failure in this sector, and, consider the survival rates for
business of your type.

Discuss how the failure of company affects creditors of that business – you will need to refer
to the role of receivership and liquidation in this part.

Give your opinion on whether the liability of directors is a sufficient deterrent to behaviours
that cause losses to creditors and whether you would change the law in this regard.
Marking guide for Assignment:

Business plan - Comment Max mark Mark

- Clear statements of plan
- Supply chain
- Market
- Services and products, employees,
management structure
- Financing external
- Commercial objectives set out
fully
Business plan total 5

Regulatory controls on the business 10

Application to partnership
- worksheets completed 10
- Table 20
-
Application to Company
- worksheets completed 10
- Table completed 35
Step 4
Decision on which structure is made and 10
justified – relate to the commercial
objectives

Step 5 Research question

Statistical sources are used

Discussion of the sector and implications
for the business
20

TOTAL 120

Contribution to overall mark (60%) Your mark/2

workseets
Partnership Law Workshop :

Formation of Partnerships
Assignment Note: You can use this workshop for the partnership issues in formation of a business for
your assignment. You do not need to cover all issues in partnership in the assignment. Only enough
to answer the questions.

1. Section 4.
a. Outline the 3 requirements of s.4 of the Act
i. What is “a business” – are the people in ‘one business’ they share in
and contribute to, jointly profit from. Alternatively are they in sepatare
businesses that just work together?
ii. Can people work together to make a profit but NOT be in a business
together.
iii. What does it mean to be ‘in common’
1. The meaning of mutual agency – doing things on behalf of each
other
iv. The view to a profit – Intention is key.
1. Where does the profit come from? (refer to “a business”)
2. Is this gross or net profit
3. Is this an accounting or ‘legal’ approach to profit?
b. Give an example of each of these elements.

Discussion: What is a joint venture?

2. Section 5.
a. What are rebuttable presumptions?
i. Presumptions and assumptions – what’s the difference.
b. Discuss and give an example of the presumptions in section 5.

Discussion: Can you have a term (clause) in your agreement to run a business which says

“ the parties agree that this is NOT a partnership and no party shall represent themselves to be a
partner with any other party to this agreement”

Discussion questions: discuss questions 1 and 2 from Partnership discussion questions.

Assignment Part 1: Partnerships

1. For your business plan/idea consider the implication if you had a meeting agreed with
your group (people entering the business) to go ahead with the business
a. Would you be in partnership?
b. If you didn’t want this to be a legal partnership how could you avoid this?
2. You can consider here using the clause above to prevent a partnership. (will it work
against a third party who does not know of this agreement?)

Partnership Law Workshop :

Internal rules
Assignment Note: You can use this workshop for the partnership issues in formation of a business for
your assignment. You do not need to cover all issues in partnership in the assignment. Only enough
to answer the questions.

The Rules provided by the Partnership Act:

There are two types of rules

1. Compulsory

a. You cannot change these rules.

2. Default rules – these are rules that apply UNLESS you change them. The default rules you can
change will always have wording like ‘subject to any agreement’ or other wording which clearly
states that the rule will be over ridden by agreement between the partners.

b. The rules are changed in an agreement

a. Does this have to be in writing?
b. Does it have to be a deed?
c. Your partnership deed/agreement is a contract between the partners. It does NOT
affect third parties (unless they are aware of the internal rule)
d. List the sections in the partnership which allow you to change them

Assignment Part 1: Partnerships

3. In your business plan work out the practical issues of running a business as owner.
The following are a few suggestions. Make a list of these issues. (not every detail just
a selection of the main issues)
a. Who does what work
b. How is the business managed
c. How is profit shared
d. What are the contributions
e. Can you allow new people into the business
4. You should work through the sections providing rules to help and add to your list
based on the rules in the act.
5. For your business plan/idea considers the rules you would include in a partnership
agreement relating to the list of the practical issues you have identified.
a. What is the rule
b. How does it affect your business
c. Do you want to change the rule
d. How would you change the rule?

