BUSINESS ASSOCIATIONS INTRODUCTION I. Overview of What a Business is About A. Nature of the business, participants/persons affected -participants = stakeholders, eg owners, managers, creditors, consumers -bringing required materials/assets together to sell goods and services B. Different ways of associating to carry on business -sole proprietorship - single owner of business; makes most of basic day- to-day decisions -partnership - two or more owners; potential for disputes -corporations - group of people; company; limited liability (facilitates having many owners) separate legal entity - an abstract person on its own C. Themes -policy - reliance/unjust enrichment/mutual benefits agency costs - person acting on your behalf may not have same interest as you and may not act in your best interest. That imposes costs on you - 1)Monitoring costs; 2)Bonding costs - agent has incentive to act in your best interest as their compensation may depend on how well they demonstrate they are going to act in your best interest; 3)Residual risk - of agent not acting in your best interest agency costs = monitoring costs + bonding costs + residual risk -benefits/costs of limited liability -separation of ownership and control - conflict between owners and managers, much corp law deals with this -minority and majority interests conflict -effect on 3rd party contractors - voluntary (creditors); involuntary (victims of tortious acts, crimes, etc) II. Accounting Primer A. Two basic accounting statements: 1. The balance sheet: Eclectic Collections Balance Sheet as at . . . Assets Beginning End of Month Cash 5000.00 8000.00 Accounts Receivable 6000.00 Inventory, etc 28000.00 27000.00 Total - 33000.00 Total - 41000.00 Liabilities Accounts Payable 3000.00 4000.00 Bank Loan 10000.00 10000.00 Owner‟s Equity 20000.00 20000.00 Increase in Owner‟s Equity 7000.00 Total - 33000.00 Total - 41000.00 The balance sheet is a list of assets and sources of funds that indicates an accountant‟s valuation of the business at a particular date. Assets = Liabilities + Owner’s Equity 2. Income Statement: The income statement is also known as the statement of profit and loss. It shows business activity over a period of time. Eclectic Collections Income Statement For Period Ending... Revenue (Sales) 19300.00 Less Cost of Goods Sold Beginning Inventory 8000.00 Purchases 10000.00 Goods Available 18000.00 Less Ending Inventory 7000.00 Cost of Goods Sold 11000.00 Gross Profits 8300.00 Expenses Rent 1000.00 Heat/Lighting 200.00 Interest on Loan 100.00 Total Expenses 1300.00 Net Income/Profit 7000.00 III. Methods of Valuation A. Book Value: -is determined from the financial statements. -Net Book Value = Assets - Liabilities. -problem with book value: assets are recorded at the price purchased and this may have nothing to do with their actual or current value. -alternatives: a)replacement value but there may not be an exact duplicate b)liquidation value - price at which you could sell them but the assets may have more value together than sold separately B. Capitalized Earning Value: -time value of money - opportunity cost of a risk-free investment -earnings available through other investment opportunities are opportunity costs in sense that turning down such an investment for an equivalent promising a lower reward is equivalent to absorbing a loss -example: most you would pay now for $110 one year from now at 10% interest per annum is $100 - $100 is the present value(pv), $110 is the future value(fv), 10% is the discount rate - PV = FV for one year, PV = FV for two years, etc. 1+i (1+i)2 -use “r” to indicate the risk free rate of interest, discount rate -PV = -above formula determines value by estimating future earning flows and determining what they are worth today -problems with capitalized earning value: have to get assessment for discount rate and it‟s hard to assess risk accurately -difficult to project future earnings accurately -at some point, future earning values lose meaning C. Market Value: -get market value(mv) of the equity and liabilities, not assets -problems: to get mv, you need a good market that trades frequently -depends on assumption that mv is actual value of the firm - efficient capital market hypothesis - old information irrelevant as everything already reflected in price - it‟s useless to predict price -tested by events studies - measure effect of transactions (eg legislation) on stock prices -event studies try to remove market information and assess risk to find what they thought price should have been without the event -example: what‟s effect of a corp selling off many assets? would expect price to go down but actually goes up -problem with event study - how do you know that‟s what affected price? IV. Economic Analysis of Corporate Law A. Uses of Economic Analysis 1. Predictive: Economists don‟t make normative decisions but predict what will happen if you try to achieve that objective in this particular way -example of rent control - what will happen? fewer apartments on market, no upkeep, conversion to condos 2. Descriptive: used to explain certain phenomena, ie why did this happen -intended use of most economic analysis -look at pressures bought to bear -caution - easily slips into normative 3. Normative: (i) Pareto Efficiency - if we can make one person better off without making anyone else worse off, that‟s a good thing -problems: (1)must start with fair initial endowments for fair trade; (2)problem with rational consent - can you really make an intelligent trade - this requires info on the real value of the goods and it may be difficult to determine value of the other person‟s goods - may have too little info or info overload; (3) doesn‟t often work in real world because in real world, third parties are affected - can be difficult to assess who they are and whether they‟re worse or better off - could be dealt with if the 3rd party could bargain with us eg they pay us not to pollute them, we pay to pollute (ii) Kaldor-Hicks Efficiency - can make some better off and they could compensate the losers and still be better off; deal with distribution effects separate from efficiency -justification - instead of compensating through the initial transaction, we compensate them in a broader scheme eg the welfare net -difficulty: have to determine who the losers are and how can we measure how much they lost before you know if efficient? -2 ways of