Partnership Business: Smith's unauthorized purchases
You must answer the two problem-type questions below, using the ILAC (Issues, Law, Application, Conclusion) forma.
Road Measuring Professionals is a surveying firm based in Newcastle, NSW. Its major client is the New South Wales government, for whom it surveys roads that are under construction. Smith, Jones and Peters have been partners in the firm for some time. There is an agreement between them limiting the authority of the partners to contracts up to $ 10 000. Smith has often purchased surveying equipment on behalf of the firm from Sydney Engineering Supplies, dealing with its manager, Mary.
Smith buys a surveying instrument costing $ 11 000 from Mary. It is delivered on 5 June, and the firm receives an invoice for the contracted amount.
Smith has always wanted the firm to branch into road transportation, as he is also a qualified truck driver, but his partners have continually rejected such a move. Hoping to demonstrate to them the profitable nature of such work, Smith signs a contract on behalf of the firm to buy an old truck from Used Trucks Ltd for $ 8 500. The firm has received an invoice for the truck, which is due to be delivered on 6 June.
Jones and Peters are angry when they see the invoices, and have told both Mary and Used Trucks Ltd that the firm will not pay them. Advise Mary and Used Tricks Ltd as to their legal position, citing relevant law.
David Bradbury used to run a second-hand car yard as a sole trader. However, as part of a sentence for fraud imposed by a court two years ago, David was prohibited from “buying and selling new or used vehicles” for a period of five years. Breach of this order is prosecutable as contempt of court.
David is however desperate to go into business again. He hears that a good opportunity exists to start a second-hand car dealership in a suburb of Sydney. He also hears that a vacant lot is available for lease. Because several other businesses are eager to lease it, he rushes to the owner of the site, Cenvest Real Estate Ltd, and signs a 1-year lease for $ 50 000 on 5 January. Occupation of the premises and payment of the $ 50 000 are due to take place on 1 February. He signs the lease “David Bradbury, as Managing Director, Sydney Auto Group Pty Ltd”. On 10 January he goes to ASIC and registers Sydney Auto Group Pty Ltd. On the ASIC documentation he is listed as sole shareholder and as Managing Director. Sydney Auto Group Pty Ltd starts trading the next day, operating from David’s back yard, buying two old Mercedes cars and selling them to vintage car collectors a few days later. All contracts are signed “David Bradbury, as Managing Director, Sydney Auto Group Pty Ltd.”
On 15 January, David decides that the company needs extra capital, and so his three brothers, Christopher, Anthony and Richard each contribute $ 70 000 to the business in exchange for shares and a position on the board. When the board first meets on 17 January, Christopher is elected Managing Director. At the meeting Christopher, Anthony and Richard say that $ 50 000 is too much for the lease and decide that the company should lease a different lot for $ 30 000. They send a letter to Cenvest Real Estate Ltd stating that Sydney Auto Group Pty Ltd refuses to move its business to the vacant lot and refuse to pay the $ 50 000.
David is facing prosecution for contempt of court and has been sued for breach of contract by Cenvest Real Estate Ltd. Advise him on his legal position, citing relevant legal authority.
In this paper, the issue to be discussed is whether Mary and Used Trucks Ltd recover the payment from Road Measuring Professionals for delivering the equipment and truck.
The Partnership Act, 1892 (NSW) deals with the formation of a partnership business in Australia. According to section 1 of the above-mentioned Act, when a collaboration between two or more individuals performing the functions of a corporation with a shared goal of revenue is referred to as a partnership (Murray, 2016, p. 176).
A partnership business does not have a separate legal entity as a corporation does. Thus, section 4 of the said Act states that personal responsibility concerning debts must be equally shared by all the parties. However, it is easy to easily incorporate a partnership firm as it encompasses fewer formalities but it is vital to enter into a transcribed contract to avoid future clashes.
As the trustworthiness is the heart of the partnership business thus, it is vital to perform the responsibilities of the partners in utmost good faith and that is the reason for which it is said that each partner is considered to be as an agent for the other partners (Colvin et al., 2018). The above-stated Act states that all partners need to:
- Be held responsible for partnership transactions under section 28;
- Report the other partners of the firm regarding the assistances received and must not create hidden revenue under section 29; and
- Prevent each other from competing with the business under section 30.
Apart from that under agency law:
- Partners are prohibited from making any secret profit at the loss of the partnership;
- Partners are anticipated to avoid clashes of interest; and
- Partners are prevented to use sensitive information of the business for their benefit (Zwart, 2018).
