Chan v zacharia 1984 154 clr 178

LAW

TOPIC 1 cont.

Partnership Law

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PARTNERSHIPS AIM: At the end of this topic you

should understand:

•  Essential elements of a partnership ✓ •  Formation and dissolution of a partnership •  Relationship between partners – rights and liabilities •  Relationship with third parties

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Partnership Act 1892 (NSW) A link to the Partnership Acts can be found in the study guide.

E-copy - GO TO www.austlii.edu.au NSW Legislation New South Wales Consolidated Acts ‘P’ PARTNERSHIP ACT 1892

Table of provisions, familiarise self with contents Note ‘Parts’ & ‘Divisions’ & integrate with the material in Topic 1. See comparative table; Text pp 80-81.

© John ORR

Re-cap from last week •  Definition of partnership, section 1(1) “Partnership is the relationship which exists between persons

carrying on a business in common with a view of profit…” •  Essential elements

•  the carrying on a business •  in common •  with a view of profit

•  Rules for determining existence of partnership, section 2

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Relationship between partners

• Contractual obligations

• Fiduciary obligations • Statutory rights and obligations

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Study guide p 17-18 quote from Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1> •  Trust and confidence •  Loyalty • Act in good faith • Not profit as result of trust • No conflict of interest • Not act for own benefit

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Fiduciary duties between partners

Hospital Products Limited v United States Surgical Corporation [1984]

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations: •  trustee and beneficiary, • agent and principal, •  solicitor and client, • employee and employer, • director and company, • partners

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Fiduciary Relationship of Partners •  Fiduciary features apply to the relationship of

partners as an accepted fiduciary relationship • Distinguishing feature of the partnership relationship is

that the duties are mutual. •  Both parties are in a sense at the same time both

vulnerable and ascendant.

Source: Trinkler v Beale [2009] NSWCA 30 [46] (MacFarlan JA)

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Fiduciary duties between partners Study Guide p 17 & 18 Turner & Trone 26.240 PA sections 28, 29 & 30 Partners are bound to exercise the utmost good faith in their dealings with one another, creating: • a fiduciary relationship of trust and confidence; which in turn gives rise to

• a duty of full disclosure towards each other. Fiduciary - acts in the interests of a person who has placed trust or confidence in them

Partners as fiduciaries Critical features: • fiduciary undertakes or agrees to act for or on behalf of or in interests of another person • in the exercise of a power or discretion • which will affect the interests of that other person in a legal or practical sense. • relationship gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position Hospital Products v United States Surgical Corporation (1984) 156 CLR 41, 97-8 (Mason J) cited in Trinkler v Beale [2009] NSWSC 30

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Fiduciary duties between partners • Can not compete with the partnership • Must disclose if personal interest conflicts with interest of the partnership

• Can not make private gains from partnership property

• Can not take personal advantage of partnership opportunities

• Must act in good faith towards other partners Birtchnell v Equity Trustees ... (1929) 42 CLR 384 (HCA) Chan v Zacharia (1984) 154 CLR 178 (HCA)

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Statutory fiduciary obligations to protect partnership business

• Section 28 Duty of partners to render accounts

• Section 29 Accountability of partners for private profits

• Section 30 Duty of partner not to compete with firm

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Full information • Duty to disclose any information or opportunity relevant to the firm’s business to other partners - section 28

• Opportunities are anything which may fall within the business of the firm - Birtchnell

• Even when firm is being set up or wound up

To account for profits

• From a like business which competes with the firm - section 30

• Like = same nature • Compete in fact •  In a way which has a substantial effect on the firm

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Personal benefits • Must account for any personal benefit from an association with the partnership - section 29

• Using anything within the scope of the firm’s business - name, assets, business connections and information obtained from the relationship with the firm - Birtchnell's Case

• During set-up, continuation and winding-up (dissolution)

Knowledge and Consent A duty is not breached if the other partners •  know about it; and • consent to it • Must give full and frank disclosure to gain fully

informed consent.

Effect of breach

• Any profit or gain made must be shared with the others

•  If the partnership agreement so states, expulsion may be justified

• A Court may use it as a ground to order dissolution - section 35(d),(f)

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Rights and duties of partners

• Rights and duties of partners are usually set out in the terms of the partnership agreement

• Where no agreement is made by the partners, section 24 Partnership Act NSW* set out rules to determine the rights of the partners.

• But note: rights in section 24 can be overridden by an express or implied partnership agreement.

