Business Law: Nightclub Contracts, Liability, and Regulations

This report analyzes the legal aspects of establishing and operating a nightclub business, addressing key issues such as business structure, contract validity, and liability. The report begins by advising DJ Phunky Pham and Khan Chan on suitable business structures, recommending a general partnership initially, followed by the implementation of a partnership agreement, and ultimately, registration as a Limited Liability Company (LLC) to mitigate personal liability. The analysis draws upon the Corporation Act 2001 and other legal authorities. The report then examines the validity of a contract between RR and 'Rainforests-R-Stupid Pty Ltd,' considering a breach of the company constitution by a receptionist. It concludes that the contract is valid, as the breach does not affect external parties. Finally, the report assesses whether a loan contract is binding on the company, discussing the common law indoor management rule and relevant statutory assumptions. It finds that the company is liable for the loan due to the receptionist's actions, the lack of monitoring, and the application of the indoor management rule, emphasizing the directors' responsibility. The report uses legal authority and the Corporation Act 2001 to support its findings.

Name of university
Student Name
Student ID
Assessment ID and Code
1

Question 1: Advise DJ_PP and Khan Chan in relation to a suitable business structure to
operate such a high-risk business.
You must support your answer with legal authority.
DJ Phunky Pham and club promotor Khan Chan want to establish an own nightclub business.
However, such types of businesses require several licenses and legal requirements to operate.
It also produces different risks as per a former club owner like higher implementation cost,
liquor licenses, music license, rent, staff salary, and location. Hence, it is necessary to
understand legal aspects before even company registration as per the corporation law 2001.
Let’s understand the procedure step by step. The business structure is the first step in which
company size and type will be decided. Further, it should consider separate legal entity
doctrine, which will refer to the company as an authorized person (Koenig 2017). The
Corporate Act 2001 legislation 124 state that “a company will have legal capacity and power
posing as an individual in jurisdiction inside and outside for shares, debts, grant options, and
security interest” (Federal Register of Legislation 2017). Furthermore, legal aspects of
structure for more individuals are also essential. Hence, for the nightclub business, a general
partnership between DJ Phunky Pham and Khan Chan is the first suggestion. A general
partnership is a form of legal structure that offers collaboration between two people who
know, trust, and agree to work jointly (Lupulescu 2017). Thus, this partnership is
recommended because of partners involved will operate nightclub and share the
responsibility to partnership debts and liability (Korchak 2017).
However, DJ and Khan must concern for personal liability because liability is considered
personally in case of debts, issues, and obligations (Entrepreneur Staff., n.d.). Hence to avoid
this liability issue second step is the implementation of the partnership agreement. According
to Corporation Act 2001, legislation 127 states that the execution of documents by the
company itself should be company policy. It states that “a common seal could execute a
document under witnesses such as two directors of that company” (Federal Register of
Legislation 2017). This will definitely provide a record for agreement between two parties,
DJ and Khan, in a legal manner.
The third step for nightclub business partners will be registered into a limited liability
company to seek protection from personal liability issues. Limited Liability Company (LLC)
is a business structure in which both partners will not be responsible personally for
2

nightclub’s debts from investment firms, banks, and sponsors (Mancuso 2017). Furthermore,
if in case a company shutdown authority involved will not handover their personal assets
such as money, jewelry, or house. There are three important benefits for making the
company’s registration into LLC like limited responsibilities, income tax, economic risks,
easy internal operations, and reduce investment monitoring (Molly 2017).
Additionally, limited liability partnership (LLP) is another form of safety net that protects
against business risks. The LLP offers a way so that partners’ liabilities stays as per
investment to the nightclub, whereas investment banks cannot harm personal assets or
income if the club fails (Beattie 2019). Lastly, in the case of former club owner Mel, public
liability insurance was unable to save his personal assets. Therefore, the last advice is to have
a good liability insurance policy (PLI) against business risks. As nightclubs will come in
contact with the public; therefore, insurance against lawsuits is essential. Also, the PLI policy
will cover expanse for issues like broken injuries, damage of property, and legal expenses
(Murray 2019). Hence, all the suggestions made as per the partnership business structure and
conducting risky business operations.
QUESTION 2 With reference to legal authority, analyse whether the contract between
RR and ‘Rainforests-R-Stupid Pty Ltd’ is valid in light of the receptionist’s breach of
the company constitution.
The contract is a legal binding between two parties, which offers a certain accomplishment
and price for a service. In this case, it important to analyse the breach that occurred by the
receptionist in the company — considering the decision for appointing DJ and Khan as only
single directors and shareholders. There are different rules for registration of an organization
in Australia as per the Corporation Act 2001 legislation (Cth) 114. As per this legislation, a
company can have its own constitution, one shareholder, and one director (Federal Register
of Legislation 2017). Hence, the basic requirement for the company registration by DJ and
Khan seems valid and follows the rules properly as per Australian standards.
Now, as DJ and Khan have decided to develop a company’s constitution, which is easily
customized and overruled by the rule of Corporation Act 2001, the legislation under 111J
Small Business Guide refers that, “a company does not require separate constitution however
it can follow rule in the Corporation Act while constitution is required if company want to
displace, modify and add to replaceable rules” (Federal Register of Legislation 2017). Hence,
3

