Business Structure in Which Mary, Fred and Chris Are Running the Cafe - Assignment Example

Company and Commercial Law Case Study By student’s name Course code+ name Professor’s name University name City, state Date of submission Question 1a Issue The issue is determining the business structure in which Mary, Fred and Chris are running the café. Rule Section 5(1) of the Partnership Act 1958 (Vic) defines a partnership as a relationship between people who are carrying on a business with the aim of making profit. Application The definition of a partnership under the Partnership Act 1958 shows that there are three elements that have to be met before a business can be referred to as a partnership. These elements are the carrying on of a business, which is in common and with a view or aim of making profit (Adams and Nehme 2015, 5). For the business structure being used to operate the café to be considered as a partnership, it must meet these three requirements. The first element is the carrying on of business. For parties in a business to be regarded as a partnership they must show that they have been carrying on a business. The courts have held that for persons to be considered to be carrying on a business, they need to establish some repetitiveness in their actions which constitute the business (Adams and Nehme 2015, 6). In Smith v Anderson (1880) 15 Ch D 247 the court held that carrying on of a business means the repetition of acts. It does not cover the performance of one particular act that is never repeated. This position was upheld in Ballantyne v Raphael (1889) 15 VLR 538 where the court held that a partnership cannot exist where there is an isolated act which is not repetitive. Based on the facts of the case, Mary, Fred and Chris started a business where they contributed equally to start the business of running a café. They started their business and ran it to the point that it became very popular with the local residents. This means that they conducted the business for more than once for it to attract customers. This means that their business meets the first criteria; it was conducted in a repetitive manner (CPA Australia 2016, 11). The second element is that the business must be carried on behalf or by all the partners. Although all partners need not take part in the running of a business, it must be shown that those running it are doing so on behalf of the other owners or partners to show that there is an agency relationship as was held in the case of Lang v James Morrison & Co. Ltd (1912) 13 CLR 1 (Adams and Nehme 2015, 6). Mary, Fred and Chris were all involved in the management of the business hence the second criteria is met. They business was carried on by all of them. The third element is the making of profits. Section 6(3) of the Partnership Act provides that the fact that a person is receiving a share or portion of the profits of a business is prima facie evidence that such person is a partner. In this case, Mary, Fred and Chris all agreed to share profits of the business which makes them partners. Conclusion The business ran by Mary, Fred and Chris is a partnership. Mary, Fred and Chris started running the café and did so for quite a while to the extent that the customers liked the place. This shows that they did so repetitively. They all were also involved in the running of the partnership which shows that the business was being carried out by all the partners. Lastly, they shared all the profits they made which is enough evidence showing that they were partners. This means that their business structure was a partnership. Question 1b Issue The issue in this section is determining whether it is Chris or the partnership that is liable for the second-degree burns suffered by the customer. Rule In Bazley v Curry (1999) 174 DLR the court held that for an employer to be held vicariously liable for the acts of the employee it must be shown that the tortious act committed by the employee is so closely connected with the nature of his employment that it would be just and fair to hold the employer vicariously liable. Application Where an employee commits a tort in the course of carrying out his or her duties under the employment contract, the employer can be held vicariously liable for the actions of the employee (Neyers 2005, 15). This doctrine arises from the fact that the employer has control over the actions of the employee in the course of the employment. The employee performs the duties assigned to him or her by the employer. This same doctrine applies to partnerships. Section 9 of the Partnership Act stipulates that every partner in a partnership is an agent of the other partners and the firm. As a result, the acts of each of the partners done in the usual way of business are binding on the other partners and the firm. The court in Bazley v Curry held that for an employer to held liable for the acts of the employee, the actions of the employee must be so closely connected with the nature of the employment or the duties assigned to him in the course of employment to make it fair for the employer to held liable. In the case of a partnership, it must be shown that the partner acted within the authority given to him. Further, as the court held in Polkinghorne v Holland (1934) 51 CLR 143, it must also be shown that the partner actions were done in the usual way of the business of the firm (Queensland Law Reform Commission 2015, 54). In this case, Chris served coffee without checking the temperature regulator of the coffee machine causing second degree burns to one of the customers. The thermometer of the coffee machine was already broken making it hard to regulate the heat of the water. The hot coffee served to the customer caused second-degree burns which had to be