Question

QUESTION 1:

How does the law define partnership? Why would people choose to establish a partnership instead of a company? Discuss some of the important cases which developed the law of partnership. What are some of the most important legal principles established in those cases?

QUESTION2:

Ming, Mya and Naz are friends who met at college. After graduation, they established a small proprietary company called Yazoo which supplies computer products to technology retailers. The three of them are executive directors of the company and Naz is also the Managing Director. Previously close friends, the trio has drifted apart over the years and now the three rarely see each other, either socially or at the office. Each frequently works from home and when one attends the office, one or both of the other directors may not be on the premises. You are the company’s lawyer and Ming contacts you to tell you about his concerns about his fellow directors and the financial position of the company. He tells you that Mya has not attended board meetings for six months. The company’s constitution requires board meetings to be held monthly. Ming last saw Mya three months ago. She said she had been on holiday in Bhutan and Nepal and told him that she had ‘more important things to talk about than business.’ When they spoke, she insisted on telling him about her recent experiences of trekking and meditating. When Ming tried to discuss business matters, she told him that it was her hard work that had enabled the company to grow. She said, ‘Now it’s me time. I’m rewarding myself for my contribution.’ Ming has not seen Mya since that conversation but he remembers that she said that she needed to ‘stretch her wings’. He assumed she intended to go on another holiday. When he tried to call her on a few occasions, her phone diverted his call to Messages. Ming has seen Naz, the Managing Director, several times in the last six months but usually they have conversed briefly. Ming and Naz have held three board meetings but Naz has failed to attend three other scheduled board meetings. He told Ming that he is very busy starting a new company with his uncle and Yazoo ‘can run itself’. Ming has spoken to Yazoo’s accountant who has told him that for the last six months, the company has failed to pay four of its largest creditors for product supplied. Mya is usually responsible for authorising payments and the accountant has sent reminders to her. He did not know that Mya was absent and assumed that she would inform the other directors of his reminders. He has prepared monthly accounts for the board meetings and assumed the directors would discuss Yazoo’s undischarged liabilities. Ming says to you that he is a technical person and doesn’t like financial matters. For that reason he avoided discussion of finances at the board meetings and Naz seemed uninterested in discussing operational matters. Assume that the Australian Corporations Act 2001 governs actions taken by Yazoo. Advise Ming about the potential legal liability of each of the directors in relation to Yazoo’s creditors. Have the directors breached any of their duties under the legislation? Please use the legislation and case law to support your answers.

QUESTION 3:

a) Describe and discuss the different types and classifications of companies based on their liability. What type of company structure would you adopt in the following situations:  Having successfully run a local coffee shop for years, you now wish to expand your business and have two additional coffee shops in two new locations;  You are a sugar farmer and wish to form an entity to advance the position of all sugar farmers;  You are a mining magnate who is interested in exploration.

b) ‘In this lecture, I have chosen to canvass a topic that has been the subject of intense discussion for a long time, but which remains fascinating and in significant parts unresolved. That is the problem of the “veil” – to what extent can courts look behind legal structures…in determining the disputes before them? The topic of piercing the veil has been described as an “unprincipled”…area of the law’ (Hon Chief Justice M Warren AC ‘Corporate Structure, the Veil and the Role of the Courts’ (2016) 40 MULR 657 at 659.) Critically discuss this quotation, paying particular attention to, eg, the James Hardie dispute. Do you agree? Analyse the situations under which the courts have pierced the veil and situations under which they have refused to do so. What are the themes?

Answer 1

QUESTION 1

Under U.S. law a partnership is a business association of two or more individuals, through which partners share the profits and responsibility for the liabilities of their venture. U.S. states recognize forms of limited partnership that may allow a partner who does not participate in the business venture to avoid liability for the partnership's debts and obligations. Partnerships typically pay less taxes than corporations in fields like fund management.

Section 1 of The Partnership Act 1890 defines the word "partnership" as,

"(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit

(2) But the the relation between members of any company or association which is -

(a) Registered as a company under the Companies Act 1862, or any other Act of Parliament for the time being in force and relating to the registration of joint stock companies; or

(b) Formed or incorporated by or in pursuance of any other Act of Parliament or letters patent, or Royal Charter

is not a partnership within the meaning of this Act".

There are reasons a partnership might work for a business:

1. Easy Setup. Partnerships are formed by a private agreement between the partners, and don't need to register their existence with the state like corporations or limited liability companies. Partnerships don't require a written agreement, but it's a good idea to have one, nonetheless.
2. Easy End. Just as easy as it is to form a partnership, it's simple to change or dissolve a partnership; all it takes is one partner giving notice of his express will to leave the partnership. (This may also be a detracting factor, depending on how you look at it.)
3. Easy Taxes. While partners are taxed on profits and losses from the business, the partnership itself is not taxed; therefore partners must only report profits on their personal tax returns, rather than creating a business tax return.
4. Easy Options. Limited partnerships, general partnerships, and even joint ventures, are some of your options when creating a partnership; each have their advantages and can provide your business with the flexibility it needs.
5. Hard Choices. In a partnership, partners have a duty of loyalty to each other and must not enrich themselves at the expense of the partnership, forcing each partner to do what's in the partnership's best interests.