its own constitution is also applicable to the new company Rainforest Raves Pty Ltd (‘RR’)
as per their addition for contractors and suppliers who are carbon neutral.
However, the club’s receptionist had made a mistake by checking the supplier’s carbon status
and accidentally placing large order with Rainforests-R-Stupid Pty Ltd. It actually breaches
the concept of club business constitution proposed by the directors. It is important to notice
how the constitution provides laws for a consequence of the breach. Company constitution is
a document which mentions rules for governance for relationships, and activities of the
company with shareholders, members, directors, and secretary (Woolrych 2019). According
to legislation 140, “company’s constitution will work as a contract between the company and
each member, each director, company secretary, and member” (Federal Register of
Legislation 2017). Hence, it is clear that the constitution will only apply to the people
involved in the company rather than external parties.
Therefore, the supplier Rainforests-R-Stupid Pty Ltd is not directly involved in the club’s
internal governing rules due to being the consideration of the external party. As per
legislation 135(3), “the failure to comply constitution does not impact the third person and
thus criminal liability, civil liability and injunctions are invalid” (Federal Register of
Legislation, 2017). This proves the contract between RR and Rainforests-R-Stupid Pty Ltd
does not offer criminal activity. Also, legislation 125 states that “an act of company is not
considering invalid as it contradicts with the traditional constitution” (Federal Register of
Legislation 2017). Hence, it is clear club’s receptionist breach the constitution of a company,
which does not align with external suppliers. To conclude, the contract between RR
and ‘Rainforests-R-Stupid Pty Ltd’ is valid because it neither produces a criminal offense nor
affects external parties.
QUESTION 3 - With reference to legal authority, analyse whether the loan contract is
binding on the company or the company might be able to escape liability.
In your answer discuss common law indoor management rule and relevant statutory
assumptions.
As per the company constitution, contracts over 10, 000 dollars requires a signature from
both directors. However, the law has provided authority to a small minority member
company receptionist for singing low-value contracts under 100 dollars with prior director
approval. This case depicts that authority to management is responsible for financial fraud.
4

Firstly, it is essential to understand the significant issues in the constitution which was
responsible for fraud. Secondly, the reasons for which the company cannot escape the
liability to such fraud is another crucial aspect.
As per one report, companies facing such fraud do have a duality authority and lack of audit
committees or laws in the company constitution (Wan et al. 2017). Hence, failure for such
financial fraud has a huge possibility in small scale companies like the RR club. Additionally,
Sly Azafox, the club’s receptionist, was visiting the local branch and made deposits and cash
withdrawals from the business account of the club. However, with no authority for audit
committees, nobody suspected here to make an application loan of 40,000 dollars.
As DJ and Khan both are single directors and shareholders, they come under the binding of
the loan contract, which their receptionist did by manipulating their identities. Besides,
another concern is that the director was unaware of such fraud going inside the club business
due to a lack of monitoring activities (Singh and Singh 2015). For example, monitoring
activities inside companies include financial reporting irregularities that offer instant fraud
detection (Gao et al. 2017). Therefore, the two important issues are observed for the company
established by DJ Phunky Pham and Khan Chan. For instance - more importance and to
minor authority and management, lack of monitoring, and no auditing committees.
The third aspect, which makes directors responsible for paying for loan binding, is their
liability as an appointed authority (Caliskan 2019). According to legislation 111J small
business guide, “Directors’ liability for company’s debts: a director of the company is equally
responsible for the company debts if they fail to and even ask for personal guarantee by the
investment banks” (Federal Register of Legislation 2017). Therefore, the company’s director
is responsible for paying the loan made on behalf of their receptionist. Hence, it makes both
directors into the possibility of fraud and difficulty to escape from liability.
On the contrary, in some countries, support liability, whether offense by a company has done
is based on two aspects. Firstly, is there any evidence for the director’s role in criminal
activities and secondly the importance of the people involved in the company (Vyapak Desai,
2018). Therefore, directors are not involved in this criminal offense because it was made on
behalf of their misused authority by receptionist Sky rather than them.
However, the common law indoor management rule is applicable in this condition as per
corporation law 2001. In the legislation 128, “A person is entitled to make assumptions that
on company’s behalf agent or officer could forge a document in context with dealings and
5

