Definition of Partnership under Partnership Act, 1963

The issue here is to determine if there is a partnership between Thomas, Samuel and Peta.

A partnership that is carrying on business activities within the jurisdiction of the Australian commonwealth is governed and regulated by the provisions of the Partnership Act, 1963 (Hannigan2015). According to the provision of Section 6 of the Act, partnership can be defined as the form of business structure in which involves business operations between two or more individuals with an intention to earn profits (Benn and Dunphy2013). Section 7 of the act lays down circumstances that would aid in inferring a partnership between individuals.

Section 7 (2) of the act provides that a partnership would not be created by merely holding property together such as a tenancy in common or a joint tenancy or partly or wholly owning a piece of property together even if the individuals derive profits from their joint holding of the property (Gospel, Pendleton and Vitols2014). Section 7 (3) of the act lays down a similar provision relating to gross earnings from a piece of property and states that a partnership is not created by merely sharing gross earning earned from a property (Clarke 2018). Section 7 (4) of the act further clarifies the circumstances under which a person would not be regarded as a partner of a venture. These state that a particular individual would not be regarded as a partner if (Stephens 2017):

• He receives any form of liquidated damages or debts from the partnerships profits.
• He receives part of the partnerships profits as a child or spouse of a deceased partner.
• He is an employee or an agent of the partnership and receives a part of the profits.
• He provides a written loan to the partnership with interest which is signed by all the partners.

The landmark judgment of Smith v Anderson (1880) 15 Ch D 247 laid down ways in which a partnership can be inferred from a particular business relationship (Clarke 2013). These are the act of carrying on business in common for the purpose of earning profits. In the absence of these requisites it may be inferred that no partnership exists between the parties. The intention of the parties to enter into business transactions mutually with a view of earning profits must be present for a partnership to be inferred between the parties (Vandekerckhove2016). Thus position has been clarified in the judgment in Wise v Perpetual Trustee Co Ltd [1903] AC 139. 

Thus for a partnership to be determined from a business relationship between individuals the elements of Section 6 and 7 of the Partnership Act, 1963 must be present. If the same cannot be inferred it would not constitute a legally valid partnership between the parties as laid down by the above judicial interpretations.

In the given set of facts and circumstances a company was going into liquidation. Samuel, Peta and Thomas entered into transactions selling the assets of the company on the internet. A partnership can be inferred from the conduct of the parties and through the transactions undertaken by them as they mutually agreed to undertake these business transactions with a view of earning profits. This also follows the judgment in Smith v Anderson (1880) 15 Ch D 247 where it was laid down that when individuals enter into business transactions which are to be undertaken mutually with an aim of earning profits it would be considered a partnership. This also has the requisites of Section 6 of the Partnership Act, 1963 and thus maybe deemed a partnership as per the provisions of the act. Section 7 (4) of the act further provides that when a person receives a share of profits from the partnership and it is everything the individual would be considered a partner of the venture. It has also been stated in Section 7 (4) of the act that an individual who receives a share of the profits for giving a loan to the business venture with interest would not be regarded as a partner however the amount brought into the business by Peta ($100,000) would not be considered a loan to the business venture as it does not have the provision of payment of interest on the same. Thus the business structure that Thomas, Peta and Samuel were transacting under would be considered a partnership business and would be governed and regulated by the provisions of the Partnership Act, 1963.

Criteria for Inferring Partnership under Section 7 of Partnership Act, 1963

Conclusion

To conclude there was a partnership between Thomas, Peta and Samuel and thus their business structure would be governed by the provision of the Partnership Act, 1963. 

