The Partnership Between Mr Walker and Mr Melham: Six Issues to be Determined by the Court - Research Paper Example

Answers to the questions regarding the New South Wales Supreme Court decision of Robert Mark Walker v Rodeney Derane Melham[2007] NSWSC 264 (9 March 2007). 1. When did the Plaintiff argue that the partnership had dissolved? The Plaintiff, namely, Mr. Robert Mark Walker argued that partnership agreement between him and the defendant Mr. Rodney Derane Melham was valid and was in force up to 18th November 2005. 2. When did the Defendant argue that the partnership had dissolved? Mr. Melham, the defendant argued that the partnership between Mr. Walker and himself had dissolved on May 1994, when Mr. Walker walked out of their Ski Lodge called River Gum Lodge declaring that he (Walker) no more was prepared to work alongside Mr. Melham on a day-to-day basis. 3. What were the issues to be determined in this case? There were six issues to be determined by the Court in this case. (i) The first issue was to ascertain the date of dissolution of the partnership agreement between the two parties. The plaintiff argued that it was 18th Nov, 2005 and the defendant argued that it was in May 1994. (ii) The second issue was whether the land was a partnership asset, or whether the partners made use of the land without its becoming partnership asset. (iii) The third issue was about the status of the land as an asset with respect to the partnership. The Court had to decide upon how an account should be taken, given that Mr. Walker mortgaged his interest in the land and the very same interest was purchased by Mr. Melham later on from QBE, with whom Mr. Walker had mortgaged that interest. (iv) The fourth issue before the Court was to find out whether the plaintiff had abandoned any claim in the share of the profits derived by the defendant’s continuing to carry on the business s of the partnership, attributable to the plaintiff’s share of the partnership assets. The Court has to determine whether the plaintiff had abandoned any claim to interest as provided for by s 42(1) of the Partnership Act 1892. (v) The fifth issue was to determine whether the plaintiff was prevented in claiming a share of profits made after dissolution of the partnership attributable to the use of his share of the partnership assets, due to the delay in seeking legal claim. The Court had to take a decision whether Doctrine of Laches was applicable in this case. (vi) The last issue was about the declaration of the date of dissolution of partnership. The Court was forced to find out the specific date of dissolution of the partnership as both the parties differed in their arguments relating to the date of dissolution of the partnership. 4. How did Justice White describe the nature of the partnership between Mr. Walker and Mr. Melham? According to Justice White, Mr. Walker and Mr. Melham had entered into a partnership for an undefined term that could be dissolved by either partner giving notice to the other of his intention to dissolve the partnership within the purview of Part A Partnership Act, ss 26(1) and 232 (c ). The terms of the partnership agreement call for active involvement of both the partners in the partnership business. They were to contribute, not only capital equally, but were to contribute their time and labour equally. 5. Did the Court find that Mr. Walker abandoned the partnership? Does abandonment amount to termination of the partnership according to the Court? The Court was satisfied that the plaintiff had abandoned the partnership virtually after their talk sometime in May 1994. The Court pointed out that Mr. Walker ended up their conversation with the statement, “Well, you can keep the fucking lot”. Mr. Melham retorted him by saying, “All right. I’ll run the place on my own”. The action of Mr. Walker bringing a truckload of firewood to the Ski Lodge in 1995 while Mr. Melham was absent will not amount to the extension of the dissolution date. Since equal share of time, money and labour are requisite for the continuity of the partnership; the action of Mr. Walker of not contributing them, after the fateful talk committed sometime in May 1994, undoubtedly established that the partnership became inoperative after the very crucial date of abandonment. Therefore, the abandonment on the part of Mr. Walker marked the termination of the partnership between the parties, according to the Court. The Court held the opinion that abandonment of basis on which partnership conducted amounted to abandonment of partnership and the abandonment would operate as notice of intention to dissolve partnership. In this regard the Court held the view of Higgins & Flecher. (Higgins &Flecher, The Law of Partnership in Australia & New Zealand, 8th ed (2001) Sydney, LBC Information Services, pp 216-217) 6. Why did Mr. Walker and Mr. Melham change their positions as to whether or not the land was a partnership asset? As per the provisions contained in the Victorian Partnership Act 1958 s 24 and as per the subs 20(1) and 20(30) of the New South Wales Act 1892, land held in the co-ownership might not be partnership property, although the co-owners are partners and profits were made from the use of the land. Here the issue was whether the land of the Ski Lodge was an asset of the partnership, or whether it was purchased from distributed partnership profits. Moreover it was not treated as partnership asset in accounts. The Court held that the land was not a partnership asset. Outgoing partner was entitled to have a share of value of net partnership assets as on the date of dissolution of the partnership. Plaintiff had entitlement to interest on this share of value of net partnership assets. That was why Mr. Walker and Mr. Melham often changed their positions as to whether the land was a partnership asset or not. Initially they said that the land was purchased by their personal money, and then stated that it was purchased from the distributed partnership profits. Mr. Walker wanted that share of the profit earned by the use of the land, but Melham wanted to retain the profit with him. But the Court held that the land purchased from distributed partnership profits could not be treated as partnership asset in accounts. 