Rules in section 24(1) •  to share equally in the capital, profits and contribute

equally to losses by the firm (If a firm is insolvent on dissolution, each partner must make good the deficiency in equal shares);

•  to indemnify every partner acting in the ordinary course of

the business of the firm;

•  to receive interest on advances;

•  to receive interest on capital after the ascertainment of profits;

•  to share in the management of the firm;

Rules in section 24(1) (cont.) •  not to take wages for acting in the partnership

business; •  not to introduce a person as a new partner without

the consent of all existing partners;

• differences over ordinary matters of partnership business to be decided by a majority of partners;

• access to partnership books to be kept at the principal place of business and accessible to all partners

•  If a firm is insolvent on dissolution, each partner must make good the deficiency in equal shares

Any agreement to the contrary prevails

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Partnership Property •  Distinguishing between partnership property and a

partner’s separate property Section 20 deals with partnership property:

•  Brought into partnership assets at commencement •  Acquired in course of partnership business

Harvey v Harvey (1970) 120 CLR 529, 530 (Menzies and Walsh JJ) ‘There is no general principle that, in the absence of agreement, a partner whose property has been increased in value by the expenditure of partnership money is bound to allow the other partners to share in the increased value.’ Section 21: Kelly v Kelly (1990) 64 ALJR 234

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Partnership property •  The Act also contains rules on how property is to be divided on the dissolution of the partnership; section 39

•  If property is not properly identified in the agreement the court will infer ownership "from the manner in which the affairs of the partnership have been conducted": Kelly v Kelly (1990) 64 ALJR 234

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Relationship of partners with third parties

Each partner is an agent of the firm and agent of partners for the purpose of the business of the partnership The acts of every partner who does any act for the carrying on in the usual way of the business of the firm binds the firm and the other partners unless: •  the partner exceeds their authority and the person with whom they are dealing knows this; or

•  the person with whom the partner is dealing does not know or believe them to be a partner

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Relationship of partners with third parties Subject to the partnership agreement, the implied powers of partners to bind the firm include:

• the selling of property and goods of the firm • purchasing goods usually used by the firm • to receive payment of debts and giving receipts • hiring employees and if the partnership is a trading firm, i.e. buying and selling goods: •  issue, accept and make negotiable instruments in the firm’s name

• borrow money on the credit of the firm • pledge the firm’s assets • give an equitable mortgage

Relationship of partners with third parties

Generally a partner has no implied authority to: • bind the firm by deed • give a guarantee in the name of the firm • bind the firm to arbitration • pledge the firm’s credit for a purpose not connected with the ordinary course of business of the firm without express authority

• pledge the firm’s assets for private debts where the other party knows they are not the partner’s private assets

Liability of partners - contract Liability in contract to third parties: •  is joint (collective) for all debts and contractual

obligations of the firm •  Each partner is jointly liable for the debts for which

the firm is liable under sections 5 - 9 • A creditor only has one action against partners as

there is only one cause of action

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Agency and partnership. • Section 5 “Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership…” (see flow chart p 21 Study Guide)

• note that like agency law liability under the PA may be found via estoppel/ partnership by holding out; section 14

It is important to note that partnership law is related to agency law and the general principles of agency law should be reviewed.

Section 5(1)

Every partner in a partnership other than a firm that is a limited partnership or incorporated limited partnership is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member, binds the firm and the other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner.

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Section 5(1)

1.  Transaction of the kind carried on by firm 2.  Transaction done in the usual way 3.  Outsider must not know or suspect that partner was

exceeding authority 4.  Outsider must have known/believed that the

individual was a partner Seiwa Australia Pty Ltd v Beard [2009] NSWSC 240

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Section 5 tests

Was the transaction within the scope of the business carried out by the partnership?

Was it carried out in the usual way?

Did the partner have the authority so to act?

Did the TP know of the limitation?

Did the TP know/believe the ‘partner’ to be a partner?

YES NO Firm not

liable

Firm not liable

Firm liable

Firm liable

Firm not liable

Firm not liable

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YES

YES

YES

YES

NO

NO

NO

NO

Liability of partners - tort

Liability in tort to third parties is joint and several (i.e. collectively and individually liable) for a wrongful act or omission of any partner acting in the ordinary course of business of the firm, or with the co-authority of their co-partners Sections 10 & 12

Section 14: Liability for “holding out” as a partner A person who holds themselves out as a partner may become liable as an “apparent partner” if:

• they have represented themselves by words or conduct, or allowed themselves to be represented, as a partner in a firm; and • another person has given credit to the firm; and • the person giving the credit has acted in good faith on the representation

