Question

Rose, Mary, Violet and Sonny are the best of mates. Rose and Mary run the Busy Bee Florist Shop in partnership with each other. Due to a long drought and unseasonal weather, the business bank account is overdrawn and the Friendly Bank is refusing to honour any more cheques. Rose approaches Violet for a loan in return for a share in the business. Violet agrees to lend the partnership $20,000 in exchange for the drawing up of a loan agreement which was to document, among other things, the following terms:

· The lender will receive a share of the profits and losses to the extent of 20 per cent.

· The lender has a right to examine the partnership books at will.

· The lender has a right to receive a quarterly business statement.

· The money advanced is a loan and the lender is not to be regarded as a partner of the business.

Rose executes the loan document, as requested, prior to Violet advancing the money. Both parties signed the loan document. Meanwhile Mary approaches Sonny, who is also their employee, for a loan.

Sonny agrees to lend $10,000 to Mary but he requires some interest on the loan. A deal is struck which results in Sonny receiving his salary plus a one-eighth share of the net profit (or a one-eighth share of the firm’s losses) in consideration for making a loan to the firm.

Rose and Mary inform the Friendly Bank that Violet and Sonny are now partners in the Busy Bee Florist Shop. Business continues to decline and Rose and Mary secretly decide to take an extended holiday in the Congo Basin.

Both Violet and Sonny were unaware of the large debt owing to Friendly Bank and believed the purpose of their loans was to expand the business of the Busy Bee Florist Shop. Friendly Bank seeks to recover debts owing by the Busy Bee Florist Shop from Rose and Mary.

Advise Violet and Sonny of their potential liability to Friendly Bank in relation to the Busy Bee Florist Shop.

1. Issue: Can Violet be considered as a partner? Explain (3 marks)(450 words limit).

2. Issue: Can Sonny be considered as a partner? Explain (3 marks)(250 words limit)

3. Issue: Did Violet and Sonny allow themselves to be held out as partners? Explain (2 marks)(150 words limit).

4. Question: If Violet is a partner will she be liable to Friendly Bank? Explain (2 marks)(150 words limit).

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