measuring: (a)willingness to pay: how much would they pay for us not to make the change; (b)assuming you have the right, how much would you demand in compensation to give up this right? -often reach 2 different numbers so which do we use - depends on how much wealth one has to start with for determining what they‟d give up or accept as compensation -Kaldor-Hicks used in slippery way - hypothetical claimholders bargain - what people probably would have agreed to if there were no transaction or bargaining costs is the deal we should move towards - we can make them better off IV. Economic Theories of the Firm A. Transactions Cost Theory -explains why a firm exists (firm - everything done in-house) -to contract with each person has costs and the market is costly, eg negotiation costs, gathering info, residual risks of opportunistic behaviour -to get around these costs, you organize into a firm - the boundary of the firm is affected by these transaction costs -at some point, you may decide not to do everything through the firm because of the costs of organizing into a single firm, eg market costs and firm costs - through firm, you lose info on prices that‟s available in market organization B. Agency Cost Theory -firm exists to control agency costs -have risk that someone will shirk so put in a monitor to monitor the behaviour of team members in the firm - in a firm, the monitor is monitored by giving them the residual claim, ie by giving them the leftover profits, they won‟t shirk or will lose those profits -as you increase firm size, monitor costs go up and at some point it‟s no longer efficient to be a firm C. Nexux of Contracts -firms are legal fiction, they‟re just a nexus of contracts -there are complex contractual relationships around the firm which includes everybody - makes no sense to speak of what‟s outside and inside the firm -normative part of theory - laissez-faire view of corps - slips very easily from nexus to laissez-faire as being best mode of operating SOLE PROPRIETORSHIP I. Introduction -single owner - sole proprietor - can have employees -can be large or small II. Financing The Sole Proprietorship -done through bank loan, personal resources, and accounts payable(credit) -see problem #1 III. Who Controls The Business? -problem #1, question 2 - Jones has main control -bank - through putting restrictions on loan agreeement - can step in with reciever manager if Jones defaults IV. The Legal Nature of A Sole Proprietorship -sole proprietorship doesn‟t exist apart from owner - only owner exists and they own all the assets (both business and personal) therefore can sue owner for all assets, there‟s no division and no limited liability -see problem #1 question 5 - can get business and personal assets V. The Registration of Business Names -BCPA s. 88 - IF: 1. business of trading, manufacturing or mining; 2. not in partnership; and 3. the business name isn‟t the sole proprietor‟s own name, OR the business name consists of a phrase indicating a plurality of persons THEN the name must be filed with the Registrar -trade can mean - any activity one engages in to make a living; selling goods and services; or can have exceptions of certain professions - broad interp likely one to be used -BCPA s. 89 - Registrar not to register name if it resembles name of a corp in BC or if it‟s likely to confuse or mislead UNLESS: the corp consents in writing OR the business name was used before the corp first used its name -BCPA s. 90(2) - Registrar keeps index showing: Firm Name Names of Persons Composing The Firm -failure to comply - you‟re subject to penal sanctions per Offence Act ss.4 and 5 -reasons for registering: -so person suing can find out who to sue (prob1 ques4) -allows person dealing with the sole proprietorship to have way of finding out who is behind business for purpose of a credit check -to help person who‟s trying to determine proprietary interest in that name or one similar to avoid “passing off” AGENCY LAW -foundation of partnership and corporate law -what is it? one person (agent) effects the legal relations of another person (principal) primarily through entering into contractual relations and through tortious acts, eg insurance broker, bank manager, stock broker -agency vs. emplyment - not all employees are agents -agency vs. trust - trustee becomes owner of the property but an agent doesn‟t; when a trustee acts, they enter into contractual relationships but an agent doesn‟t (principal is bound but the agent isn‟t) I. Summary of Relationships Between Agent and Principal A. Actual Authority 1. Express - as per oral or written agreement (written is power of attorney) OR -as inferred from words of oral/written agreement -no consideration is required 2. Implied - look to the usual or customary authority of such agents -allowing ratification continually can be dangerous because of this type of authority Freeman & Lockyer v. Buckhurst Park Properties Ltd. Eng CA, 1964p.36 Facts: pff architects wanted payment from def company formed by K and H who were directors. K was paying expenses for upkeep and would be reimbursed from profits of the resale. Pff prepared plans on behalf of K as owner of the property and was instructed by K on behalf of def company. Pff contends that K had actual authority to hire them or alternatively K had ostensible authority(see below). Issue: Did K have actual authority? Decision: For pff. Reasons: Actual authority a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Scope is determined by applying ordinary principles of construction of contracts, including any proper implications from express words used, usages of the trade, or the course of business between the parties. If agent enters into contracts on behalf of principal, contractual rights and liabilities are created between the principal and contractor even if principal is undisclosed. Corp is a fictitious person whose capacity is limited by its constitution and it can‟t do any act except through its agent. B. Duties of the Agent to the Principal 1. to perform contractual obligations/perform according to instructions of principal 2. to perform with reasonable care - standard of reasonably prudent person in care of own property 3. fiduciary duties*: (i)not to delegate (remedies - damages, injunction) (ii)not to put themselves in situations where their duties and personal interests conflict (damages, injunction, accounting for profits) - can