LAW

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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TUTORIAL TOPIC 1.2 Activities 1.2.4 & 1.2.6

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Activity 1.2.4

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Question styles & Answer Structures

! Problem Style: I: Issue L/R: Law/Rule A: Apply to law to the facts C: Conclusion

! Essay Style: Introduction Body Conclusion

Is this a partnership?

•  Stated in question ‘A, B and C are in a partnership…..’

•  Partnership status is given and there is no need to apply the three essential elements.

Partnership Act - Section 24

•  Is there an agreement?

• Will section 24 apply?

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Comparative provisions

Partnership Act 1892 (NSW)- section 24

Rules as to the interests and duty of partners …subject to special agreement (1) The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement expressed or implied between the partners, by the following rules: (1) 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. (2) The firm must indemnify every partner in respect of payment made and personal liabilities incurred by the partner. (a) In the ordinary and proper conduct of the business of the firm, … (3) A partner making, for the purpose of the partnership, any actual payment… beyond the amount of capital which the partner has agreed to subscribe is entitled to interest at the rate of seven per centum per annum from the date of the payment….

A’s position

•  The opportunity to purchase the grain arises in the course of her duties as a partner.

•  'A' purchased the grain using her personal account not that of the partnership.

•  Therefore 'A' would argue that purchase occurred in the ‘course of her duties as partner’, accordingly reimbursement should follow provided the conduct was "ordinary and proper" under 24(1)(2).

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Assessing A’s position Questions:

• Did A follow normal procedures in buying the grain as she did?

• Has the grain been used in the normal course of business of the partnership?

• Why is there a requirement for two partner signatures on a cheque drawn against the partnership bank?

'ordinary and proper'

• What is 'ordinary and proper' may be found by examining past practices of purchasing grain.

• What are the past practices for the partnership?

Activity 1.2.6

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Issue: Nature of business relationship

• What is the legal status of the relationship, if any, between W, H & B?

•  Is it a partnership?

Partnership

In determining whether or not a partnership exists, the most important factors are the intentions of the parties to carry on a business in common as expressed by mutual rights and obligations which is evident by looking at the total facts.

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Statutory definition of a “partnership”

Section (1)(1) of the Partnership Act 1892 (NSW) ‘Partnership is the relationship which exists between persons carrying on a business in common with a view of profit…’ Essential elements: 1.  Carrying on a business 2.  By persons in common 3.  With a view of profit

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Partnership - 3 essential elements

•  Set out the legal principles of the three essential elements (see Duke v Pilmer extract)

• Apply the three essential elements to the factual scenario

1: Persons carrying on a business • Refer to Study Guide & Partnership Act • ‘Persons’ includes any legally recognised person, including a company

• ‘Business’ defined section 1B(1) PA • Must be the same business Checker Taxicab Ltd v Stone [1930]

NZLR 169

• ‘Carrying on’ – no statutory definition • Judicial guidance

= ‘activities were systematically organised and involved continuous and continuing transactions’; Duke v Pilmer [1999] SASC 97 para 973

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Essential Element 2: In Common

• Not necessary for each partner to be actively involved in the business

•  The courts look for evidence that partners have "a

mutuality of rights and obligations between them" and that they each act as agent for all the other partners (mutual agency)

•  see Duke v Pilmer [1999] SASC 97 para 952-954 & 962

•  Fulfilled if agency relationship binds parties, where each party carrying on business is acting on behalf of the others

•  The intention of the parties is essential in determining the scope of the agency relationship

•  Judicial interpretation includes inactive capital contributors (‘sleeping partners’) Duke Group Ltd v Pilmer [1999] SASC 97

• More than agency – mutuality of rights and obligations between the parties Smith v Anderson (1880) 15 ChD 247.

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2: ‘in common’

3: ‘With a view to profit’

•  Intention to make profit ‘at very heart’ of partnership relationship Bova v Avati [2009] NSWSC 921

•  Immaterial if venture successful or not and makes losses

•  ‘Profit’ not defined in Partnership Act

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With a view of profit

• This distinguishes partnerships from social and non-profit organisations.