The agency law regulates the relationship between the partners and which is modified by section 5 to 9 of The Partnership Act, 1892 (NSW). The provisions state that partners by entering into a written or oral agreement can limit their authority. Here, all the partners have vibrant authority and everyone is bound by agreements entered into within the context of each partner.
The vital impacts of this provision are, first, according to section 5(1) In respect of a partnership company each partner, as a representative of all partners, shall have implied authority, even though the partners do not grant authority directly. The second major feature of paragraph 5(1) is that when a partner contracts outside his express authority, a third party may still hold the partner to account if it can prove that the arrangement is part of a partner of an organization in this type, except as otherwise agreed upon. (Ong, 2018).
Birtchnell vs. Equity Trustee, Executors & Agency Co Ltd  42 CLR 384 is a famous case in which the court held that every partner must reveal the material information of the business along with the remunerations received from the business.
Legal provisions related to Partnership Business
In Wang vs. Rong  NSWSC 1419 case the court stated that all the partners would be held responsible if any third party is not conscious of the fact that there occurs an agreement between partners regarding the limiting authority.
In this given scenario, Smith, Jones and Peters operate a partnership firm, namely Road Measuring Professionals which is a surveying partnership firm situated in Newcastle. They have a partnership arrangement which restricts their authority as a partner and can make contracts up to $10,000. Smith also purchased surveying equipment on behalf of the firm and he recently bought an instrument that costs $11000 from the Sydney Engineering Supplies Director, Mary. In the end, Smith purchased a truck to make more profits from Used Truck Ltd. from $8500, and the company obtained the receipts from that truck. But Jones and Peters, the other partners got angry after seeing the invoices and told Mary and Used Trucks Ltd, they would not pay them for the equipment and truck.
Here, given the relationships that exist between Jones, Smith and Peters, according to section 29 of the aforementioned legislation, all of them must reveal the other partners about the vital decisions they have taken and to reveal the benefits of the company to the other partners. This obligation has been infringed by Smith when he bought a truck for $ 8500 without notifying Jones and Peters about the purchase.
By applying the rule of Birtchnell vs. Equity Trustee, Executors & Agency Co Ltd case it can be established that Smith failed to perform his obligations under section 29 of the Partnership Act, 1892 (NSW) Act.
Moreover, Smith has bought surveying equipment of $ 11000 by going outside of the limits of contracting authority of $ 10000. He also bought a truck for $ 8500 which is inside the contracting limits of $ 10000. Here, as stated in Wang vs. Rong case, it can be said that as per the nature of the trade the acquisition of surveying equipment is reasonable despite the high price. However, as per the nature of the business, the acquisition of a truck is not essential and the other partners are also not well-versed about the contract but the acquisition of a truck is inside the contracting authority of Smith. In this case, both Mary and Used Truck Ltd did not aware of the restrictive authority of partners.
Henceforth, by applying the rule of Wang vs. Rong case it can be concluded that all the partners would be said to be responsible as the third parties are not conscious of the fact that an agreement exists between partners regarding the restrictive authority.
Legal implications of the Smith's purchases
Therefore, both Mary and Used Trucks Ltd can recover the payment from Road Measuring Professionals for delivering the equipment and truck.
In this paper, the issues to be discussed are:
- Whether David is accountable for committing contempt of court;
- Whether David is answerable for infringing the lease contract with Cenvest Real Estate Ltd.
The corporations of Australia is regulated by the provisions of the Australian Securities and Investments Commission (ASIC). On the other hand, the Australian Securities and Investments Commission Act, 1989 (Cth) regulates it. It plays various roles in Australia while governing the tasks of a corporation. The creditors of different corporations get helps from ASIC to recover their due amount from a corporation (Yogaratnam, 2017).
Section 119 of the Corporations Act, 2001 (Cth) states that registration is important to established a company and a company comes into existence when it becomes a legal entity. A company and its members are different from each other because of its separate legal entity. A company has the authority to sue or be sue by its registered name. (Ramsay, 2015).
In the landmark case of Salomon vs. Salomon & Co Ltd  AC 22 the court apprehended that having a distinct legal entity is the most important feature of a company. Moreover, the principle of separate legal entity and limited responsibility of shareholders is also stated by this case.
In Gilford Motor Co Ltd vs. Horne  Ch 935 case a worker of the plaintiff after agreeing limitation of trade practice started a new business of similar nature. The court apprehended that due to the activity of the worker the limitation had been broken.
The expression ‘corporation’ as mentioned in section 57A contains a company which is recognized as a co-registered association within the connotation of section 9 of the Corporations Act, 2001 (Cth). A business registered under the said Act is considered to be as a type of business.