acts fraudulently” (Federal Register of Legislation 2017). This corporation act demands that a
third party or local branch could assume that dealings for loan payments were made as per the
company’s policies. The indoor management rule was established in the case of Royal British
Bank vs. Turquand to resolve problems for outsiders dealing with a company (Jaswal 2018).
The people dealing with the company as an external party such as investment banks do not
know about internal company policies or authority over directors and other individuals.
Hence, this rule was proposed, which states that “a person having good faith dealing with an
organization has no responsibility to ensure whether the organization has gone through
procedures before applying for permission. It includes articles, in-laws, resolutions, contracts,
and policies. Or the company has given authority for the transaction to the agent on behalf of
the organization” (Lexology.com 2014). Hence, this rule state that the bank is responsible for
the mistake of the company.
DJ and Khan and their internal constitution to authorize receptionist is not the bank’s
personal responsibility as they lend 40,000 dollars loan to a representative. The directors have
received a letter of demand to repay loan binding, or legal action will be taken against the
club. It cannot help the company know as they will need to pay for a loan due to a lack of
legal support. It is clear now; the company cannot escape from liability as the constitution
follows Corporation Act 2001 for the registration process. Therefore, it is a valid reason that
proves the club cannot escape the liability to pay the loan back. Sky has made a huge blunder
and taken authority into her own hands. However, the company cannot escape liability
because the third party is not responsible for corporate authority or company constitution
flaws. However, the fraud has accomplished, and it must be paid by the company’s directors
and their personal guarantee if put at the time of registration.
To summarize, the purpose of this essay was to analyse the scenarios for nightclub business
opportunity for the DJ and Khan. Firstly, different legislations from the corporation’s law act
2001 was obtained to analyse different situations. The business structure for the company is
proposed as per the capital structure and management structure. Additionally, a general
partnership is apt for both of them because of their rapid trust and understanding. The
partnership agreement will legally bind both DJ and Khan as directors for their nightclub
business. Further, the registration process for the company should be under a limited liability
company so that personal assets for them could be saved. As nightclubs are considered risky
business due to different licenses, it is important to keep it from bankruptcy. The contract
6

between RR and ‘Rainforests-R-Stupid Pty Ltd’ is valid in light of the receptionist’s breach.
There are different types of aspects which make the contract extremely valid. The company
follows its legislation under the company constitution document. This constitution is between
internal stakeholders involved rather than external parties, which contract unbreakable.
Lastly, the loan contract does bind the company due to its authority over loan sanction. Here
banks are not responsible for the approval of loan contracts due to indoor management rule.
With this rule, the bank is an outsider who is not responsible for looking into the internal
activities of the company.
7

References
Beattie, A 2019, ‘Limited Liability Partnership (LLP): The Basics.’ Investopedia, viewed 7
January 2020, https://www.investopedia.com/articles/investing/090214/limited-liability-
partnership-llp-basics.asp
Caliskan, S 2019. ‘Company Liability and Competition Law: Exposure of Company to Risk
of Undesirable Behaviour of Directors.’ Liverpool Law Review vol. 40, pp. 1-29.
Federal Register of Legislation, 2017, Corporations Act 2001, Sydney: Australian
Government, pp.1-556.
Entrepreneur Staff. (n.d.). ‘Business Structure Basics’. Entrepreneur, viewed 7 January 2020,
https://www.entrepreneur.com/article/75118
Gao, Y, Kim, JB, Tsang, D, & Wu, H 2017, ‘Go before the whistle blows: an empirical
analysis of director turnover and financial fraud’. Review of Accounting Studies, vol. 22, no.
1, pp.320-360.
Koenig, C. (2017). An Economic Analysis of The Single Economic Entity Doctrine in Eu
Competition Law. Journal of Competition Law & Economics vol. 13, pp. 281-88.
Korchak, J, 2017, Advantages And Disadvantages Of A Partnership Business - Inform
Direct, viewed 7 January
2020, https://www.informdirect.co.uk/business-management/partnership-business-
advantages-and-disadvantages/
Lupulescu, AM 2017, ‘Some considerations on the general partnership’. Tribuna
Juridică, vol. 7, no.2, pp.6-16.
Lexology.com 2014. The 'indoor management rule' explained | Lexology, viewed 7 January
2020, https://www.lexology.com/library/detail.aspx?g=469212cf-f6d8-458d-8a5d-
2722c5d4ba99#6
Mancuso, A 2017, Your Limited Liability Company, 8th ed, Berkeley, California: Nolo.
Moll, DK 2017, ‘Judicial Dissolution of the Limited Liability Company: A Statutory
Analysis.’ Transactions: Tenn. J. Bus. L., vol. 19, p.81.
8

Murray, J 2019, Get the Facts on Public Liability Insurance, viewed 7 January 2020,
https://www.thebalancesmb.com/what-is-public-liability-insurance-all-the-facts-4176621
Singh, P & Singh, M 2015 ‘Fraud Detection by Monitoring Customer Behaviour and
Activities.’ International Journal of Computer Applications vol. 111, pp.23-32.
Vyapak Desai, S 2018, ‘A director’s liability in cases of fraud’. Livemint. viewed 7 January
2020, https://www.livemint.com/Opinion/gwAQg5BZaenLohVeKUVLYM/A-directors-
liability-in-cases-of-fraud.html
Wan, WY, Chen, CC, Xia, C, & Goo, SH 2017. ‘Managing the risks of corporate fraud: the
Evidence from Hong Kong and Singapore.’ Forthcoming Honk Kong Law Journal.
University of Hong Kong Faculty of Law Research Paper No. 2018/020.
https://ssrn.com/abstract=3165829
Woolrych, D, 2019, What Is A Company Constitution? (2019 Update) [Online]. viewed 8
January 2020, https://lawpath.com.au/blog/what-is-a-company-constitution
9