Partnership

Partnership - structured answer The Partnership Act (Vic) s5 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. 1. Is a business being carried on in common? a. Carrying on implies a repetition of acts, and excludes the case of an association formed for doing one particular act which is never to be repeated. i. Goudberg v Henriman Associates (2007). H a firm of architects entered into contract with G. They incurred costs. Courts held that although they had a view of profits they did not intend to carry on with business after. So since they are not partners only H was liable for the costs. b. Partnership can arise where people enter into a joint venture in respect of a single undertaking or endeavour (Canny Gabriel castle Jackson Advertising v Volume Sales 1974) partnership occurred because there was a share of profit and a more integrated business structure than usual. 2. Is such business carried on with a view to profit? i. It is possible to be a partner even if you do not have a claim to a share of the profits but receive a fixed sum M young legal associates v Zahid 2006) ii. Charity, cricket club etc 1. Although they make profit, they reinvest those profits in their primary activities and do not distribute them as dividends to their members Determination of existence of partnership

1. To establish whether a partnership exists the following must be established: a. Was there agreement? b. “Carrying on” a business. It must be systematic and continuous – not just a “one-off” transaction: (Canny Gabriel) c. The business must be carried on in common (“by and on behalf of the partners” – ie, they must be agents for one another … there must be a degree of “mutuality” regarding ownership and control): Degiorgio v Dunn. d. Business must be carried out with a view of profit (not necessary to actually make a profit). In these circumstances, the agreement is unlikely to be regarded as a partnership. If a partnership does not exist, they are not legally liable for the debt under s 13 Most important factors to be taken in account: 1 2

Intention of the parties (ascertained by the court after viewing the whole of the facts) Participation in the net profits of a business (accompanied by an agency relationship)

The Partnership Act provides rules in determining existence of a partnership: Section 6 Partnership Act (Vic)

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Joint or part ownership or joint tenancy, or tenancy in common does not create a partnership as to anything held or owned. Sharing of gross returns does not necessarily create a partnership (Cox v Coulson 1916) The receipt by a person of a share of the profits of a business is prima facie evidence that they are a partner in the business. Receipt of such a share or amount of money does not by itself make a person a partner in these cases: a Receipt of debt by instalments or otherwise from profits b Receipt of payment by a servant or agent of a person engaged in business by a share of that business c Receipt by a spouse or child of an annuity out of the profits d Receipt of interest varying with the profits, or of a share of profits in consideration of an advance e Receipt of a portion of the profits of a business in consideration of the sale and goodwill of such business All these alone do not constitute a partnership, something more needs to exist.

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Carrying on business in common a Degiorgio v Dunn (2004) Cover band disbanded and one of the members (the defendant) discussed plans to start a new band with the plaintiff. It was established that there was no partnership though there was a view for profit as the latter ‘partner’ did not partake in any direction and management of the firm. It was established that plaintiff’s actions did not amount to ‘carrying on a business in common’ relative to the founding and operation of the business. Even though they have entered into partnership, there was no partnership due to the lack of this. b Khan v Miah (2000) Partnership commences at the first step of implementing their business plan. Joint venture participants do not become partners unless they actually begin embarking on the activity. c Goudberg v Herniman Associates (2007) CACL 17.55 Defendant may have contributed to the planning of the activity but have not done anything in furtherance of the plan, hence it was established that he wasn’t “carrying on business,” and hence was not a partner. View of profit a A partnership does not need to create profits, but has a view of creating profit. M Young Legal Associates v Zahid (2006) CACL 17.60 b Possible to be a partner even if they do not have a direct claim or share of profits. E.g charities. c View to profit does not include pecuniary profits (aka religious associations, charity, sport clubs)

Expulsion of a Partner Majority of partners cannot expel a partner unless express power to do so was granted. If it was in accordance with the terms of agreement, then it must be exercised in good faith and for the benefit of the firm.