7. Did the Court find that Mr. Walker was entitled to an account of profits in relation to any partnership asset? Explain your answer. No. The Court found that Mr. Walker, the outgoing partner, was entitled to only the share of value of net partnership assets as on the date of dissolution of the partnership. The plaintiff was entitled to have interest on his share of value of net partnership assets as at the date of dissolution of the partnership. The Court declared that the partnership assets do not include land in certificate viz., River Gum Lodge. The Court also observed that the profits earned by the defendant after the dissolution of the partnership could not be taken into account as it was difficult for him to account it, as to what and wherefrom the profit was originated. However the Court declared that the plaintiff was entitled to simple interest at the rate of six percent per annum on the amount of his share of the partnership net assets as so determined. Part B – Partnership Act 1892 (NSW) and Corporations Act 2001 provisions: (1). Find section 32(c ) and section 42(1 ) of the Partnership Act 1892 (NSW) Section 32(c) Dissolution by expiration or otherwise, subject to any agreement between the partners, a partnership is dissolved: If entered into for an undefined time, by any partner giving notice to the other or others of the partner’s intention to dissolve the partnership Section 42(1) Right of outgoing partner in certain cases to share profits made after dissolution: Where any member of a firm has died, or otherwise ceased to be a partner, and the surviving and continuing partner carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner, or the partner’s estate, then, in the absence of any agreement to the contrary, the outgoing partner or the partner’s estate is entitled, at the option of the partner or the partner’s representatives, to such share of the profits made since the dissolution as the Court may find to be attributable to the use of the partner’s share of the partnership assets, or to interest at the rate of six per centum per annum on the amount of the partner’s share of the partnership assets. (2). In which section of the Corporations Act is ‘accounting standard’ defined? What is the definition? Section 9 of the Corporations Act defines ‘accounting standard’. Accounting standard means ‘an instrument in force under section 334’ or a provision of such an instrument as it so has effect. (3). Find the sections of the Corporations Act that govern (i) A company's name : CORPORATIONS ACT 2001 - SECT 148 Company may use available name or ACN (1) A company may have as its name: (a) an available name; or (b) the expression "Australian Company Number" followed by the company's ACN. The name must also include the words required by subsection (2) or (3). (2) A limited public company must have the word "Limited" at the end of its name unless section 150 or 151 applies. A limited proprietary company must have the words "Proprietary Limited" at the end of its name. (3) An unlimited proprietary company must have the word "Proprietary" at the end of its name. (4) A no liability company must have the words "No Liability" at the end of its name. (5) A public company must not include the word "Proprietary" (or an abbreviation of it) in its name unless: (a) it was a public company before 1 July 1998; and (b) the word "Proprietary" (or an abbreviation of it) was included in its name before 1 July 1998. (ii) Changing of a company name: CORPORATIONS ACT 2001 - SECT 157              1)  If a company wants to change its name, it must: (a)  pass a special resolution adopting a new name; and (b)  lodge an application in the prescribed form with ASIC.              2)  The company must lodge a copy of the special resolution with ASIC within 14 days after it is passed.              3)  If the proposed name is available, ASIC must change the company’s name by altering the details of the company's registration to reflect the change. The change of name takes effect when ASIC alters the details of the company's registration. (4). Find the section in the Corporation Act 2001 that gives ASIC the power to make class orders: CORPORATIONS ACT 2001 - SECT 601QA - ASIC's power to make class orders (1) ASIC may: (a) exempt a person from a provision of this Chapter; or (b) declare that this Chapter applies to a person as if specified provisions were omitted, modified or varied as specified in the declaration. Without limiting this, ASIC may declare that this Chapter applies to a person as if section 601HA included a requirement for scheme property to be held by a person other than the responsible entity as the responsible entity's agent. (2) The exemption or declaration may: (a) apply to all or specified provisions of this Chapter; and (b) apply to all persons, specified persons, or a specified class of persons; and (c) relate to all securities, specified securities or a specified class of securities; and (d) relate to any other matter generally or as specified. (3) An exemption may apply unconditionally or subject to specified conditions. A person to whom a condition specified in an exemption applies must comply with the condition. The Court may order the person to comply with the condition in a specified way. Only ASIC may apply to the Court for the order. (4) The exemption or declaration must be in writing and ASIC must publish notice of it in the Gazette. (5) For the purposes of this section, the provisions of this Chapter include: (a) regulations made for the purposes of this Chapter; and (b) definitions in this Act or the regulations as they apply to references in: (i) this Chapter; or (ii) regulations made for the purposes of this Chapter; and (c) the old Division 11 of Part 11.2 transitional. (5). Which section of the Corporations Act deals with members obtaining information about directors’ remuneration? Members may obtain information about directors' remuneration: CORPORATIONS ACT 2001 - SECT 202B (1) A company must disclose the remuneration paid to each director of the company or a subsidiary (if any) by the company or by an entity controlled by the company if the company is directed to disclose the information by: (a) members with