Whether the DNC Firm Constitutes a Partnership Firm - Case Study Example

Law Problem Problem 1 Issue The issues to be considered are; first, whether the DNC firm, which was started by Alvarez and Zara, and which offers security services, constitutes a partnership firm. Second, whether Alvarez is liable for the crime committed by Zara, while discharging his duties. Third, whether the jewellery company has any remedy against the DNC firm for the losses suffered by it, due to the theft. Fourth, whether Alvarez has any interest or right over the properties purchased by Zara with the funds received for his illegal act. Rule In accordance with section 5(1) of the Partnership Act, if business is being carried on, in common for making a profit, then such business is termed a partnership business. Section 13 of the Partnership Act 1891, renders a partner jointly and severally liable for any criminal act of a partner, while conducting the regular business of the firm. This section goes on to specify the wrongful deeds and describes the firm’s liability, with regard to any penalty that had been sustained, consequent to the misdeed. Analysis In the Canny Gabriel case the High Court held that if the understanding between the parties in partnership was inherently approved, then even a single business deal constitute a business for the purposes of the partnership Act (Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd , 1974). In our problem, Alvarez and Zara were conducting the security guard business in common for gain. Hence their business constitutes a partnership. Although section 13 of the Partnership Act renders the members of the partnership jointly and severally liable for the deeds committed by one of its members, it requires the approval of the other members. In our problem, no such authorisation was given by Alvarez to Zara. Moreover, Zara committed the misdeed without the knowledge of Alvarez. Hence Zara is personally liable for the crime, and the jewellery shop cannot proceed against DNC or Alvarez. In general, a partner would not have been authorised to commit criminal deeds, such as theft or homicide. Hence, no partner of a firm would be held liable for the criminal act of another partner in that firm (Latimer & CCH Australia Limited, 2009: 760). The decision in Polkinghorne v Holland provided a very important precedent relating to the legal status of a partnership firm. A partnership can neither initiate litigation nor be sued. Consequently, each partner in a firm can be sued for the acts of the partnership (Polkinghorne v Holland , 1934). However, in Walker and others v European Electronics Pty Ltd, it was held that the usual course of business of a partnership firm was to be ascertained via a reference to the agreement between the partners. Thus, in any litigation involving a partnership firm, it is indispensable to assess the nature and scope of the business being conducted by that firm (Walker and others v European Electronics Pty Ltd ). The Bishop v Chung Brothers case related to the violation of the trading hours legislation by the defendant. The latter were a partnership that compelled its factory workers to work beyond 2:30 pm on Saturdays. The court convicted the partners of Chung Brothers, in their personal capacity, in order to circumvent the according of a legal entity status to the partnership (Bishop v Chung Brothers , 1907). As per the case law discussed above, Alvarez cannot be held liable for the criminal act committed by Jara, while attending to the work of their security guard services firm. Moreover, Alvarez was unaware of the criminal conspiracy entered into by Jara with Daicot. Conclusion Thus, any legal action taken against the DNC will have to be restricted to the individual partners and not to the firm. Therefore, the law will convict the actual criminal, in this case Jara, for the crime committed. The DNC partnership firm cannot be made a party to this crime, and consequently, Alvarez will not be liable for the criminal acts of his partner. In our case, the DNC firm was in the business of providing security guard services. Now, the crime committed by Jara was of his own volition and did not involve any sanction from the DNC, either explicitly or implicitly. Hence, the DNC is not liable for the loss suffered by the owner of the jewellery store. Moreover, as Alvarez had neither aided nor abetted Jara in his criminal act, he cannot be held liable for the jewellery store’s losses. The jewellery store owner cannot file a case for compensation against Alvarez or the DNC. Jara had purchased the Gold Coast property, from the amount received from Daicot. Consequently, Alvarez can have no interest over this property. Problem 2 Issue The issues to be considered are; whether Henry and his spouse are personally liable for the amounts borrowed for the purposes of the trust. Whether the Farm Bank Ltd has got any remedies against Hendy for the amounts owed by them to it. Whether Henry and his spouse are responsible personally for the debts