Week 1 Notes (Fiduciary Concepts & Partnerships) PDF

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LAW452 CORPORATIONS LAWWEEK 1 NOTESFIDUCIARY CONCEPTSPARTNERSHIPSLAW452 Corporations LawTABLE OF CONTENTS Partnerships.............................................................................................................................. Overview..................................................

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LAW452 CORPORATIONS LAW WEEK 1 NOTES FIDUCIARY CONCEPTS PARTNERSHIPS

LAW452 Corporations Law Ashley Roberts 32206731

TABLE OF CONTENTS Partnerships..............................................................................................................................1 Overview..........................................................................................................................................1 Identifying a partnership................................................................................................................1 The rules of interpretation.............................................................................................................2 Business associations................................................................................................................................2 Inactive partners.......................................................................................................................................3 Is there a carrying on of a business?.........................................................................................................4 Was the joint venture a partnership?.........................................................................................................5 Intent to carry on business in common......................................................................................................6

Sharing mutual rights and duties as principals of that business.....................................................6 Indicia of partnership....................................................................................................................7 Profit sharing.............................................................................................................................................7 Entitlement to share profits of business: whether a lender or a partner?.................................................7 Being a partner without sharing profits....................................................................................................8 Sharing gross returns................................................................................................................................9 Distinguishing between profit shares paid for the supply of services and partnership profits...............10

Partnership property.....................................................................................................................11 Partners’ relations with each other..............................................................................................13 Fiduciary duties and the resolution of disputes...........................................................................14 Identifying the scope of fiduciary obligation...........................................................................................15 Commencement of the duty.....................................................................................................................16 Obligation continues until the final settlement of accounts on winding up............................................18 Accounting for misuse of partnership property, name or business connection.......................................20

The relation of partners to persons dealing with the firm..........................................................21 Contractual liability....................................................................................................................22 Authority of partners; agent for an undisclosed principal......................................................................23 Usual authority........................................................................................................................................25 Unusual transactions...............................................................................................................................26

Torts, breaches of duty and offences...........................................................................................27 Persons liable by holding out......................................................................................................29 Dissolution and winding up..........................................................................................................32 Dissolution..................................................................................................................................33 Types of partnership................................................................................................................................33 Notice to dissolve a partnership at will...................................................................................................34 Arising by inference from conduct...........................................................................................................34

Partners’ entitlements on winding up..........................................................................................35 LAW452 Corporations Law Ashley Roberts 32206731

Failure to wind up partnership affairs.........................................................................................36 Assignment of partnership interests............................................................................................37 Alternatives to a general partnership..........................................................................................37 Joint ventures..............................................................................................................................38 Loans in return for a share of the profits.....................................................................................38 Limited partnership.....................................................................................................................38 Incorporated limited partnerships................................................................................................38

LAW452 Corporations Law Ashley Roberts 32206731

PARTNERSHIPS Taken from Baxt, Fletcher and Fridman Chapter 1 and Lecture Week 1

Overview  Partnerships are mostly subordinate to the limited liability company.  Partnerships provide a cheap form of business organisation.  Many companies adopt it when entering into joint ventures. Identifying a partnership  Partnership is ‘the relation which subsists between persons carrying on a business in common with a view to profit’: Partnership Act 1895 (WA) s 7.  A partnership arises from a voluntary contractual association: Smith v Anderson.  If disclosure of the partnership is not on the public record, then the people involved will try to avoid liability being imposed on them.  A partnership must include three conditions: o A valid agreement between the parties: Playfair Development Corp Pty Ltd v Ryan; o A business is carried on: Khan v Miah; Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd; and o The alleged partners have mutual rights and obligations as principals arising from the business connection: Beckingham v Port Jackson and Manly Steamship Co Ltd.  Carrying on a business means a commercial enterprise exists. o Business includes any trade, occupation or profession: Partnership Act 1895 (WA) s 3 (definition of ‘business’).  In common means that the business is conducted by, or on behalf of, all the alleged parties: Lang v James Morrison & Co Ltd (Griffith CJ).  A view to profit means that the association has the object of acquisition of financial gains for its members. o A person with no entitlement to share in the profits can still be found as a partner: M Young Legal Associates Ltd v Zahid.  A partnership is to be determined from the facts and ascertaining the intention of the participants from their statements and conduct.