The rules

1. S.27
 a. Read the first paragraph. How do you know you can change these rules?
2. See s.22 – what does this mean?

Consider the following

a. One person contributes $1000, markets a trucking service, and obtains a 2 year
contract to cart gravel at a quarry. The other contributes a truck worth
$25,000 and drives the truck. The profit of the company is $80,000. How
much is each paid?
b. The marketing partner in the above question takes the quarry owners to lunch
once a month, then to a show, and buys drinks. It costs $1500 each time. Who
pays for this?
c. Eight new partners are brought into the business. Each has a truck and drives
in the newly expanded quarry contract. They meet every week. The meetings
take hours as everyone wants to talk and often they do not agree. Nothing gets
done. Who is in control of this business?
d. One of trucks is very old and breaks down. It costs $250,000 to fix. Who
pays?
3. One of the truck drivers likes to sleep in. He usually arrives at the quarry at 11.00 a.m.
and goes home about 3 p.m. The other nine want to get him out of the business but he
is happy. Can he be removed? See section 28 .

For each of the situations with the Quarry trucking business how would you change the rules? and
what other rules in s.27 would you alter?

4. One of the drivers is given a case of beer by the client. Who gets to drink the beer.
See s.32
a. in your business how will you deal with partners or employees who receive
gratuities?
5. Assume you are one of the truck drivers working on the quarry contract. In the
weekend you carry metal on your truck for farmers near where you live. They pay in
cash. You have done this work for years before the current quarry contract. Is there
any potential problem with this? See s.33

Partnership Law Workshop :

Ownership and Exit

Assignment Note: You can use this workshop for the partnership issues in formation of a business for
your assignment. You do not need to cover all issues in partnership in the assignment. Only enough
to answer the questions.

Definitions & Key questions:

c. Ownership - this means personal ownership either individually or as a co-owner. Co-

ownership does not have to be equal.
d. Find the default rules for ownership. Can you change these?
e. How is property brought into the partnership
i. Compare capital and Leasing or licensing property to the partnership
ii. How does this affect the business as well as the partner
3. The basic rules: S.23
All property and rights and interests in property originally brought into the partnership
stock, or acquired (whether by purchase or otherwise) on account of the firm or for the
purposes and in the course of the partnership business, are called in this Act partnership
property, and must be held and applied by the partners exclusively for the purposes of
the partnership and in accordance with the partnership agreement.

Who owns this? See. S.27 a 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

Apply this to your business

- What are some of the key assets your business will need?
- What are the options for bringing in these assets
o Contribute the assets?
o Contribute money to buy assets?
o Sell assets to the partnership?
o Lease assets to the partnership?
- Decide how you will do this.
- Relate that to s.27 and set out your rules on ownership (share of capital).

4. Exit
Exit means getting out of the business. The options are to dissolve the business, or to
agree a mechanism to exit. IF you don’t decide the default rules apply
s.29 - Where no fixed term has been agreed upon for the duration of the partnership,
any partner may determine the partnership at any time on giving notice of his
intention so to do to all the other partners.

a. What is the effect of a partner giving notice on your business

i. can the business continue as it was? Do you still have a partnership
ii. do you have to pay out the partner leaving?
b. What now happens to the assets. Look at s.35, 36.
c. What will happen to your business if you have to pay out one of the partners
i. put an approximate value on your business
ii. divide by the number of partners (default rule)
iii. Will you have this money to pay them out?
iv. If you don’t have the money what will happen to the business?

5. Do you need to tell anyone that you have left a partnership?

a. Consider s.39
 i. What are apparent members
ii. How do you avoid liability?
b. Does s.17 apply here
6. What other situations will end a partnership
a. An agreed term expires or venture. see. s35
i. is this a good idea?
ii. what if you want to continue in business?
b. Death, bankruptcy and charge – see s.36
i. this section will be explained in class
c. Illegality
i. in what circumstances could your business become illegal?
ii. Assume you sold party pills with BZP included in 2010 as a
partnership. What happened to the business when the law changed?
d. By the court. s.38
Question: How an these situations affect your business?
SOME THINGs TO CONSIDER:

a. Whey do banks prefer to deal with companies? Consider these issues

i. How do you know exactly what assets are business assets in a partnership?
ii. Is the solvency of the partnership affected by the other business and private
activities of the partners?
b.
i. What happens if one partner dies, divorces, or is being sued for unrelated debts?
ii. How do you know if your partners are going to pay: at the start, as the business
progresses?
2. If you are entering a business as a partnership should you be concerned by:
- the other partners health
- The stability of their marriage, defacto or civil union?
- What other businesses they have?
3. Do you agree with these statement:

‘Entering a partnership is like letting someone put their hand in your wallet”
“A partner with nothing to lose, has nothing to lose but your money”

Partnership Law Workshop :

Dealing with Third Parties

Definitions:

Who is a third party?