Partners must be given: 1 2

Reasonable notice of the charge Reasonable opportunity of meeting the case against them before receiving notice of expulsion

Fiduciary Obligation Partnership is a class of contract founded on mutual trust. 1 2

Gives rise to full disclosure towards each other for all matters concerning the firm Obligation continues throughout the term of the partnership a Fiduciary Obligation After Dissolution – Does not conclude on dissolution but until final settlement of accounts on winding up Chan v Zacharia (1984) CACL 17.250 Partner took advantage of the partnership lease to set up a new business without the consent of the other partners, after dissolution. This was a breach of the fiduciary relationship of partnership that existed beyond dissolution. b Fiduciary Obligation Before Settling of Terms – United Dominion Corp v Brian (1985) CACL 17.260 A fiduciary relationship may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture, even before partnership are terms settled

Retirement of a Partner When no fixed term has been agreed upon, any partner may determine the partnership at any time by giving notice of their intention to do so to all the partners. Section 30 Partnership Act (Vic) Dissolution takes place from the date mentioned in the notice or if none specified, from when notice was communicated. If done by deed, written notice by partner must be signed. Revocation of Guarantee by Change in Firm (change in constitution or construction) A continuing guarantee given by or to a partnership is revoked as to future transactions by any change in the constitution of the partnership. A continuing guarantee made by a partnership for another partnership then the guarantee would be revoked by a change in the construction of either partnership. Continuance of Business After Expiration of Term (of the partner) Whereby a partnership has been entered into for a fixed term is continued after the term has expired, without any new agreement, rights and duties remain the same prior to the expiration of the term. Partnership becomes a partnership at will. Partnership Property (to determine in case of dissolution, who owns the property) Consists of: Section 24 Partnership Act (Vic) 1 2 3 4 5

Property originally brought into the partnership Property acquired whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business Items acquired for the purposes of and in the course of the partnership business. Property acquired with the firm’s money unless the contrary intention of the parties appears from transactions (s25) Goodwill of the business

Harvey v Harvey (1970) Harvey owned land and allowed his brother to farm on it. Court held that the land was not partnership property because H intended to keep it for his son in the future. Separation of Property:

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Inclusion of Property to Partnership Assets (Express) – Whether the separate property of one partner used in a partnership becomes part of the assets of the partnership or remains the separate property of the partner ultimately depends upon the agreement between partners. Inclusion of Property to Partnership Assets (Inferred) – Where there is no express agreement, it may be inferred from the manner of which the affairs in the partnership were conducted and the intention of the partner to share his/her property to the partnership. Fixation of Partnership Assets Allocated – Interests within the partnership assets allocated to every partner is not fixed Sharp v Union Trustee Co of Aust (1944) CACL 17.305

Goodwill: 1 2 3

Definition – The probability that the old customers will resort to the old place Cruttwell v Lye (1810) CACL 17.320 Definition – Advantages that a business has in connection to its customers In Dissolution – In the absence of any agreement, sold upon the dissolution of a partnership for the benefit of all partners.

Provisions in Partnership Agreement: 1 2

Deceased partner’s representative must be provided a share of the goodwill, must be written within the partnership agreement for ease of calculation Retiring partner is entitled to their share of the total value of the goodwill according to the proportion in which profits were shared

Charging a Partner’s Share: Partnership property is not liable to be seized for the private debt of a partner and may only be made liable on a judgement against the partnership. After dissolution, items absorbed within the partnership property are deemed to be fairly divided as surplus of assets after debts of the firm are paid. There are no rights to claim specific items. Relationship of Partners to Third Parties (Apparent/Implied and Non-Implied Authority) Acts of every partner who does act carrying on the business of the kind carried by the firm of which they are a member, bind the firm and its partners. Where a partner has no actual authority It is not binding. Apparent Authority extends to the following activities: 1 2 3 4

Sell any goods or personal chattels of the firm Purchase on account of the firm goods of any kind necessary for or usually employed on the business carried on by it Receive payment of debts due to the firm and give receipts or releases for them To engage employees for the partnership business

If the partnership is a trading one, every partner may also bind the firm by any of the following acts: 1 2 3 4

Accept, make and issue bills and other negotiable instruments in the name of the firm Borrow money on the credit of the firm For that purpose pledge any goods or personal chattels belonging to the firm For the like purpose give an equitable mortgage by deposit of deeds or otherwise

Exceptions: 1 2

Partner exceeds their authority in the matter and person whom the partner is dealing knew this exceeding of authority. (Not apparent or actual authority applied) The person whom the partner is dealing with does not believe them to be a partner.