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The rules of interpretation  The principle from Cox v Hickman is that regard must be paid to the true contract and intention of the parties as can be ascertained from all the facts of the case. o See also Partnership Act 1895 (WA) s 7(2).  Partnership Act 1895 (WA) s 8 sets out a number of rules that assist this determination. o Receipt by a person of a share of business profits is prima facie evidence of a partnership. o Neither the sharing of gross returns nor joint ownership indicate a partnership. Business associations Smith v Anderson (1880) 15 Ch D 247  A group of investors subscribed to purchase shares in various companies.  The shares were vested in trustees.  An investor paid the trustees £90 and would receive a £100 certificate from the trustees.  The trustees could sell the shares at a minimum premium, and could reinvest and distribute the proceeds.  Each certificate holder could attend an annual meeting to consider a report from the trustees and vote on the election of auditors and new trustees.  One of the certificate holders sued the trustees to have the trust wound up, on the grounds that it was an association of twenty or more persons formed for the purpose of carrying on a business with the object of gain contrary to companies legislation.  James LJ o One person could go with £90 to the trustees and receive a certificate, then another could do the very same. o Neither person has knowledge of the other.  There is no arrangement between those two persons.  They do not create mutual rights or obligations.  They are entire strangers. o Persons who have no mutual rights or obligations do not constitute an association. o The group did not carry on a business.  A trustee is a man who owns property and deals with it as principal.  A director is a paid servant of a company and the director acts for the company. LAW452 Corporations Law Ashley Roberts 32206731

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o The trustees were carrying on their duties as trustees and dealing with property as trustees would if it were for a marriage settlement with large properties and extensive powers. o The object was not to evade the companies legislation. Inactive partners Playfair Development Corp Pty Ltd v Ryan [1969] 2 NSWR 661  Playfair was a property development company.  It raised capital by selling partnership interests to members of the public, while retaining management control.  Playfair sought declarations that the inactive partnerships were recognised as partnerships in law.  Street J o Playfair carried on its business in association with Smith and Timms, the sole directors and shareholders of Playfair. o The three followed an established pattern of conduct in their business activities. o A deed entitled ‘Covenants of Partnership’ was entered into by Playfair, a trustee company, and Playfair together with Smith and Timms. o The deed states that the partners constitute a partnership (the Myee Syndicate). o The word partner meant those who are an original partner or a partner who has become a partner as a result of the transfer of a partnership unit.  A partnership unit was ‘one-twentieth of the capital of the partnership’. o Playfair advertised the partnership units for purchase by the public. o A brochure was sent to those who enquired (in quite misleading terms). o The brochure included an application form for those who wished to apply for units at $2250 each and ‘membership of the Myee Syndicate’. o Smith on examination agreed that if all went smoothly, then it would be rare for the partners to ever meet in person.  A partner would only have to make the original purchase.  This was an advantage of the scheme. o The association was a partnership because the partners were bound by the covenants.

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o The object of the association was that the partners would earn profits from the letting of the units. Is there a carrying on of a business? Khan v Miah [2000] 1 WLR 213  Miah and Ahad wanted to open an Indian restaurant called The Nawah.  They approached Khan, who had money, and Khan agreed to participate in the joint venture.  Khan was to provide the capital, Miah was to manage and Ahad was the chef.  The three found an empty gas showroom for premises. However, British Gas would not deal with them because of their limited commercial experience. The three brought in Khasru as a sleeping partner.  In October 1993, Khan and Khasru opened a bank account as partners of The Narwah.  British Gas sold the freehold to the parties. The bank agreed to lend 80% of the cost and Khan and Khasru made up the rest.  Khan struggled to find the cash.  Miah proceeded to enter into contracts for furniture, equipment and laundry services. The opening of the restaurant was advertised in the local press.  The purchase was settled on 21 January 1994. On 25 January, Khan wrote to the partners terminating the partnership.  The restaurant commenced trading on 14 February.  Khan sought an order for a declaration that the partnership had been dissolved. o In the County Court, the judge held that the partnership was dissolved. o On appeal, the Court of Appeal (2:1) held that there was no partnership in the restaurant because a restaurant business had not been carried on at the time of the alleged dissolution. o Khan appealed to the House of Lords.  Lord Millett o The Court of Appeal recognised that there was a distinction between a contemplated partnership and the partnership itself. o It was necessary to identify the business as agreed and then decide whether that was being carried on by the parties. o The Court of Appeal identified that the business was a restaurant business. LAW452 Corporations Law Ashley Roberts 32206731

