Partnership Act 1963 And Corporation Act 2001 (Cth) Impose Duty Of Diligence And Care In Essay.

Samuel, Thomas and Peta decided to start up an internet business reselling products over the vast online marketplace. They were keen to purchase goods from unfortunate companies that had gone into liquidation and resell the goods at a substantial gain. 
The proposed form of the new venture was not decided upon. Peta used $100,000 equity in her home to finance the start-up costs of the new venture. All three parties joined forces and worked together in the business venture. The business was profitable and the three venturers decided on the following payment arrangements. 
Peta was not paid anything for the 1st year but there after was paid $6,000 per month. Samuel and Thomas characterised the payments to Peta as "a gratuity" — "a thank you for putting up her family assets as the bulk of the collateral". Samuel and Thomas were not paid as employees but through consultancy arrangements with the venture. 
Samuel and Thomas deny the existence of any partnership.

1. With reference to case law and the Partnership Act, discuss whether or not the venture is a partnership. 

2. Discuss:

a) The directors' duties of care and diligence; and

b) The directors' duties of loyalty and good faith 
In your answer explain the consequences for breaching the directors' duties provisions of the Corporations Act 2001 ,cth). 

Definition of Partnership under Partnership Act 1963

Issue
Determination of whether there is a partnership between the three parties involved in the situation

Rule
Meaning of partnership is provided under the rules of section 6 (1) of the Partnership Act 1963. The relationship which exists between people who are carrying out a business in common having a view of profit has been termed as partnership.

The rules of determine the existence of partnership have been set out in section 7 of the PA. When there is a tenancy in common, joint Tenancy, part ownership or joint property of itself, cannot create a partnership of its own. The real test of formation of a partnership depends upon whether such owners or tenants share profits or not which is made by using things so owned or held.

In addition where gross returns are shared it does not create a partnership in itself. The real test in relation to formation of partnership is that whether there is a tenancy in common; joint Tenancy, part ownership or joint property which is used for getting the return.

When a person receive the share of profit from a business it is evident that such person as a partner in relation to such business. However, the receipt of such payment or share which depends upon the profit of the business does not in itself create a partnership. This specifically occurs when:

• A person receives a debt or a liquidated demand through the profits of the business
• When a person is remunerated based on the share in profit of the business
• A child or domestic partner who is provided periodic payments in relation to the profit made by the business
• A person who is provided the rate of interest based upon the profits and losses of the business in relation to the loan provided

Therefore it can be determined that partnership when there is a business in common which is carried out to make profits and there is a kind of joint ownership in the business unless the above discussed exceptions are applicable. The meaning of carry out a business, in common and making of profit has been discussed by various cases at common law.

Carrying of a Business
This issue has been addressed by the case of in Trimble v Goldberg [1906] AC 494

In common
This issue had been addressed by the case of Keith Spicer Ltd v Mansell [1970] 1 All ER 462

Purpose of making profit
This issue been addressed by the case of Wise v Perpetual Trustee Co Ltd [1903] AC 139

Application
The three friends in context have planned to initiate a business activity through which they want to purchase assets of organization going into liquidation and then reselling them for the purpose of making profit. In order to fund the business Peta has provided the business with a funding of $100000 through the equity in her house. She had not been paid anything for it in the first year but after that she was provided with $6000 which the other parties in the business termed as Gratuity. Samuel and Thomas get income as employees based of consultancy arrangements. In this situation whether a partnership exists or not can be established by the application of section 6 and 7 of the PA 1963 and the common law provisions as discussed above. The first element is that there has to be a business as per both section 6 and the case of Trimble v Goldberg which is present in the given situation in relation to purchase assets of organization going into liquidation and then reselling them for the purpose of making profit. In addition the business is carried out in common as it is provided through the facts that they are involved together in running the business. Further as as they are purchase assets of organization going into liquidation and then reselling them their intention is to make profit. Thus there is a partnership between them as per common law. In addition it has been stated in Section 7 that a person given loan will not be a partner only if the investment is treated as a loan and as Peta participates in the business she is a partner. The funding of $100000 through the equity in her house will not be treated as a loan as she has not anything for it in the first year.  Samuel and Thomas are also partners because they share the business profits by taking shares of consultancy arrangements. Thus it can be stated in the given situation that Peta, Samuel and Thomas are partners of the business.

Tests for Determining the Existence of Partnership under Partnership Act 1963

Conclusion

Thus it can be concluded that Peta, Samuel and Thomas are partners of the business under both common and statute law.

There is an obligation which any person managing a company in Australia is provided with known as the duty of diligence and care. The directors and other offices of a corporation fall under the scope of this duty. The duty has been incorporated into the legal system by the rules provided in section 180 (1) of the Corporation Act 2001 (Cth). In relation to the provisions of such duty the directors and other officers of a corporation have to show diligence and care while discharging their obligations owed to the company. An issue related to the breach of this duty is frequently brought before the courts in Australia. The Corporation Act provides a wide range of scope to the provisions of section 180 through its wordings. The wordings under this section signify that any officer or director of a corporation who is discharging his duties and exercising his rights has to do it with the observation of diligence and care. The extent of diligence required does not have to be that of an expert it merely has to resemble the actions of reasonable or prudent director in similar circumstances. Where there is failure to resemble the actions of a reasonable or prudent director in similar circumstances the court would deem that the director in question has reached the provision of this duty. Due to the Limited wording of the section and the wide range of functions which the officers and directors of a company have to perform while discharging their obligation there have been various interpretations by the courts in relation to this section as to what would account to a diligent and careful action. The breach of this duty leads to Civil penalty provision along with compensation orders of the court deems fit. Under the Civil penalty rules a person who has been found to have reached the duty of diligence and care is imposed with a financial penalty extending up to $200,000 and/or a management ban for a period which is deemed fit by the court. The Civil penalty provisions can be invoked if the Australian securities and investment Commission can get a declaration from the court that this duty has been breached by the alleged person under the text of section 1317E of the CA. The provisions for Pictionary penalties are provided to Section 1317H, the provisions for management ban are provided under section 206C and the compensation order can be obtained under section 1317S.  There are few cases which can better illustrate the provisions of section 180. The first case which needs to be discussed in relation section 180 of the CA is the case of ASIC v Rich. In this case the court analyzed the defence when the provisions of section 180(1) will not be breached. This defence had been given under the provisions of section 180(2) of the Act and is in general known as the business judgement rule. In this case a few factors had been stated which determine whether the duty has been complied with or not. These include not having a personal interest in the matter, making an informed decision and acting in good faith. If these elements are present that the directors and other officers would be exempted from liability under section 180(1) of the CA. Another case which is relevant in relation to the duty of care and diligence is the case of ASIC v Cassimatis (No. 8) [2016] FCA 1023. In this case the court stated that the sole shareholders and directors of the company would be also liable for the breach of this section and the court may find the breach even in case there has been a loss of reputation to the company.

Duty of Diligence and Care under Corporation Act 2001 (Cth)

Another duty which is given under the provisions of Section 181 of the CA is the duty of working for a proper purpose, having bona fide intentions and for ensuring the best possible outcome for the company. The duty corresponds to the fiduciary duty of loyalty and honesty. One of the most significant implications of the introduction of section 181 into the company law in Australia is that the officers and directors working an organization must sacrifice personal interest over the interest of the company in their role as officers and directors. Priority in case of a conflict of interest have to be given to the best interest of the company rather than personal interest of the officers and directors or the interest of any third party involved in the situation. There are three primary elements in which the duty can be divided. These include Best interest, Good faith and Proper Purpose. There have been various cases where these three elements have been discussed and interpreted by the courts. Whitehouse v Carlton Hotel Pty Ltd (1987) is a case where the provisions of this section had been discussed. The court initiated a subjective test of “honesty or good faith” to decide whether the duty had been complied or contravened. According to the majority of judges in this case good faith is dependent on the circumstances of every case and this is the cause for which fixed principles for the analysis have not been provided by the case. In addition the court focused on the fact that where there has been intentional breach of law by the directors it would be considered that there was a lack of good faith in the transaction.  What is the best interest of the company had been discussed through the case of Kinsela v Russell Kinsela Pty Ltd (in liq) (1986). Here the court stated that when considering the best interest of the company the officers and directors have to take into consideration shareholders in form of a collective group. However, where there company is insolvent than the interest of the shareholders needs to be taken into consideration. In general when an act of the director is directed towards achieving the purpose of the company it is considered to be in the best interest of the company. The personal interest of the directors may also be the same as the interest of the company. However, even where the directors have acted in good faith it would not conclude that it is in compliance with this section. It needs to be shown that there was an intention on the part of the directors to act in the benefit of the organization as a whole. In the case of Re Smith and Fawcett Ltd 1942 it was stated by the court that the directors have to exercise their discretion in a bona fide way according to their own judgement and not the judgement of the courts in relation to the best interest of the company but such a decision must not be for any other collateral purpose. To the extent where the directors have acted in the interest of the company and in good faith by getting into an act with a third party he cannot be liable in personal context even if the deal was not advantageous for the company. Thus the heart of the matter in this situation is the intention of the directors or officers. The important element is that the act was in good faith and the directors had an honest belief that it would be beneficial for the company.

References

ASIC v Cassimatis (No. 8) [2016] FCA 1023

Corporation Act 2001 (Cth)

Keith Spicer Ltd v Mansell [1970] 1 All ER 462

Kinsela v Russell Kinsela Pty Ltd (in liq) (1986)

Partnership Act 1963 (Cth)

Re Smith and Fawcett Ltd 1942

Trimble v Goldberg [1906] AC 494

Whitehouse v Carlton Hotel Pty Ltd (1987)

Wise v Perpetual Trustee Co Ltd [1903] AC 139