There are case laws related to law of partnership:

• Pooley v Driver (1876) 5 Ch 458 C advanced 2500 pound to A and B. As per agreement between them, C was entitled to inspect and take copies of the partnership book and a part of annual profit. The agreement further provided for a final account and repayment at the end of the partnership unless it should appear that C has received more than the money C has given. D also advanced to A and B on the similar terms. Held that there exist a partnership and the money was not given as loan but towards capital contribution in the firm.
• Abdul Latif v Gopeshwar AIR 1933 Cal 204 The plaintiff undertook a contract with a company and he appointed the defendant to manage the business who was also authorized to receive advances from the company and also to extend advances in favour of the company. Defendant was also liable for all the losses in case of negligence. The plaintiff sued the defendant for accounts in the capacity of agency whereas the defendant claimed that there exist partnership. Held, there is no partnership as the business was exclusively in the name of the plaintiff and the defendant was only managing the same on sharing of profit and loss basis.
• Bhagat Ram Mohanlal v Commissioner (AIR 1956 SC 374) It was held that when karta of a Hindu family becomes a partner in a partnership firm on behalf of the family and subsequently the other family members also join the partnership firm it requires amendment in the constitution of the firm. Partnership by karta does not make the other coparceners partner in the firm.

QUESTION 3

(a)

Based on the liability type there are 3 types of companies which are as follows:-

(1) companies limited by shares,

(2) companies limited by guarantee, and

(3) unlimited company.

Companies Limited By Shares

A company limited by shares is a registered company having the liability of its member limited by its memorandum of association to the amount, if any, unpaid on the shares respectively held by them. A shareholder cannot be called upon to pay more than the amount remaining unpaid on his shares. Shareholder’s assets cannot be called upon for the payment of the liabilities of the company if nothing remains to be paid on the shares purchased by him. Such a company is also known as a “Share Company.”

Companies Limited By Guarantee

A company limited by guarantee is one having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up. Such a company is also known as a “Guarantee Company”. A pure “guarantee company” does not have a share capital.

Unlimited Company

An unlimited company is where the liability of the members or shareholders is not limited. An unlimited company incorporated with or without a share capital (and similar to its limited company counterpart), but where the legal liability of the members or shareholders is not limited. Its members or shareholders have a joint, several and non-limited obligations to meet any insufficiency in the assets of the company to enable settlement of any outstanding financial liability in the event of the company’s formal liquidation.

(b)

Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil. A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing. But it is likely a court would say that the new company was just a "sham", a "cover" or some other phrase, and would still allow the old company to sue the man for breach of contract. Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability.[3] For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates entirely from statute as a result of the creation of incorporated entities. The laws for piercing the corporate veil will vary from country to country, because each country has its own rules of law to pierce the corporate veil.

The corporate veil in UK company law is pierced very rarely. After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach. According to a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the only true "veil piercing" may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation. The veil is also often ignored in the process of interpreting a statute, and as a matter of tort law it is open as a matter of authority that a direct duty of care may be owed by the managers of a parent company to accident victims of a subsidiary. There are also significant statements still among the judiciary in support of a broader veil lifting approach in the interests of "justice". The issue is discussed at length in a 2013 UK Supreme Court case, Prest v Petrodel Resources Ltd., which effectively remodelled the circumstances where the corporate veil will be permitted to be pierced by courts.

The following are the instances in which the corporate veil can be lifted.

1. When Company tries to avoid Legal Obligations: When the corporate personality is used to avoid any legal obligation, the Court can disregard the legal personality and can identify with its members. In other words, the Court can hold the shareholders with unlimited liability.

2. Where the Character of the Company is to be Determined: In case doubt arises, that a company is owned or controlled by enemies of another country, the Courts, at their discretion, ignore the corporate fiction and examine the persons who exercise de facto (real) control over the affairs of the company.

3. Where the Company Acts as an Agent: A company may sometimes act as an agent or trustee of its members or of another company. In those circumstances, such company is deemed to have lost its individuality and shall be identified with its members.

4. Avoidance of Welfare Legislation: Avoidance of welfare legislation is as common as the avoidance of taxation. It is the duty of the Court in such cases to get behind the smoke screen and discover the true state of affairs.

5. Where the Company is a Clock: The Courts also lift the veil where a company is a mere cloak, which means to disguise or pretend.