treated in a hospital. The actions that led to the injuries to the customer were done within the usual course of business of the firm since the partnership was a café business ran by the three partners. Chris also had the authority to make the coffee since they had agreed to run the café together. Section 14(1) of the Partnership Act provides that where a partner commits a wrongful act or omission causing injuries to a person who is not a partner in the firm, the firm is liable in the same way as the partner who has committed the wrong. Conclusion Based on the above discussion and the provisions of section 14(1) of the Partnership Act, the firm is liable to pay the damages to the customer who suffered second-degree burns. The actions that led to the injuries to the customer were performed in the course of the business and in the usual way of the business of the firm. The injuries occurred as Chris was preparing and selling coffee to a customer and in the process he served coffee that was so hot that it cause second degree burns to the customer. Further, since the partners had all agreed to take part in the management of the partnership, Chris had the authority to prepare the coffee for the customer as was the business of the firm. Question 2a Issue The issue is identifying the appropriate business form for Mary, Fred and Chris that would allow them to limit their liability and also sell shares of the business to families and friends. Rule The case of Salomon v Salomon & Co.Ltd (1897) is the locus classicus case in articulating the concept of a company being a separate legal entity. In this case, the court held that a company is a different person in law from the shareholders. Such shareholders are not liable except to the extent provided by the law (University of Sydney 2014, 7). Further, section 113(1) of the Corporations Act 2001 (Cth) provides that for one to change a business into a proprietary company, the company must have not more than 50 non-employee shareholders. Application Mary, Fred and Chris intend to limit their liability in the business and also to raise capital for the business by selling the shared to families and friends. It is only a company as a business vehicle that can allow them to transfer or sell their shares to other people in order to raise capital. While there are various types of partnerships that can help the parties to limit their liability, such partnerships do not allow the sale of shares as a mode of raising capital. This means that a company would be appropriate (University of Sydney 2014, 8). Regarding the liability of the owners of the business, a company limited by shares would be appropriate. The courts in the case of Salomon v Salomon held that a company is a different legal entity from its shareholders hence the shareholders are not personally liable for the debts or other obligations of the company. A company limited by shares would, therefore, help Mary, Fred and Chris to avoid personal liability for the debts of the company. One of the advantages of a company other than the issue of limited liability is the ability to transfer or sell shares. A shareholder of a company can sell their shares to another person within the rules or the constitution of the company (University of Sydney 2014, 2). In this case, Mary, Fred and Chris intend to raise capital by selling some of their shares to families and friends. The specifications as to the people the shares will be sold to means that the partners do not intend to sell the shares to any member of the public. As a result, a public company would not be suitable since they would have to sell the shares to the public and comply with the legal requirements that apply in the process of conducting an initial public offering. The suitable business form would be a proprietary company limited by shares. This means a private company where the liability of the shareholders is limited to the unpaid shares in the company. Setting up a proprietary company limited by shares will also mean that they have the ability to limit the number of shareholders of the company as provided for in section 113 of the Corporations Act 2001 (University of Sydney 2014, 2). According to the section, such a company cannot have more than 50 non-employee shareholders. Such a business form also enables them to choose who they want to be shareholders in the company, unlike a public company where any member of the public can subscribe for the shares. Conclusion Based on the above discussion, a proprietary company limited by shares would be suitable for the Mary, Fred and Chris’s business. This is because such as a business form enables them to limit the number of people who can be shareholders and also to decide who can buy shares of the company. The business form also enables them to limit their liability to the value of the non-paid shares in the company. Question 2b Issue The issue is whether the business is bound by the loan contract entered into by Chris. Rule Section 127 of the Corporations Act 2001 provides that a company may choose to execute a document or a deed without the use of a common seal by ensuring that more than two directors sign the document or in the alternative, one director and a company secretary. Application Chris entered into a contract with a bank for a loan of $150,000 for the purpose of purchasing the nearby shop and the renovation of the shop. This was, however, contrary to the provisions of the constitution and the replaceable rules of the business. According to the internal rules of the company, a director had the power to manage the ordinary affairs of the company. Such a director was, however, not allowed to enter into a contract for goods and services that exceeded $100,000. Chris was aware of this