get around by fully disclosing to principal and getting their approval (iii)not to make secret profits (accounting) (iv)duty to account (evidentiary presumption against agent who fails to account) - must keep good records of everything done *Qualification - those are implied terms - agent and principal can change it by contracting around it so watch what‟s specifically provided for or what could be implied (contract, usual practice, customary practice, if task can‟t be performed without delegation, or where act is purely administrative) C. Duties of the Principal to the Agent 1. to pay remuneration - generally requires an express agreement; agent must perform obligations under the agreement; commission only if the services provided were the effective cause of the sale/contract/etc. 2. to pay expenses and indemnify against losses - agent must be acting within scope of actual authority; expenses not through fault of agent II. Summary of Events of Termination A. By Acts of the Parties 1. agency agreement provides for termination 2. otherwise unilaterally terminable (requiring reasonable notice when it‟s similar to an employment contract) B. By Operation of Law 1. where the principal or agent becomes bankrupt 2. by frustration - whole basis for contract is over, not there anymore 3. by the death of either the agent or the principal III. Relationships with Third Parties -who should bear the loss? A. Ostensible Authority/Apparent Authority -principal may be liable even where agent acts beyond actual authority 1. principal must make a representation (rep) or permit a rep (which can be express or implied from words, conduct or circumstances) that agent has authority to act on his/her behalf; and 2. third party reasonably relies on the rep to his/her detriment - if 3rd party knows of actual authority of agent and agent acts beyond authority, then principal not liable (likely not reasonable reliance) -if agent acts beyond his/her authority then 3rd party may have action for breach of warranty of authority - elements of: (i) agent reps that he/she has authority; (ii) the rep is false; and (iii) the 3rd party acts to their detriment -no action against principal but may have one against agent -reasons for ostensible authority: (i) protecting 3rd party‟s reliance provided it‟s reasonable (ii) least cost avoidance of potential losses in the relationship - principal can better avoid the losses occurring - better able to check agent‟s trustworthiness, better remedies against the agent (can fire them), better able to monitor agent and get insurance for losses caused by the agent Freeman & Lockyer v. Buckhurst Park Properties Ltd., Eng CA, 1964 Reasons: Apparent authority is a legal relationship between the principal and the contractor created by a rep, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the apparent authority, so as to render the principal liable to perform any obligations imposed upon him by the contract. Agent is a stranger. Rep may take many forms including rep by conduct (permitting agent to act in some way in the conduct of the principal‟s business with other persons). As regards corps, no rep can operate to estop the corp from denying the authority of the agent to do on behalf of the corp an act which the corp isn‟t permitted by its constitution to do itself and since conferring of actual authority upon an agent is itself an act of the corp, the capacity to do which is regulated by its constitution, the corp can‟t be estopped from denying that it has conferred upon an agent authority to do acts which by its constitution it‟s incapable of delegating to that particular agent. To create an estoppel between corp and contractor, the rep as to the agent‟s authority which creates his apparent authority must be made by some persons who have actual authority from the corp to make the rep. Four conditions must be fulfilled to entitle a contractor to enforce a contract against a company that was entered into on behalf of the company by an agent who didn‟t have actual authority to do so. Must show: -that a rep that the agent had authority to enter on behalf of the corp into a contract of the kind sought to be enforced was made to the contractor; -that such rep was made by persons who had actual authority to manage the corp‟s business either generally or in aspect to which the contract relates; -that contractor was induced by the rep to enter the contract, ie he relied on it; -that the corp‟s constitution didn‟t deprive it of the capacity to either enter into the contract or to delegate authority to enter it to the agent.(p.41) B. Ratification 1. principal can ratify if: (i) agent purported to act on behalf of the person who seeks to ratify (that person must be in existence or ascertainable at the time); AND (ii) principal must have the legal capacity to do the act both at the time the agent acts and at the time of ratification -ratification relates back to the time of the offer and acceptance between the agent and the third party 2. the ratification: (i) can be express/by conduct/by acquiescence; (ii) the person ratifying must do so based on a knowledge of all relevant facts (ie ratification must be fully informed) 3. usual consequences of ratification: (i) principal can sue and be sued by 3rd party (ii) agent is no longer liable for breach of warranty of authority (iii) agent no longer liable to principal for exceeding authority (iv) principal will be liable to agent for reasonable remuneration or indemnity for loss 4. why ratification is the way it is: (i) when 3rd party entered into it, it was for their benefit; if principal ratifies, it was for his benefit - therefore mutual benefit (ii) potential injustice for agent is avoided when ratif takes place - seems unfair if principal can sit around and take advantage only if for his benefit - shifts downside risk to agent - ratif by acquiescence takes this away (iii) cures minor defects in grant of authority - avoids litigation - principal may try to avoid claims for compensation or indemnification by saying agent acted beyond authority - agent can say that principal ratified so now prin is responsible (iv) avoids speculation - 1)by principal: without ratif, prin could speculate against agent or 3rd party but that‟s avoided with ratif as they can accept by acquiescence - prevented from suing agent if things go bad but keeping benefits when things good; can‟t speculate