Question

Karina and Jay wanted to establish a bakery business called ‘Exquisite Buns’. Karina was a trained baker, while Jay had $45,000 that he invested in the business. Karina also provided a commercial oven worth $5,000, which helped reduce their set-up costs. Due to renovation costs, they had to borrow $50,000 from Lilly, a very experienced businesswoman. Lilly agreed to help manage the business but stated that once she had been repaid in full by sharing the profits equally, she would leave Karina and Jay to run the business by themselves.

At first, business thrives due to Lilly’s expert guidance. Then Karina orders very expensive baking trays and a commercial refrigerator from Doug’s Kitchen Supplies Pty Ltd. These new trays and refrigerator cost a total of $10,000. Unbeknownst to Lilly and Jay, she owns 1% of the issued share capital of the company. She did not consult the others about the purchase and bought those trays and refrigerator on credit with finance provided by the company at a rate of interest five times the normal rate. Karina also received from the company 5% commission on the contract. When Lilly and Jay found out, they were furious.

Is the relationship between Lilly, Jay and Karina a partnership? Explain the reasoning behind your answer.

Explain who, if anyone, is liable for the purchase of the trays and refrigerator. What duties have been breached?

Answer 1

The bakery business ‘Exquisite Buns’ establishe by Jay and Karina along with Lilly, would be considered a partnership firm with three partners - Jay, Karina and Lilly. A partnership is not formed only out of capital invested by the partners, a partner who has not brough capital into the business but is working and managing the business is also considered as partner. Here, the most of the capital is invested by Jay and Lilly, that is, $45,000 ams $50,000 respectively, while karina brought only an oven worth $5000.

Karina has however contributed only 1% of the total capital, she is still a partner in the firm and can be taken as a working partner considering that she is a trained baker which is primary to run the business.

Although Lilly has lended capital and is expecting to leave as soon as she receives a pay back, she is also managing the business and adding value to the business through her vast set of experiences, therefore she will considered a s a partner in this partnership. however, here loan and terms will be explicitly mentioned in the partnership deed.

We can conclude that yes there is partnership between Jay, Karina and Lilly.

Karina orders a very expensive baking trays and a commercial refrigerator from Doug’s Kitchen Supplies Pty Ltd. worth $10,000 on credit with % time the normal interest rate, without consulting/informing other partners (Jay and Lilly). It has also been observed that Karina received from the company 5% commission on the contract.

This act is considered as breach of duties of partners. Partners in a business have a fiduciary duty, which is the highest of the duties a person may owe. A partner has a duty of honesty, a duty of loyalty, a duty of fairness, and a duty to act in good faith. Partners should not enrich themselves at the expense of their business, and should not put their own interests first ahead of their business. If a partner engages in self-dealing, withholds material facts, does not account for profits of the partnership, diverts company opportunities to himself, or engages in other action that harm the company’s interests, all of these can be the potential breaches of fiduciary duty.

A breach of fiduciary duty is a serious violation that can result in a lawsuit against the partner who is engaged in the breach. The other owners of the company could pursue a civil case in order to try to hold the breaching partner responsible for losses that occurred as a result of the partner’s conduct. A fiduciary is held financially responsible for damage which is caused through a breach, although there are defenses that can be raised to allegations of a breached fiduciary duty.

In this case, Karina evidently has vested interest in making this contract as it resulted in a 5% commision to here credit. She has not conducted herself in good faith and has breached the duties of a partners. Jay and Lilly can therefore can hold Karina responsible for damages and can aslo pursue a civil case against her. If the partnership agreement has no clauses addressing a breach, the remaining partners will have to take legal action against your partner in a breach of contract suit.

Note: Please inform if a more elaborate answer is required.