Document Sample

                            School of Business
                         BL611 Organisations Law

                               TOPIC ONE
                          TYPES OF BUSINESS
                          LECTURE GUIDE AND
                            TUTORIAL WORK
                       Prepared by Christine Baker
                           as at February 2007

Learning objectives: to
    know the types of legal structures that can be used to carry on
      commercial and not-for-profit activities
    understand, in general terms, the different governance issues that can
      arise from the different legal structures
    understand the factors which will determine when one type of business
      structure may be used compared to another
    know the difference between a company and a partnership
    know how partnerships are formed, what obligations partners have to
      each other and to outsiders, when partnerships are dissolved

Essential reading:
Hanrahan, Ramsay & Stapledon (HRS), - chs 1-3
Hinchy and McDermott (H&M) – ch 3, pp 77-84
Woodward Bird & Sievers (WB&S) Topics 2 and 24 (24 will be handed out)
Partnership Act 1958 (Vic) - print off relevant sections as per this lecture

Other references:
Lipton & Herzberg 12th edition (L&H) p.42-47
Griggs, L., Clark, E., Streeter, J. & Iredale, I. (1999) Managers and the law: a
guide for business decision makers. Pyrmont, NSW: LBC –p.78 sample
partnership agreement (not contained in second edition of text)

   1.     Various types of organisations and their legal structures: -
          HRS ch 3; H&M pp 77-84 (also WB&S Topic 2)

   (a)    Unincorporated associations - what types exist?

   (b)    Incorporated associations – these are artificial types of legal entities
          (i) list the 5 main types
          (ii) what types of companies exist?

   2.     What factors will influence what type of legal structure is used
          for commercial activities?
                 (a) Risk and liability (what type and who bears it)
                 (b) Management and control (by whom and how much)
                 (c) Taxation (how best to minimise)
                 (d) Maintenance costs (costs of formation, ongoing
                     disclosure etc.)
                 (e) Capital raising options (which structure provides best
                     avenue for raising finance)
                 (f) Succession (do you want the organisation to survive

   3.     How do the main organisational/legal structures compare and
          what governance issues arise? See HRS ch 3, to p.64; L&H
          p.42-47 (company/partnership/trust) and WB&S Table 2.1 p. 22 and
          Topic 24 (partnerships/not-for-profit associations)

The reasons for choosing a partnership compared with a company structure
should now be apparent. Partnerships will now be dealt with. See WB&S
Topic 24. The rest of the unit concentrates on companies, the dominant form
of business organisation.

Throughout this topic ask yourself:
 Why does it matter if I or these people are in a partnership?
 What are the advantages and disadvantages of partnerships compared
   with corporations?
 Are partnerships still useful vehicles for business operations?

  4.     Definition of a partnership:
See ss 5&6, Partnership Act 1958 (Vic) (Partnership Act)

To be legally recognised as a partnership there must be:

Two or more persons (but usually no more than 20) carrying on a
business in common with a view to profit. Check intention of the parties
and their conduct.

Carrying on a business
This infers repetition and continuity of commercial activity although the High
Court in Canny Gabriel v Volume Sales (1974) 131 CLR 321 (facts given in
class) did acknowledge that a single venture partnership is possible provided
that certain criteria were met: each partner is an unlimited agent of every
other partner and there is mutuality of rights and obligations.

In Common
Whilst it is not crucial that all partners take an active role in the daily running
of the partnership business (ie there can be silent or passive partners), it is
important that the business activity is carried on on behalf of all partners.

With a view to Profit
A partnership cannot exist unless the business is carried on with a view to
making and sharing in the profits.

Activity One
   (a)    What are some of the important indicators of a partnership? See
          s.6, Partnership Act
   (b)    What was the outcome and reasons for the decision in Cribb v Korn
          (WB&S p.481)
   (c)    See also the cases in WB&S para 24.70 including
   (d)    Re Megevand; Ex parte – C advanced 10,000 pds to A and B for a
          business which A and B intended to carry on in partnership. A
          contract term was that C was not a partner. Other contract terms
          provided that C was entitled to share profits and losses up to 25%;
          to look at the partnership books, to receive a quarterly statement; to
          cancel the arrangement if 10,000 pds was reduced by half by the
          borrower’s losses; the ‘loan’ was not repayable until after the
          partnership was dissolved. When A and B went into voluntary
          liquidation, C claimed as a creditor. Was he?