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o However, their view was too narrow. o The ‘business’ as agreed also included finding premises, fitting them out and running the restaurant. Acquisition, conversion and fitting out were all part of the joint venture. o There is no rule that the parties to a joint venture do not become partners until actual trading commences. o The rule is that the persons who agree to carry on an activity as a joint venture do not become partners until they embark on that activity. o Any commercial activity capable of being carried on by an individual is capable of being carried on in partnership. Was the joint venture a partnership? Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321  Fourth Media obtained a management contract for Cicila Black and Elton John to tour.  Fourth Media obtained finance for the pre-tour expenses from Volume Sales.  It then granted Canny Gabriel a lien on ticket sales as security for other debts.  McTiernan, Menzies & Mason JJ o A contract between Volume Sales and Fourth Media constituted the parties as partners to the joint venture of exploiting the contracts. o Mahoney J at trial held that, although there was a joint venture, the contract did not constitute a partnership. o The contract stated that Fourth Media has made contracts for the appearances of Black and John, that it had made requests for Volume Sales to finance those contracts and that Volume Sales agreed to do so. o Fourth Media agreed to assign to Volume Sales a one-half interest in the contracts. o It was common ground that the payment of box office proceeds would go into an account established in Volume Sales’ name. o The joint venture was a partnership, as the parties anticipated profits and provided that the advance by Volume Sales was a first charge upon profits. o The joint venture agreement indicated that the parties had mutual rights and obligations.

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 The parties were joint venturers in a commercial enterprise with a view to profit.  Profits were to be shared.  The policy of the joint venture was a matter for joint agreement.  Differences were to be settled by arbitration.  An assignment of a half interest was attempted.  The parties were concerned with the financial stability of each other.  The advance was made to the joint venture, not to Fourth Media. o The contract exhibited all indicia of a partnership. Intent to carry on business in common Keith Spencer Ltd v Mansell [1970] 1 All ER 462  Bishop and Mansell agreed to form a company to carry on a restaurant business.  Bishop ordered goods for the restaurant and had them delivered to Mansell’s premises.  The business was never established.  Bishop went into bankruptcy. The supplier sued Mansell.  Harman LJ o Bishop and Mansell decided to establish a limited company which would carry on the business. o There was a company incorporated eventually. o They concluded that they would do preparatory things for the business so that the company could carry on business once it was formed. o Bishop ordered goods, which were intended to be used by the business, not Mansell. o There was no evidence that the two were carrying on a business.  There was evidence of buying goods.  There was evidence of a bank account being opened.  The bank account did not include the word ‘Limited’.  This is not enough to establish that there was a partnership.  They were merely preparing to carry on business as a company as soon as they could.

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Sharing mutual rights and duties as principals of that business  The agency test in Lang v James Morrison (Griffith CJ) does not require that all persons alleged to be partners are active in the conduct of affairs.  The business need only be run on their behalf and that liability is shared, if the business incurs obligations. Indicia of partnership Profit sharing  Profit sharing is the best indicator of a partnership, but is not sufficient on its own.  Profit sharing that is a sign of a partnership must be between principals. o Those principals must also bear responsibility for losses if the venture is unsuccessful.  Profit sharing must be distinguished from the sharing of gross returns. o Gross return is income that does not deduct the costs of doing business.  It must be established that profits are being shared between principals, not contractors or employees. Entitlement to share profits of business: whether a lender or a partner? Ex parte Delhasse; Re Megevand (1878) 7 Ch D 511  Delhasse gave £10 000 to Megevand and Schoeppi for a fixed period on terms that they invest it in their partnership business.  Delhasse was to share in the profits and losses to the extent of 25%.  The advance was stated to be a loan pursuant to Bovill’s Act 1865 (Partnership Act 1895 (WA) s 8(3)) and did not render Delhasse a partner.  Delhasse later claimed as a creditor in Megevand and Schoeppi’s bankruptcy.  James LJ o The question is what the true intent and meaning of the contract between the parties and what is the true legal effect of the transaction between them. o There was every element of a partnership: right to control property, right to receive profits, and liability to share in losses. o It was alleged there were other provisions that showed the intention to make the parties lender and borrower.

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 Clause 4 stated that ‘the £10 000 is advanced by Delhasse to the other two by way of loan under that section, and such advance does not and shall not be considered to render Delhasse a partner in the business’. o All of the other provisions were inconsistent with cl 4 and the notion that a loan was made. o The loan was to the business which was to be carried on by Megevand and Schoeppi for the benefit of themselves and Delhasse. o It was to be repaid out of the business except in the case of loss. o In the case of loss, liability would be borne in the proportions agreed between the three. o The loan was a mere pretence. o The insertion of the provisions did not alter the real nature of the transaction. o The business was carried on for the risk and benefit of Delhasse and the others. Being a partner without sharing profits M Young Legal Associates Ltd v Zahid [2006] 1 WLR 2562  Mr Bashir was ...