Foundations of Company & Commercial Law - MyAssignmenthelp.com

Question: Discuss about theFoundations of Company Commercial Law for Partnership. Answer: There are three common business structures that are usually used for the running of a business. These include sole proprietorship, partnership and company. In the given case, considering there are three members namely Mary, Fred and Chris who would share the ownership, hence, the given structure cannot be labelled as sole proprietorship as the ownership of the business is limited to only one owner. Further, the given business structure by way of formation does not seem to be a company as this typically has elaborate formalities which would involve some time and cost for the formation. Also, the fact that the terms were written on a serviette clearly reflect that the given structure is not a company. Hence, the only possible business structure that seems likely is the partnership structure. In order to determine whether the given structure is a partnership or not, the relevant provisions of the Partnership Act, 1892 (NSW) need to be considered. As per s.1 of this act, any partnership needs to fulfil the following three conditions. Carrying on of a business In the above regards, there are certain crucial aspects which must be adhered. There needs to be involvement in business and not hobby as highlighted in the verdict of Ferguson v Federal Commissioner of Taxation. There is a difference between preparing to carry on a business and actually carrying on a business as reflected in the verdict of Goudberg v Herniman Associated Pty Ltd Also, it is essential that the underlying activity for which the partnership is formed is not for a single venture or isolated transaction but it should be for repetitive business activity. This is reflected in the arguments of the Ballantyne v Raphael. In this particular case, the partnership was formed amongst partners for a particular sub-division of a land and hence was not termed as a partnership since it was for a particular land only and there was no intention to repeatedly engage in the same. Business must be carried out in common It is essential that even though all the partners are not engaged actively in the business but all the business activities must be carried on the behalf of the partners of the firm. This is apparent from the arguments and underlying verdict of the Lang v James Morrison Co Ltd. In this particular case, the honourable court indicated that mutuality of obligations is critical for the existence of partnership and in the absence of the same, the relationship between parties cannot be termed as partnership. Also, the right to participate in profits is critical to being a partner as highlighted in the Re Ruddock case. Presence of Profit Motive In accordance with the commentary in Wise v Perpetual Trustee Co Ltd, partnerships are associations formed with the intention to earn profits unlike clubs which are mere associations and are not considered as partnership as the profit motive seems to be absent. Further, profit in terms of partnership refers to monetary gains only as other gains can be found in other association. It is imperative to note that the definition of profit has not been offered in the PA but is derived from commentary in cases such as Bond Corporation Holdings Ltd Anor v Grace Bros Holdings Ltd Ors. In accordance with this, profit tends to occur if the asset value of a partnership firm tends to be different at different point of time and the difference in value is termed as profit. In accordance with the above three requirements, the current scenario needs to be analysed so as to opine whether the given structure would be a partnership or not. It is apparent that the three partners i.e. Mary, Fred, Chris are not limited to planning but actually set up a caf business with joint ownership. Further, there was presence of an oral agreement with regards to the sharing of profit which amounts to the partnership agreement which is required for setting a partnership into place. It is mentioned that it is a business; hence it cannot be considered a hobby. Also, considering it is a business, hence the profit motive would also be present. Besides, it is apparent that the business is being run in common as the three partners have stakes are also involved in the day to day management of the caf. Besides, considering the nature of the business, it is also apparent that the business is not an isolated transaction but rather a repeated activity which is done over and over agai n, thus ensuring that it is indeed a business. It is apparent from the above discussion that all the conditions associated with a partnership relationship is fulfilled in the given case, hence it would fair to recognise the given business as a partnership firm with Mary, Fred, Chris being partners. It is imperative to note that in a partnership business structure unlike the company structure, the underlying principle is not the firm since a partnership has no legal entity. As a result, the partner while acting as the firms agent tends to also represent the other partners when running the partnership business and if certain actions are undertaken by the partner in the usual manner of conducting business, then such actions would be binding not only on the firm but also the partners. The only exception to this is when the other party is aware of the lack of authorization on part of the partner. However, this is primarily applicable for contractual liability. The scope of discussion in the given case would be limited primarily within the ambit of tortious liability. S. 10 of the PA is relevant in this regard and states that if any act which is wrongful or caused due to omission of the partner which results in causing damage or injury to any person who is not the firms partner, then the firm and partners jointly would be held responsible for the same provided that the omission or the wrongful act was carried out in the ordinary course of business. S. 12 of the PA also reflects that any liability arising from any wrong would be joint and several. This makes sense as for the actions of the agent the principal is responsible which in the given case cannot be firm since if the firm is sued; it essentially implies that the parties would be caught in a lawsuit. Also, since the partnership firm could potentially have unlimited liability, thus there is risk that in case of any tort related liability, the claims could potentially reach the person a ssets of the partners as the underlying liability arising from the tort would not be limited to business as in the case of a company but rather extend to the partners who would be held liable on account of the firm or business, Clearly, with regards to the above section, a major concern is to determine as to what constitutes as the ordinary course of business. In this regard certain useful cases are Polkinghorne v Holland and also Walker and others v European Electronics Pty Ltd. In the latter case, the judge stated that in order to define both the business