Partnership Act and Formation of Partnership
Section 1 of the Act submits that a partnership is nothing but a relationship that is between two or more persons which is carried on by them on continuous bases with the basic purpose to earn profit and share losses. There are few basic rules which must be evaluated before considering any association as partnership. The same are submitted under section 2 of the Act:
- Sharing of gross returns does not established partnership
- Joint tenancy, common property, tenancy in common, joint property are not the elements which help in the establishment of partnership between the parties;
- If the parties are sharing profits and losses then it is considered as one of the prime element to establish partnership;
- However if there is presence of contract for the remuneration or if payment is received for the death or by way of annuity or advances over the loan from the profits , then, it cannot be considered as a proof for the presence of partnership between the parties.
These are the basic rules which must be kept in mind in order to formulate partnership between the parties.
Zac and Todd are friends. Todd was a business student in Marketing and Zac was a science student (Chemistry). Both of them are very fond of beer and thus decided to establish their own home brew. The main activities that are undertaken by them are:
- Zac uses his money and bought a 50 liter micro-brew equipment set.
- The shed of Todd’s dad was used for the setting up of business;
- Both worked together to set up the equipment in the shed;
- Both worked together and established their first batch of beer.
It is submitted that there can be a partnership that is established amid the two, because:
- Both Todd and Zed are two persons who formulated the business. The presence of two or more persons is the first requirement for the establishment of partnership;
- Both carry on business of brewing on continuous basis;
- It is to be assumed that both have agreed to share profits;
- Both indulge in several activities together.
Thus, these are the arguments which can be put forth for the establishment of a partnership amid Todd and Zac.
But, it is submitted that there was no evidence that shows that both Todd and Zac intend to share profits and losses. as per section 2, presence of profits and losses is the prime ingredient to form a partnership. Since this element is missing, thus, there cannot be any partnership amid the two.
There cannot be any partnership amid Todd and Zac as there was nothing which could prove that they intend to share profits and losses from the business.
Is Zac entitled to the money from the beer he had been selling?
Section 29 (1) of the Act is applicable in the given situation. It is submitted that the partner are authorized to receive gain for the transaction which is related to the business of the partnership. But, if any income is generated by using the property of the partnership without seeking the consent of all the other partners of the firm then such defaulting partner must account the profits to the firm. Section 29 (2) submits that this obligation is applicable even if the partnership is dissolved because of the death of the partner till the time the partnership is wound up.
It is submitted that by the end of January it was discovered that Zac was selling some beer to Zac’s family and friends, and Zac had kept the money to himself. It is now established that there is a valid partnership amid the two as per section 29 Zac is not allowed to keep the money that is generated from the partnership business to himself and must account the same to the partnership.
Thus, Zac must pay back the money to the firm.
Who is liable to pay the outstanding rent?
When a partnership is established then the partners are considered to be the agents of the firm and of each other. Section 5 of the Act submits that the partners are jointly liable to each other and the acts of one partner will bind all the other partners for the same and to the firm. So, the liability that is generated by the partnership is jointly held by all the partners and the same is established under section 9 of the act.
Issue A: Existence of Partnership between Todd and Zac
So if any liability is incurred by the partners by carrying on the activities of the partnership then such liability must be borne by all the partners jointly and severally and by the firm itself.
Todd without involving Zac establishes a lease with Klaus. He also borrowed $10,000 from his Dad to pay a security bond, and three months’ rent in advance. But, the deal with Klaus does not fell through and the business is not having enough money to pay the rent.
However, as per section 5 and 9, the liability generated while carrying out partnership activities is imposed on the partners jointly and thus both Todd and Zac are liable.
Both Todd and Zac are liable for the payment of debts.
If Denton successfully sues Zac and Todd, who is liable to pay the compensation?
