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Questions:

1.Do you think that Kate, William, Harry and George are partners? Why?

2.Kate arranges for a cocktail party to be held at the stud. It will be attended by many important people from the horse racing set. "Kate wants to make a good impression and she buys a $7000 designer dress" on credit to wear to the function. She did not discuss the purchase with any of the men as she thought they would not understand. Is the business liable to pay this debt?

3. Kate, William, Harry and George want to acquire a "new breeding horse". It is going to cost $170,000 but the business does not have this amount on hand. They borrow the money from Harry at an interest rate of 15% p.a. Is there any problem with this agreement?

4. George wishes to leave the stud and take up acting. He wants to make sure he is not "liable for any debts incurred before or after he leaves". What can George do to protect his interests? How can George get his money out of the business.
 
 

Answers:

1.Issue

The issue of this case study determines whether Kate, William, Harry and George can constitute as partners.

Rule

As per the Partnership Act, the term Partnership defines a situation where there must be a relationship between those individuals who have accepted the conditions on sharing the profits of a business that is executed by everyone. Therefore, a partnership arises due to five necessary elements as per section 51 of the Australian Partnership Act, 1958. Firstly, partnership is considered to be an outcome of a contract. It does not arise from any process of law. For instance, at the time of the father’s death, who was a partner of that particular company, the son has the power to inherit or claim the share in the partnership property but he will fail to become a partner unless he enters into a contract with the concerned persons. Correspondingly, individuals carrying on a family business cannot be known as partners since the link did not arise from any contract. As a result, a contract is a mandatory ingredient in forming partnership. Secondly, minimum of two persons are required to constitute a partnership since that is the result of a contract. Individuals who are eligible to contract can enter into a contract of partnership. Persons entering into the contract can be either artificial or natural. In the case of Griffiths CJ in Land v James Morrison & Co Ltd (1911), it stated that when a partnership firms enter into contracts of partnership with another partnership individual, the members of the firm become partners in their own capacity. Thirdly, the parties should agree to carry on the business. If a handful number of individuals agree to share the income of a specific property for dividing goods that were purchased in bulk against them, then there will be no partnership. Such individuals cannot be called partners. The work must be divided equally among the partners. Fourthly, it states that an agreement should carry on its business with the purpose of sharing profits among all the partners. Therefore, partnership will not exist if the business is carried on with a motive and not for obtaining profits. For a partnership to arise, it is not mandatory that the partners will agree to share and distribute the losses. There must be a partnership deed, which will state in which manner the profits, and losses should be distributed. Lastly, all the partners should carry on the businesses or any of them acting for them which means that it must be a mutual agency. Each partners are said to be both an agent and principal the rest of the other partners and himself.

Application

Kate, William, Harry and George will not be considered to be partners as the business ‘Tall Oaks’ ran by them was not registered as a business name. Hence, they cannot be called as partners of the company. Without the company being registered, the individuals will not be treated as partners. Unless these terms and methods are applied, a business cannot be formed into  a partnership. Hence, all four of them will not be treated as partners as well. Kate, William, Harry and George needs to register their business first otherwise, which it will not be considered to be a proper company.

Conclusion

It can be concluded from the given case study that without getting the company registered, four of them will not be treated as partners.

2.Issue

The issue in the given scenario deals with a situation of who will be liable to pay for the designer dress worth $7000, which Kate bought in credit.

Rule

According to the law of agency, it is referred to an area of commercial law that is associated with a set of contractual and non-contractual fiduciary relationships that includes a person who is known as an agent. The work of an agent is to act on behalf of another in forming legal relations with another third party as described under section 64 of the mentioned Act.. If Kate does not pay the credit amount of the designer dress then all the other members will be liable to clear the credit. From then onwards the rest will have to compensate and clear off the debt of Kate. The other members will act as the agents of Kate since they are the remaining owners of their business stud business. Agency Law can help her to clear the debts for buying an expensive dress worth $7000. It has been proved in the case of Pioneer Concrete Services v Galli.

Application

In this given scenario, it can be stated that only Kate will be liable to pay this debt for buying the dress on credit. However, she did not discuss about the purchase with any of the members. William, Kate, George and Harry own the business. Therefore, all four own the business them equally since Edna Barcoo their grandmother had divided her estate equally to four of them. The liability authority rests with all the four existing members of the business but since Kate got the dress for a cocktail party that she organized, she herself will be liable for it and not others. All four of them equal share of Edna’s estate. Even if the other three members pay the debt of the dress, Kate can keep the partnership binding.

 

Conclusion

It can be concluded that being one of the owners of the business of the stud Kate will have the authority to bind the partnership by using the Agency law

3.Issue

The issue of this question deals with whether Harry will be able to advance the money to partnership for acquiring a new breeding horse.

Rule

As per section 32 of the Partnership Act 1958, it has been observed that a partner can lend money for the benefit of the company. Operating agreements is a contract that exists between two or more partners in a company as seen in the case of Checker Taxicab Ltd v Stone. However, Kate, William, George and Harry are not considered to be as partners since their business is not registered. To buy the new breeding horse, if they require the money they have to create a contract with Harry since he will be lending an interest rate of 15% per annum. If there is no agreement created referring the issue then they have to create the contract.

Application

In the given case scenario, borrowing money from Harry at an interest of 15% will be allowed since if an agreement is made between them regarding this. The Authority and power will be vested with Harry since he is the one lending the money to the other members of the business for the beneficial of the business. Although the rights and powers lies with other members as they are a part of the contract but he upper hand is vested with Harry.

Conclusion

It can be concluded in this scenario, that as per the Partnership Act, 1963 Harry will be able to advance money to the partnership as per the agreement.

4.Issue

The issue in this given case scenario deals whether Section 12 of the Partnership Act, 1963 will come into action if George leave the stud.

Rule

As per the Partnership Act, 1958 the section 12 will be applicable if George wants to leave the stud. He wants to ensure that he is not liable for any debts that is being incurred before and after he leaves. George can protect his interests and take out the money based on Section 12 of the Act as seen the case study of Re Fisher and Sons. Therefore, in case of on going partners the general rule states that if the debt or liability has been incurred after the partner has left the business then that partner will not be liable for the same reason. Correspondingly, if the partner has created any debt or liability before leaving the company, then that individual will be liable. An agreement of novation must be formed between the parties. The partner at the time of the contract, creditor of the partnership comes into existence with the creditor and an incoming party. By a novation agreement, a creditor can agree on the fact that the liability of a partner who is leaving or a previous partner has to finish and a new partner should be taken up.

Application

Before George leaves the business he should clear the debts as much as possible otherwise he has to back out from the business at that very moment. A notice needs to be provided to the other existing members of the company. There has to be an existing Contract between the parties. Every partner has a right to be involved in the process and conduct of the business. Every partner is also bound to focus on his duties in the conduct of the business. Thirdly, as per the Act every partner has a right to have access in inspecting the books and copies of the firm. George have to resign from the partnership deed and take out his share of money and interest out of the business. To make sure that he is not liable for any debts incurred before and after he leaves, he has to form a contract with the other partners as per the rule of the Act

Conclusion

It can be concluded stating that George can clear out the debts and liabilities before leaving the business if he wants to.

 

References:

Pioneer Concrete Services v Galli [1985] VR 675

Re Fisher and Sons [1912] 2 KB 491

Checker Taxicab Ltd v Stone [1930] NZLR 169

Griffiths CJ in Land v James Morrison & Co Ltd (1911) 13 CLR 1

OR

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