Partnership Act and the Case of Samuel, Thomas, and Peta
Solution 1
Issue
Whether or not the venture amid Samuel, Thomas and Peta is a partnership?
Law
The law of partnership is one the business venture which is normally carried in Australia.
As per section 1 of the Partnership Acts 1892 (NSW), a partnership is one of the simplest methods wherein 2 or more individuals join together and carry a business with an intention which is common and with a motive to earn. In Green v Beesley (1835) the basic nature of partnership was elaborated. But, as per section 2, to prove a partnership amid persons few essentials are needed which includes: (Graw 2001)
- It is necessary that to establish a partnership there must be 2 or more persons. A minimum of 2 and maximum 20 people are needed for partnership;
- The main aim to establish an association is that profit must be earned by them. Any relationship not for profit making is not partnership and is held in Bond Corporation Holdings Ltd & Anor v Grace Bros Holdings Ltd & Ors (1983).
- It is very necessary that all the persons who has join together must have common intention to carry on the business. Common intention signifies that the intention of all the partners to carry on the same business with same intention. It is not necessary that all must take active part in the business but must have common intention and is held in Keith Spicer Ltd v Mansell [1970];
- It is very necessary that aim of conducting the business is that it must be carried on by the parties. The intention is not to involve in a single transactions but in a series of transactions and is held in Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd[1961].
All the elements together results in the formation of a partnership amid the persons.
The law is now applied to the fact of the case.
Application
A business dealing with internet is initiated by Samuel, Thomas and Peta. There are various factual situations which try to settle that the relationship that exists amid them is of a partnership. The reasons to support the same are:
1.Samuel, Thomas and Peta are the persons who are entering into a relationship. Thus, the first requirement is met as a relationship is established amid two or more persons.
2.The business that was established amid them was profitable. It was decided that since Peta has invested $100,000 thus, nothing is paid for 1styear and then $6,000 per month and termed the same as gratuity and mainly because he put his asset as a collateral for the business. Samuel and Thomas were not paid as employees but through consultancy arrangements with the venture.It is submitted that though the name within which they are sharing the profits is very different but they are sharing the profits of the business and is held in Bond Corporation Holdings Ltd & Anor v Grace Bros Holdings Ltd & Ors. Thus, the main aim to carry business is profit sharing. So, the second element is also employ with
3.All the three partners were willing to carry a business over internet where they purchase the goods from the business which are closing down and then reselling the same with the aim to earn gain. So, all the three partners have one common intention of buying goods and then reselling with aim to earn profits. There is a common intention to carry on the business. All the three parties have joined hands to work together for the business venture and thus it establishes that there is a common intention that is prevalent.
The Duty of Care and Diligence under Common Law
It is submitted that the intention of all the three partners is to carry on the business on continuous basis. They agreed that they will not Peta for one month but then regularly on monthly basis. Also, Samuel and Thomas were not paid as employees but through consultancy arrangements with the venture. The form of dividing the profit is very different but the aim was to divide the profits amid them in order to establish a partnership amid them as held in Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd.
4.It is thus submitted that all the three persons Peta, Samuel and Thomas are the persons who are carrying on a business with common intention and with the aim to earn profits. Thus, all the elements are complying with and thus there is a partnership amid them.
Conclusion
Peta, Samuel and Thomas are the persons who are thus carrying on a partnership and thus must acts like the partners with each other and with the firm.
Solution 2
With specific reference to the general law and relevant provisions in the Corporation Act 2001 (Cth) a brief discussion is made on :
a) The directors’ duties of care and diligence
Common law (Maharaj 2008)
In common law, one of the significant duties that must be complying with by the directors of any company is the duty to carry out acts with care and diligence. In the leading case of BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] it was held by the courts that the directors of the company cannot shed away with their legal duty of care and diligence. The duty submits that the acts must be carried out with such precautions that is taken by a normal prudent person in the like situation and thus must avoid any kind of negligence in his part while catering the services of the company. (Hall and Wilcox 2018)
The duty of care and diligence is not a fiduciary duty that is imposed on the directors; rather, the duty is based on the experience, skill and the ability of the director to act in a particular situation. If the director has not complied with under the said arena then the director can be considered as negligent in his acts. Thus, as per Du Plisses NO v Phelps 1995, the level of care is not much high under the common law duty of care and diligence and if the director can prove that he catered with all reasonable care and precaution then the duty of care and diligence is presumed to be comply with. a general duty of acre and diligence must be comply with and no professional requirements are needed for the compliance of the said duty. In Re Brazilian Rubber Plantations & Estate Ltd [1911] a company director is expected to carry the level of care an d diligence to a level what is expected from his level of skill and intelligence and not beyond. Thus, the duty is reasonable in nature.
The Duty of Care and Diligence under Corporation Act 2001 (Cth)
Statutory law ( Dundas 2018)
The duty of care and diligence is made part of the Corporation Act 2001 under section 180.
The government of Australia has understood the importance of the common law duty of care and diligence and thus incorporated the same under the Corporation act 2001. Section 180 (1) of the Act submits that every officer and director of the company has an obligation to carry its actions and conduct his powers while discharging his duties in such manner so that a proper degree of care and diligence must be comply with and is rightly held in the leading case of Statewide Tobacco Services Ltd v Morley (1990). The duty of care and diligence is imposed on ever such person who is undertaking the acts of the directors and officers of the company and is held in the leading case of ASIC v Vines (2003).
