Agreement of Partnership - Assignment Example

 Law Assignment 1(i). The first issue that must be established in this case is whether or not Susie has entered into a partnership with Dave. Any rights and obligations that she may have are likely to have greater strength if such a partnership exists. Dave and Susie have not entered into any written partnership agreement, but when an association of two or more individuals if formed to carry on a business for profit, then it is not necessary that such an association must be evidenced in writing1. Although the Partnership Act states that the “receipt by a person of a share of the profits of a business is evidence that the person is a partner with respect to the business.”2, it also clarifies that “the sharing of gross returns does not, of itself, create a partnership.”3 In this case, there is no written agreement of partnership between Dave and Susie, but David’s act to exclude Susie is akin to an expulsion from the business they were engaged in. This is not permissible under the Partnership Act unless there is express agreement between the parties for such an expulsion4. Had a written agreement existed, Susie’s rights could have been legally enforced if provision for relief had existed under the agreement.5 But in the absence of a formal written agreement between Susie and Dave, Susie’s rights against Dave will be limited. But Susie has been receiving profits from the business, which have been posted into a joint business account in the names of both Dave and Susie; therefore the question of fiduciary relationship between the two parties may arise. This was also the issue in the case of Hitchins v Hitchins and Another6 , where the plaintiff- one of the siblings who was receiving profits from a hotel partnership – alleged that profits being distributed to all three siblings was to be divided jointly due to the existence of a separate partnership between them, despite the fact that no written agreement existed. In the decision, Bryson J of the Supreme Court of New South Wales relied on statutory provisions7 and held that no partnership existed for the purpose of carrying on a business in common, as required under the law. But there were still grounds for relief for the plaintiff, on fiduciary grounds, due to the existence of a close relationship between the three individuals; hence the court relied on the principle of “equality is equity”, on which basis an equal distribution of profits was ordered. Susie could rely on the precedent in this case to make a claim against Dave on fiduciary grounds and the equitable principle of equality is equity as established in the case of Hitchins v Hitchins and Another8. Due to the close relationship between them and their joint operation of the business, the Courts may order relief for Susie in terms of access to the proceeds in the joint account to which she has also contributed. The best course open to Susie may thus be to register a claim under the partnership Act , since in the event of dissolution of a partnership, “every partner is entitled” to the appropriate share of the surplus funds available as a result of the business of the partnership9 and application can also be made by Susie to the Supreme Court for a winding up of the business affairs of the firm, so that she can receive her rightful share on grounds of equity. Since the business was operated through the joint account, Dave’s appropriation of the funds may also be considered inequitable on the above grounds and entitle Susie to some relief from the Courts. I (ii) (a) The situation may be somewhat different in respect to the debt, which is owed to Whichbank, which may not be in a position to take any action against Susie. Firstly, it was Dave who took the loan for the business, entirely in his name, thereby making him and him alone, liable for repayment of that loan. Susie did not sign any loan documents, neither is she listed as a guarantor on Dave’s loan. Additionally, the bank does not even know that Susie is involved in the business and therefore cannot make any claims against her. The Partnership Act of 1963 also makes it very clear that when a person receives a share of a business in the form of “accruing profits of a business”, that does not automatically mean that he or she will be liable “as a partner with respect to the business.”10 On this basis, it may thus be concluded that the bank cannot take any action against Susie. I (ii) (b). It appears likely that the Courts may find Dave’s appropriation of funds in the joint account, which belonged to the business, to be an arbitrary move and require him to compensate Susie. His contention that Susie was an employee dismissed for insubordination may not hold good because there is no employment agreement between them.11 Moreover, the Australian Fair Pay and Conditions Standard12 requires certain minimum statutory entitlements to be provided to workers, including designated hours of work, annual leave, personal leave etc as well as minimum pay standards. This standard applies to all employees in ACT, Northern Territory and Victoria, as well as those employed by the Commonwealth13, therefore it will also be applicable in the case of Susie, if Dave’s claim is to have any merit. Thus, whether Susie is considered a partner or not, the question of compensation due to her may be indisputable. In this instance, the proceeds available in the joint account may be held to be the property of the partnership or the fiduciary business relationship between Dave and Susie. The Partnership Act of 1963 allows every partner, on the dissolution of the partnership, to have surplus partnership property applied towards payment of what may be due to each partner in the firm “after deducting what may be due from that partner.”14 On this basis, Dave may have justification to deduct some amounts that may be due from Susie towards the partnership. But these amounts could at best be those incurred against expenses Susie has made herself, for the benefit of the business. The Courts may not extend this to amounts due towards repayment of the loan Dave has taken from Whichbank, because that loan has been taken solely in Dave’s name and Susie has no legal liability for a loan on which she is not a signatory at all. Ans 2: The major issue that arises in this scenario is who is to bear the liability for the debts that have been incurred by Woodcraft Pty Ltd that is functioning as a trust, as a result of the failure of the horse breeding and the real estate businesses. A trustee has the power to invest trust funds, but in exercising this power of investment, he or she is expected to “exercise the care, diligence and skill” that