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Corporate(Law(( Final(Exam(Notes( Emma$Bechara$ $$$$$$

UTS$LAW$2012$

Partnerships$ Subject(Outline(Briefing:( The$partnership$is$the$simplest$form$of$business$association$and$perhaps$the$most$common.$ (Redmond,$ P.G.$ 2)$ First$ thing$ to$ note$ is$ that$ most$ partnerships$ are$ NOT$ separate$ legal$ entities$ –$ it’s$ just$ multiple$ sole$ traders$ working$ together.$ So,$ creditors$ are$ able$ to$ impose$ liability$ personally$ on$ the$ people$ in$ the$ partnership.$ It’s$ not$ a$ separate$ legal$ entity$ (unless$ incorporated$–$has$to$have$disclosure$etc.)$Partner$is$both$a$principle$and$agent$of$the$firm.$$

2.1.(( History(of(Partnership( Two$forms$of$partnership$known$to$medieval$law$ •

•

Commenda$(cf$modern$limited$partnership)$ o

One$party$supplied$the$capital$for$the$venture$but$did$not$take$an$active$role$in$ management.$

o

Participation$in$profits$and$sharing$losses.$

Societas$(common$bond$and$responsibilities)$

Partnership$Act$as$codification$of$judge$made$law$ •

Act$is$interpreted$through$the$lens$of$that$prior$law$

2.2.(( Diversity(of(Modern(Partnerships( •

Most$small,$often$family,$businesses$;Up$to$large$international$professional$partnerships$ because$of$ethical$rules;$Limit$of$20$members$save$for$professions$(Corporations$Act$s$ 115)$$

•

Determinants:$limited$liability,$tax,$informality$and$cost;$Partnership$mostly$express$but$ may$be$ambiguous,$uncertain:$no$registration$necessary$

2.3.(( Principal(Characteristics(of(Partnerships( 2.3.1.(A(partnership(is(not(recognised(by(Australian(or(English(law(as(a(distinct(legal(entity( •

The$firm$and$its$members$collectively$are$now$endowed$with$a$distinct$entity$status.$$

•

The$rights$and$liabilities$of$the$partnership$are$no$more$than$the$aggregate$of$those$of$ the$individual$partners.$$

•

Accordingly,$a$firm$cannot$be$convicted$of$a$crime,$commit$torts$or$incur$contractual$ obligations$(yet$its$members$may$be).$$

•

There$are$a$number$of$legal$consequences$of$the$no$‘distinct$legal$entity’:$

•

o

Partners$cannot$also$be$employees;$

o

There$is$no$perpetual$succession;$

o

Partnership$cannot$own$property,$so$the$law$in$this$area$is$complex$(see$ Partnership1Act).$$

If$the$partnership$is$unincorporated,$it$is$not$a$separate$entity.$It$cannot$hold$its$own$ assets.$Each$partner$holds$a$proportion$of$the$assets$of$the$partnership$individually.$

2.3.2(( Partners(bear(unlimited(liability(for(partnership(debts(and(obligations(incurred(by( the(partnership( •

Each$partner$has$unlimited$liability$to$the$creditors$of$the$partnership$expressed$in$some$ older$cases$as$liability$to$their$“last$shilling$and$acre”.$ o

The$unlimited$liability$of$partners$may$be$contrasted$with$shareholders’$limited$ liability$for$corporate$obligations$of$their$companies.$$

o

Must$also$be$contrasted$with$separate$regime$permitting$registration$of$limited$ partnerships$with$a$class$of$partners$whose$liability$to$contribute$to$the$debts$ and$other$obligations$of$the$partnership$is$limited$to$a$publicly$recorded$sum.$$

•

This$rule$is$not$affected$by$any$agreement$between$the$partners,$even$though$their$ private$agreement$may$establish$obligations$as$between$them$to$contribute$in$different$ proportions$or$may$indemnify$some$partners$against$personal$liability.$

•

Partners$are$jointly$and$severally$liable.$ Agency(Authority(to(bind(fellow(partners(

•

Partners$are$mutual$agents$of$each$other$within$ordinary$scope$of$partnership:$Cox1v1 Hickman;1s$5$of$the$Partnership1Act.$$

•

The$common$law$of$agency$distinguishes$between$the$two$main$grounds$of$liability$of$a$ principal$with$respect$to$the$dealings$by$an$agent$with$an$outsider:$