Apparent or Implied Authority does not extend to the following activities:

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Cannot pledge firm’s credit for a purpose not apparently connected with its ordinary course of business without express authority Cannot pledge firm’s assets whereby the other party knows that they are not that partner’s own assets. a Whereby the party is unaware that the assets are not the partner’s private property, the above is ineffective. Section 11 Partnership Act (Vic) If the third party is given notice of the agreement to remove any powers to bind the firm, then the act would not be binding. Section 12 Partnership Act (Vic)

Liability of Partners Third Parties: Section 9 Partnership Act (Vic) 1 2 3 4

Agency – Every partner is an agent of the firm and other partners for the purpose of the business of the partnership Ordinary Business – The acts of every partner who does any act for carrying the usual way of business of the kind carried on by the firm. (binds the firm) Knowledge of Authority – Unless person is acting without authority and the other party knows this, or does not know, or believe him to be a partner. (does not bind the firm) Scope of Damages – Each partner is jointly liable for the acts of other partners for the debts of the firm. Two Limbs: ask what is the kind of business relationship. In Construction Engineering Pty Ltd v Hexyl Pty Ltd. CALC 17.832. Partnership expressly states that T would enter the construction contract on his own behalf and not on the behalf of the partnership. T signed a contract with construction engineering. Construction engineering sued both Hexyl and T for breach of contract. Hexyl denied liability. Held: courts agreed. There was no liability under s9 because there was no actual authority limitedT’s authority to bind the firm, and there was no apparent authority because Construction Engineering at the time if making the contract with T, was unaware of Hexyl. Joint Liability (CALC 17.385) Only one cause of action: creditor can bring only one action against members of the firm.

Incoming Partner: CALC 17.390 1 2

Past Debts – Person incoming does not become liable for debts or obligations before he or she became a partner. Section 21 Partnership Act (Vic) Agreement in regards to Past Debts – But may be incurred if it was agreed upon (eg. substituting debts of retiring partner to new partner)

Retiring Partner: 1 2 3

A retiring partner does not cease to be liable for partnership debts incurred before their retirement. (Unless expressly stated in the constitution or agreement methods to incur debt) Agreement in regards to Past Debts – But may not be incurred if it was agreed upon by current partners, expressively or impliedly, discharged to the new members Notice of Retirement – A retiring partner will incur future debts after retirement, hence the retiring partner should give specific notice of their retirement to those persons. Hamerbaven v Ogge (1996) Ogge retried but was retained as a consultant. Issue was whether he was still liable. Notice of retirement or dissolution in the Government Gazette is enough, as well as newspaper publications. This transferred debt cannot be enforced by a 3rd party. Someone can only sue members prior to new constitution or members after the new constitution. Not both!

Liability for “holding out” (representing one) as a Partner: 1 2 3

A person has by words or by conduct represented themselves or knowingly allowed themselves to be represented as a partner Another person has given credit to the firm Person has so given credit on the faith of the representation Lynch v Stiff (1944) CACL 17.430

They are liable as a partner, in this case and they are estopped from denying otherwise. It it necessary for the person to have given credit to show that they had faith in the representation. Liability for Wrongs Partners are: Subsection 14 and 16 Partnership Act (Vic)   

Liable jointly and severally for the wrongful act or omission of any partner Acting in the ordinary course of business (duties handled) of the firm Or with the authority of their co-partners.

Walker v European Electronics (1990) CACL 17.445 Partner is liable for the actions of other partners if he or she misappropriates or does some misleading conduct on the course of his or her duties or authority. It doesn’t have to be related to the business of the partners. Partners were liable for fraudelant misappropriation while G was liable for fraud. National Commercial Banking Corp of Australia v Batty (1986) CACL 17.450 If the acts were not done in the course of business or not as business intends to act like it can be said that the partners are not liable. Polking Horne v Holland (1934) CALC 17.455 A partner of Holland was a solitor gave Polking advise on investments. The investments failed and P sued H. Held: H’s partners were liable because though solicitors don’t have the expertise to give financial advise, he had a duty to give advice carefully when they were asked to provide it. As the advice was provided as the role of a solicitor, it had been given “In the ordinary course of the business of th firm , and the firm was therefore liable. In the event of misapplying firm money, Partners are liable if: 1 2

Partner acts within the scope of their apparent authority receives and misapplies the money Receives money in the course of business and misa pplied by one or more of the partners

Liability for Misapplication of Trust Moneys: If a partner improperly employs trusts property on account of partnership, other partners are not liable unless they were aware of the breach of trust.