There are some cases when before registering a company the creator of such a company sign agreements which includes buying furniture, leasing vacant land. These creators are called promoters. Often, these types of agreements create a problem regarding the responsibility of the parties to enforce such a contract. (Bird & Gilligan, 2016). A promoter cannot become an agent unless the company comes into existence under the common law.
If after completion of registration, a company rejects to accept those contracts which were signed before registration then the court If there is a position where the Co is registered and rejects to accept a pre-incorporation contract, the court may, as per section 131(3), direct that company to deliver a remedy as it deems fit, together with allowing the company to reimburse a part of the compensations for which the promoter is answerable (Anderson, Ramsay & Welsh, 2016).
Establishment of Sydney Auto Group Pty Ltd
The economic penalty under section 1317G of the Corporations Act, 2001 (Cth) may be imposed on a company if the infringement extremely impacts the capability of the company along with its members or creditors.
In this given scenario, as David is forbidden by a court order to run his sole proprietorship for five years due to fraud therefore if he violates the court order prosecution may start against him. A new lease agreement for $ 50.000 for 1 year has been signed by David for starting a new business of second-hand car dealership on 5 January with Cenvset Real Estate Ltd. He signed the lease as on behalf of the unregistered business of Sydney Auto Group Pty Ltd. the company was registered on 10 January as Sydney Auto Group Pty Ltd under the ASIC guideline. He has listed himself as sole shareholder and Managing Director under ASIC documentation. He has started again purchasing and selling cars on the company name. For further investment, he has approached to his three brothers and declared Christopher as the Managing Director. At the meeting, his brothers were decided to cancel the contract with Cenvest Real Estate Ltd as the lease amount is huge and a letter has also been sent in this regard.
Here, as per the provisions of section 119 of the Corporations Act, 2001 (Cth) Sydney Auto Group Pty Ltd has a separate legal entity from its members after registering as a corporation under the said Act. It also has a separate legal entity by applying the rule of Salomon vs. Salomon & Co Ltd case.
Here, the Sydney Auto Group Pty Ltd has been created by David as a promoter by signing contracts of leasing vacant land to operate the business. Such contract has been created by the company with Cenvest Real Estate Ltd before completion of registration and now it wants to decline the pre-incorporation agreement by refusing to pay the amount.
Here, as per the provisions of section 131(3) of the said Act, the court may direct the corporation to deliver a remedy as it deems fit.
Under section 206C of the said Act, the directions of the court regarding the selling and buying cars for five years have been infringed by David. Thus, the prosecution has begun against him.
By applying the rule of Gilford Motor Co Ltd vs. Horne case it can be concluded that under the doctrine of ‘lifting of corporate veil’ David is a controller as the limitation of buying and selling of second-hand cars had been violated by him
Thus, the monetary fine under section 1317G of the Corporations Act, 2001 (Cth) can be imposed as the violation of court’s direction by Sydney Auto Group Pty Ltd extremely impacts the capacity of the company and its members.
Therefore, it can be concluded that:
- David is accountable for committing contempt of court as he is not allowed to buy and sell second-hand cars for five years as per the direction of the court;
- David is answerable for infringing the lease contract with Cenvest Real Estate Ltd and for this reason penalty may be levied on him.
Anderson, H., Ramsay, I., & Welsh, M. (2016). ASIC, PHOENIX ACTIVITY AND THE VIEW FROM THE OUTSIDE.
Bird, H., & Gilligan, G. (2016). Deterring corporate wrongdoing: Penalties, financial services misconduct and the Corporations Act 2001 (Cth). Company and Securities Law Journal, 34(5), 332-359.
Colvin, E., McFARLANE, K. A. T. H., Gerard, A., & McGrath, A. (2018). ‘We Don't do Measure and Quotes’: How Agency Responses Criminalise and Endanger the Safety of Children Missing in Care in New South Wales, Australia. The Howard Journal of Crime and Justice, 57(2), 231-249.
de Zwart, M. (2018). We have lift off! Why Australia needs the new Space Agency.
Murray, P. (2016). EU–Australia relations: a strategic partnership in all but name?. Cambridge Review of International Affairs, 29(1), 171-191.
Ramsay, I. (2015). Enforcement of Continuous Disclosure Laws by the Australian Securities and Investments Commission. Company and Securities Law Journal, 33(3), 196-204.
Werneck, B., & Saadi, M. (Eds.). (2015). The public-private partnership law review. Law Business Research Limited.
Yogaratnam, J. (2017). Corporations law: in principle. Thompson Reuters.
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