fact and yet he went ahead and entered into the contract for the loan. The Act provides that a document can only be properly executed without a company’s seal by having two directors sign the document or one director and a secretary of the company. The only time the Act allows a single director to execute the documents of the company is in the case of a proprietary company with a single director. In this case, Mary, Fred and Chris were all directors of the company. This means that there was no basis for Chris to sign the loan agreement as a sole director. A document is binding on a company where such a document is properly executed as per the internal rules of the company or the Corporations Act. This means that a document not executed in accordance with the internal rules of the Corporations Act is not binding on the company. The proper execution of the loan agreement, in this case, would have been to have the document signed by two directors, that is, Chris and one other director. This did not happen as Chris signed the contract alone. The court in Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd (2014) SASCFC 103 held that a document that is not properly executed cannot bind the company (Seaton and Wilksch 2015, 1). The company would have been bound only if the loan agreement had been signed by one other director. The execution of the document was incomplete since it was signed by one director. Conclusion The company is not bound by the loan agreement. The Corporations Act 2001 provides that a business or a company can execute a document without a common seal only if such document is signed by two directors. The same provisions were included in the constitution of the company requiring that a contract for goods or services exceeding $100,000 can only be executed by two directors. In this case, the loan agreement was only signed by one director. The company is, therefore no bound by the loan agreement. Question 2c Issue The issue is whether Chris has breached any duties as a director under the Corporations Act 2001 by taking up the loan. Rule Section 180(1) of the Act requires a director of a company to exercise their power with the level of care that a person in such a position would exercise. Section 181, on the other hand, requires a director to exercise their powers in good faith and for the benefit of the company. Application According to section 180(1) of the Corporations Act, a director has to exercise care when discharging their duties in the company in the same way that a reasonable person in a similar position would do. In Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 the court interpreted this section to mean that a person must exercise an objective standard of care that is consistent with their fiduciary duty to the company (PricewaterHousecoopers 2014, 6). When Chris took the loan, there was no guarantee that the acquisition of the neighbouring business would be profitable to their company after the expansion. The cost of the transaction exceeded the amount that any of the directors could make a decision without the input of the other directors. His duty to the company meant that he had to exercise care and diligence and consult the rest of the directors for such a big financial transaction. His failure to do so was in complete breach of his duty to exercise an objective standard of care as a director. Section 181 of the Corporations Act requires a director of a company to discharge his or her duties in good faith. This means that he must discharge their duties in the best interests of the company and for a proper purpose (PricewaterHousecoopers 2014, 7). The decision by the directors to put a limit on the amount that a single director can transact without consulting the others is to ensure that decisions involving large financial commitments for the company were not made by one director for the sake of the company. They felt that it was in the best interests of the company that such decisions be made by more than one director. The fact that Chris ignored the provisions of the constitution was a decision that was not in the best interests of the company. He ought to have consulted the rest of the directors or at least one other director. The failure to do so was in contravention of the duty to act in good faith. Conclusion Chris breached the duty to act with care and diligence and the duty to act in good faith when he executed the loan agreement on his own. He ought to have consulted the other directors and gain their approval for the loan and the plan to acquire the neighbouring business. Sections 180 and 181 stipulate that he had the duty to ensure that his decisions were in the best interests of the business and that meant ensuring that he complied with the rules or the constitution of the company. The failure to do so was in contravention of his duties as a director. References Adams, M and Nehme, M 2015, Business organisations: Law guidebook, Oxford University Press. CPA Australia 2016, Forms of public practice: Business structures, Certified Practising Accountants Australia. Neyers, J 2005, A theory of vicarious liability, Alberta Law Review, 43(2), 1-41. PricewaterhouseCoopers 2014, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia, PricewaterhouseCoopers, Australia. Queensland Law Reform Commission 2015, Vicarious liability, Available at: http://www.qlrc.qld.gov.au/__data/assets/pdf_file/0008/372527/R56.pdf [Accessed 27 May 2017] Seaton, A and Wilksch, J 2015, Putting pen to paper- Execution under section 127, Available at: https://www.jws.com.au/en/acumen/item/660-putting-pen-to-paper-execution-under-section-127 [Accessed 27 May 2017] University of Sydney 2014, A company as a corporate entity, University of Sydney, Australia. Read More