at least 5% of the votes that may be cast at a general meeting of the company; or (b) at least 100 members who are entitled to vote at a general meeting of the company. The company must disclose all remuneration paid to the director, regardless of whether it is paid to the director in relation to their capacity as director or another capacity. (2) The company must comply with the direction as soon as practicable by: (a) preparing a statement of the remuneration of each director of the company or subsidiary for the last financial year before the direction was given; and (b) having the statement audited; and (c) sending a copy of the audited statement to each person entitled to receive notice of general meetings of the company. Part C: How to operate a business as a sole proprietor or as a company Introduction: The right structure for conducting a business depends upon the type of business, the number of owners the business will have and the financial situation of the business; It has to be taken into consideration that a single choice will not suit every business. An individual will have to choose the structure which best meets his/her needs. The important factors to be considered when choosing a business type are: i. The probable risks and liabilities of the business ii. The rules and regulations and operating expense needed in instituting and preserving the several business structures iii. The income tax situation, and iv. The investment needs. The simplest business structure trading under its own name is a sole trader form of business. The business can be operated in one’s own name or under a registered business name. This form of business is managed by the sole trader himself and he personally is responsible for all debts and liabilities. Aptness of sole Proprietorship Form of Business: A sole proprietorship form of business organisation is suitable: i) If the market for the product is small and local like selling grocery items, books, stationery, vegetables, etc. ii) If the customers have to be given personal attention based on their personal tastes and preferences like making special type of furniture, designing garments, etc. iii) The business is simple in nature like having a grocery, garments business, or telephone booth, etc. iv) The capital requirement is small and risk involved is not heavy like selling vegetables and fruits or having a tea stall, etc. v) If any manual skill is required like making jewelry, haircutting or tailoring, cycle or motorcycle repair shop, etc. Procedures involved in formation of a sole proprietorship: One of the great features of a sole proprietorship is the simplicity of formation. Little more than buying and selling goods or services are needed. In fact, no formal filing or event is required to form a sole proprietorship; it is a status that arises automatically from one's business activity ( Michael Spadaccini, 2004). Also it should be noted that not much of legal formalities are involved in starting a sole proprietorship. Company A company is an autonomous legal entity and can do business in its own right. The shareholders are the owners of the company and the directors conduct the business of the company.  The directors of a company or its employees can be its shareholders. In most cases if a person sues a company the person suing will only have resort to the assets of the company, and not the assets of any directors or shareholders.  Forming a company: (Doing business in Australia - Chapter two) A company need not have its own separate constitution unless it wants to alter or add to the replaceable rules. A company must maintain a registered office open to the public. An accountant's office is often used for this purpose. Directors: The Board of Directors is the chief controlling body of a company and this board is appointed by the shareholders. A public company must have at least three directors, two of whom are ordinarily resident in Australia, and at least one company secretary. A proprietary company must have at least one director who ordinarily resides in Australia. Audit requirements and practices: All companies must appoint auditors to annually report on their financial reports. Difference between a sole proprietorship and a company: (http://www.essortment.com/career/limitedliability) Legal Protection: In a sole proprietorship, the individual owner and the company are one and the same. This means that if someone sues the business, then the personal assets of the owner like his car, home, etc can be utilised for paying off the debts. Where as the company is a separate entity from the owner. If a person sues the company, only the assets of the company can be used to pay any legal judgment. The personal assets of the owner are safe. The main purpose of incorporating is to separate an individual from legal liability of a company. The veil of incorporation ensures that a company is a separate legal entity from its directors and shareholders, thus protecting the personal assets of owners and investors from lawsuits. The veil of incorporation was brought about in the case of Solmon Vs. Solmon where by it was decided that the company is a separate entity and the owners are separate. But this protection is limited when the owner is personally negligent for wrongdoing by the company. Credit Every new business needs some type of capital to start with. Because a sole proprietorship is owned by the person running it any credit and debt is the sole responsibility of that person. If the business fails and loans cannot be repaid, the owner of the business is completely liable for that bad debt. But when it is a company then the business is a separate entity from the owner. This means that if the business fails, the debt would not be the sole responsibility of the owner. Application for credit also differs. If it is a sole proprietorship, the credit history of the owner is the sole basis in determining whether the business is a good credit risk. If the owner has bad credit then getting finance becomes difficult. Since a company has a separate entity from the owner, getting financed can be easier. Legal Requirements Another major difference between these two business entities is the requirements to maintain