Procedures to Commence a Partnership Business - Assignment Example

PARTNERSHIP AND CORPORATIONS LAW STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Question 1 Procedures to commence a partnership business A partnership is an association of people carrying on a business together with the aim or intention of making a profit1. Generally a partnership is not a separate legal entity like that of a company and therefore the individual partners are bound by the other partners and by the partnership agreement whether written, or implied2. In the case of Hitchins v Hitchins3the court stated that a partnership cannot exist if it fails to meet the definition under section 1(1) of the Partnership Act 1892 that is the partners in this case were not carrying on a business in common. There are no special formalities that are required for one to enter into a partnership, there needs to be only the act of fact of carrying in a business in common showing that the individuals are operating as partners. In the case of Ex parte Coral Investments Pty Ltd4 the court held that there was a partnership between a finance company and a property developer despite there being a joint venture deed which was capable of being construed to constitute a partnership. The most important formalities in creation of a partnership: a) There have to be two or more partners; b) Carrying on a business in common (Hitchins v Hitchins (1998); c) With the intention of making a profit; d) If the partnership will last for more than one year, then it must be in writing and comply with the provisions of the Statute of Frauds. e) In most instances, a partnership is created by a partnership deed or an agreement which shows whether a partnership exists between two or more partners. Liabilities faced by Bill and Ben whilst operating their partnership The Partnership Act at section 24 (1)(1) states that the partners are entitled to share equally in the capital and profits of the business and must contribute equally to the losses whether capital or otherwise sustained by the firm. According to section 24(2) of the Partnership Act, the firm must indemnify every partner in respect of payment made and personal liabilities incurred by the partner in the ordinary or proper conduct of the business and secondly in or about anything necessarily done for the preservation of the business. When it comes to liability, each partner in a partnership has an unlimited liability for the debts and any obligations incurred by the partnership of the firm5. The Partnership Act at section 5 (1) views the partnership relationship as that of an agency as was held in Re Agriculturalist Cattle Insurance Co6 that as between partners and the outside world each partner is the unlimited agent of every other matter connected with the partnership business. This the liability of Bill and Ben are unlimited according to section 24 (1) of the Partnership Act and it is not restricted to the extent of the investment of the partner in the business. Could Bill and Ben have restricted their liability as a partner? As a general rule, according to section 24 (1) (1) of the Partnership Act partners must contribute equally to the losses whether capital or otherwise as sustained by the firm or the business. In creating a partnership where the liabilities of the partners are restricted, then it would become a limited liability partnership and must be registered under the Limited Partnership Act. The Partnership Act under section 10 and 11 deals with liability of partners in cases where liability is joint or several. In this case if the partnership liability is restricted the partners who incurs losses may sue any or all the other partners Question 2 The area of law applicable in this section is the incorporation of a company. The Corporations Act (CA) 2001 (Cth) under section 148 requires that a company must use A.C.N Ltd, Pty Ltd, Pty and NL must form part of the name of the company. A company must not use identical or unacceptable names under section 147 of the CA and that a company may reserve a name prior to registration under section 152 of the CA. The CA under section 138 is clear that a company can adopt a constitution prior to or after registration the members having passed a special resolution. The Constitution of a Company forms the internal governance rules of the corporation creating a statutory binding agreement with the members of the company under section 140 (1) of the CA. It is clear that in registering a company, one must lodge a form under section 117 of the CA. Bill and Ben having decided that the business is growing and selling garden plants, then they need to decide on the type of the company and reserve a name for the company at the Australian Securities and Investments Commission (ASIC)7 Flowerpot Pty Ltd. a) They should then lodge the form of incorporation under section 117 of the Corporations Act the type of the company, name and addresses of its members, the address of its registered office and place of business, the details of the shares it has issued to its members. b) The Constitution of the proposed Company Flowerpot Pty Ltd need to be lodged together with the lodge form. c) Flowerpot Pty Ltd needs to be registered according to section 119 of the Corporations Act and registration is done by whose powers at to register and regulate corporations. After successful registration Flowerpot Pty Ltd will be issued with a certificate of incorporation. Thus in incorporating Flowerpot Pty Ltd Ben and Bill must comply with the provisions of the ASIC Act (2001) and the CA. They must have a name, a constitution, registered address for their business, a company seal or logo, the name and addresses of the directors and the capital shares of each of the members. Describe the Liabilities faced by Flowerpot Pty Ltd and each of its shareholders if Flowerpot Pty Ltd is wound up Winding up is the means by which a company is liquidated that is the collection and realisation of its assets and from that realisation, they proceed to pay creditors in order of priority and then proceed to pay the members after the adjustment of the rights of the shareholders8. There are two ways of winding up a company that is voluntary winding up and winding up by the courts. According to section 9 of the CA the liabilities of its members is limited to the unpaid amount on the share capital this is where the company’s liability is limited by shares. In this case Flowerpot Pty Ltd issues 300,000 shares for $1.00 each that is 100,000 to Bill, 100,000 to Pansy and 100,000 to Ben. The shares issued to Pansy are paid up to 60% while those of Bill and Ben are fully paid on issue having been paid for by the transfer of the partnership business. In accordance with section 9 of the CA the liabilities of its members is limited to the unpaid amount on the share