Business Organisations Law: Law 3105/3106 - Case Study Example

LAW 3105/3106: RESIT work I Type of Business Organisation Formed by Simon, Lee and James From the facts alleged in the problem, the business organisation formed by Simon, Lee and James point to the existence of a partnership. According to s. 1 of the Partnership Act 1890, a partnership is defined as “the relation, which subsists between persons carrying on a business in common with a view of profit.” However, a juridical person, like a company, may also be considered a person for purposes of forming a partnership (Sheikh 1999 p. 27). The existence of a partnership, unlike a corporation, is always a question of fact, and the presence or absence of partnership documents do not ipso facto proves or disproves its existence (Dabydeen 2004 p. 52). Thus, a person claiming the existence of partnership cannot simply offer papers documenting that partnership as sole evidence thereto but must also adduce facts proving that two or more persons had acted in commonality to carry out a business to benefit all of them. In the problem at hand, Simon, Lee and James had formed a partnership because the three of them agreed to engage in the business of car repairing, albeit without formal partnership documents, with Lee contributing to the economic capital and the other two their skills. In addition, the car repairing business was apparently established to benefit them. The term “business” according to the Partnership Act 1890 may include any trade, occupation or profession (s 45), the end purpose for which must be to make profit. In Britton v Commissioners of Customs and Excise [1986] VATTR 209, the Court held that a wife who received shares from her husband’s business did not necessarily make her a partner because partnership entails more than joint ownership. It necessitates that individuals explicitly agree to use properties and other resources for profit. Also, in Re Spanish Prospecting Co Ltd [1911] Ch 92, it was held that a partnership exists although the business was temporarily losing. The Court emphasised that what is important is that the business was set up with the intention to make a profit. In addition, profit must be reckoned by comparing the business’ condition at the beginning of the period with its condition at the end. Business structures may take the form of the following: sole proprietorship; partnership, and; companies with limited liability. Sole proprietorship, as the term implies, is a type of business organisation in which there is only one owner and is the simplest form of business structure for which the law imposes no formalities for its creation except perhaps, in the choice of business name. On the other hand, a simple company is one which is also owned by one person but that person is a juridical entity, created by fiction of law, whose personality is distinct and separate from its members that comprise such company. And then there is the partnership, which could take the form of either general or limited (Nayler 2006 pp. 132-148). Obviously, the partnership formed by Lee, James and Simon was not a sole proprietorship because of their number. On the other hand, it was neither a company because of the liability factor and the absence of incorporation. A company is a juridical entity and has a personality separate and distinct from its owners whilst in a partnership, the individual owners retain their separate individuality from the business structure they formed. The implication is that any liability of the business is shouldered by the company, or the juridical entity, and not by its shareholders in their individual capacity. A company is endowed a legal personality through incorporation, a process of complying with the requirements set forth under the Companies Act 1985 (Kelly & Holmes 2002 p. 342) Relevant to this is s. 2 of the PA 1890, which provides for the measure of gauging the existence of partnership. The following are not deemed partnership: joint tenancy, tenancy in common, joint property, common property or part ownership; sharing of gross returns regardless of the ownership of the returns; the receipt of a share in the business; profits is a prima facie evidence of being a partner but does not in itself, alone, makes one a partner. In Davis v Davis [1894] 1 Ch 393, two brothers inherited their father’s business, along with some real properties, and continued its operation. The issue was whether they are in a partnership or not. The Court declared in the affirmative because their conduct showed that they were engaged in the carrying on of a business for profit. In addition, their conduct also showed that they intended to share profits and losses. In Cox v Coulson [1916] 2 KB 177, someone in the audience was shot by an actor inadvertently during the play. The victim sued the theater owner who received 69% of the gross takings of the play and not the touring manager who received the remaining 40% of the gross takings. The Court held that the sharing of the takings between the two did not ipso facto imply the existence of partnership and therefore, one