Commercial Law and Practice in the South Pacific

Mohammed L. Ahmadu, Robert Hughes

• Publisher: Routledge-Cavendish
• Year: 2017
• ISBN:
  9781135334406
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Commerce has become an area of central importance to the South Pacific region. Although the countries are small it is widely acknowledged that their need to promote and develop commercial enterprise is crucial for their future sustainability.

This new textbook is the first to examine the main areas of commercial law in the common law jurisdictions of the South Pacific region. These jurisdictions include the Cook Islands, Fiji Islands, Kiribati, Marshall Islands, Niue, Nauru, (Western) Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu. The text is divided into six parts each with its own introduction to aid the reader through each particular area.

Utilising both a structural and transactional approach it examines:

• the establishment and termination of commercial organizations
• the internal and external relations within and between organizations
• the legal principles applicable to various kinds of commercial dealings eg. insurance, sale of goods, bills of exchange
• aspects of foreign trade and international commerce relevant to the region.

Knowledge of the legal principles that regulate commercial activity within the South Pacific Region is essential for the communities themselves and for those from outside interested in doing business in the area. Students studying commercial law in the region will find this textbook essential reading as will those involved, or seeking to become involved, in commercial activity there

Part A
The Legal Structures of Commerce

Introduction

In Part A of the book we will examine some of the most common legal structures that are available for the conduct of commercial enterprises and for the carrying on of business. Commerce and business are two terms that overlap considerably. We will use them interchangeably in this book. Some might dispute the merit of doing so, but we see no particular point in indulging in fine distinctions between the two terms within this book.

Much commercial and business activity is carried on by individuals who are sole traders. The same is probably as true in the South Pacific as it is in more economically developed regions, although it is to be noted that the peoples of the South Pacific, as is well established, are generally more disposed than elsewhere to community-based activity. However, it is sometimes said that real commerce begins where two or more people get together in order to combine their resources and increase their investment power by establishing some kind of common enterprise for the conduct of their business. There is strength in numbers and there are also increased profits on combined investment power.

Some of what we will be examining in this book is of as much relevance to sole traders as it is to the combined commercial endeavours of groups of individuals. In this Part we will not be paying much attention to sole traders as commercial actors. Sole traders engage in commerce through entering into contracts of various kinds, just as do large corporations and commercial trusts. What we will do is focus on some of the major legal structures that exist as the basis for the carrying on of commercial activities. In some cases, for example with respect to companies, the structure involves the creation of what is in law a new individual or a new sole trader, viz the company itself. But companies also have features that compel us to recognise that they are associational structures, much as are partnerships. Trusts also in a sense involve, or can involve, an individual carrying on business on behalf of a trust, viz the trustee. But in such a case there will usually be other interests involved and these are the beneficiaries under the trust.

Thus, in this Part we will pay no more attention to the single trader than to simply acknowledge that it is one basis for carrying on business. We will look at partnerships in Chapters 1 and 2. In Chapters 3 and 4 we will look at the legal nature of trusts, particularly those used for carrying on business. In Chapters 5 and 6 we will examine the legal structure and methods of the creation of companies. Other associations such as cooperatives, friendly societies, banks and credit unions, and registered associations will provide the focus for Chapter 7.

Before proceeding further, let us look at some of the issues that arise in respect of the making of choices between these various legal structures for the conduct of commerce.

The Structure of Commerce or Business

Promoters of new commercial ventures are presented with many options as to how they might legally structure the operation of their proposed commercial enterprise. It is a relatively basic principle of law that a person can select whatever structure or combination of structures they like. That is the case even though one structure might have very different taxation and different consequences from another. In relation to taxation there are different taxation regimes in relation to companies, trusts and partnerships. Opting for one structure will thus affect the taxation obligations both of the individual parties or investors and of the entity as a whole.

By 'other consequences' we refer to the likes of liabilities in relation to third parties as well as internal relationships. Liabilities and rights in respect of third parties are dealt with in different ways depending on whether a trust, a company or a partnership is involved. Legal managerial responsibilities will be different depending on whether it is a trustee managing a commercial trust or a board of directors managing a company. We will look at these issues later on. The different legal structures available have various advantages and disadvantages. Much depends upon factors such as the number of interested parties, the taxation benefits and the size of the operation, the involvement of the parties, management relations, and the type of investment involved. In fact, it has become increasingly common to adopt a combination of different structures in a single business, as will be seen from the following discussion.

Even though there are significant differences there is still scope for choice. In respect of partnerships there are some limitations. As we will see, partnerships of a certain size must be registered as companies. They cannot carry on business otherwise. But aside from this, generally the law respects the choice of structure made by the promoter of the business venture. In other words, in most cases the choice of which structure to adopt is left to the promoters of the venture themselves.