Dissolution of Partnership Retirement initiates Reconstitution – Retirement of a partner or addition of partner affects dissolution of the former partnership and/or the creation of a new partnership. SJ Mackie v Dalziell Medical Practice (1988) CACL 17.490 The non-partner breaks continuity of the firm, constituting a new firm or partnership, constituting a new firm or partnership of those members of the former partnership who remain and the newcomer. Dissolution follows Settling – In the absence of any agreement, dissolution must be followed by a final settling of accounts. Partnership agreements contain provision to enable the transition from one firm to another effected without disruption of winding up. Partnership may be dissolved by: 1 2

Operation of law a Illegal Affairs – By any event which makes it unlawful for the business to be carried out Agreement of partners a Fixed Term – If entered into for a fixed term, the ending date is set out. Accordance to the provisions of partnership agreements b Fixed Venture – Entered for a single adventure, ceases after that adventure c By Notice – Whereby there was no time specified, then by notice to other partners intention to dissolve i Mutual agreement d By Circumstance – By death, bankruptcy or insolvency of any partner. These apply if there was no agreement made beforehand

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Courts upon application a By Incapability – When a partner is of unsound mind or incapable of managing their affairs b By Incapability (Other) – When a partner is becomes in other way, permanently incapable of performing their part of the partnership contract c By Special Conduct – When a partner has been guilty of such conduct in the opinion of the court, is calculated prejudicially affect the carrying on of the business d By Capital Loss – When the business can be carried only at a loss e By Equity – Wherever any case has arisen whereby it is equitable to dissolve the partnership.

The Partnership Act sets out specific circumstances for grounds of dissolution in the event that partners have not expressively or impliedly decided on such. Application of Partnership Party On Dissolution Every partner is entitled to have partnership property applied towards the payment of the partnership liabilities and free themselves from these liabilities. A partner is entitled to:  

Acquire Leftover Surplus on Dissolution – Have any surplus assets after payment of liabilities, after deduction of the firm’s liabilities. Appoint a Receiver to Wind up Affairs – Any partner on the termination of partnership may apply to the court for a decree to dissolve partnership and for the appointment of a receiver to wind up the business and affairs of the firm.

Partners must continue the business with the outgoing partner and their responsibilities if a partnership is dissolved yet no final settlement of accounts has been done. Final Settlement of Accounts on Dissolution: Section 48 Partnership Act (Vic) 1 2

Losses, including losses and deficiencies of capital must be met first out of profits, next capital, and then by the partners relative to their entitlement to receive profits. Method: a Third Party Debts – Debts paid to third parties b Partner Advances – Paying Advances to each partner if any are due c Partner Dues – Paying what is due to each partner d Any Residue – Ultimate residue is divided among partners relative to their share of profits

Bankruptcy of Partners:    

Joint estates of partners applied to their joint debts Separate estates of partners applied to their separate debts If there is a surplus in the separate account, it is dealt with the joint debts If there is a surplus in the joint account, it is dealt with the separate debts in proportion to interest of each partner in the partnership.

Limited Partnerships CALC 17.620 Partnerships where there is at least one partner with unlimited liability and one or more limited partners whose liability for the debts or obligations are limited (limited liability). A limited partnership provides that:  

Limited partner cannot partake in the management of the business o If he/she does, he/she would be liable as a general partner Limited partner does not have power to bind the firm o No consent needed for new partners of firm o Cannot dissolve the partnership by notice

Ceases to be limited if: 

None of the partners is a limited partner

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All partnerships cannot be limited, as decided by general members

Advantages: ability for partners to utilise income tax losses - advantage of conferring limited liability without being a limited liability company.

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Incorporated Limited Partnership: The incorporated limited partnership is a further variant of a limited partnership that wraps around the unlimited company under the basic limited partnership structure. There is no risk that limited partners will be vicariously liable for tortious or other breaches of duty by the general partner.