What is a contract?
Who has authority to form a contract on behalf of the partners?
What are torts eg negligence?
7. Contract Use s.8 and s.12

s.8 Every partner is an agent of the firm and his 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 he is a member bind the firm and his 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 he is dealing either knows that he has no authority or does not know or believe him to be
a partner.

Summarise the key issues highlighted.

a. Consider your business – describe its business – this is the “usual kind carried
out”
b. Who does the partnership deal with, or could deal with, in the usual way of
business?
c. Who is liable for these contract?
d. What is the effect of an internal rule limiting authority?

How much are the partners each liable for?

See. S.12 : key points

Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm
incurred while he is a partner; and after his death his estate is also severally liable in a due course of
administration for such debts and obligations as far as they remain unsatisfied, but subject to the
prior payment of his separate debts.

Questions:

a. How much could you be liable for – consider your business

b. What happens if your partners have NO money to pay?
c. How do the debts affect the estate of a partner?
d. Who would a creditor sue – one, two, or all partners and who do they get the money
from?

Liability in Tort

Sections: Use s.13 and s.15

s.13 Where by the wrongful act or omission of any partner acting in the ordinary course of the
business of the firm, or with the authority of his co-partners, loss or injury is caused to any person
not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same
extent as the partner so acting or omitting to act.

Questions

a. What is the ‘ordinary course’ of business. Apply this to your business. Define
what you see as ordinary course.
 b. Consider TWO actions that could affect third parties. One can be a car or
vehicle accident.
c. Outline the damage to the other party. How much money could this be
(approximate)
d. Who pays for this?

How much does each partner pay?

s.15 Every partner is liable jointly with his co-partners and also severally for everything for which the
firm, while he is a partner therein, becomes liable under either of the 2 last preceding sections.

6. What does s. 14 do?

Section 17 – Holding out

This section allows a third party to sue someone who is not a partner for the partnership debts IF

- that person has represented themselves, or allowed themselves, to be seen as a partner

by the third party eg a creditor
- The third party has relied on this and does not know or suspect the person is not a
partner.
NOTE: this does NOT make the person a partner. It makes them liable to that
creditor only.
Question

- You are thinking about going into business. You attend a meeting with two others at a
bank where one person says the three of you are starting a business together and need
$5000 overdraft facility.
- You later decide you don’t want to be in a partnership with them. They start the
business. They use a letterhead you designed with all your names on it, and, they have
a facility with the bank.
- Do you have any potential liability?

When could this happen?

- before partnership
- during a partnership
- After leaving – see s.39 as well.

Company Formation

Worksheet: To be used in class and for assignment

1. Sections applying:
Companies Act 1993 Part 2 Incorporation

2. What can we find out about a company: Searching the companies register

a. find the companies offices site at business.govt.nz – this is a general portal

You can go directly to the companies site a companies.govt.nz
b. Find a company (or two)
a. who are the directors
………………………………………………………………………………………
……………………………………………………………………………………….

b. who are the shareholders

c. ………………………………………………………………………………………
.
 a. does it have a constitution
……………………………………………………………………………………….

b. Is it registered or struck off – what’s the difference?

……………………………………………………………………………………….

……………………………………………………………………………………….

c. Find Thornlands Limited. – What is the ‘restoration’ document?