against 3rd party - existence - ability to create legally recognized person, enter into k on behalf of corp, speculation - if price goes up you want original - so you go and create company and ratify k - if you don‟t want goods you don‟t bother to incorp so when 3rd party sues you say no corp so 3rd party out of luck (ratif avoids this as person must be in existence at time of offer and acceptance; must also be ascertainable which prevents you from hiding from bad deal but taking good deal); 2)by 3rd party: knows act beyond authority of agent so they know there‟s no real k, sit and wait to see what happens - in interim they cancel deal (doesn’t work because ratif goes back to time of offer and acceptance) C. Undisclosed Principal -agent doesn‟t disclose that they‟re acting on behalf of principal 1. prin can disclose agency and sue 3rd party on the k 2. this doesn‟t apply if 3rd party was really looking to agent which might occur if: (i) the contract terms require performance by agent; (ii) 3rd party clearly intended to contract with agent alone (such as where the k is for the services of agent, there‟s some personal aspect to the k or 3rd party wouldn‟t have contracted with prin if prin‟s identity were known) 3. 3rd party, on learning of the agency, can sue prin 4. 3rd party can still sue agent 5. in an action by prin, 3rd can set off rights against agent and can use any defence that would be available against agent 6. Policy: (i) if 3rd not concerned with who they deal with, mutual benefit to 3rd as work gets done, and to prin, as gets contract (ii) potential unjust enrichment - if 3rd doesn‟t perform and prin undisclosed, prin would have to get agent to sue - if prin doesn‟t perform and is undisclosed, 3rd can sue the agent - what if agent gone or bankrupt and 3rd doesn‟t perform - unjust enrichment for 3rd as gets benefit; if prin doesn‟t perform then prin unjustly enriched as 3rd can‟t sue agent or it‟s not worthwhile to sue agent D. Liability of Principal for Agent‟s Torts -prin is liable for agent‟s torts committed within scope of agent‟s authority PARTNERSHIP I - RELATIONSHIP BETWEEN PARTNERS I. Introduction -more than one owner -less common since development of readily available techniques of incorporation -common uses of partnership: (i) professionals - eg doctors, lawyers (ii) joint ventures (iii) tax reasons - profits and losses flow through to partners (iv) default - people hadn‟t planned or organized to be partners but were found to be partners (p) -the Act is a codification of earlier common law cases - s.91 says Act doesn‟t overrule common law -as between the p‟s, it‟s essentially a default contract -much of the law of partnership (prtsp) is based on agency law concepts -as far as general prtsp is concerned, it doesn‟t require any documents to be filed to exist unlike corp or limited prtsp - can be partner without documentation II. Existence and Nature of a Partnership A. When a Prtsp is Said to Exist - s.2 (i) persons (2+); (ii) carrying on business; (iii) in common; and (iv) with a view to profit -“person” defined in s.29 of Interpretation Act as including a corp, prtsp or party, and the personal or other legal representatives of a person to whom the context can apply according to law -excludes: (i)non-profit organizations (“with a view to profit”) (ii)incorporated companies or associations [s.2(2)] -”in common” - used for different purposes eg. settling disputes between contracting parties, protecting 3rd parties, preventing tax avoidance B. The Nature of a Prtsp - s.5 1. A prtsp firm is not a separate legal entity [see eg. Re Thorne] -Thorne hurt at mill and claimed for workers comp but turned down - court held that he wasn‟t an employee. Can‟t be a partner and employee because prtsp not a legal entity. When a prtsp contracts an employee, the k is between the employee and the individual partners - can‟t contract with yourself to be an employee and employer 2. Contracts entered into are contracts between each partner and the other party therefore each partner is personally liable for the performance of contractual obligations - their liability is unlimited 3. Property held by the prtsp for prtsp business is jointly held by the partners for the purposes of the business 4. Partners aren‟t employees of the prtsp III. BCPA (re Provisions Affecting Relations Between Partners ss.21- 48) A. Prtsp property - ss.23-26 -s.23(1) all property brought in is prtsp property -s.23(2) land in prtsp that‟s held by one partner is held in trust for all partners -s.24 property bought with firm money is prtsp property -s.25 if you have land or interest in land that becomes prtsp property, it‟s treated as personalty -normal rule to avoid trust for sale rule -avoids partition -clarifies position of heirs of the partners -s.26 can only get execution against prtsp property if you get a judgment against the firm B. Rights, Restrictions, and Duties - ss.22, 27-34 1. Rights and restrictions - s.27* -s.27 (a) you share equally in profits and capital (b) partners are entitled to indemnification for liabilities incurred (c) if you‟ve made advance beyond required, are entitled to interest (d) no interest for required contributions (e) have right to take part in management (f) have no right to remuneration (g) unanimous consent required to admit new partners (h) decisions on ordinary business matters are done by majority unless decision changes nature of business (unanimity) (i) prtsp must keep books which partners can inspect (j) right to arbitration -s.28 - if you‟re a partner, you can‟t be expelled without your consent -s.29 - any partner can terminate prtsp immediately on notice -s.30 - if prtsp for fixed term and business continues beyond then, normal rights continue to apply -s.34 - restriction on assignment - can only assign share of profits or share of assets on dissolution; s.34(1) lists what assignee can‟t do 2. Duties - s.22, 27, 31-33 -s.22 - general duty to act in good faith and with utmost fairness -s.27(a) - must contribute equally in losses -s.31 - must render accounts -s.32 - must account for benefits received using prtsp property or something connected with prtsp business -s.33 - must account for any profits from engaging in competing business C. Dissolution - ss.35-47 1. Events of dissolution that come about by p‟s themselves -s.35(a) - if end of fixed term, end of prtsp -s.35(b) - end of single venture/undertaking, end