5.     Different types of partnerships and partners

Apart from the classic form of partnership described above, a partner can be
(a) salaried (an employee and not a full partner in the sense of carrying on
business with a view to make profit but must be careful what representations
are made)

(b) sleeping or dormant or silent (the partnership contract can exclude a
sleeping partner from the management of the partnership but the sleeping
partner is still bound by the acts of other partners).

Most Australian jurisdictions also provide for:

(a) ‘limited partnerships’; and
(b) ‘incorporated limited partnerships’.

Activity Two
Access the Consumer Affairs website and the Partnership Act to find out more
about limited partnerships.

6.      Formation and formalities of a partnership
A partnership can be created by express or implied agreement either orally or
in writing. Each State has a Partnership Act (largely uniform) which applies
unless the parties override it. The Acts do not, however, deal with all aspects
and the parties must look to case law and other legislation (eg Business
Names Acts) to ‘fill in the gaps’.

The advantage of the partnership structure is its ease of formation. However,
in business, parties commonly enter into a formal partnership agreement
(referred to as a deed).

Entering into a partnership deed can have certain benefits as privately
negotiated terms in a partnership deed override the statutory provisions
in the Partnership Act if there is an inconsistency between the two. See
Griggs (1999 p.78-81) for an example of a partnership deed.

7.      Size of partnerships
A limit is placed on the size of a partnership. Usually, the maximum allowed to
participate in a partnership is twenty persons ( s.115, Corporations Act 2001
(Cth) (CA)). Unless the professional partnership is a prescribed exception
(see Reg 2A.1.01), a partnership that exceeds 20 in number MUST register
as a corporation under the Corporations Act 2001 (Cth) (CA). See L&H p. 47
for the exempt professional groups.

8.     The Status of a Partnership
Legally a partnership is NOT a separate legal entity. This means the
partnership is in essence a matter of contract between the individuals
involved. However, for accounting procedures the partnership will be
regarded as a ‘firm’ and is treated separately from its members. This is due to
taxation requirements placed on partnerships to lodge a return for the firm

indicating each partner’s share of the profit and loss. For Court procedural
convenience, a partnership can be sued or sue in its name.

If a name other than that of the partners is used, a business name must be
registered pursuant to s. 5 of the Business Names Act 1962 (Vic).

Because the partnership is based on contract, each time a partner retires,
dies or a new partner joins, the partnership is dissolved. For this reason
partnership agreements should make provision for the orderly restructure of
the business. In addition retiring partners should obtain a release from the
continuing partners: see eg ss 21, 23 & 40 of Partnership Act.

9.     Partnership Property
See s. 24-26, Partnership Act. All property brought into the partnership or
afterwards acquired by the partnership belongs to the partners collectively.

10.  Operation of the Partnership: Relations between Partners

(a)    Salient features of the relationship are-
 it is consensual
 it is fiduciary – each owes an obligation of loyalty and trust
 it is one of agency – each is the principal and agent of each other
 there is unlimited liability (subject to any contractual limitations between
 there is joint liability for the debts and obligations of the firm (and joint and
  several liability on the part of a deceased partner’s estate)
 there is joint and several liability for torts committed by partners

(b)      What rights and obligations flow from being a partner?

Activity Three
Look at s.21, 28-34, Partnership Act
Make a note of the rights and obligations and consider the following:

     What rights do partners have in managing the business?
     How should decision-making take place?
     What information should partners have access to?
     How are the liabilities of partners limited? See s.21.

11.  Operation of the Partnership: Relations with Outsiders
Compare this with the authority of members/shareholders of a company.

(a)    Authority to bind the partnership-effect on the partners.
As partners are principals and agents of each other, each has the ability to
bind the partnership – at least concerning matters that are normally within the
business of the partnership.
Partners are bound where they have acted:
(i)    within actual authority
(ii)   within apparent authority.

Activity Four
Recall the agency principles from BL503 or your previous study!
   (a) What implied authority does a partner have?
   (b) When does apparent authority operate at common law? See the
        operation of s.18
   (c) Look at the wording of s.9 – when will partners be bound by each
        other’s actions?
   (d) What other sections provide examples when partners will or will not
        be bound?
   (e) What is the effect on partners of being ‘bound’ to the contract?