•

o

Actual$authority$(express$or$implied)$–$“is$an$agent$of$the$firm”$–$$an$agency$ created$by$a$consensual$agreement$between$principal$and$agent,$the$scope$of$ which$includes$any$proper$implications$from$the$words$used,$usages$of$the$trade$ or$the$course$of$dealings$between$the$principal$and$agent.$$

o

Ostensible$(apparent)$authority$–$“who$does$any$act$for$carrying$on$in$the$usual$ way$business$of$the$kind$carried$on$by$the$firm$of$which$the$partner$is$a$member,$ binds$the$firm”$–$provides$some$protection$for$the$outside$and$scope$for$ confident$reliance$upon$the$authority$of$a$professing$agent.$It$rests$on$the$ relationship$between$the$principal$and$the$outside$in$that$the$principal$is$said$to$ have$represented$to$the$third$party$that$the$agent$is$authorised$to$enter$into$the$ particular$transaction.$$

Section$5(1)$of$the$Partnership1Act:$ o

Provides$that(every$partner$is$an$agent$of$the$firm$and$of$the$other$partners$for$ the$purpose$of$the$business$of$the$partnership;$the$acts$of$every$partner$carrying$

on$in$the$usual$way$the$business$of$the$kind$carried$on$by$the$firm$binds$the$firm$ and$other$partners.$ o

Excludes$liability,$however,$where$the$third$party$knows$that$the$agent$has$no$ authority$to$act$for$the$firm$in$the$particular$matter,$or$does$not$know$or$believe$ the$agent$to$be$a$partner.$

Limited(Partnerships(allow(for(limitation(of(the(liability(of(some(partners( •

Limited$partnerships$are$rare$in$Australia,$however$overseas,$particularly$in$the$US,$they$ are$used$often.$Particularly$in$managed$investments.$There$is$no$real$advantage$that$ cannot$be$gained$from$being$a$small$corporation.$

•

The$limited$partnership$form$represents$a$modern$version$of$the$medieval$commenda.$

•

The$principal$feature$of$limited$partnerships$is$the$creation$of$two$classes$of$partner:$

•

o

General$partner$–$subject$to$the$terms$of$the$partnership$agreement,$general$ partners$have$unfettered$control$over$the$conduct$of$the$partnership$business.$$

o

Limited$partner$–$contribute$to$capital$and$share$profits$but$have$no$right$to$ participate$in$management$of$the$partnership.$ §฀

If$limited$partners$do$take$part$in$management,$they$assume$the$ unlimited$liabilities$of$general$partners:$s$67.$$

§฀

Otherwise,$liability$limited$to$their$capital$contribution:$s$67(2).$$

This$form$is$sometimes$used$for$venture$capital$and$private$equity$investments;$its$ adoption$usually$reflects$taxation$advantages$of$the$form$for$the$passive$investors.$

2.3.3.( Other(characteristics(of(partnerships( •

The$features$to$which$reference$is$commonly$made$in$determining$whether$a$particular$ business$relationship$is$a$partnership:$ o

Sharing$of$net$profits;$

o

A$relationship$of$principal$and$agent;$

o

Participation$in$control$and$management;$

o

Contribution$of$capital$and$resources;$

o

Mutual$trust$and$confidence;$

•

None$of$these$is$regarded$as$absolutely$essential.$

•

Limit$of$20$members$save$for$professions$(if$you$have$more$this$is$difficult$to$determine$ who$you$are$dealing$with$in$case$of$legal$obligations.$$

•

“Two$or$more$parties”$–$can’t$have$it$with$one$person,$can’t$contract$with$yourself.$

•

“View$to$profit”$–$can’t$have$a$non_profit$partnership$

•

No$formality$or$registration$required,$except$for$Business1Names1Acts$

o

May$be$wholly$oral$(and$unconscious$and$unintended)$

o

Wise$counsel$of$formality,$of$course$

•

Partnership$interest$is$usually$not$transferable$without$consent.$$

•

Default$terms$in$Partnership1Act$s24(1):$see$[1.115]$

•

Presumption$that$admission$of$new$partner$requires$unanimity:$s24(1)(7)$

•

Assignment$of$partnership$interest$does$not$give$assignee$rights$beyond$the$profits$of$ the$assigned$share:$no$rights$to$information,$management$participation$