scope and nature, reference needs to be given to the partnership agreement which would help in answering the above question. The following commentary given by Mahoney JA is also relevant in this regard and highlighted as shown below. In considering whether the act of a person is done in the ordinary course of the business of a firm of which he is a member, it is, of course, necessary to determine what the business of the firm is. Sometimes the business of the firm is defined or described in the partnership agreement. In such a case, the court must decide, as a question of fact, whether the act in question can be and was done in the course of carrying it on. This may be decided by reference to specific evidence that an act of the kind in question is apt to be, or was, done in carrying on such a business. Or, in some cases, the court may be in a position to take notice of the fact that a business of the kind in question is apt to be carried on by doing acts of the relevant kind. Further, in cases, where the scope and normal conduct of the business activities cannot be defined or identified through the aid of the partnership agreement, then in such cases, the decision is based on the underlying situation as has been highlighted in the verdict of the National Commercial Banking Corporation of Australia Ltd v Batty. Further, this is also reiterated in the Goldberg v Jenkins case. The prime reason was purely circumstantial since in the ordinary course of business, the interest rate paid on borrowed funds was significantly lesser in comparison to the rate at which the partner borrowed which effectively resulted in exemption of the liability for the firm and the other partners. In the given case, also, the above understanding would be applicable and the liability needs to be fixed with reference to the relevant sections of the PA along with applicable case law. It is apparent that the customer has been damaged owing to the coffee being too hot and considering the fact that the caf had duty to care, there is clear case of negligence and also the customer who has suffered the burns intends to claim damages. It is apparent that Chris who was negligent while serving the coffee would be definitely liable for the damages claimed by the customer. In order to determine whether the partners i.e. Mary and Fred would also be held liable or not, it needs to be ascertained whether the negligence was observed during the normal course of the business or not. It is apparent that the business that the partners are engaged in is caf. For a caf business, making and serving coffee to the customers is a regular part of the business and thereby it would be appropriate to conclud e that Chris was involved in the normal business course and thus in accordance with s. 10, 12, all the partners would be jointly and severely responsible for the damage claimed by the aggrieved customer. The current business structure is partnership which has two very big disadvantages which necessitates the review of the current business structure. In line with the incidents that occurred in part 1(b), the personal liability of the partners is potentially unlimited and as business grows, it is endeavour on the part of the partners to form a business structure which provides immunity to their personal assets to any issues related to the business. As a result, a company structure would be better suited. Further, another issue for the business in the partnership structure would be in raising of incremental finances which are not possible without dissolving the partnership firm. This is because every time there would a new shareholder that is added or alteration in the existing shareholding of partners, there would be a requirement to enact a new partnership agreement and form a new partnership firm which is quite cumbersome. Also, there is restriction in the number of members who can become partners and it might not be possible to arrange the requisite finance for business expansion from even the maximum number of partners possible. Thus, in this endeavour a company structure might be better suited considering the ease with which the transfer of securities can be enacted. A critical aspect of company which resolves the above two issues witnessed in partnership firms, is the fact that the company has a legal identity unlike other business structures which are known only by their respective owners. This was established over a century ago in the Salomon v Salomon Co Ltd. when the House of Lords distinguished between the liabilities of the company from that of the owners. Afterwards, this particular stance has been vindicated by a host of other cases. Even though in certain cases, the court may decide to lift the veil but despite that the principle of legal separation between the shareholders and the directors is well acknowledged. Additionally, in accordance with Corporations Act 2001, a company structure is capable of the following. Hold property Sue other parties and get sued in turn Perpetual in existence Limited Liability It is apparent from the above that the liability of the shareholders in a company structure would be limited as the maximum loss that the shareholders can bear is limited by their respective share investments. Thus, if the company becomes bankrupt then the shares would not have any worth and it would be deemed that shareholders have lost the money invested in the company. This is highlighted in the Green v. Bestobell Industries Pty Ltd case. Further, it is also apparent from the above that the company always remains in existence, thus it provides freedom for the owners to transfer shares as this would also happen one the shareholders are dead. But, the transfer of shares would not impact the existence of company which continues to exist and function irrespective of the ownership change. This allows for greater flexibility in raising finance for business purposes by diluting the equity while preserving the entity of the business. The objective is to determine whether the loan which has been taken by one of the directors Chris would be binding on the business under the relevant provisions of Corporation Act 2001 (Cth). It is noteworthy that when the individuals decide to use company business structure for their business, then the liability of any act of the director is mainly imposed on the name of company. The leading case is the judgement given in Salomon v. Salomon Co Ltd case. It is because company itself has a legal entity. Hence, company has its own rights and the respective obligations created by any action of the authorised agents which would create a legal liability for the company only. It has been highlighted in the Green v. Bestobell Industries Pty Ltd case, that the directors or the respective shareholders of the company are considered completely separate from the liabilities of the company because the liability is imposed on the company name only. This aspect is known as VEIL OF INCORPORATION under Corporation Act 2001. However, this scenario is different when the directors or