would normally be exercised by a “prudent person engaged in that profession.”15 Michael and Claire have satisfied the requirement under the Trustee Act of 1958, which imposes a duty to “take advice” before carrying out an investment16, since they have consulted a solicitor before taking steps to make investments. Therefore, it could be argued that the liability for the failure of investment decisions may be the liability of the solicitor who was functioning in the role of an expert. The same issue also arose in the case of Astley17 where Astley was the solicitor who provided advice on investments by a trust, which was later wound up with liabilities that were well in excess of its assets. This is also the case with Woodcraft Pty, which has assets of $5000, but liabilities far in excess of this amount. In the Astley case, the trust sued the solicitor firm for liabilities resulting out of faulty investment decisions, and the Court held in their favor, allowing for payment of damages. The precedent in this case may also be applicable in the case of Woodcraft, which can hold the solicitor firm it consulted responsible for the losses arising out of investment decisions that were made on the advice of the said solicitors. On this basis, it would appear that the creditors will not be able to recover their losses from the trust, but must target the solicitor, who will also have to pay damages to Woodcraft Pty Ltd. However, the Trustee Act of 1958 also places a duty upon trustees to “exercise the powers of a trustee in the best interests of all present and future beneficiaries of the trust.”18 On this basis, the decision to expand by venturing out into two separate businesses involving a large investment may be questionable. Secondly, the Act also imposes a duty on the trustees to “invest trust funds in investments that are not speculative.”19 But it must be noted that the kind of businesses the trustees have chosen to invest in, i.e, horse breeding and real estate, are in fact speculative. Although they have taken these decisions on the basis of advice from the solicitor, they also need to exercise their own discretion and duty of care and may be liable through application of contributory negligence. This was one of the other aspects pointed out in the case of Astley, whereby trustees may also face the risk of personal liability for misappropriation or improper investment of trust funds. Davis and Knowler in a discussion of contributory negligence, point out that the duty of care expected from a trustee requires him or her to place the interests of the beneficiaries on par with his/her own interests in terms of levels of skill and care that must be exercised in arriving at decisions20. A failure to exercise the required levels of skill and care would constitute a violation of trustee duty and may result in personal liability being attributed. On this basis, there is also the possibility that Michael and Claire Smith may be held to be personally liable for the liabilities the trust now faces. There is a question of accountability that also arises here. The trustees have a fiduciary responsibility to the beneficiaries of the trust. This indicates that a trustee is “obliged, or has undertaken, to act in relation to a particular matter in the interests of another and is entrusted with a power to affect those interests in a legal and practical sense.”21 It is the fiduciary responsibility, which is placed on a trustee that ensures that the trustee will act with responsibility and be accountable for decisions that are taken, utilizing the power of investment. Flannigan points out that when the assets of beneficiaries are placed at the disposal of trustees, there may be a temptation for the trustee to use those assets for selfish purposes, therefore it is necessary to more clearly delineate the requirements of fiduciary responsibility and the accountability that will arise as a result of it.22 It may however, be concluded that there may be a question of fiduciary accountability that may arise in this case due to the fiduciary duty associated with the functions of a trustee. As a result, the trustees Michael and Claire cannot escape accountability altogether, although it does appear likely that the Court may also find the solicitor to be liable. But Michael and Claire may also have a liability under contributory negligence. The expenditure of $20,000 paid to Forest Products Pty Ltd may be well justified because the trust deed authorizes the trustee, working through Woodcraft Pty Ltd, to engage in the business of wholesale and retail trade in furniture. Furthermore, since this business has also been successful, therefore the trustees will not be in violation of their duties as trustees if they make further investments into this business. On this basis, it may be argued that Forest Products Pty Ltd will have strong grounds to recover any dues owing to them, because the trustees have not violated their duties or acted against the interests of the beneficiaries in making this investment. As a result, such investments must be honored and payments due must be made. It appears very likely that the Courts may require Michael and Claire to pay this amount out of the trust assets and to compensate the shortfall, i.e, 15,000 pounds from their own funds. On the balance of investments that have been made for the horse breeding and real estate investments, it appears likely that the Courts may find the solicitor and the trustees liable for the debts and may require them to pay back the creditors, so that the interest of the beneficiaries are not compromised. Bibliography * Anderson, Frances and legal, Moores, No date. “Workchoices – the Australian Fair Pay and Conditions Standard what does it mean for your business?”, http://www.findlaw.com.au/article/14732.htm ; July 28, 2008 * Astley v Austrust Ltd, (1999) 161 ALR 155 * Australian Fair Pay and Conditions Standard; http://www.workplaceauthority.gov.au/graphics.asp?showdoc=/PayandConditions/fairpaystandard.asp; July 28, 2008 * Davis, Gary and Knowler, Jane, 1999. “Case note: Astley v Austrust, Ltd”, 23, Melbourne University Law Review, 795 * Flannigan, Robert, 2004. “The boundaries of fiduciary accountability”, New Zealand Law Review, 215 * Hanlon v Brookes (1997), 15 Australian Company Law Cases 1626 * Hitchins and Hitchins and Another (1998) NSW Lexis 2382; 47 New South Wales Law Review, 35 * Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 * Partnership Act of 1890 * Partnership Act of 1963 * Trustee Act of 1958, Section 6; http://www.austlii.edu.au/au/legis/vic/consol_act/ta1958122/s6.html ; July 29, 2008. 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