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3. What are the basic requirements to form a company? Refer s.10 List these
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4. Is your name available for your business?

a. If yes, does this mean you cannot be challenged if you use it (meaning, does
registration mean you own the name if someone else is using it in a
partnership?
i. To answer this you need to look at the tort of passing off, trademarks.
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b. what would make your name unacceptable to the registrar

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5. Removing a company
a. look at a number of removed companies
b. Note the ones that are removed – it may take a few to find the first two.
Examples below, but find your own as well

i. By the registrar – Bobs Heatpumps plus odd job bob limited – why are
there no documents about the removal?

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ii. Look at Dundee Developments Limited. See the request for removal,
note the section, the documents that accompany it. (this is the right
way to end your company)
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iii. Look at one with a receiver or liquidator appointed.

It is not possible to specifically search for companies in receivership or

liquidation. There is a site that give delisted companies. These companies have
withdrawn from the NZ Exchange. They are not necessarily in receivership or
liquidation.
What is receivership? see explanation here
What is liquidation? see explanation here
There is another option where a company is serious trouble can negotiate with
creditors under the companies act to create a scheme to keep the business trading
and recover. This is called voluntary administration.
The Shanton clothing company recently went out of business. It has several companies. Some
are in liquidation, others in receivership. In either the receiver or liquidator is appointed and
must file documents with the registrar of companies. For an example use Shanton as your
search on the companies site.
Shanton gives us several examples. Companies in receivership and companies struck off. See
the documents filed while in receivership and once the receiver ceases to act.

What else can we find out?

There are many databases. See for a list here – notice the limited partnership register.

These are for companies so are not all the databases. An important one for sole traders and
partners is the insolvency register.

NOTE: These are real people so be aware that you might find information that is sensitive
and act accordingly.

Pre-incorporation Contracts

Sections to use: sections 182 – 185

What should happen?

A person signs on behalf of a company which has not been incorporated. The company is
incorporated shortly after. A directors meeting is held. The directors pass a resolution agreeing to
the contract. The contract is now between the new company and the other party to the contract.

What can go wrong?

The company is not incorporated,

The directors do not ratify (agree to) the contract.

Who can be sued?

If the company does ratify – the company AND the person signing in rare situations – s.185
If the company is not formed OR does not ratify – the person who signed

Can the person signing avoid liability?

Yes, if they put a term in the contract they sign that says they cannot be sued. This could say they
have no personal liability.
STEPS

1. Is this a pre-incorporation contract

a. Has the company been incorporated?
b. Does the contract purport to be on behalf of a company to be formed?

Questions:

a. Al enters a contract with the owner of a building for a lease. The contract states
This contract is between Owner and AL. AL and owner agree this is a pre-incoporation
contract

b. Al signs the above contract “for and on behalf of ABC Limited”

c. Al signed the above contract “for and on behalf of ABC Limited to be formed”

2. Is the company formed in a reasonable time? Do the directors ratify the contract
a. Yes – summarise the relevant section

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b. No – summarise the relevant sections

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How can a person signing a pre-incorporation contract be sure the company will ratify it if
there are other directors? Think practically here.

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3. Does the contract exclude liability of the person signing

a. What section provides for this?

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Bill is interested in buying a bulldozer because he believes he can sell it to a farmer for a large profit.
He is worried about personal liability. He convinces the owner to sell to him and writes the contract.
He signs as

Bill Baggins “for and on behalf of Dozer best buys Limited to be incorporated”. He then finds the
farmer no longer wants a bulldozer and this bulldozer is not worth the price he has agreed to pay.

Bill incorporates the company. He is the only director and holds a directors meeting to ratify the
contract. He advised owner the contract is now with Dozer Best buys Limited but the company has
no money and he has passed a resolution putting the company into liquidation.

Read and summarise s.185

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Can Bill be sued by Owner in this situation?

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4. Would you enter a pre-incorporation contract?

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Who controls the company?

There are four main areas we discuss:

Constitution

Shares rights and appointing directors

Major transactions.

Meetings (covered in another worksheet)

Constitution.
1. What is the constitution? Define the constitution

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2. When and how is the constitution changed? see s 32 and s.106

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3. Can the rules on changing the constitution be changed?

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4. Consider the following people and the effect of changing the constitution. What
changes would help these shareholders.

a. a shareholder with 15% of the voting rights

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b. A shareholder with 30% of the voting rights.

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c. A shareholder with a class of shares with no voting rights.