cannot be made liable for the other’s responsibility. In Strathearn Gordon Associates Ltd v Commissioners of Customs & Excise [1985] VATTR 79, a management consultant company alleged that it should not be assessed VAT for its services to seven separate enterprises because it became part of them on the ground that it was receiving shares of the profits from each as payment. The Court disagreed contending that receipt of shares of a partnership’s profit does not automatically make one a partner thereto. II Type of Partnership Formed by James, Lee and Simon There are three known types of partnership under UK law: general or standard partnership; limited partnership, and; limited liability partnership (Kelly & Homes 2002 305). A general partnership is one where all the partners equally share rights as well as liabilities of their business. The act of one partner with respect to the business can bind all the other partners. One of its advantages is that the business is not taxed because taxes are passed on to individual partners and incorporated in their respective individual income tax. On the other hand, a limited partnership is one which allows one, or some but not all, of its partners to limit his liability to the extent of his contribution to the business. However, at least one of the partners must have general liability and such a partner or partners are also given the prerogative to manage and make business decisions. Finally, a limited liability partnership, governed by the Limited Liability Partnership 2000 and has, in effect, altered the general conception of ‘partnership’ allows a separate juridical personality from its members, enjoys perpetual succession with membership changes unaffecting it and partners are liable only to the extent of their contribution to the partnership (Kelly & Holmes 2002 pp. 305-306). The partnership formed by James, Simon and Lee can be classified as a general partnership because both limited partnership and limited liability partnership require registration as a prerequisite under s. 5 of the Limited Partnership Act 1907and s. 2 of the Limited Liability Partnership Act 2000, respectively. In the present case, none of the incorporation requirements were met by the partnership. Moreover, partners themselves can be classified as equity partners, fixed equity partners, salaried partners and sleeping partners. Equity partners and fixed equity partners both share in the profits of the business but the equity partner takes a higher priority over the other who receives only the remaining profit. A salaried partner, as the name implies, is one who receives salary from the company much like an employee would but on a higher level. A sleeping or dormant partner is one whose contribution to the partnership is financial capital and is usually not involve in the actual management of the business. However, he is still liable to third parties for partnership debts and obligations (Sheikh 1999 pp. 28-29; Ramsey & pp. 233-234). In the present problem, Lee can be classified as a sleeping or dormant partner because he contributed only money but did not participate in the day-to-day affairs and management of the business; James and Simon may be classified as equity partners because they contributed human capital and managed the conduct of the business on a day-to-day basis. Salaried partners are usually defined in a document where the terms thereof are indicated. In the case of Stekel v Ellice [1973] 1 All ER 465, a man hired an employee for a period of three years starting 1967 in his accounting firm, but the following year agreed to make the latter a salaried partner. The partnership document also included a provision for a future agreement which would promote the salaried partner to full partnership but this did not materialise. When relations broke down between the two, the salaried partner asked for the winding up of the partnership. The Court ruled that a partnership existed albeit the other partner did not share in the profits but was only receiving salary because the facts of the case satisfied the conditions of partnership and the conduct of both parties demonstrated its existence. III The Liability of the Partners A. James In this problem, one of the partners, James, sold a car, which is not owned by him to one of the partnership’s customer and absconded with the money. The nature of his liability will depend on how he came to acquire the car that he sold to another. If he got it from its owner without the latter’s permission the crime would be theft because it involves the appropriation of another’s property with intent to taking it. The Theft Act 1996 defines theft as a dishonest appropriation of “property belonging to another with the intention of permanently depriving the other of it” and such intention could either be to gain or for one’s own benefit (s. 1). Theft of a motor vehicle is specifically tackled under s. 12 of the same law. However, if the car was left with the partnership for the purpose of having it repaired, James is guilty with respect to the partnership law, at least, of improper