•  ‘…the effect of the authorities is that, however profit may be identified or calculated, it connotes a direct and definable pecuniary gain. It does not mean the receipt of some other type of benefit or advantage, even if some benefit ultimately leads to a pecuniary gain’; Duke v Pilmer [1999] SASC 97 para 973

Partnership Act 1892 (NSW) The courts have interpreted section 1 Partnership Act by applying the general law partnership principles Partnership Act also sets out rules (in section 2), framed negatively, to which regard shall be had: • common ownership of property; • sharing of gross returns; • sharing of profits suggests partnership but is not conclusive; s 2(1)(3)(b)

Take a look at s 2 Partnership Act.

Issue: Rights of Boating House Pty Ltd against WB&H Company for $20K still owing. If partnership - Partnership Act will apply.         •  Refer to section 7 (is B specially authorised by the

other partners?) if no ….B breached the fiduciary duty regarding good faith to firm. Look at sections 28 & 29.

• Disclosure; section 28

• Account for private benefit derived without the consent of the other partners; section 29

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Partners owe fiduciary obligations.

Partnership Act 1892 (NSW) 28 Duty of partners to render accounts 29 Accountability of partners for private profits 30 Duty of partner not to compete with firm  

Fiduciary obligations under Partnership Act 1892 (NSW)

28 Duty of partners to render accounts (1) Partners in a firm other than an incorporated limited partnership are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner’s legal representatives.  

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29 Accountability of partners for private profits (1) Every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership, or for any use by the partner of the partnership property, name, or business connexion. (2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner, and before the affairs thereof have been completely wound up, either by any surviving partner or by the representatives of the deceased partner.

30 Duty of partner not to compete with firm (1) If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, the partner must account for and pay over to the firm all profits made by the partner in that business.

Boat House v WHB

! Is the firm liable in agency; see section 5 PA ! Note the flow chart re tests in section 5 (see next

slide)

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Agency and partnership. • Section 5 ‘Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership…’ (see flow chart p 21 Study Guide)

• Note that like agency law liability under the PA may be found via estoppel/ partnership by holding out; section 14

It is important to note that partnership law is related to agency law and the general principles of agency law should be reviewed.

Section 5 test : Agency; p 21 Study Guide

Application of facts to section 5 tests

! Transaction does not meet these tests so firm is not liable.

! Obviously B will be personally liable to Boating House Pty Ltd.

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Partnership Act 1892 (NSW) section 7

7 Partner using credit of firm for private purposes (1) Where one partner pledges the credit of a firm … for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound unless the partner is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner. (2) …

Issue: Can business be dissolved?

• Dissolved by Court? •  See section 35(c)(d) and (f) -just and equitable

Partnership Act 1892 (NSW) 35 Dissolution by the Court On application by a partner the Court may order a dissolution of the partnership in any of the following cases: … (c) When a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the Court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business. (d) When a partner, other than the party suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise conducts himself or herself in matters relating to the partnership business so that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner. (f) Whenever in any case circumstances have arisen, which, in the opinion of the Court, render it just and equitable that the partnership be dissolved.

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Activity 1.2.6 (cont)

So,

• Partners have unlimited liability – section 9 • See section 35(e) Dissolution by the Court … partnership can only be carried on at a loss.

Section 44: Rule for distribution of assets on final settlement of accounts

In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed: (a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits.

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(b) The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order: 1 In paying the debts and liabilities of the firm to persons who are not partners therein 2 In paying to each partner ratably what is due by the firm to the partner for advances as distinguished from capital 3 In paying to each partner ratably what is due from the firm to the partner in respect of capital 4 The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

Applying principles to facts

• W, H and B (subject to agreement) will have to contribute $100,000 each (the full amount of their private assets)