According to s. 9 partners will be bound when:
 the transaction was within the scope of the partnership business
 the transaction was carried out in the usual way
 the other party did not know or suspect the partner was exceeding its
 the other party thought or knew it was dealing with a partner of a firm.

Note the important terms ‘within the scope of….’, ‘transaction was carried out
in the usual way’…

Activity Four
Consider the facts of Mercantile Credit v Garrod [1962] 2 All ER 1103 in
WB&S p.481
G&P were partners in a garage which let lock-up garages and repaired cars.
G was a passive partner. There was a term in the partnership agreement that
the firm would not buy or sell cars. Without authority, P sold a Mercedes
Benz to Mercantile Credit (MC). P had no title to the car. When MC sued for
the return of the money the question was raised: Was G liable as a partner?
What do you think and why?

(b)    Contracts with others – effect on third parties

Partners will only be bound if there is a contract with a partner/the partnership.
The question is whether the person acted privately or on behalf of the firm.

Case example: Custom Credit Corporation Limited v Heard (1983) 33 SASR
Four members of the Hanna family formed a partnership to acquire and run a
restaurant in Adelaide. With their parents, they approached CC for a loan,
taking a personal liability to repay the loan. Some of the money was used in
the business. The business failed and the Receivers and Managers told CC
they were not treating CC as a creditor of the business (to whom moneys
were being distributed). CC applied for an injunction.
The Court held: the loan was not made to the partnership but to the
individuals. CC was not entitled to any funds from the business.

Activity Six
 If the contract binds the partnership, but the assets of the partnership are
   insufficient to pay the contract price, what happens?
 What is the consequence of liability being ‘joint’?
See s.13

(c)    ‘Wrongful’ acts
Partners are jointly and severally liable for the tortious acts, breach of trust
and criminal acts of other partners IF
 there was a wrong
 committed by a partner
 acting in the ‘in the ordinary course of business’ or with actual, implied or
    apparent authority
 the third party suffered loss as a result of the wrongful act.

Refer ss. 14 -16 Partnership Act.

Although the wording is ‘wrongs’, case law indicates that partners will not
always be liable for crimes committed by one of the partners – especially
where there was no collusion. Statutory offences which do not require
intention are different and partners could be liable for fines levied for price
fixing (Trade Practices Act).

Activity Seven

Liability of tortious actions is ‘joint and several’ – what does this mean?

Activity Eight : Case example
Polkinghorne v Holland (1934) 51 CLR 143
There were three partners in a legal practice: Thomas, his son Harold and
Louis. P. was one of Thomas long-time clients but Harold had been assisting
her recently – regarding investment of her money. Harold suggested she alter
her investment strategy and put the moneys in two companies which he knew
were ‘shell’ companies. He then suggested she become a director of one of
the companies and guarantee its overdraft in exchange for shares. She lost
all her money. Thomas had disappeared by then.
Were the remaining partners liable? What would they argue? W hat do you
think the court’s decision was?

12.    Dissolution
The partnership may be dissolved but the business still exists. See eg ss 36-
39. Section 41 requires a public notice of the dissolution. If the business is
not sold, it will be wound up, either by the partners or, if there is
disagreement, by a receiver. If there is no provision in the partnership
agreement for the distribution of assets, s.48 sets out the priority.

Reflection and activity Nine
   (a)    What seem to be the advantages and disadvantages of operating
          as a partnership?
   (b)    Or a similar question: what features of a business/proposed
          business would influence you to operate (or advise someone else to
          operate) a business as a partnership?
   (c)    What matters should be dealt with in the written partnership
   (d)    What other actions should partners consider in order to reduce the
          risks inherent in partnerships?

                     TUTORIAL WORK FOR WEEK TWO
1.       Write (NOT underline the text!) answers to
     (a)    Practice questions: Partnerships - 1 and 3; Associations – 1 to 5
     (b)    Look up: Consumer Affairs Victoria: and
            find information on business names, and incorporated associations
            – now supplement your answer to (a). Find information on ‘limited
            partnerships’ – what are these? How do they differ from ‘normal’

2.     Browse Problems for Discussion in W B&S : your tutor will choose one
or more to be worked on during class. (Look at the ‘Guidelines to Problem
Solving’ which will give you lots of hints!!)


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