of prtsp -s.35(c) - notice by a partner 2. Events of dissolution by operation of law -s.36 - death, bankruptcy, or dissolution of a partner dissolves prtsp of 2 but carries on minus that partner for 2+ prtsps. -s.37 - event that makes it unlawful to carry on business 3. Events of dissolution by order of the court -s.38 - mental infirmity, behaviour prejudicial to prtsp, continual conduct which violates Act, whenever it‟s just/equitable to do so 4. Procedures on dissolution -s.40 - retirement can cause others to notify of the change in prtsp so retiring partner not liable to creditors -s.41 - authority of partners continues as necessary for purposes of winding up -s.42 - prtsp property applied to pay liabilities, surplus paid to partners -s.45 - failure to settle accounts of investment - retired partner can continue to share profits or get interest -s.46 - amount due to outgoing partner is debt of the prtsp -s.47 - order of payout [s.47(a)] - profits, capital, indiv partners - and division of assets [s.47(b)] IV. Application of the BCPA -*s.21* - mutual rights and duties can be varied by consent of parties - express or inferred from course of dealing -s.27 -see problem #6 -may want to contract around things Act provides for in written agreement but should put everything in agreement even where it and Act agree -agreement is a document for parties themselves so they know their rights and obligations -agreement can be done by a single lawyer but there‟s potential for conflict of interest so should have separate lawyers to act on behalf of each partner - may be better in some situations for one to be a limited partner and can‟t tell them this without damaging interests of others PARTNERSHIP II - RELATIONSHIPS WITH OUTSIDERS I. Existence of Prtsp: Prtsp by Implication or Estoppel A. Sections 2 & 3 of BCPA 1. S.2 provides that prtsp is: persons; carrying on business; in common; with a view of profit 2. S.3 gives guidance as to meaning of s.2 -s. 3 (a) - common ownership alone not sufficient (b) - sharing of gross returns not sufficient (c) - share of profits is prima facie evidence of prtsp [can be rebutted: Cox] - share or payment varying with profits not sufficient (c)(i) - payment of fixed amount of debt out of profits not sufficient - codification of Cox (c)(ii) - bonus out of profits isn‟t sufficient (c)(iii) - annuity out of profits to spouse or child not sufficient (c)(iv) - loan in writing for repayment by share of profits or rate of interest varying with profits isn‟t sufficient (c)(v) - annuity out of profits to pay for goodwill isn‟t sufficient B. Policy 1. Reliance - 3rd party perceives 2 or more persons involved and assumes both jointly responsible and therefore advances credit on that basis - wouldn‟t have given credit but for presence of B, C, D, etc. -reliance not complete explanation because nothing in ss.2 & 3 requires that 3rd party know the person is a partner 2. Unjust enrichment - those who get benefits must also take burdens and liabilities -problems with this as there are provisions in s.3 where person received benefits without bearing burden 3. Least cost risk bearer - who‟s in better position to control for risk of loss -look at 2 factors: 1)ability to assess and control risk; and 2)lowers cost of credit - creditor knows who can lower risk so interest lower - this is what parties would‟ve agreed to even without the rules 4. Distributional concern - who is the wealthier person? C. Cases 1. Cox v. Hickman, 1860, HL - pre-bankruptcy legislation Facts: Smith in financial difficulties, creditors make arrangement so all could get paid rather than just some - assets would be transferred to trust for benefit of creditors where profits would pay debts and then trust would revert back to S. Cox and Wheatcroft were initially trustees and creditors. Hickman sold goods to business on credit and claimed against trustees but business went bankrupt and H couldn‟t recover. H sued beneficiaries of trust as they are getting a share of the profits. Principles Established: Share of profit doesn‟t necessarily mean prtsp (codified in s.3(c) of BCPA) - it‟s a rebuttable presumption -clear that dormant partners can be liable to creditors even though they aren‟t known to exist (implicit in ss.2&3) -prtsp - person is a partner if they stood in relationship of principal to those who were ostensibly carrying on the business - agency Policy: Reliance - didn‟t know persons advanced credit (however, could‟ve checked who was running it); fairly large amount given by H - not unreasonable to think business has some equity and not all credit financed -unjust enrichment - creditors are getting benefits of profits but not liabilities -maybe want to have arrangement where business carried on to try to make something of it - now allowed in bankruptcy legislation 2. Martin v. Peyton, 1927, NYCA Facts: investment firm operates as a prtsp, gets in financial difficulties. Friends get together and give $2.5 million in marketable securities which K,N, K was going to take as collateral for $2 million loan. K,N, K ultimately don‟t succeed and creditors go after friends. Agreement expressly said that friends wouldn‟t be partners. Principles Established: Just because they said they didn‟t want to be partners doesn‟t mean they aren‟t partners - it‟s not determinative. Prtsp results from contract, express or implied and if nothing else, receipt of share of profits enough. -factors looked at indicating not prtsp: -securities to be returned to friends -K,N,K to turn over some of its securities for collateral -loan security not to be mingled with other K,N,K assets -K,N,K can sell securities but profits to go to friends -K,N,K to pay over to friends any interest or dividends on those securities -friends can sell securities if price goes up -friends can substitute other securities of equal value -friends as trustees can‟t bind the firm -factors indicating prtsp: -40% share of profits to friends (limited to $500000max for limited time) -friends could inspect the books -K,N,K partner to be kept on as manager -friends to be advised and consulted on important matters -partners of K,N,K were to assign interest in firm -ability of K,N,K partners to draw out money limited -friends could forbid loans to K,N,K partners Decision: After balancing factors, found not to be a prtsp Policy: Reliance by 3rd parties - extra securities could lead others to advance credit -unjust enrichment - friends get benefits without liabilities -least cost risk bearer - friends could best see how good K,N,K business was - advanced so much capital, they should‟ve looked at risks 3. Ex Parte Delhasse, 1878, Eng CA Facts: D had been partner in old firm, retired and loaned new one L10000 and share of profits. Agreement provided that firm name to continue; D could control drawings of other partners; books to be kept; if either of other partners died, D could dissolve prtsp and get back 50% of capital; D could dissolve prtsp if his capital decreased to less than L5000; prtsp dissolves if agreement not renewed. Prtsp went bankrupt and claim made against D. Reasons: Court looked at all factors and read in that D could control use of capital. Law doesn‟t allow one to be real principal but not be liable - effectively would be a limited prtsp and court doesn‟t allow this. Decision: D a partner, not a creditor. 