employment of property entrusted to the partnership under s. 11 of the PA 1890. In the event Lee or Simon are sued upon to pay the loss to any of claimants, if appropriate under the circumstances, jointly or severally and they do pay, then they can go after James to pay them the amount they gave as payment to the claimant. B. Lee Albeit Lee was a dormant partner because his contribution to the partnership is only monetary and he did not take part in the management of the car repairing business, he is nevertheless, liable for all the obligations and liabilities of the partnership as well as all the acts of his partners. His obligations as a partner are set out in ss. 9 to 13 of the PA 1890. Section 9 lays down the general obligation of the partner, which is jointly with other partners in respect of the liabilities and obligations incurred by the partnership during the period of his being a partner. This is an obligation that is not co-terminus with his death because the liability persists and subsists even after to the extent that it remains unsatisfied. Under s. 10, a partner’s liability extends even to torts committed by the other partners if the tort occurred in the course of the business of the partnership and such liability is joint and several, according to s. 12 of the same law. Lee’s liability will depend on the circumstances of James’ action. Section 10 of the PA 1890 provides that the partners will be liable only for the acts of a partner if the wrongful act for which liability results was done in the course of the business of the partnership. If the taking of the car was unrelated to the business of the partnership despite it being sold to a customer of the partnership, then Lee is not liable because the partnership was not involved in the business of selling cars but only in car repair. However, if the car was left intentionally by its owner to the car repair shop of the partnership, then Lee is liable as a partner to such owner because the selling of the car was, at least, tortious, and done in the course of the business of the partnership. Under s. 11 of the PA 1890, partners are liable for the misapplication by a partner of monies or property received by him acting in the course of the business of the partnership. The extent of liability of partners for misapplication of one of the partners of property or money entrusted to the partnership is joint and several. This means that Lee alone may be held by the claimant-car owner to pay for all the losses owed to him or her by James without depriving Lee of recourse to go after Simon and James for their shares of the liability. The claimant may also choose to sue both Simon and Lee to pay severally for the amount of damages owing him. Since Simon has presently declared himself in a state of bankruptcy, then the claimant may then choose to hold Lee to pay all the damages owing to him. C. Simon Like Lee, Simon is also responsible and liable for the acts of James if such acts were done in the ordinary course of business of the partnership. If the car that was sold by James was owned by a customer who had left it for the purpose of having it fixed, then Simon, like Lee, is liable jointly and severally with James and Lee for the loss. If the car was taken, however, outside of the course of the business of the partnership, then Simon, like Lee is not liable for the acts of James despite the fact that the car was sold to a customer of the partnership. If damage is subsequently incurred by the buyer, who was a customer of the partnership, the partners are not liable for such because selling cars cannot be said to be done in the ordinary course of the partnership’s business since the latter is engaged in car repairing only. However, since Simon is presently in a state of bankruptcy and cannot therefore contribute or pay entirely any resulting loss to the car owner, if such car owner is a customer of the partnership’ business and had left his car for repair with James, then the implication here is that Lee will have to pay the entire amount to the claimant. References: Britton v Commissioners of Customs and Excise [1986] VATTR 209. Cox v Coulson [1916] 2 KB 177. Dabydeen, S. R. (2004). Legal and Regulatory Framework: For Business in the UK. Lincoln, NE: iUniverse. Davis v Davis [1894] 1 Ch 393. ENSORS. How Partnership are Taxed. http://www.ensors.co.uk/cms/filelibrary/How_partnerships_are_taxed.pdf. Limited Liability Partnership 2000. Limited Partnership Act 1907. Kelly, D. & Holmes, A.E. (2002). Business Law, 4th Edition. Routledge. Nayler, P. (2006). Business Law in the Global Marketplace: The Effects on International Business. Butterworth-Heinemann. Partnership Act 1890. Ramsey, V. & Telford, T. (2007). Construction Law Handbook. London: Thomas Telford. Re Spanish Prospecting Co Ltd [1911] Ch 92. Salomon v A Salomon & Co Ltd [1897] AC 22. Sheikh, S. (1999). Business Law and Practice Transactions Guide, 2nd Edition. London: Routledge. Stekel v Ellice [1973] 1 All ER 465. Strathearn Gordon Associates Ltd v Commissioners of Customs & Excise [1985] VATTR 79. Theft Act 1996. Read More