When any partnership is formulated then the partners are considered to be the agents of the firm and to each other and the same is enshrined under Section 5 of the Act. Thus the partner must carry out their actions within the course of dealing of the business and within the authority that is granted to them thereby making all the partners and the firm liable for the act that are carried by him. However if any partner exceeds his authority and establish any contractual relationship with an outsider, then, the outsider can sue all the other partner for such a contract provided the outsider is dealing in good faith and honesty. Such contract cannot be avoided by the partnership on the account of lack of the authority of tube partner.
It was found that a letter was received by both Zac and Todd Denton’s law firm informing them that they were being sued for $50,000. It turns out that the beer supplied at Denton’s office Christmas party was defective, and all the guests got sick. Denton suffered reputational loss and is blaming Todd and Zac. The beer is supplied by Todd was involved in the marketing and thus he was giving free beer to all the guests. The beer was distributed in order to promote the business of their new brand.
Thus, the liability is incurred while carrying the partnership activities and the partnership is liable to pay the compensation.
Can Zac leave the partnership in the way he did?
Section 1 of the Act submits as how a partnership is established between the parties. However division 4, Part 2 of the Act establishes as to how a partnership can be dissolved by the parties. There are various manners in which a partnership can be dissolved and the same are established under Section 32 of the Act:
- Terminated after the completion of the adventure, if the partnership is established for a single adventure;
- If the partnership is for a particular period of time, then, the partnership cease to exist after cessation of such time;
- If the partnership is not for any particular time period then the intending party must give a notice of termination to the other parties for the termination of the partnership. The partnership is considered to be dissolved from the date that is mentioned on the notice or when the notice is communicated to the other parties..
If the partnership is dissolved by any of the partners by fraud, then, as per section 41 of the Act, the non defaulting party has a right to exercise his right of lien over the surplus assets of the partnership or he must be indemnified for the debt incurred or he must be treated as creditors and payment can be claimed from the partnership.
It is assumed that a valid partnership exists amid Todd and Zac. It is submitted that the partnership that was established amid Todd and Zac was not for any one transaction or for a fixed duration of time wherein the partnership is dissolved after the cessation of such activity or duration.
Thus, as per section 32 of the Act, it is necessary that Zac must serve a notice of the termination of the partnership and the partnership cease to exist from the date mentioned on the notice or when the notice is delivered to Todd.
Zac is not permitted to terminate the partnership in the way he did and he can be sue under section 41 for the Act for incurring frauds.
Is the brewing equipment, Todd’s laptop, and recipe and formula partnership property?
Section 20 of the Act submits that when any property is acquired and made part of the stock of the partnership for the use of the partnership, then, such property is considered to be the property of the partnership. Such property must be used by the partners and held by the partners for the purpose of the partnership itself and for no other purpose.
It is found that Zac moved the brewing equipment and his laptop (which contained files outlining the brew recipe and formulas for his innovative fermentation process) to the warehouse. The things and the formula was bought in by Zac for the use in the partnership. Thus, as per section 20, it is the partnership property and belongs to the partnership.
It is thus concluded that the brewing equipment, Todd’s laptop, and recipe and formula is the partnership property and Zac cannot take away the same.
Reference List
Cassidy, J, ‘Concise Corporations Law’, 2006, Federation Press.
Commissioner of State Taxation v Cyril Henschke Pty Ltd [2010] HCA 43.
Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103.
Powell v. Powell (1932) 32 SR (NSW) 407;
Polkinghorne v Holland (1934) 51 CLR 143.
The Partnership Act 1891;
ATO, ‘Elder’s Trustee and Executor Co Ltd v Federal Commissioner of Taxation’ 2017 < https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2205%3ACases%3AHigh%20Court%3A1961%3AElder%27s%20Trustee%20and%20Executor%20Co%20Ltd%20v.%20Federal%20Commissioner%20of%20Taxation%20-%20(12%20January%201961)%3A%230102%23Judgment%20by%20Windeyer%20J%3B%22&DOCID=%22JUD%2F104CLR12%2F00002%22>.
E-resources, ‘The High Court of Australia’ < https://eresources.hcourt.gov.au/browse?col=0&facets=name&srch-term=&page=204>.
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