shareholders are involved in any fraudulent activity on the name of the company, evading fiduciary duties, a voiding the obligations of contract. In this regards the honourable court would consider the situation and will LIFT the applicability of VEIL OF INCORPORATION. The testimony of this aspect is given in the verdict of Pioneer Concrete Service Ltd v. Yelnah Pty Ltd case. Dealing with a company for a third party is completely different as compared to a sole trader or partnership firm. It is because if the shareholder or the director is working on behalf of the company, then the respective directot is working as an agent for the company. Also, the third party can assume that the agent has the requisite authorization to create the contract in the absence of anything suspicious. Further, the liability of the enacted contract would be directly validated by the company. In this regards, under the provisions of section 127, Corporation Act 2001,the third party can enter into the contract and form legal contractual document if the contractual document in the following manner (without the seal of the company). When the contract has been signed by the two directors of the company When one director and a company secretary have signed the contract If the company has only one director (who is also designated as the sole secretary) then his/her sign on the contract would create the contract with the third party. These would extend the contractual liability on company under the applicability of section 128 and 129 of Corporation Act, 2001. In the accordance of the section 126 of Corporation Act 2001, the person has implied or express authority to enact legal relations with the third party can execute legal contracts on the part of the company. In this scenario, the person would be termed as agent of the company and company itself works as the principal. The judgement furnished in the Brick Pipe Industries Ltd v Occidental lie Nominees Pty Ltd case. Moreover, respective statutory assumption can be made on behalf of the third party while creating legal relation with the agent only when the document has been executed under the provisions of section 127, Corporation Act 2001. However, it is the responsibility of the third party to make certain enquiries related to the authorization of the agent. Further, the third party who is not aware about the limitation of the threshold limit of authority of the agent can enter into the contract in the good faith. The third can make assumptions related to the authorization of the conc erned agent under the provisions of section 129. This is in line with the rules of indoor management which have been upheld in the Royal British Bank vTurquand case. Also, a leading case in this regards is highlighted in Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd. The external or third party can make assumption even if the agent has fraudulently working on the name of company and the company has not informed about revoking the authority of the given agent. In the present case scenario, it is apparent that Chris who is working as one of the directors of the company has issued loan from the bank in order to purchase the neighbouring shop. The amount of loan is $50,000. It is highlighted in the constitution of the company that a director shall be able to enact contract with the third party only for the amount of $100,000. If any contract related to the expense for the goods or/and service, including loan has a contractual amount greater than $100,000, then it is essential that the contractual document must be signed by a director and an authorised board member. However, the bank is not aware about this constitution of the company and has made the assumption under the provisions of section 129 of Corporation Act that Chris has the requisite authority to take the loan. Therefore, the rights of the bank would be protected and the company would liable to complete the contractual obligation. It is because Chris is working as an agent for the c ompany and hence, the principal (company) is bound with the loan contract. Therefore, final conclusion can be drawn as the loan contract made by Chris on behalf of the company has extended the loan contractual liability on the company. Further, if the company would not satisfy the contractual liability then bank has the legal rights to sue company and recover the damages Considering the pivotal role played by the directors in the running of the company and the eventual success or failure, the Corporations Act 2001 has bestowed a host of duties on the conduct of the directors. The most key duty is imposed by s. 180 as which per there is a duty on the part of the directors to act with care and adequate due diligence. Further. S. 180(2) also known as the business judgement rule acts as a defence to decisions taken under s. 180. Thus, any decision which is taken to be in the interest of the company needs to be taken in good faith and by exhibiting faith. Another relevant duty on the director falls under the s. 588G as per which the director should not assume additional debt which can potentially lead to the bankruptcy of the company and thereby should continue to decrease the travelling expense. In the event that any reckless debt would be assumed that the company would have to pay the requisite amount to the bank. Besides, it is essential all the member s especially directors should adhere to the replaceable rules along with taking proactive measures so as to ensure that the affairs of the company are run in appropriate manner. As per the information extended in the case, it is apparent that Chris has assumed a loan of $150,000 even though his authority was limited to a sum of $ 100,000. Apparently, the step taken was in order to purchase the shop available in the neighbourhood at significantly discount prices. However, it seems quite strange as to why didnt Chris try to discuss the matter with the other board members if the project was indeed profitable. It is apparent that there has been a breach of corporations Act as loan has been assumed without adequate consultations with the other partners knowing about the utility of the same, it reflects breach of the constitution considering the clear parameter measured which is also considered. Further, it is imperative to note that the decision to assume incremental debt if did not prove correct could have potentially led to bankruptcy of the company had the strategy not worked. Thus, before assuming the loan, it was critical on the part of Chris to conduct with other investors especially if it was considered to be value accretive for the company. Thus, it is apparent that the conduct of Chris is not in line with the relevant Corporations Act especially because of acting independently. To be in line, it would be imperative that the assumed debt should have been approved by the board of directors before being assumed as the same was not authorised by the Constitution. While the current decision did not backfire, but there are chances of the claim not creating value for investors.