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d. If a shareholder votes against a change in the constitution what rights does this give
them? Refer to the minority rights diagram and sections 110 – 115
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APPOINTING DIRECTORS

1. Who appoints directors?

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2. How are directors removed?

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3. How can you change the rules so that minority shareholders have the right to appoint
a director?
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4. If you own a company and decide to sell 51% to an investor do you lose control of the
company? How can you avoid total loss of control
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5. If new shares are issued how does this affect the rights of shareholders – including
appointing directors. Why is this important?
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6. What is the role of the directors? Summarise s.128

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7. How do they delegate their powers? See s.130

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MAJOR TRANSACTIONS

1. Summarise s.129
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2. Why is this power given to shareholders?

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3. What rights does the shareholder have if they disagree and;

a. the shareholder doesn’t vote on the resolution
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b. the shareholder votes against the resolution

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WHO CONTROLS THE COMPANY?

1. Is the control with the shareholders or the directors?

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2. How much direct (management) control of the company do shareholders have?

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3. Can shareholders have a right to directly control the actions of directors in the
constitution?
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4. If the Shareholders have a right to make decisions that directors would normally make
are they responsible (liable) for those decisions. See s.126 (1)(b)(iii).
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5. Explain this statement “Control equals liability” – Is it true? Can shareholders exert
control over the directors without being personally liable?
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Shareholders Rights – Rights attached to Shares

The Sections - Part 6 – sections 35 -40

What are shares?

They are property – you can own, buy and sell

What rights does a shareholder have? Summarise s. 36

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How does the constitution affect these rights? Can we have extra rights?

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What if there is no constitution or you need to change it. How is this done?

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Can a shareholder sell their shares to whoever they want? s. 39

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What is a pre-emptive right?

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Can we give shareholders different rights? – The answer to this is NO, not if they are the same class
of shares.

By default there is only ONE class of shares = ordinary shares.

A class of shares is created in the constitution. You can give different classes different rights, but
everyone in the same class has the same rights.

How do we create classes of shares?

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Classes of shares are called types of shares in s.37. Summarise the types we can create in the
constitution

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Can we add extra types of shares, AND, can we prohibit certain classes or any classes?

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Examples. Consider different classes that do the following. Why would we do this? Answer for
each example. What sort of shareholder would want these rights?

a. Preferential to dividend. NO voting rights.

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 b. A company has two classes of shares. Class A and Class B. Class A hold 70% of the
voting rights. Class B has the right to appoint two directors
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c. Class B shares are redeemable. The shareholders can required the company to buy
back their shares. Class B shareholder (only 1) is an investor which has provided
finance to the company by investing as a shareholder. (Why not just lend the money?)
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COMPANY LAW : Assignment worksheet

1. Share issue.

Share issue process is covered in the company law diagram. In this part of the
assignment you will look at

- Whether to use different classes of shares

- What rights or powers to give to the shareholders.

The purpose of using different classes is to give different rights. The assignment has
multiple objectives for your business. You decide the priority of those.

Shares, and the powers and rights given to the classes can be used for

- Return on investment
o How is profit paid to shareholders, who gets paid first, how much is
paid to each class.
- Control
o This issue is about voting rights. Can you give different classes
different rights to vote, or not vote at all?
o If you give shareholders control of directors note s.126 (will the
shareholders then be directors when they make that decision?)
o A BIG issue in control is to ask what happens when new shareholders
are created. How does this affect the existing shareholders and their
rights, control, ect.
- Growth – raising capital
 o This is share issue.
o Do you want there to be new shares (because this changes the voting).
Should you stop more shares being issued?
o Should you require a vote of shareholders and if so what percentage
- Duration of the business
o Your constitution can state when a company must liquidate.
o Do you want the business to end with a vote?
- Exit
o For this look at ‘redeemable shares’
o Can you sell your shares?
o You do NOT need to look at convertible securities ( shares that turn
into debt)

DIRECTORS DUTIES
use alongside the diagram directors duties in the company diagrams folder. Attached at the end of
this worksheet as well.