•

Partners$are$agents$to$each$other$–$E.g.$Partner$A$can$bind$partner$B$in$contract.$This$is$ a$vulnerable$situation.$Equity$recognises$that$there$is$vulnerability$there$and$recognises$ a$fiduciary$relationship.$

•

Transfer$of$partnership$interests$–$A$partnership$is$an$agreement$between$partners.$ Generally$there$is$no$bar$to$the$transfer$of$the$rights$under$the$agreement.$There$are$ two$strands$of$authority:$ o

A$partner’s$interest$in$a$partnership$is$an$interest$in$underlying$assets.$

o

A$partnership$interest$isn’t$really$an$interest$in$the$underlying$property,$a$ partnership$interests$as$against$the$other$partners$to$account$for$profit$and$ against$the$winding$up.$It$is$a$right$to$demand$your$share$of$the$capital.$

o

The$better$view$is$that$the$interests$have$a$combination$of$both$properties.$

2.4.(

When(will(it(be(necessary(to(determine(if(a(partnership(exists?(

2.4.1(

Partnership(litigation(

•

X$sues$A$seeking$to$make$her$deep$pockets$responsible$on$transaction$between$X$and$B$ (3rd1party1suit)$

•

X$sues$Y$claiming$that$profit$Y$generates$or$asset$acquired$belongs$to$X$also$(internal1 action)$

•

In$both$instances,$proof$of$partnership$may$unlock$remedy$sought$(instrumental)$

2.4.2.( The(competing(relationships( •

Non_partnership$joint$venture$

•

Other$contract$based$relationships$(it$maybe$we$are$employed$as$employees$rather$than$ partners)$

•

Employer/employee$

•

Agency$relationship$(Principal/Agent)$$

•

Perhaps$even$unincorporated$non_profit$association$

$

$

2.5.( Does(a(partnership(exist?( Note:$$ • •

Partnerships,$other$than$limited$partnerships,$are$not$required$to$be$registered$and$ enjoy$a$high$degree$of$privacy$for$their$affairs;$ Several$provisions$deal$with$the$duration$of$partnerships.$If$a$partnership$is$for$an$ indefinite$time,$it$may$be$determined$at$any$time$by$one$partner$giving$notice:$ss26,$32$ (c).$If$it$is$for$a$fixed$term,$it$is$dissolved$by$expiration$of$that$terms$(s$32$(a))$unless$ earlier$dissolved$by$mutual$consent$(Moss1v1Elphick),$or$in$one$of$the$other$ways$ prescribed$by$the$Act.$$

2.5.1( •

The(definition(of(partnership(

Partnership$is$defined$by$the$Partnership1Act1in$section$1(1)$as:$ “the$relation$which$exists$between$persons$carrying(on(business$in(common$with$a$ view(of(profit”.$(s$1$(1))$$

•

Persons$who$have$entered$into$a$partnership$are$collectively$a$“firm”$for$the$purposes$of$ the$Act$and$the$number$under$which$the$business$is$carried$on$is$called$the$“firm$name”:$ s$4.$$ $ Partnership(is(a(relationship(founded(upon(a(business(carried(on(in(common(

•

(i)$“Business”$$ o

•

Includes$every$trade,$occupation$or$profession:$s$45$

(ii)$“Carrying(on”$ o

Implies$a$repetition$of$acts.$

o

Excludes$the$case$of$an$association$formed$for$doing$one$particular$act$which$is$ never$to$be$repeated:$Smith1v1Anderson1(1880)$

o

If$a$transaction$is$undertaken$which,$if$repeated,$would$be$one$of$a$series$of$ transactions$of$a$business$character$and$more$transactions$are$intended$at$the$ firm$of$the$first,$then$the$business$exists$from$the$time$of$the$commencement$of$ that$transaction:$Re1Griffin;1Ex1parte1Board1of1Trade$(1890$

o

While$the$phase$“carrying$on$a$business”$contains$an$element$of$continuity$or$ repetition$in$contrast$with$an$isolated$transaction$which$is$not$to$be$repeated$…$ the$emphasis$which$will$be$placed$upon$continuity$may$not$be$very$heavy:$ United1Dominions1Corporation1Ltd1v1Brian1Pty1Ltd$(1985)$per$Dawson$J1

