Exam Prep - Partnership PDF

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Summary

PARTNERSHIPNotesPartnerships - A partnership is an association of persons actually ‘carrying on a business’ together, the partners decide what business will be carried on, they are usually entitled to get involved in the day-to-day operations, they owe one another fiduciary duties and, in the case o...

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PARTNERSHIP

Notes Partnerships - A partnership is an association of persons actually ‘carrying on a business’ together, the partners decide what business will be carried on, they are usually entitled to get involved in the day-to-day operations, they owe one another fiduciary duties and, in the case of limited partnerships and incorporated limited partnerships, they are personally liable for the partnerships debts and obligations. ‘In Common’ - Means that there must be some joint participation in a common business. - Just because two parties are engaged in closely related activities, does not mean that they carry on a business in common. Each runs it’s own business, usually for its own exclusive benefit. - The ‘in common’ requirement is met when the business is carried on by or on behalf of the partners. View of Profit - “A view to ultimate profit is essential in a partnership, but it has not been essential that there be a profit-making motive in the short term”. - Essentially, the ‘partners’ are carrying on their business with the expectation there could be losses, or at least initially, however the business will still be carried on ‘with a view of profit’, if the parties intend that it will ultimately earn profits. - The requirement for proof of a ‘view of profit’ does not apply to clubs, societies and not-for-profit organisations as they do not operate with a view of profit for the members, thus does not satisfy the legal requirement of a partnership. Partnerships and Companies - The Partnership Act specifies that companies are not partnerships. - Companies are their own independent, legal entities who obtain their funds from shareholders Ownership structure of a Company - Shareholders (Owners) - Director (Operates the company) - The Company (needs to be told what to do) Advantages of a Partnership - Simple and cheap to set up and dismantle. - Not closely regulated/no formal reporting requirements. - Entitlement to participate in management and decision-making. - Flexible through being able to quickly shift focus as the circumstances change or new opportunities arise. - Partners owe fiduciary duties to one another. - Partnerships can be used to reward and retain the services of appropriately skilled and deserving employees. This can be employed through including a new partner into the partnership, and allowing that person to share the risks and rewards of the business. Disadvantages of a Partnership - Partnerships have no separate legal existence. They are not considered legal entities, thus they depend on the legal persona of their individual partners. - Continuity problems arise due to everytime a partner leaves or a new one joins, the current partnership is terminated and a new one starts. - Partnerships (In Australia) are limited to a maximum of 20 members. - Capital is difficult to get, as they can borrow funds, they do so on the collective credit of their partners. Alternatively, companies can raise capital by issuing shares to or borrowing from the public. - Unlimited liability as all partners are personally liable, without limit, for the partnership’ debt and liabilities.

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Statutory agency is established as each partner is an agent of both the firm and of his or her fellow partners, at least in relation to acts done in the course of the firm’s business. - Partnership interests are not freely transferable. This means that a partner cannot simply sell, give away or otherwise dispose of his or her interest in the partnership to some third party unless all other partners agree. - Some partnership decisions require unanimity by all involved. Illegality as the basis for prohibition in partnerships The four points occurrences that render a partnership illegal. 1. Exceeding the maximum number of members permitted by the statute. 2. Having objects that are illegal or contrary to public policy. Eg. criminal activity or to defraud revenue. 3. Entering into a partnership with an enemy alien 4. Entering into a partnership with a person who may not lawfully carry on the business in which the partnership is engaged. The effect of war on partnerships - As a general rule, a declaration of war automatically terminates, or at least suspends, all commercial dealings between parties who are the subjects of rival, hostile nations. - As a result, partnership agreements with an enemy alien cannot be enforced during hostilities, although it appears they may be terminated and the partnerships formally dissolved. - Further, any such partnerships actually formed during hostilities will be void on the grounds that their formations are against the national interest and, therefore, contrary to public policy. ‘In the usual way’ - Even if what a partner does is within the scope of the firm’s business, a third party should normally be put on notice that perhaps the transaction is not being carried out on behalf of the firm. Essentially, if the third party has sufficient evidence or cause to be reasonably suspicious then, if the transaction is not completed or if there is some other breach, the third party should not be able to take action against the other partners. - It's not easy to ascertain what is the ‘usual way’, and each case differs depending on the facts. The general test for identifying whether something qualifies is ‘given the nature of the firm, are the circumstances of the transaction such that a reasonable person should have suspected that something was or could be wrong’. The Partners’ Joint Liability - A partnership's debts and obligations in contract arise under contracts that have been negotiated on behalf of the partnership by either one of the partners. (in doing so, they effectively act as the firm’s agent, or someone acting with the firm's authority). - Law of Agency comes into effect. Provided the agent has truthfully disclosed that he or she is acting in a representative capacity and not on his or her own account, the agent is not personally liable on the resulting contract, either at all (in the case of non-partner agents) or except in his or her capacity as a member of the firm (in the case of a partner). - Essentially, any contracts that are entered into by or on behalf of the firm, are only binding to the partners jointly, and that there is no separate liability that attaches to any particular partner individually. However, because of ‘unlimited personal liability’, any partner can be sued individually for the entire debt. The nature of the other person’ liability - If any partner commits a wrongful act on the firm’s behalf, or with the authority of the other co-partners, the firm is not liable to the same extent as the partner committing the act. - However, as a firm has no legal existence separate from its partners, this can only mean that the other partners are liable. - Essentially, they are only liable in their capacity as partners, not as individuals. However, each partner will still need to meet the liability using partnership assets, and if that is not sufficient then private assets will need to be used.