4. Pooley v. Driver, 1876 Facts: Series of people made loans and one of these was Driver. P sold goods to the prstp and wasn‟t paid so sued D as partner. D had control over loans, employees; was to get share of profits proportional to loan. Reasons: D tried to claim under Bovill‟s Act [like s.3(c)(iv) of BCPA] that loan for share of profits doesn‟t constitute prtsp but Act doesn‟t apply once we‟ve determined that it‟s a loan. Found to be prtsp as had all the elements of prtsp. Intent irrelevant - test objective on the evidence to prevent people from avoiding liability - like Martin. Policy: Unjust enrichment - D trying to get all incidents of prtsp without the liability. II. Priority of Creditors - Application of s.3(c)(iv) and s.4 of BCPA A. Review of s.4 If: (i)a person to whom money is advanced by way of a loan on contract as mentioned in s.3; or (ii)a buyer of goodwill in consideration of a share of the profits; either: (i)becomes insolvent; (ii)enters into an agreement to pay creditors less than 100 cents on the dollar; or (iii)dies in insolvent circumstances; then: -the receiver of a bonus, lender, seller of goodwill isn‟t entitled to recover anything in respect of the loan or share of the profits until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money‟s worth have been satisfied B. The Requirement of Writing [Re Fort] -does there need to be writing for there to be subordination? 1. Re Fort: Facts: S loaned F L3000 at 5% interest, 50% share of profits in oral agreement. S sues F who admits agreement but says S can‟t take advantage of s.3(c)(iv) because the agreement‟s not in writing. F lost and goesbankrupt. S files against F‟s trustee in bankruptcy and trustee says S‟s claim subordinated by s.4 and court agrees. S appeals to Div Court which holds that S‟s contract isn‟t of type in s.3 so s.4 doesn‟t apply - S didn‟t get benefit of s.3(c)(iv) so shouldn‟t have burden. F appeals to CA. Decision: CA restores original judgment. Reasons: S.3 applies whether in writing or not otherwise you‟d have written loan agreement subordinated by an oral one. -A loan by way of share of profits subordinated whether written or oral Comments: Don‟t want to encourage oral agreements by subordinating written ones. Likely the same approach would be followed in Canada. 2. Canadian Commercial Bank, SCC, 1992 Facts: CCB in financial trouble so fed and prov govts and other banks loan it $255000000 in return for assignment on loans, warrants on common shares and 50% share of profits until principal of loan paid off with interest at prime rate. Six months later, there‟s a winding-up order so fed, prov, other banks seek to rank equally with unsecured creditors. Trustee opposes. Issues: 1) Is the arrangement of a type that falls within s.3(c)(iv)? 2) If not, and it falls within s.3(c)(i) then does s.4 apply? Decision: No subordination. Reasons: 1) Profit payments were merely payments for money advanced. S.3(c)(iv) only applies to payments of profits other than in repayment of the principal amount of the loan (presence of warrants didn‟t alter this). Cases applying s.3(c)(iv) have been situations where payment out of profits are for more than just repayment of capital. 2) S.4 doesn‟t apply to s.3(c)(i) situation. Since s.4 refers to “contract” of type mentioned in s.3 and s.3(c)(i) doesn‟t refer to contract, and since policy of s.4 is that one who gets benefit of profits should also share risks, but here fed, prov, bank lenders didn‟t get benefit of profits over and above repayment of capital since total return doesn‟t vary with the profits. 3. Sukloff v. Rushforth, SCC, 1964 Facts: S loaned R‟s company money to buy apartments. R‟s company would pay $ to vendors who would buy building from Rest Plan Properties Ltd. with money from Guarantee Trust Co who got funds from investors who bought the units from the syndicate which got shares from Rest Plan. S‟s first loan for $45000; 10% interest; 50% share of profits. Second loan for $5000; 10% interest and notice given to Guarantee Trust that S to be paid $35000 on purchase of first building, $15000 on purchase of 2nd building. Only 1st building purchased and the $35000 not paid out. Decision: Part subordinated, part not, part ranked ahead of creditors. Reasons: $35000 was assignment of trust funds by way of security for loans. S.4 doesn‟t apply to security interests therefore it ranks ahead. $5000 advanced without share of profits therefore s.4 doesn‟t apply and ranks with creditors. $10000 advanced with share of profits therefore s.4 applies and for this amount S ranks after creditors. C. Summary of Subordination of Credit Advanced in Return for Share of Profits 1. Pursuant to s.4, a person owed money pursuant to a contract of the type mentioned in s.3(c)(ii),(iv) or (v) is subordinated to other creditors[ie other creditors get paid in full before a s.3(c)(ii),(iv) or (v) creditor gets paid off] 2. The contract under s.3 doesn‟t have to be in writing for the subordination in s.4 to apply [Re Fort] 3. In the case of a loan for a share of profits, s.3(c)(iv) doesn‟t apply where the share of profits is only applied to pay off the principal of the loan [Cdn Commercial Bank] - interest to a reasonable rate (prime, prime+) 4. S.4 doesn‟t apply to the payment of a debt out of accruing profits under s.3(c)(i) [Cdn Commercial Bank] 5. The subordination of other creditors pursuant to s.4 does not apply with respect to security taken for the debt [Sukloff v. Rushforth] -see