However, whether the parties have in fact chosen one structure as opposed to others is not something that depends solely on the words of choice which are used. That is a matter for the courts to decide. In some cases, as with companies, cooperatives and limited liability partnerships, there are specific legal processes that must be followed in order to set up the relevant entity. In respect of trusts, joint ventures and partnerships, generally there is not. In those contexts, the parties might think they are setting out to adopt one kind of structure and actually create something of quite different legal effect.

It is a matter for the courts to determine the legal effect of the arrangement that the parties have made and to construe the negotiations and agreements of the parties accordingly. The fact that they have called their arrangement a partnership, a joint venture, a trust or something else is one factor only It is by no means conclusive. The legal effect of what has been agreed is to be decided by the courts largely as a matter of construction.

A trust is one possible structure, as noted above. Trusts are creatures of equity rather than commercial law, although, as noted above, it is clear that, historically, trust law has made significant contributions to the law of associations, including partnership and corporations law. The parties might opt for a trust where one person holds property on behalf of the others with a power of trustee to carry on the business. The trustee might be one or more of the investing parties, some independent trustee, or in fact a company. In the case of a company it might be independently owned or it might be one in which the investors, promoters or their relations have a shareholding or other investment interest. It could be that the trustee is a completely independent company which carries on the business of a professional trustee, or it could be a professional management company. In order to carry on business, the trustee must in the trust instrument be provided with a power to carry on business. Traditionally, as we will see, trusts were not regarded as vehicles for commercial enterprise; in fact commercial activities were discouraged by the courts. Thus, for example, the courts prohibited the trustee from carrying on business in the absence of an explicit power to do so. Nevertheless they were, and now frequently are, used to provide the basis for business operations.

Under a trust arrangement the trustee holds the outward interest in the initial and accumulated property of the venture. However, the trustee is compelled to hold and deal with the trust property exclusively for the benefit of the beneficiaries. These are the persons who are regarded by the equity courts as the true 'owners' of the trust property.¹ There are, however, many different types of trust. Under some trusts, for example discretionary trusts, the interests of the beneficiaries may not be immediately vested. The entitlement of the beneficiaries to capital or income, or both, is dependent on the trustee exercising their discretion in favour of some or all of the beneficiaries before they can be said to have a determinate interest. Thus the idea that the trust beneficiaries have ownership of the trust property in equity is perhaps not as straightforward as might be thought.

Basically, however, it is the trustee or trustees of the particular trust who operates the business venture. Generally, it is not for the beneficiaries to direct the trustee as to how the business is to be carried on. The trustee is obliged to act exclusively in the interests of the beneficiaries. However, the trustee, at the same time, is required to exercise independence of judgment in determining what those best interests might be. A trustee would be in breach of trust if he or she fettered or restricted this capacity for independent judgment. The trustee is not an agent of the beneficiaries at all.

The trustee, like many other types of manager, is a fiduciary as against the beneficiaries. Indeed the trustee falls into the highest category of fiduciary, in the sense that the trustee is required to act exclusively in the interests of the beneficiary. Partners are, as we shall see, fiduciaries of one another but they are also principals and agents of one another. Furthermore, as we noted above, a trust is not, unlike a partnership, a form of association at all. The beneficiaries are not legally associated with one another as are partners in a partnership. Certainly they are related because they all have interests in the same trust institution. But being related or having common rights does not necessarily mean that there is an association in the legal sense.

Significantly, it is the trustee who carries on the business of the trust on behalf of the beneficiaries. As noted already, the beneficiaries are not participatory members of the trust because one can only be a member of an association. People will inevitably use membership notions to describe a trust, and we admit that there are areas of some obscurity here. It is the large public unit trust which perhaps places this notion under stress. In many respects the position of an investor in this entity is indistinguishable in fact from the position of an investor in a large corporation. One is no less associated than the other. But in principle, beneficiaries are not members and do not have membership rights.

Given that the trustee operates the trust and the trust business, it is the trustee who enters into transactions with third parties in respect of trust transactions. It is the trustee who incurs debts and liabilities. The 'trust' does not exist as a juristic entity at all even though it might be common enough to call the trust by some name. It is the trustee who is personally liable for such debts and liabilities even though it might be clear that they were incurred on behalf of the trust rather than in the capacity of a private individual. The creditor or third party does not have to, and indeed cannot, sue the trust or the beneficiaries.

The other major choice is that of an incorporated company or some other corporate form. Companies are one form of corporation, along with cooperatives, friendly societies and the like. There are various types of company: one example is the proprietary company, in which membership is defined by the holding of shares. Such companies have the advantage of limited liability, which serves to protect directors and members or shareholders against personal liability in respect of the claims of creditors and other third parties against the company. Neither a trustee nor the partners in a partnersh...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Table of Cases
• Table of Legislation
• Abbreviations
• PART A: THE LEGAL STRUCTURES OF COMMERCE
• PART B: CONTROL AND MANAGEMENT OF COMMERCIAL ENTITIES
• PART C: COMMERCIAL TRANSACTIONS
• PART D: BANKING
• PART E: FOREIGN TRADE
• PART F: TERMINATION AND WINDING UP
• Index