Partners as fiduciaries - The relationship between partners is both contractual and fiduciary. This means that partners not only owe one another the duties and obligations that arise under their agreement, they are also expected to use their best endeavours and to exercise such rights and powers as they have as partner, in good faith and for the benefit of their firm as a whole. Essentially, both sets of duties co-exist with one another. - A parties fiduciary obligations flow from the fact that partnerships are presumed to have arisen out of and be based on the mutual trust, confidence, understanding and goodwill that is assumed to exist between all members of every partnership. - Partners have two consequences resulting from their relationship: 1. Partners are not normally permitted to act except for the common good; and 2. Their relationship is governed mainly by the parties’ own agreement rather than by detailed rules laid down in the Partnership Acts. - The partners fiduciary responsibilities are subject to their obligations under the partnership agreement. Sharing Losses Where the partnership has made an overall loss, the Partnership Acts provide: - Losses, including losses and deficiencies of capital, shal be paid first out of profits, next out of capital, and lastly, by the partners individually in the proportion in which they were entitled to share profits. - If the company does not have the suitable assets to settle the debts, the partners may be personally liable to contribute their own assets to settle company debts, in accordance with the original partnership agreement. Piercing the Corporate Veil - The insulation from corporate debts is known as the ‘corporate veil’. Used to protect company/corporation liability from the shareholders. - In limited circumstances, if the corporation is not properly operated, the corporate veil can be pierced. - Two factors which help determine whether to pierce the corporate veil: 1. Formalities - is there a sufficient unity of interest and ownership between the corporation and its owners, such that the separate entity status of the corporation should be disregarded? - Is the corporation undercapitalized? Does it not have sufficient funds to properly operate and, therefore is not a separate entity that can stand on its own. - Failure to observe corporate formalities such as holding board and shareholder meetings. - Non-payment of dividends. - Insolvency of the debtor corporation at the time. - Siphoning of funds of the corporation by the dominant stockholder. - Non-function of other officers or directors - Absence of corporate records - Any indication that the corporation is merely a facade for the operations of the dominant stockholder or stockholders. 2. Fairness - would it be unfair to pierce the corporate veil? Limited Liability Company - A business structure where the owners are not personally liable for the company’s debts or liabilities.

Relevant Cases Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321

Took on the joint venture with a view for profit.

Sections Partnership Acts Section 6 (Partnership Act 1958) Rules for determining existence of partnership In determining whether a partnership does or does not exist regard shall be had to the following rues: 1. Joint tenancy in common joint property or part ownership does not of itself create a partnership as to anything so held or owned whether the tenants or owners do or do not share any profits made by the use thereof. 2. The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. 3. The receipt by a person of a share of the profits of a business is evidence that that person is a partner in the business. But the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make that person a partner in the business. Section 8 (Partnership Act 1891) Power of Partner to bind the firm 1. Every partner in a partnership, other than a firm that is a limited partnership or incorporated limited partnership, is an agent of the firm and his or her 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 of business of the kind carried on by the firm of which the partner is a member find the firm and his or her partners, unless: a. The partner so acting has in fact no authority to act for the firm in the particular matter; and b. The person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner. Section 10 (Partnership Act 1958) Partners bound by acts on behalf of firm An act or instrument relating to the business of the ifmr and done or executed in the firm-name or in any other manner showing an intention to bind the firm by a person thereto authorised whether a partner or not is binding on the firm and all the partners. Section 11 (Partnership Act 1958) Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business the firm is not bound unless he is in fact specially authorised by the other partners, but this section does not affect any personal liability incurred by an individual partner. Section 27 (Partnership Act 1891) Rules as to interests and duties 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 must be decided, subject to any agreement express or implied between the partners, by the following rules: a. All 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: b. The firm must compensate every partner in relation to payments made and personal liabilities incurred by the partner: I. In the ordinary and proper conduct of the business of the firm; or

II.

In or about anything necessarily done for the preservation of the business or property of the firm; E. every partner may take part in the management of the partnership business. F. no partner is entitled to remuneration for acting in the partnership business. G. No partner may be introduced as a partner without the const of all existing partners. Section 30 (Partnership Act 1958) Retirement from partnership at will 1. 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 to do so to all the other partners. 2. Where the partnership has originally been constituted by deed a notice in writing signed by the partner giving it shall be sufficient for this purpose. Section 30 (Partnership Act 1891) 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 a pay over to the firm all profits made by the partner in that business. Section 31 and 32 (Partnership Act 1891) Duty of partners to render accounts etc. 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 his or her legal representatives. Section 33 (Partnership Act 1958) Accountability of partners for private profits 1. Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from any use by him of the partnership property name or business connection. Section 35 (Partnership Act 1958) Rights of an assignee of share in partnership 1. An assignment by any partner of his share in the partnership either absolute or by way of mortgage or redeemable charge does not as against the other partners entitle the assignee during the continuance of the partnership to interfere in the management or administration of the partnership business or affairs or to require any accounts of the partnership transactions or to inspect the partnership books but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled and the assignee must accept the account of profits agreed to by the partners. 1. In the case of a dissolution of the partnership whether as respects all the partners or as respects the assigning partner the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners and for the purpose of ascertaining that share to an account as from the date of the dissolution. Section 38 (Partnership Act 1891) Continuing authority of partners for purposes of winding up -

On application by a partner the court may decree a dissolution of the partnership in any of the following case a. if a partner is shown to the satisfaction of the court to be of permanently unsound mind, in which case the application may be made as well on behalf of that partner by his or her committee or next friend or person having title to intervene as by any other partner; b. if a partner, other than the partner suing, becomes in any other way permanently incapable of performing his or her part of the partnership contract;

c.

if a partner, other than the partner suing, has been guilty of conduct that, 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. if a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner; e. if the business of the partnership can only be carried on at a loss; f. if in any case circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved....