Legal Case Study
In the concerned case, the involved individuals are parties to a partnership agreement where each party holds share in the company. Feng, Qiyuan and Linda are directors of Darwin Property Developments, and among them Feng and Qiyuan are brothers who originally founded the company. Qiyuan considered including Linda in the partnership due to the fact that Linda is a close friend of Qiyuan and partially because both Qiyuan and Linda are partners in a separate accounting firm. Moreover, Qiyuan brought Linda into the company (Darwin Property Developments) primarily because she has a powerful reputation in the sphere of accountancy and she is a reputed accounting professional. She is a person who is also renowned for her tough decision-making abilities and potentials. But as Feng’s wife recently died, his involvement in the business has been disrupted to a large extent. He is not only grieved by the loss but as a sole parent he has to take up the responsibility of his children.
Quite naturally, owing to the demise of her wife and due to performing his parental duties, Feng has to get aloof from the business duties and conducts. Even though Feng is unemployed for the time being, he, just like the other two partners, is a shareholder in the concerned company, and each shareholder has 2,000 shares. Now, as Feng is short of money, he requests Linda and Qiyuan to consider paying the members dividends again, but his request has been turned down by the other two partners of the Darwin Property Development (DPD). Being rejected, Feng again requests them to buy out his shares, but again he faces rejection. On the contrary, the other two partners suggest that Feng should resign from his post of the Director of DPD because his personal grief is impacting negatively on the business’ operations and profitability. But even though Feng reluctantly agrees to resign; before doing so, he wants to check DPD’s most recent financial statements. In this respect too, his request is turned down by Qiyuan and Linda. It is in this course that Feng has come to know through a third party that DPD has been paying very large accountancy service fees to Qiyuan and Linda’s accounting firm. This has raised suspicion in Feng’s mind about the intentions of the other two partners and he feels that he has been cheated by Qiyuan and Linda. Feng is now in need of a legal aid and he needs to determine his rights in respect of bringing about some serious claims against his partners.
Primarily, from the legal perspective, it is quite obvious that even though Feng had to miss some important board meetings due to the family mishap; he has not yet resigned from the post of the director, and hence, he still holds the member rights that would allow him to bring an action against Qiyuan and Linda. But as a legal aid I have to decide whether it would be good for Feng to bring a derivative or to bring a personal action. Going through the case and analyzing the issues it seems right for Feng to bring a derivative, i.e., proceedings brought on behalf of the company. Feng has still not resigned from his position in DPD and he still has the power to hold the other partners accountable to the company (Victorian Current Acts, n.d.). In this respect Feng can refer to the clause mentioned in Sec. 5 of the Partnership Act of 1892 which states that, “the acts of every partner who does any act for carrying on in the usual way business of the kind carried on my firm of which the partner is a member, binds the firm and other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner” (New South Wales Consolidated Act, n.d.). Feng is still a partner and an equal shareholder in the business, and the action carried out by the other two partners involved company’s fund, and hence, they are liable to answer to Feng in respect of any discrepancy found in the financial statement.
Feng has not provided any written consent conveying his decision to resign or exit his position, and that is yet another reason why he still has the legal rights to question the conduct of his partners. Moreover, as Feng is an equal shareholder, he has the right to bring a derivative against the other two partners on the ground of misconduct and undue utilization of power and position. I must suggest Feng to sue the other two partners first on the ground of violation of the delegation clause. The partnership/shareholder agreement automatically includes the clause that there are certain procedures for delegating decisions to individuals or committees (CPA Australia, 2016). Moreover, as Feng is an equal shareholder in DPD, Qiyuan and Linda should have asked for his permission or consent to delegate high valued accountancy jobs to the accountancy firmed owned by Qiyuan and Linda. The Corporations Act 2001 states that, all the delegations among the board members must be specified formally and expressly (Federal Register of Legislation, 2013). But without informing Feng anything about the delegation in a formal manner, Qiyuan and Linda has breached the agreement and has shown noncompliance with the corporate law of the land. Feng can sue the two partners on this basis. Secondly, Feng can bring a derivative against the other two partners/shareholders on the ground of non-acceptable behavior (CPA Australia, 2016). But I may suggest Feng that he can also bring personal action against the other two shareholders on the ground of breach of duty (ASIC, 2016). Qiyuan and Linda’s undue spending (without the knowledge of Feng) on the issue of accounting to apparently benefit their other company in which they have partnership interests, has eventually made DPD face financial crises for which it has been unable to provide dividends to the members. And Feng can bring this issue to the notice of the court and hold the other two partners personally liable as directors of DPD (ASIC, 2016).