o

Courts$consistently$recognised$that$‘carrying$on$a$business’$is$NOT$continuity$of$ activity,$(satisfied$by$a$single$commercial$activity).$There$have$been$a$number$of$ cases$where$a$partnership$has$been$formed$in$respect$of$what$may$be$regarded$ as$a$single$venture,$as$distinct$from$commercial$undertakings$of$more$indefinite$ duration$and$wider$range.$1

o

•

•

§฀ §฀ o

Whether$or$not$a$business$is$being$carried$on$by$or$on$behalf$of$all$of$the$ partners$is$a$question$of$fact$and$all$the$surrounding$circumstances.$An$ important$consideration$is$whether$there$are$mutual$rights$and$obligations$ between$those$on$whose$behalf$the$business$is$being$conducted.1

(iii)(“in(common”1 o

The$words$“in$common”$in$the$statutory$definition$constitute$the$central$ defining$element$of$partnership,$reflecting$the$requirement$that$each$partner$ must$be$a$principal$in$the$business$and$indicating$that$the$societas$(or$common$ bond)$between$the$associates.1

o

Not$a$matter$of$statutory$construction$of$section$2$although$statutory$rules$assist$ (refer$to$s2).$Statutory$rules$not1conclusive$but$part$of$wider$indicia$derived$from$ case$law$as$to$existence$or$otherwise$of$partnership$See$Re1Megevand;1Ex1parte1 Delhasse$and$Badelay1v1Consolidated1Bank.1

o

No$single$factor$is$decisive.1

o

Not$necessary,$for$a$business$to$be$carried$on$in$common,$i.e.$partners$actively$ participate$in$the$day_to_day$management$of$the$firm’s$business.$Only$necessary$ for$firm’s$business$to$be$carried$on$either$by$or$on$behalf$of$all$partners.1

o

Partners$may$act$personally$or$through$agents$(not$partners).$Partners$are$at$ once$principals$in$the$firm$(i.e.,$acting$for$themselves)$and$agents$for$other$ partners.$$1

o

However,$mere$agency$of$itself$is$not$sufficient$to$constitute$a$partnership.$ Otherwise$it$would$follow$that$every$agent$is$in$partnership$with$their$principal.$1

o

Not$necessary$for$the$business$to$be$carried$out$in$common.$Can$be$carried$by$ partners$or$they$can$delegate.$Griffith$CJ$–$Lang1v1James1Morrison$–$is$the$person$ who$carried$on$that$business$doing$so$as$agent$for$all$the$persons$alleged$to$be$ partners.$1

(iv)(“with(a(view(of(profit”1 o

The$objective$of$profit$is$an$essential$feature$of$partnership.$This$is$the$element$ that$distinguishes$partnerships$from$non_profit$clubs$or$associations$and$from$ some$other$associations$such$as$joint$ventures.$Must$be$financial$or$pecuniary$ gains$for$its$members.1

o

The$Partnership1Act1does$not$define$‘profit’$and$courts$have$construed$profits$in$ terms$of$balance$sheet$profits,$namely,$pecuniary$or$financial$gains$or$accretions.1

o

Profit$distinguishes$partnership$from$club:1

For$example,$“in$unincorporated$voluntary$associations$the$intended$gain$is$not$for$the$ individual$members”:$Wise1v1Perpetual1Trustee$1 Club$may$derive$profits$from$operations$but$must$bar$distribution$to$members.1 Boundary$with$partnership$can$become$elusive?1

o

Profit1v1product$distribution$may$distinguish$partnership$from$non_partnership$joint$ venture$(eg,$oil$&$gas)1

1 2.5.2.( Rules(and(indicia(for(determining(the(existence(of(partnership( •

The$Partnership1Act$contains,$in$s$2(1),$several$specific$rules$to$which$regard$must$be$had$ in$determining$whether$a$partnership$exists.$These$rules$are$not$conclusive$but$take$ their$place$with$other$indicia$which$provide$a$guide$for$the$existence$of$partnership.$1

•

(i)(The(parties’(characterisation(of(their(relationship1

o

The$legal$status$which$putative$partners$have$sought$to$assign$or$repudiate$for$their$ relationship$is$relevant$but$not$necessarily$decisive$in$determining$the$existence$of$ partnership.$1

o

If1legal1status1as1partnership1is1not1clear1–1expressed1intention1is1important.11 If1facts1clearly1point1to1partnership1–1parties’1denial1is1meaningless1and1useless.11