the legal status. Because a sole proprietorship is a business based on the name of the owner, no special fees are typically required. While the business will probably still need to obtain a business license in the area in which it is doing business, the company will not have to draw up paper declaring its status. With a company, the business will need to register itself as such. In most places, the forms to do this are fairly simple. Advantages of a sole proprietorship: The chief advantages of sole proprietorship are that it is comparatively easy to wind up or sell such a business. The expenses incurred in establishing and operating the business are generally less than those of other structures; and, apart from an individual tax return, there are generally no other reporting or disclosure requirements. On the death of the sole proprietor, the business will cease although it may be sold by the deceased’s personal representatives. The main disadvantage of a sole proprietor is unlimited personal liability for his/her business obligations and debts. There are also some income tax disadvantages in operating this way. For instance, there is at present a significant difference between the highest rate applicable to an individual's taxable income (48.5%) and that applicable to a company (30%). Advantages of a Company: Separate entity: The business is a separate entity from the owner. Protection of corporate veil is limited and is not applicable when the owner is personally negligent for wrong doing by the company. (Paul Redmond, Companies and Securities Law: Commentary and Materials, 2nd ed. (1992), at p. 417.): "[there is a duty] to avoid situations where, without the consent of the company, the director's interest (or that of another whom the director is bound to protect) conflicts or may possibly conflict with his or her duty to the company." Absent provision in the articles or disclosure to and approval by the shareholders, the director's interest makes the contract voidable, and it is irrelevant the deal it represented was fair to the company: Aberdeen Rwy v Blaikie Bros - (1854) 1 Macq. 461; [1843 - 1860] All E.R.. Rep. 249 (H.L.). If there is no provision in the articles, it would not matter if revelation were made to fellow directors, as the company is entitled to the advice of all of its directors: The Liquidators of the Imperial Mercantile Credit Association v. Coleman (1871) L.R. Ch. App. 558 (C.A. in Ch.). Disclosure would then have to be made to the general meeting for absolution by it, assuming that was within its power: below. If there is an article permitting a director to retain a benefit if he or she discloses the interest to the board and abstains from voting there, then the director must make full disclosure to fellow directors: The Liquidators of the Imperial Mercantile Credit Association v. Coleman (1873) L.R. 6 H.L. 18 (a director had an interest as partner in broking firm which stood to make commission on placement of shares to his corporation, which apparently itself would replace them, albeit at lower commission; at the meeting, he simply declared he had an interest, without specifying it; HELD, liable for whole commission his partnership earned thereby, not just his share). Advantages of a company (http://www.business.qld.gov.au/virtual) Limited liability One of the biggest advantages of the company structure is that the legal liability of the company's shareholders is limited to their share capital (that is, how much money they pay for their shares in the company). This means that, in most cases, the personal assets of shareholders cannot be seized to pay company debts. Rather, only the assets of the company can be used to pay the company's debts. However, company directors may still be liable for any debts, liabilities and legal actions held against their company in certain circumstances, such as when the directors have allowed the company to continue trading when insolvent (http://www.business.qld.gov.au/virtual/topics). Pay less tax Companies may also pay less tax than other business structures such as sole traders or partnerships. Companies are taxed on their profits at the company tax rate, which may be lower than the marginal tax rates of its individual shareholders. When shareholders receive company dividends that the company has already paid tax on, they will often receive tax credits through the company imputation tax system. This means that the tax paid by the company is already taken out and shareholders' dividends are given credits for the tax already paid by the company. Tax implications are discussed later in this fact sheet (http://www.business.qld.gov.au/virtual). Continuity A company structure can ensure continuity of management and ownership in the event of the death or disability of key people in the business because shares in companies may be transferred. Control The structure of the company can effectively separate the management and ownership aspects of the business. For example, the managers of the business can be appointed directors of the business. The owners of the business are its shareholders. Australia wide (http://www.business.qld.gov.au/virtual) Under the Corporations Act 2001 (Commonwealth), once your company is registered in one state it’s free to trade in all states, provided your Australian Business Number is on all business stationery. Disadvantages of a company (http://www.business.qld.gov.au/virtual) Operating costs The different costs include costs of preparing and submitting annual statements, keeping ASIC informed of any changes to the company's structure, officeholders or operations, and any fees for accounting and legal services. Company administration can also require the directors, and more particularly the company secretary, to spend a lot of time attending to company paperwork. Responsibilities of directors The directors of the company have certain legal obligations. If directors fail to meet these obligations they may be held personally liable for the debts of the company. References: 1. Michael Spadaccini, 2004 Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, Entrepreneur Press. http://www.business.qld.gov.au/virtual/topics/pageSurround_OSB.cfm?displayID=18069 Read More