capital, and therefore Pansy will be paid only the 40% unpaid on the share capital while Ben and Bill will be paid the full 100,000 paid on the share capital. How would the liabilities of Bill, Ben and Pansy as Shareholders be different if the Company was registered as Flowerpot Pty? The CA at section 9 defines a limited Company to means that the company is limited by shares, it is limited by a guarantee or that the company is limited by both shares and guarantees but it does not include a no limited liability company. The CA at section 9 states that a no-limited liability company is a company that is registered or converts to a no liability company. A no liability company can convert under Part 2B.7 of the CA and that under subsection 112 (2) it must be solely for mining purposes and have no contractual right to recover unpaid calls. The CA at section 148 states that a company must use limited or Ltd in registering accompany. Question 3 A liability under section 9 of the CA refers to a debt, a liability or an obligation. A director is not a promoter, and a promoter acts on behalf of the company during the period that leads to registration of the company. In the case of Twycross v Grant, it was stated that an active promoter is one who undertakes to form the company. The promoter of a company owes a fiduciary duty to the company as well as to the potential investors in the company. Whilst acting as a fiduciary a promoter must act in utmost good faith, must not act induced by conflict of interest as held in Erlanger v New Sombrero and must disclose their undertakings to the board or in the general meeting. It is important to state that as was held in Kelner v Bexter at common law a company cannot enter into contractual obligations before its incorporation and at the same time the company and the promoter will not be liable as held in Black v Smallwood. This means that under common law a promoter acting as an agent cannot bind a non-existent principle. However statutorily under section 131 of the CA if a person enters into a contract on behalf of or for the benefit of the non-existent entity the company is bound if it is formed and when the company ratifies the agreement within that time or else the person or agent will be liable. Further under section 131 (4) if the Company ratifies the agreement and it fails to meet the obligations then the person will be liable. In this case, Ben signed the agreement with the governor in May as the agent of Flowerpot Pty Ltd prior to its incorporation in June, this means Ben acted as a promoter within the meaning of section 131 of the CA. It is important to note that in October Flowerpot Pty Ltd told the Governor’s department that it could no longer supply the plants and this meant a breach of contract. This means that it failed to meet the obligations of the agreement and in invoking section 131 (4) of the CA Ben will be liable for Flowerpot Pty Ltd.’s failure to meet the pre-incorporation contract obligation. Question 4 Explain why Conn Bank may be able to recover $25,000 personally from Bill The duties of a director under the CA include the duty of care and diligence (s.180), duty not to make improper use of their position or information (s. 182-183), duty of good faith (s.180) , duty not to trade while insolvent (s. 588G) amongst other duties. In the case of Salomon v Salomon & Co Ltd9 the court stated that a company is a separate legal entity, separate from the individuals creating it with limited liability responsible for its actions. According to section 588G of the CA, ‘a company is responsible for its debts and if a director allows an insolvent company to trade the courts can lift the veil of incorporation and make directors personally liable for the debts of the company’. Conn Bank can recover the $25,000 personally from Bill because Bill knew that Flowerpot Pty Ltd was in financial difficulties and could not repay the loan borrowed from Bigbucks Bank Ltd and he lied to Conn Bank that the amount was required to pay Flowerpot’s Pty Ltd garden accessories but was instead used to pay interest to BigBucks Ltd. Flowerpot Pty Ltd having become insolvent under section 588G of the CA, Bill ought to have reported the issue to ASIC or its members in order to invoke either statutory winding up or voluntary winding up by the resolution of its members. Question 5 Discuss separately the constitutional rules (i) and (ii) above indicating whether you consider them as valid The Constitution of a Company binds the members of the company as well as it personalises the structure of the company10. Rule (i) states that “the company’s activities are restricted to operating a garden business and it will have only legal responsibility should it engage in any other activity”. This restricts the company to only operating in garden business. The company will therefore not be liable for any activities that are not related to garden business except that which is provided by the law. The implication of rule (i) is that in order for the company to engage in other activities, then the constitution must be modified or repealed. According to the CA at section 136 (3) at least 90$ of the shareholders must approve the modification or repealing of the entrenching provisions in the constitution and this repeal must be lodged with ASIC. Rule (ii) states that “Bill will be a permanent director of the company”. In stating that Bill will be a permanent director of the company this means that Bill cannot be removed from office as director unless by a special resolution passed by the members to remove him as a director of the company. The future implication of Rule (ii) is that for Ben to be removed from being a permanent director then the constitution of the company needs to be modified or altered under section 135 (2) of the CA. According to section 136 (2) of the CA, the constitution can be amended or altered through a special resolution by the members or the board of the company. In seeking to pass a special resolution, a 21 days’ notice must be given to the members and that 75% of the members who are present must be entitled to vote and 75% must vote in favour of replacing Ben as the permanent director. References Australia CCH, (2011). Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Volume 1 of the Australian Corporations and Securities Legislations 2011. CCH Australia Ltd Corporations Act 2001 (Cth) Hanrahan, P., Ramsey, I and Geof, S. (2014) Commercial Applications of Company Law. 15th ed. Australia: CCH Latimer, P. (2012) Australian Business Law. Sydney: CCH Australia Limited Partnership Act 1892 List of Cases Black v Smallwood. Erlanger v New Sombrero Ex parte Coral Investments Pty Ltd Hitchins v Hitchins Kelner v Bexter Re Agricultralist Cattle Insurance Co Salomon v Salomon & Co Ltd [1987] AC 22 Twycross v Grant, Read More