problem #8 Sept.25 - he goes through setting it out III. Liability of Partners in Contract, Torts and Frauds A. Liability in Contract - ss.7-11 -s.7: every partner is an agent of the firm and other partners for purposes of prtsp business - partners bind the firm when they do any act in the usual way of business of the kind carried on by the firm (apparent authority to 3rd parties) unless they had no authority and 3rd party knew so or 3rd party knew they weren‟t a partner (non-reliance by 3rd party) -s.8: sets out actual authority - even if business not within usual business, if person has been given actual authority, then anything they do binds the firm -s.9: a pledge of credit of firm for something not connected with the firm is not binding unless person was specially authorized by others -s.10: if partners have agreed to a restriction on their power to bind the firm than any act done in contravention of that agreement will not bind with respect to persons having notice of the agreement -s.11: partners are jointly liable for debts of the prtsp; after death, estate is severally liable subject to prior payment of deceased‟s separate debts B. Liability in Tort and Breach of Trust - ss.12-15 -s.12: firm is responsible for any loss or injury as long as partner acted with authority of co-partners or within ordinary course of business -s.13: firm is liable for misapplication of money -s.14: partners liable jointly and severally -s.15: firm isn‟t liable for separate breach of trust unless they knew of breach, are partly responsible for it, and the money can be traced to the prtsp C. Joint and Several Liability 1. Joint: if you sue B, you can‟t sue C, D, E, etc - suing one is bar to suing others 2. Several: can sue one at a time without being barred from suing others 3. Significance of distinction overridden: (i) Law & Equity Act, s.48 - (1)an order can be obtained against joint debtor (partner) notwithstanding that others haven‟t been served; (2) if you obtain an order against one joint debtor, it doesn‟t release any of others from liability so long as they‟re jointly sued; (3) any person who has satisfied an order can sue for compensation from other joint debtors (ii) BC Supreme Court Rules, Rule 7 - you can sue partners in the name of the firm and that automatically jointly sues all partners in the firm; whether others have been served process or not, it‟s sufficient to serve at place of business and that counts against every partner IV. Registration of Prtsps and Actions Against Prtsps -s.81 - must file a declaration -s.82 - must file within 3 months of formation of the firm -s.83 - must file new declaration every time there‟s a change in membership of the firm or in the firm name -s.84 - allegations in the declaration aren‟t controvertible -s.87 - if no declaration is filed and somebody sues, you‟ll be jointly and severally liable (makes no difference because of L&E Act, s.48 and Court Rule 7) -s.90 - Registrar keeps 2 indices, one with name of firm and the other the individual index -if you don‟t file declaration, are subject to sanctions in Offence V. Retirement of Partners A. Underlying Policy re Retirement -want to permit partners to leave firm without being perpetually bound by continuing firm liabilities BUT want to avoid losses to 3rd parties who may rely on the retired partner as continuing to be a partner B. Effects of S.39 1. “Apparent” partners continue to be partners with respect to 3rd parties UNLESS notice of the change is given [s.39(1)] - “apparent” means apparent to persons dealing with the firm [Tower Cabinet] - can be due to prior dealings, name of the firm, use of name on notepaper or sign or due to some other indirect info [Tower Cabinet] -Tower Cabinet - didn‟t know Ingram to be a partner at the time of retirement so he‟s not liable 2. Notice can be affected by an advertisement in the Gazette for persons who had no dealings with the firm prior to retirement [s.39(2)] 3. Actual notice is required for persons who had dealings with the firm ` prior to the retirement [by implication from s.39(1) and (2); Dominion Sugar v. Worrell; Tower Cabinet v. Ingram] 4. The retired partner is not liable to those who can be shown not to have known that the retired partner was a partner C. Effects of Prtsp Registration 1. General rule is that failure to file a declaration of change will cause a retired partner to be deemed to be a partner [s.85] -Dominion Sugar v. Worrell - DS had dealings with firm prior to dissolution but Gamble Robinson didn‟t deal with firm til after dissolution but prior to declaration of change. Court didn‟t buy W‟s argument that he had given oral notice and said that DS needed actual notice and W didn‟t give it. GR didn’t have prior dealings and weren’t entitled to notice if they didn‟t think W was a partner - problem here that still have s.85 that says W a partner until declaration filed but court seems to say that GR should‟ve checked register and then W would‟ve been apparent partner 2. (i) Filing a declaration isn‟t notice to all the world of retirement of a partner (in particular it isn‟t notice to those who have had prior dealings with the firm since they ought not be required to check the register every time they deal with the firm) [Dominion Sugar] (ii) Filing a declaration of change is notice to all those who haven‟t had prior dealings with the firm [Dominion Sugar] -Dominion Sugar - ss.39 and 85 are 2 heads of liability, both of which must be considered -Coatsworth & Cooper v. Schotanus - C&C dealt with firm before it dissolved but declarations of creation and change weren‟t filed till after dealings with C&C. One partner was dormant and C&C said they didn‟t know him to be a partner either actually or apparently. Not liable under s.85 as president of C&C basically admitted that they had never looked at the register or inquired into the business - no reliance so no liability or would make law an absurdity 3. If the 3rd party didn‟t rely on the false declaration then the retired partner may/will not be liable under s.85 [Coatsworth & Cooper]. Non- reliance may be shown by evidence indicating non-reliance [as in Coatsworth] or by evidence of actual notice [as W tried to demonstrate in Dominion Sugar] D. Governing Principles -partner ought to be able to leave the firm without being liable for subsequent firm liabilities -onus on partner to protect against 3rd party reliance -BCPA