Summarise the legal entity theory and what is meant by the corporate veil

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Do creditors have a right to sue the directors for the debts of the company in the same way they can
sue the company if it doesn’t pay them?

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When can creditors sue the directors? Who is the person most likely to sue a director and when
does this happen? Summarise s.301(1)

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WHO is a director? Summarise s. 126 (1)

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Consider who is a director in the following situations:

a. Bill and Ted are the directors of a company. They ask Jed to assist. Jed is
retired but owned and run an adventure centre for many years. Jed takes part
in all meetings to discuss the venture and produces the business plan.

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b. Druid Supplies Limited supplies novelty products. It has four shareholders,

Bob and Betty and Ren and Stimpy. Ren and Stimpy are not directors and
take no active part in the company. The company has been in operation for
20 years and has been profitable. Bob and Betty are executive directors.
They have appointed a manager to run the company on a day to day basis
with instructions to tell them of any real problems. Bob and Betty have never
been very concerned about company issues. The manager runs the
company and their accountant does the accounts and tax returns each year
 and tells them how much tax to pay and how much money to pay as a
dividend.

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c. The Bean family manufacture musical instruments including Banjos. The

business is operated as a company called Back Country Banjos Limited (the
Company). The company was started by Jilly Bean and her Husband Jed. Jilly
and Jed are now quite elderly and spend most of their time sitting on the
verandah at home. The company is run by their children Elmer and Jake.

Early this year Jilly and Jed resigned as directors. Elmer and Jake became
directors. However, Jilly and Jed have continued to help Elmer and Jake with the
business and participate in all meetings. Elmer and Jake always ask for their advice

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Directors Duties

s.131
Directors’ duties are throughout the Companies Act 1993 and other legislation. We are focusing on
ss. 131 -137. We also use s.138 which is a defence the directors can use if sued.

s. 131(1) Subject to this section, a director of a company, when exercising powers or

performing duties, must act in good faith and in what the director believes to be the best
interests of the company.
- who is the person the director owes the duty to? is this a duty to the shareholders as well?

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- what would a director do if they were on the board of two companies. One is a supplier of goods.
The other buys the goods.

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s. 131(2) A director of a company that is a wholly-owned subsidiary may, when exercising

powers or performing duties as a director, if expressly permitted to do so by the
constitution of the company, act in a manner which he or she believes is in the best
interests of that company’s holding company even though it may not be in the best
interests of the company.

what does this section mean? and, how does it affect the subsidiary company?

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s.131(3) – provides the same rule for subsidiary’s (not wholly owned) and joint ventures.

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Which company constitution must have the clause that allows the directors to act in the best
interests of the other company?

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s.133 What do you think is a proper purpose?

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s.134 Comply with the constitution.

This is self explanatory, but, makes the constitution a statutory duty for directors.

s. 135
Reckless trading
A director of a company must not—
(a)
agree to the business of the company being carried on in a manner likely to create a
substantial risk of serious loss to the company’s creditors; or
(b)
cause or allow the business of the company to be carried on in a manner likely to create
a substantial risk of serious loss to the company’s creditors.

what is the difference between agree and cause or allow?

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When is there a substantial risk (of not paying)?

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How does this relate to the solvency of the company?

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Question: Rock2you Limited (Rocks), is a small company which designs and installs rock gardens.
Ted, the director, uses accounting software he bought in Bangkok, Thailand in a store for $20. It is a
pirate copy of a well-known accounting package, Great Plains. He has had a lot of problems with the
software which often crashes. This has resulted in Ted not knowing the true financial position of
Rocks for the last two months.

Over the last twelve months the company has had a lot of problems and Ted has borrowed money.
The company is insolvent. To try and get Rocks’ cash flow moving, he has also entered into contracts
to build and maintain rock gardens for commercial premises at very low prices. The accounting
software is incomplete and missing several key parts which results in many errors in the costing. This
has resulted in losses on a large percentage of the contracts

Is this reckless trading?

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s. 136
136Duty in relation to obligations
A director of a company must not agree to the company incurring an obligation unless the
director believes at that time on reasonable grounds that the company will be able to
perform the obligation when it is required to do so.
what are reasonable grounds? (hint- who is a reasonable director – define in terms of experience,
knowledge, role, size of company, type of business)

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What is an “obligation” – does it include, debts, contracts to supply, purchase contracts,

manufacturing, developing new products or services???