Duty of care and diligence

The Corporations Act, 2001 prescribes various duties and obligations which must be observed by the administration of the company (Klettner, Clarke and Boersma2014). A company is generally administrated by the board of directors who’re tasked with the decision making process. Diligence refers to an intelligible perusal and understanding of the implications and effects of all documents reviewed and approved by the board of directors. A duty of care as defined in common law is an obligation owed to an individual or entity to observe the basic standards of care and diligence a man of ordinary prudence would when acting in a particular capacity. Thus a duty of care and diligence refers to a duty of the directors to ensure that when they act on behalf of the company they observe a certain degree of diligence and intellect which ensures that the rights of the company and the shareholders and other stakeholders are taken into consideration (Herbohn, Walker and Loo 2014). The statutory provision for this is duty is provided in Section 180 (1) of the Corporations Act, 2001. The Corporations Act, 2001 provides a wide range of powers to the directors by virtue of their position in the organizational structure. Thus when the directors of a company act or exercise these powers conferred upon them by virtue of the act they must ensure that they do so with due care and diligence which safeguards the rights and interests of the company. In case of civil penalties a “declaration of contravention” by virtue of the provision of Section 1317E is made by the court (Edwardset al. 2013). The governing body that takes cognizance of such an offence is the Australian Securities and Exchange Commission (ASIC). After the declarations is made by the court as per the provisions of Section 1317E of the Corporations Act, 2001 the ASIC would be able to apply for an order awarding penalties prescribed under Section 1317H, 1317S, 206C of the act. The provisions of Section 1317H of the act provides for a $200,000 fine that is payable to the commonwealth in case of such a breach. Section 1317S of the act lays down that when a director is in breach of his duty to observe due care and diligence under Section 180 (1) of the act he may be asked by the court to pay compensation to any party that has faced legal injury for the same. It is also provided for in the act that in case of such a breach the ASIC may bring a claim for proceedings to the court in case of an order that disqualifies the individual from managing the affairs of companies in the future. The underlying rationale behind the provision of a duty is that the interests of the company is of utmost importance and supersedes the interests of the shareholders. It was held in the case ASIC v Cassimatis (No. 8) [2016] FCA 1023that a loss to the company would be deemed a breach of the provisions of Section 180 (1) of the act and a loss to reputation is also such a loss. It has also been held that when financial statements of a company are not approved with regard to due process of law it would constitute a breach of this section. This was held in the case Australian Securities and Investments Commission v Healey[2011] FCA 717 (Ferran and Ho 2014). Sections 728, 674 and 1041H of the Corporations Act, 2001 set out various disclosure obligations which must be observed by the company. It has been held that a failure to observe the disclosure obligations prescribed in these sections would also constitute a breach of the director’s duty under Section 180 (1) of the Corporations Act, 2001. In the case of ASIC v Lindberg[2012] VSC 332 the court had awarded a $200,000 fine and a 2 year ban from managing companies due to a breach of the statutory duties under Section 180 (1) of the Corporations Act, 2001 (Hendersonet al. 2015). 

Judicial Interpretations related to Inferring Partnership

Director’s duty to act in good faith

The common law duties imposed on directors with relation to loyalty and good faith are statutory provided for just as the duty to observe care and diligence. The duty to act in good faith is statutorily provided for in Section 181 of the Corporations Act, 2001 (Lee and Fargher2013). Thus the administration of a company (Board of Directors), when acting on behalf of the company must do so in good faith. This provision safeguards the interests of the company and ensures that the directors of company avoid conflicts of interests especially relating to financial self-interests. 

This has been further judicially pronounced in ASIC v Hellicar [2012] HCA 17 where the court held that the ultimate rationale behind this duty was the protection of the company’s interests (Cranston 2018).Thus in the event that the acts of the administration of the company do cause detriment to the interests of the company the ASIC can apply to the court to award appropriate remedies (Du Plessis, Hargovanand Harris 2018). This also means that the director’s obligation in relation to the acts of the company must comprise of decisions that ultimately protect the rights of the company above all else. Thus the board of directors of a company is placed at the apex of the organizational hierarchy due to the obligations that they are entrusted (Whincop2017). Thus the purport of this obligation is to ensure that the powers conferred upon the directors by virtue of their position are not misused or abused by the directors relying on the protection provided by the corporate veil. 

Reference list

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