In the leading case of AWA Ltd v Daniels (1992) it was held that the directors must have an obligation to make independent judgments and no director can claim that he is ignorant of the actions that are carried out by the company if the acts are his own undertaking.
But, this duty has a defense under section 180 (2) of the Act which is called business judgment rule. It is submitted that the duty of care is not considered’ to be violated if: (Kluwer 2018)
1.The decision by the director is made for a proper purpose and in good faith;
2.That the decision that is made by the director does not have any material personal interest;
3.When the decision is made then the director has all reasons to believe that the decision is in the best interest of the company;
4.That they have taken professional and expert advice before making any decision on behalf of the company.
In such situation the business judgment rule will apply and it is presumed that the acts of the company director are carried with all due care and diligence.
Thus, the duty of care and diligence is very important and must be comply with by the directors of the company.
b) The directors’ duties of loyalty and good faith
Common law
Under common law, the duty of good faith signifies that the acts of the director must be carried out with fiduciary intention. It is necessary that the acts that are carried out by the directors of the company must be carried with full honesty taking into consideration the interest of the company and the interest of the shareholders as well and is rightly held in Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997). Both the subjective and objective test must be applied in order to understand the fiduciary duty of the directors of the company.
The Duty of Loyalty and Good Faith under Corporation Act 2001 (Cth)
Statutory law
Section 181 of the Corporation Act has tried to incorporate the common law duty of good faith and fiduciary obligation under the Corporation Act 2001. (Dundas 2018)
Section 181 of the Act simply submits that every company director and every company officers must make sure that the decisions that are taken by them on behalf of the company or any powers that are carried out by the officers and directors of the company must be carried out in such manner so that they are carried out with all good faith and in the best interest of the company and is held in the leading case of Whitehouse v Carlton Hotel Pty Ltd (1987). It is also necessary that the duties of the company director must be carried out with proper purpose.
It was rightly held in the leading case of Walker v Wimborne (1976) that if the directors are not able to comply with the duty of good faith and loyalty in their minds, thus, subjectively, them the duty is considered to be not comply with and there is breach of duty under section 181 of the Act. when the inters of the company is not considered subjectively, for instance, the interest of the shareholders are not considered then it is violation of the duty on the part of the director.
Apart from the subjective test, the duty of the director under section 181 of the Act is also analyzed objectively. The objective test signifies that the acts that are carried out by the company director in good faith is considered in the situation where a normal prudent man have acted in the same manner like that of the director if the similar situation arises. If the acts of the normal prudent man would have been same that like of a director then the duty is comply with and is held in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] and Kinsela v Russell Kinsela Pty Ltd (in liq) (1986). There are few instances wherein the acts by the director are considered to be carried out in good faith:
1.That the transaction is commercial favorable and is held in the leading case ofPine Vale Investments Ltd v East Ltd & East Ltd & Anor (1983);
2.That it is necessary to raise the capital of the company and is held in the leading case of Comptroller of Stamps v Howard-Smith (1936).
Thus, the duty of good faith is very important and must be comply with by the directors of the company.
Reference:
Books/Articles/journals
Graw, S. (2001) An Outline of the Law of Partnership, Thomson Reuters (Professional) Australia Limited.
Online Material
ASIC v Vines (2003) 48 ACSR 322;
AWA Ltd v Daniels (1992);
Bond Corporation Holdings Ltd & Anor v Grace Bros Holdings Ltd & Ors (1983) 1 ACLC 1009.
BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351;
Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614.
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62
Du Plisses NO v Phelps 1995 (4) SA 165.
Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW) 165;
Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997) 26 ACSR 544.
Green v Beesley (1835) 2 Bing N C 108;
Keith Spicer Ltd v Mansell [1970] 1 All ER 462;
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722.
Pine Vale Investments Ltd v East Ltd & East Ltd & Anor (1983) 8 ACLR 199
Re Brazilian Rubber Plantations & Estate Ltd [1911] Ch 425 (CA) 437.
Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405.
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Walker v Wimborne (1976) 137 CLR 1
Online Material
Dundas (2018) (online). Available at: au/directors-duties-in-australia/#_ftn1“>https://www.dundaslawyers.com.au/directors-duties-in-australia/#_ftn1. Accessed on 23rd May 2018;
Hall and Wilcox (2018) Avoidance rules (online). Available at: https://hallandwilcox.com.au/directors-duty-act-care-skill-diligence-context-general-anti-avoidance-rules/. Accessed on 23rd May 2018;
Kluwer W (2018) Division 1 – General Duties (online). Available at: https://iknow.cch.com.au/document/atagUio485896sl14504541/corporations-act-2001-section-180-care-and-diligence-civil-obligation-only. Accessed on 23rd May 2018;
Maharaj, J. (2008) duty of care and diligence (online). Available at: https://researchspace.ukzn.ac.za/bitstream/handle/10413/13130/Maharaj_Nithen_2015.pdf?sequence=1&isAllowed=y. Accessed on 23rd May 2018;
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