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Questions; Is there a breach of s.136

a. sem2, 2015 final : Ted is the director - One of the contracts Ted entered, which was
agreed to by Alan and Jenny, was to provide a Japanese garden for a large company.
The garden is to cover 2 hectares and requires over 1000 tonnes of rocks plus many
native New Zealand plants. This is an area and size the company has never entered
before. For this job Ted employed Percy. Percy provided references which showed he
was a gardener for a major landscaping company. Percy provided all the pricing and
logistics planning for this contract. Ted did not check the references. Percy has only
just completed an online free landscaping course and had only ever worked on his
parents’ garden. His estimates and plans are not professional. After two months the
large company cancelled the contract. Rocks owes suppliers $150,000 for materials.

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s. 137Director’s duty of care

A director of a company, when exercising powers or performing duties as a director, must
exercise the care, diligence, and skill that a reasonable director would exercise in the
same circumstances taking into account, but without limitation,—
(a )the nature of the company; and
(b) the nature of the decision; and
(c) the position of the director and the nature of the responsibilities undertaken by
him or her.

An accountant is a director of a company. The accountant is asked for advise on export issues for
a new product which uses a biodegradable bottle. They have customers in Europe for this
product. They manufacture two containers of the product and ship to Europe. The containers
are stopped at the border and returned. The bottles are biodegradable but in EU law on waste
they must be 20% different in size to the equivalent plastic bottle so they are not mixed. This
obscure rules in in the EU Waste directives. The accountant had never heard of these. Is the
accountant in breach of s.137.

138Use of information and advice – this section is a defence when

directors are sued.

Summarise s.138

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Consider these facts in terms of s.138

sem2, 2014: To assist with the business finances the company employed an
accountant named Stan. Stan is not a good accountant, has no qualifications and is
self taught. Elmer and Jake made no enquiries about Stan before hiring and as they
have no financial knowledge themselves are unaware of his lack of accounting
knowledge. Stan told them he was qualified.
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sem2, 2015 final

One of the contracts Ted entered, which was agreed to by Alan and Jenny, was to provide a
Japanese garden for a large company. The garden is to cover 2 hectares and requires over 1000
tonnes of rocks plus many native New Zealand plants. This is an area and size the company has never
entered before. For this job Ted employed Percy. Percy provided references which showed he was a
gardener for a major landscaping company. Percy provided all the pricing and logistics planning for
this contract. Ted did not check the references. Percy has only just completed an online free
landscaping course and had only ever worked on his parents’ garden. His estimates and plans are not
professional. After two months the large company cancelled the contract. Rocks owes suppliers
$150,000 for materials.

s.300 and s194

Read s.194: What accounting records MUST the company keep? (this is not a FRA company). Is
there a penalty for not keeping records?

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s. 196 – large companies and companies of over 10 shareholders and reporting (this is not part
of this course but you should note this for Financial Reporting courses.

s. 300 – what if the company does not keep accounting records

that comply with s.194? Read s. 301(1)(b) – what must be proved to sue the directors
personally?

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Consider these facts. Sem 2 2015 Final.

Ted (director of the company) uses accounting software he bought in Bangkok, Thailand in a store
for $20. It is a pirate copy of a well-known accounting package, Great Plains. He has had a lot of
problems with the software which often crashes. This has resulted in Ted not knowing the true
financial position of Rocks for the last two months.

Alan and Jenny sign the cheques and other documents that Ted prepares.

Over the last twelve months the company has had a lot of problems and Ted has borrowed money.
The company is insolvent. To try and get Rocks’ cash flow moving, he has also entered into contracts
to build and maintain rock gardens for commercial premises at very low prices. The accounting
software is incomplete and missing several key parts which results in many errors in the costing. This
has resulted in losses on a large percentage of the contracts.

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What is a self interested transaction and what must directors do? see s.139 & s 140
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When can the company cancel a self interested transaction made by a director? see s 141/142

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Can a director vote on a resolution in which they are interested? see s.144

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