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Section 14 - 3 requirements

1.  there must be representation made by a person, or by another person with that first person’s knowledge, that he or she is a partner

2.  credit must have been given to that firm 3.  the credit must have been given in the belief that

the representation was true The Duke Group Ltd (In Liquidation) v Pilmer [1999]

SASC 97

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Liability of partners – incoming and retiring

• An incoming partner does not become liable for debts or obligations contracted before becoming a partner unless they specially agree

• A partner who retires from the firm does not cease to be liable for partnership debts incurred before their retirement unless:

• Under a tripartite agreement the creditors agree to release the retired partner and the continuing partners agree to remain liable

Liability of partners - incoming and retiring (continued)

• Where debts are subsequently incurred after the partner’s retirement:

• a person dealing with the firm unaware of the retirement may be entitled to treat the retired partner as a member of the firm until they have notice of the change

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Retiring partners – avoiding liability

Section 36 To avoid liability, a retiring partner should: • give specific notice of retirement to all those people who deal with the firm;

• place notices in the public notices section of the daily newspapers (Sydney & local) and the Government Gazette;

•  forward notice to the Corporate Affairs Commission or Register of Business Names

DISSOLUTION OF PARTNERSHIP

•  By partners’ agreement

•  By statute

•  By court order

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Dissolution by partners

•  By unanimous agreement or under terms of partnership agreement

• When fixed period ends - section 32(a)

•  By a partner giving notice - section 32(c) for partnership of undefined time

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Dissolution by statute

•  Business becomes illegal - section 34 •  Partner dies, or becomes bankrupt - section 33

•  unless partners agree otherwise

Partnership agreements should address these issues

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Dissolution by court order • Agreement silent and partners at an impasse - Court

can order dissolution - section 35 • Various grounds set out in section 35 a)  Unsound mind b)  Permanently incapable c)  Guilty of conduct to prejudice business d)  Persistent breaches of agreement e)  Continued losses f)  ‘Just and equitable’

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Winding up partnership

• Accounts are taken - assets and liabilities • Assets (partnership property) are realised • Accounts are settled - realised assets are distributed in

accordance with partnership agreement or section 44 Bant v Bant (2003), Zisis v Knighton (2008)

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Limited partnerships

Limited partnerships are an alternative to limited liability companies in - NSW, Vic, Qld, SA, WA, Tas

In the formation of a limited partnership there is: • at least one general partner with unlimited liability;

and • one or more limited partners with limited liability for the

debts and obligations of the partnership A limited partner: • cannot take part in the management of the firm or

they will be liable as a general partner; and • does not have the power to bind the firm

contractually

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Limited partnerships - registration

A limited partnership must be registered in all States with limited partnership legislation and must include a statement signed by all the partners setting out:

•  the firm name; •  the registered office of the firm; •  the name and address of each partner; •  whether each partner is a general or limited partner; and •  the extent of liability of a limited partner to contribute to the

partnership (in WA and Tas the sum contributed by each limited partner and whether paid in cash)

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Limited partnerships Advantages •  Simple to form (compared to companies) • No limit on maximum number of limited partners

(NSW, Qld, Vic, NT, Tas)

•  Limited liability of limited partners •  Taxation Disadvantages •  Limited liability partners cannot be involved with

management • Defects in registration > loss of limited liability

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Incorporated Limited Partnerships ILPs - partnerships with separate legal entity from the partners. •  Up to 20 general partners - unlimited liability •  at least 1 limited partner (who contributes capital but

does not manage) has liability limited to capital contributed to the partnership.

NSW Fair Trading administers registration for ILPs http://www.fairtrading.nsw.gov.au/ftw/Businesses/ Business_structures/ Incorporated_limited_partnerships.page

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Summary

•  Partnership as a fiduciary relationship; sections 28-30 •  Partnership property; sections 20-21 •  Relationships of partners amongst themselves •  Relationships of partners with third parties • Dissolution of partnerships •  Limited Partnerships

PARTNERSHIPS AIM: At the end of this topic you

should understand:

•  Essential elements of a partnership ✓ •  Formation and dissolution of a partnership ✓ •  Relationship between partners – rights and liabilities ✓ •  Relationship with third parties ✓

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KEY POINTS

•  Partnership is a fiduciary relationship •  Partnership property •  Rights and duties of the partners •  Liability of partners through Agency •  Liability of partners through holding out

Next Week

•  Lecture – Topic 2 •  Tutorial - Activity 1.2.4 - Activity 1.2.6