owed by the company Hendy Pty Ltd. Whether the creditors of the Hendy Pty Ltd have any recourse for recovering the amounts owed to them by the latter. Rule Section 197 of the Corporations Act 2001 (Cwth) deals with the personal liability of Directors, for the debts of the trustee companies. Hence, a creditor’s recourse to the assets of a trust is restricted by section 197 of the Corporations Act 2001 (Cwth). Section 588 G(2) of the Corporations Act 2001(Cwth) declares that the director is under an obligation to prevent the company from trading when it is insolvent or if it could become insolvent by incurring debts. Analysis In Gordon v Campbell it was held that trustees who incurred debts for the trust, purely in their capacity as trustees, would be not be personally liable. Hence, the liability, in such instances is limited to the trust funds (Gordon v Campbell , 1842). A director of a company is required to prevent his company from trading, when the company is insolvent. This is the objective of section 588 of the Corporations Act 2001 (Cwth). Moreover, a director infringes this section at the time of incurring a debt, if it could be reasonably anticipated that the company is either insolvent or would become insolvent (Duties of Company Directors). In the ASIC v Plymin, Elliott and Harrison, the Court ruled that inactivity or failure to make any attempt to prevent the company from incurring debt, by a director, would be tantamount to failure to prevent the incurring of debt, as provided for in section 588 G(2) of the Corporations Act 2001 (ASIC v Plymin, Elliott & Harrison (No 2) , 2003). This case is not applicable to our problem since the trust incurred debt for the betterment of the business. A trust, per se, is not a legal person that can sue or be sued in its own name. It is possible for trustees to preclude legal liability by an express proclamation that they are acting as trustees and that they do not accept any personal liability. The formation of a $2 company restricts the liability of the trustee to its share capital, namely $2 (Latimer & CCH Australia Limited, 2009: 700). A creditor’s recourse to the assets of a trust is restricted by section 197 of the Corporations Act 2001 (Cwth). Consequently, full indemnity against liability cannot be claimed by a director acting as trustee, if a breach had been committed by that trustee, or if that trustee’s actions had been ultra vires of the powers vested in it (Tan & Mcleod, 2007). In our problem, no such violation of powers had occurred. Hence, indemnity can be claimed against liabilities of the trust by the directors. However, in accordance with section 197 of the Corporations Act 2001(Cwth), the assets of the trust could be made available or personal liability could be attached to the directors of the trust under specified conditions. Consequently, the creditors have the option of recovering from the corporate trustee and its directors. In our case, Directors cannot be made personally liable, since no breach of Trust had taken place. Conclusion In our problem, the Farm Bank Ltd had disbursed the loan to Hendy Pty Ltd, with the knowledge that it was a trust. The trustee did not act in a manner that caused a breach of trust. Therefore, the trustee is indemnified against any liability resulting from its action. Hence, the Farm Bank Ltd can claim their dues from the assets of the trust. As such, it cannot hold the directors personally liable, for its dues. The other creditors can proceed against the assets of the Hendy Pty Ltd, only to a limited extent. As per section 197 of the Corporations Act 2001(Cwth), if a breach had been committed by the trustee, then full indemnity cannot be claimed. In our case, no such breach of trust had transpired; hence, the liability of the company will be restricted to its share value, in respect of its dues to its trade creditors, as it is a limited liability ($2) company. List of References ASIC v Plymin, Elliott & Harrison (No 2), VSC 230 (2003). Bishop v Chung Brothers, HCA 23 (1907). Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd , 131 CLR 321 (1974). Corporations Act 2001 (Cwth). (2005, March 2). Corporations Act 2001 Act No. 50 of 2001 as amended . Canberra, Australia. Duties of Company Directors. (n.d.). Retrieved August 30, 2010, from Oxford University Press: http://www.oup.com.au/orc/extra_pages/higher_education/chew_9780195561050/test_your_knowledge_sample_answers/chapter_11_duties_of_company_directors Gordon v Campbell , 1 Bell App 428 (1842). Latimer , P., & CCH Australia Limited. (2009). 2009 Australian business law. CCH Australia Limited. Partnership Act 1891. (2009). Queensland, Australia: Office of the Queensland Parliamentary Counsel. Polkinghorne v Holland , 51 CLR 143 (1934). Tan, R., & Mcleod, B. (2007, June). Limitations on Creditor's Rights of Subrogation. Retrieved August 26, 2010, from Russell Kennedy: http://newsbriefs.rk.com.au/BankingFinance/jun07/rights.htm Walker and others v European Electronics Pty Ltd , 23 NSWLR 1 (1990 – 1991). Read More