Wiltshire)v)Kuenzli)) Facts:$Two$people$couldn’t$agree$on$the$relationship.$Their$written$contract$said$they$are$ not$partners.$HELD:$if$there$is$uncertainty$it$is$equivocal,$the$fact$that$the$parties$said$they$ were$not$partners$it$is$decisive.$However$if$it$is$otherwise$clearly$a$partnership$it$is.$Court$ said$it$looked$like$a$partnership$and$the$disclaimer$was$not$adequate.$$ Held:$If$legal$status$as$partnership$is$not$clear,$expressed$intention$not$to$be$partners$is$“of$ utmost$importance”$but$if$facts$clearly$point$to$partnership,$the$parties$denial$is$ “meaningless$and$useless.”$$ “It1having1been1ascertained1that1the1parties1intended1to1do1all1the1things1which1would1 constitute1them1partners1in1law,1no1effect1can1be1given1to1their1declared1intention1not1to1 become1partners.1Of1course,1if1the1facts1are1equivocal1the1expressed1intention1not1to1become1 partners1is1of1the1utmost1importance1as1showing1the1proper1inference1to1be1drawn1from1the1 facts,1but1if1the1facts1are1unequivocal1the1same1expressed1intention1is1meaningless1and1 useless.”11 $ Canny)v)Gabriel.)) Concert$involving$Elton$john.$2$parties$got$together$and$agreed$to$split$the$profits.$They$ entered$into$a$deed.$Deed$read$–$“this$is$not$a$partnership.$This$is$a$joint$venture”$–$HCA$ said,$it$doesn’t$matter$what$you$call$it$–$if$it$looks$like$a$duck,$and$quacks$like$a$duck$–$IT’S$A$ FUCKING$DUCK,$ 1 Gouldberg)case) Couple$of$people$agreed$to$be$a$partnerships$and$said$let’s$get$restaurants$to$run$in$hotels.$ Plans$fell$apart.$Court$said$they$were$just$PLANNING$–$hadn’t$committed$funds,$hadn’t$ negotiated$with$restaurants,$hadn’t$been$in$partnership.$$

1 Walters)case) Not$enough$details.$One$of$the$alleged$partners$came$from$china$and$started$importing$bats.$ Held:$presumption$that$sharing$gross$products$means$that$you$are$in$a$partnership.$As$$ 1 • o

(ii)(Sharing(net(profits1 Sharing$of$net(profits$is:1

§฀

$Important$but$not$the$absolute$test$of$partnership:$s$21

§฀

Prima1facie$evidence$of$partnership,$but$does$not$itself$make$for$partnership:$s$2(1)(3)1

o

The$sharing$of$gross(returns$does$not$of$itself$create$a$partnership,$whether$or$not$ there$is$a$joint$or$common$interest$in$any$property,$or$from$the$use$of$which$the$ returns$are$derived:$s$2(2)(2).$1

o

Cogent1often1conclusive1evidence1 1

Cox)v)Hickman) The$real$test$is$whether$trade$is$carried$on$“on$his$behalf”:$Was$he$the$principal$of$the$ ostensible$traders?$ Real$test$is$whether$someone$is$the$principal.$The$real$test$is$not$whether$someone$is$ sharing$profits$but$whether$they$are$doing$so$on$behalf$of$as$agents$on$behalf$of$someone$ else.$$$ “It1is1often1said1that1the1test…whether1a1person1not1ostensibly1a1partner,1is1nevertheless,1in1 contemplation1of1law,1a1partner,1is1whether1he1is1entitled1to1participate1in1the1profits.1This,1no1 doubt,1is,1in1general,1a1sufficiently1accurate1test;1for1a1right1to1participate1in1profits1affords1 cogent,1often1conclusive1evidence,1that1the1trade1in1which1the1profits1have1been1made,1was1 carried1on1in1part1for1or1on1behalf1of1the1person1setting1up1such1a1claim.1“1 o

Partnership1Act$lists$a$number$of$specific$instances$where$receipt$of$a$share$of$profits$ does$not$of$itself$make$a$recipient$a$partner:$s$2(1)(3)1

§฀

(a)$payment$of$a$debt$paid$out$of$ac...