sets out scheme by which retiring partner can satisfy the onus -at some point the efforts of the retiring partner will be sufficient to shift onus to the 3rd party to take steps to avoid the loss created by reliance E. Steps To Be Taken 1. Provide actual notice to all those with whom the firm has had prior dealings (or, for practical purposes, to all the firm‟s current creditors) 2. Put a notice in the Gazette 3. File a notice of change in the firm membership 4. Obtain agreement between the retiring partners and major creditors that the retiring partner be relieved of liability - s.19 5. Have the prtsp agreement require that steps be taken to relieve retiring partner of liability 6. Have prtsp agreement provide that remaining partners indemnify retiring partners PARTNERSHIPS III - LIMITED PARTNERSHIPS I. Introduction -Undisclosed Limited Liability - limited liability that‟s undisclosed may eventually lead to higher charges for credit BUT some investors may accept higher credit charges in return for limited liability -problem: how can this be done without deception of creditors? - limited prtsp as a solution but must make clear that liability limited -s.55(2)lp interest in lp is personal property II. What Is a Limited Prtsp? A. A limited prtsp (lp) consists of [s.50]: -one or more general partners -one or more limited partners B. Liability of lps is limited to the amount he/she contributes or agrees to contribute [s.57; 63] C. Lp formed by filing a certificate-see section for what certif must contain[s.51] III. Main Characteristics of a LP A. Features of BCPA that are Designed to Protect 3rd Parties 1. Labelling requirement - must use “limited prtsp” [s.53(1)] 2. Equity check - 3rd party can find out about contributions or agreed contributions by checking certificate [s.51] 3. Anti-deception - clear who the general partners are as distinct from the limited partners: (i)must have a general partner [s.50] (ii)certificate states who general partners are [s.51] (iii)surname or corporate name of a limited partner not to appear in the name of a lp - if it does, the limited partner is treated as a general partner provided creditor has no actual knowledge [s.53(2),(3),(4)] (iv)limited partner is personally liable if he/she participates in management [s.64] or if they contribute services [s.55(1)] 4. No abandoning ship - no return of capital if after payment the prtsp would be insolvent [s.59(2); 62(1)(a); 63(2)(b)money or prop wrongfully paid or conveyed to the lp is held in trust by him for the lp] 5. False stmt: where certif contains a false stmt a person suffering loss as a result may hold liable as a general partner every party to the certif who knew when he signed certif that the stmt was false or became aware and did nothing.[s.74] IV. Relationship between General Partners and Limited Partners A. Less Control by Limited Partner 1. not part of the management 2. could have many investors with small investment - creates a „free- rider‟ problem ie) its not worthwhile for any of them to monitor the behaviour of the managers (general partners), let other partners spend the money to monitor - you get the benefits without the costs. B. Attempts to Protect Limited Partners 1. can find out about rights per filed certificate 2. Mandatory provisions: (i) unanimous consent for [s.56]: -act which makes it impossible to carry on the prtsp business -consent to judgement -gp possessing prtsp property for other than a prtsp purpose (ii) right to inspect books [s.58] 3. Enabling provisions: (things you can change in prtsp agreement) (i) restriction on admission of additional partners [s.51; 56; 65] (ii) restiction on assignment[s.51] C. General Comments: 1. lp are very flexible, have fewer restrictions than corporations 2. main advantage is for taxes as losses in the early stages will flow through to the partners, no separate legal entity D. Cases: Be able to assess the risk of a lp who is also an officer of a corporation (who is the gp) Haughton Graphic Ltd. v. Zivot, OnHc, 1986 Facts: Z and M were limited partners of Printcast Pub Network.(limited prtsp) and Lifestyle Magazine Inc. was the general partner. Z was pres of Printcast and Lifestyle; M was V.P of Printcast. N pres of Haughton graphics, a creditor of Printcast. N knew Printcast was lp but didn‟t know what that meant. He knew that Z was Pres and had ultimate respons, and knew M was VP and appeared to be in charge of admin side. Issue: Is Z liable as a gp? Decision: Z was liable Reasons: 2 lines of US authority: (i) if the def can prove that the pff didn‟t rely on lp as gp‟s they won‟t be liable; (ii) the statute says you took part in control you are liable. They followed the second line of authority. There is no defence of specific reliance available. If you have taken part in management you will be liable. Comments: It is common to have a corp as a gp but it is advisable to tell limited partners not to be an officer of that corp or they will be found liable. Not having „no reliance defence‟ provides additional incentive to prevent deceptions of creditors. Nordile Holdings Limited v. Breckenridge, BCCA, 1992 Facts: B and R were limited partners of Arman Rental Properties Limited Prtsp and Arbutus Management Ltd was the gp. B and R were officers of Arbutus. Nordile gave property to Arman in return for cash and 2nd mortgage. Issue: Are B and R liable as gps? Decision: B and R not liable. Reasons: Trial: Judge followed Haughton in holding that there‟s no defence of specific reliance. S.64 of BCPA broader than AB legislation as BCPA says “takes part in management of the business” whereas AB legis says “takes part in control of the business”. B and R did take part in management of business therefore they‟re liable under s.64 BUT agreement of purchase and sale clear that no one but Limited Prtsp or gp to be liable. Appeal: Agreed on not following US defence of no specific reliance and agrees that the agreement makes clear that B and R not liable BUT says that B and R didn‟t take part in the management since it was agreed that they “acted solely in their capacity as officers of the gp”. Comments: Problems with this - it seems questionable. Re the “acted solely in their capacity as officers of the gp” - seems to be a problem on the facts because there were no other officers of the corp so who else was dealing with the Ltd. Prtsp?
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