Assuming that Feng does take action, it must be suggested to him that he should seek for personal liability action against the two partners. The two other shareholders/partners have indulged in the wrong conduct of benefitting their separate business at the cost of DPD. And as the financial statement of DPD is an evident to the fact, Feng as one of the active directors of the company must seek legal action against the two partners, both from the perspective of the company and from personal perspective, on the ground of breach of agreement and breach of responsibility. Feng can actually seek for such an action also on the basis of the loss that the company has suffered financially for which it became unable to pay dividends to the members. This financial loss can then be related to the over-expenditure triggered by Qiyuan and Linda in the course of benefitting their separate business establishment through the delegation of accountancy tasks of DPD. In this case, Feng can refer to the clause that, a director/s can become personally liable as a result of breaching her/their duties, and this breach of duty has the potential to incur loss to the company (ASIC, 2016). In this case, Feng might try to prove that the other two shareholders/partners, without having his consent, breached their duties as DPD’s directors by expending DPD’s capital on activities that were never discussed with Feng (even though Feng is an active director of the DPD). Moreover, Feng can also ask for action against the other two shareholders on the ground of Illegal phoenix activity which involves “the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements” (ASIC, 2016). Feng might ask for this action by showing DPD’s incapability of paying dividends as a result of the illegal phoenix activity conducted by Qiyuan and Linda while unduly delegating accountancy tasks of DPD to their other accountancy firm in which they are the sole partners. And this would also make Feng’s case stronger. Moreover, by trying to prove his aforesaid claim, Feng can put the other two shareholders in utter problem because; directors engaged in illegal phoenix activity may be actually held liable for breaching bothd civil and criminal provisions (Australian Institute of Company Directors, 2017). And if proved so, Feng could gain the power and ground of expelling Qiyuan and Linda from the post of directors at DPD.
Hence, it can be said that, as Feng is an equal shareholder, he has the right to bring a derivative against the other two partners on the ground of misconduct and undue utilization of power and position. I must suggest Feng to sue the other two partners first on the ground of violation of the delegation clause. But Feng may also be suggested that he can also bring personal action against the other two shareholders on the ground of breach of duty. Moreover, assuming that Feng does take action, it must be suggested to him that he should seek for personal liability action against the two partners.
ASIC (2016). Directors' liabilities when things go wrong. [online] Available at: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/ [Accessed 13 May 2017]
Australian Institute of Company Directors (2017). General Duties of Directors. [online] Available at: https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors [Accessed 13 May 13, 2017]
CPA Australia (2016). FACTORS TO CONSIDER IN A PARTNERSHIP OR SHAREHOLDERS AGREEMENT. [online] Available at: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/practice-management/factors-consider-pp-partnership-shareholder-agreement.pdf?la=en [Accessed 13 May 2017]
Federal Register of Legislation (2013). Corporations Act 2001. [online] Available at: https://www.legislation.gov.au/Details/C2013C00003 [Accessed 13 May 2017]
New South Wales Consolidated Act (n.d.). Partnership Act 1892 – Sect 5. [online] Available at: https://www.austlii.edu.au/au/legis/nsw/consol_act/pa1892154/s5.html [Accessed 13 May 13, 2017]
Victorian Current Acts (n.d.).Partnership Act 1958. [online] Available at: https://www.austlii.edu.au/au/legis/vic/consol_act/p84a1958135/ [Accessed 13 May 13, 2017]