Question:
Discuss about the Business Law of Violet and Sonny.
After going through the facts that have been provided in this question, the issue arises in the present case if Violet and Sonny can be held liable to repay the loan owed were Busy Bee Florist Shop to Friendly Bank. This liability may arise if Violet and Sonny are treated as the partners in the business.
A partnership can be described as a relationship that is present between the persons were getting on business in common was the purpose of making a profit. In this way, there is an agreement created between two or more persons to enter a legally binding relationship. Therefore this relationship is contractual in nature. In Green v Beesley (1835), Tindal J, has stated that the definition of partnership has always been understood as a medium participation, yet a legal entity is not created when the participants create a partnership. Similarly in Smith v Anderson (1880), James LJ had described the concept of partnership in the following words. A general partnership comprises of definite individuals who are bound together by contract created between themselves to continue jointly to achieve a joint object, either during their pleasure or for a limited period. It is essentially composed of the persons who have originally intending to the contract with each other. However, despite the presence of these definitions, limitations have been placed on the number of persons that can become partners. The relevant provision in this regard is present in the Corporations Act, 2001. Similarly, the law provides that the partnership will have a name, which will be known as the name of the firm.
The law of partnership has been derived from case law as well as statute law. The relevant provisions are present in the Partnership Act, 1892. Partnership law has been described as a special type of agency. The reason is that when the partners are acting in course of partnership business, they are considered to be acting as agents of each other (Lang v James Morrison & Co Ltd., 1911).
The law provides that three elements should be present so that it can be said that a particular relationship is a partnership. Therefore, the parties should be carrying on business; in common; and for the purpose of making profit. All these elements need to be satisfied for the purpose of the creation of a partnership. On the other hand, even if a single element is not present, the religion cannot be described as a partnership.
In order to decide the meaning of the term ‘carrying on business’, the issue arises if there is a need of establishing repetitiveness of action as compared to an isolated action by the parties. In a number of earlier decisions, the courts have said about the need for having a continuity or repetition of action. For example, in Smith v Anderson (1880), there was a group of investors. These investors have subscribed to purchase the shares by forming a trust in different submarine cable companies. The trustees, sold his shares to the investors. Along with the other investors, Smith had also received a certificate. However, later on, and application was made by Smith wind up the trust. The reason given in this regard was that the trust was an illegal association, keeping in view section 4 of the English Companies Act, 1862. This section, provided that no company, association or partnership comprising more than 20 persons can be formed to carry on a business, unless it is register. Under these circumstances, the issue arose if the trust in the present case can be described as a partnership. For this purpose, the court considered the nature of the press as well as the relationship of the parties involved. Although, every person holding a certificate could elect trustees, received a trust report and the trustees had certain powers related with management by the court noted the fact that the trustees did not have the power to speculate. Similarly, there were no mutual rights and obligations present among the persons involved in it. As a result, our conclusion was made by the court that they just cannot be described as a partnership because there was a lack of association for ‘carrying on business’.
There are certain rules present in the Partnership Act which can be used to decide if the relationship between the parties can be described as partnership or not. For example, section 2(2) object provides that merely the fact of sharing the gross returns of the business does not in itself result in a partnership, whether the persons who are sharing the returns have got this not have a joint or common right in any property from which the returns are derived. Hence, only the fact of sharing the gross profit made by the business is not sufficient for the purpose of the creation of a partnership. An example in this regard can be given of Cribb v Korn (1911). In this case, a landowner has employed Korn as a rural worker. There was an agreement concluded between the landowner and Cribb. This agreement provided that the landowner will have sloughs reviews and observation over the particular area of Cribb’s land. The agreement also provided that machinery and stock would be provided by Cribb, while the landowner was going to be half of the proceeds of the sale of produce to Cribb. Under these circumstances Korn suffered injuries when he was working on the land. He claimed compensation from Cribb. It was submitted by Korn, that in the present case, the landowner and Cribb were in fact, partners. However, the high court arrived at the conclusion that the partnership was not present between the parties, and it was only a tenancy. Due to the reason that the landowner enjoyed exclusive right to provide the land and no right was given to Cribb to direct or control the working over the land by the landowner, the relationship cannot be described as a partnership, but it was only a tenancy. Moreover, the fact of sharing the gross returns was not considered as sufficient for the purpose of establishing a partnership, but it only amounted to rent.
Therefore in order to be partners, the parties are required to establish that they have agreed to carry on some business, for example in the present case, farming, in common and for the purpose of making a profit and later on to divide or to apply the profit to some agreed object. For example, in the above-mentioned case, there was nothing to show that it was the intention of the appellant to involve in farming or to be concerned in the transaction beyond the right to receive compensation.
Another relevant rule in this regard is related with the sharing of profit and loss. In this regard, the partnership law provides that when a person receives a share, out of the profit made by the business, it is considered as a prima facie evidence that such person is a partner. However, the receipt of share in the profit or receiving a payment that is contingent on the profit made by the business, does not in itself establishes that such person can be described as a partner. The term profit has not been described in the Act. In Re Spanish Prospecting Co Ltd [1908-10], the court stated that the term profit implies a comparison between the state of the business on two particular dates that are generally separated by the year. The basic meaning of profit is the amount gained by the business in a year. Therefore, the profit can be ascertained by comparing the assets of the business on these two dates.
However the difficulty that is present in interpreting the above-mentioned provision is due to the use of the term ‘prima facie’ that qualifies evidence. It appears that the fact related with the presence of profit sharing scheme can be admitted in evidence in support of the presence of a partnership, but it cannot be claimed only on the basis of this fact that the parties have entered into a partnership (Television Broadcasters Ltd v Ashtons Nominees Pty Ltd (No 1), 1979).
Another relevant case is that of Cox v Hickman (1880). B. and J. Smith were partners and they were involved in business of iron masters and corn merchants. As they could not meet the outstanding obligations, they made an assignment of their property to their creditors, as trustees, who were going to carry on the business. After the current expenses were paid, the debt income was going to be divided among the creditors. After the creditors were paid in full, the property was going to be reconveyed to Smiths. Among others, Cox and Wheatcroft were also named as trustees. However, while Cox never accepted the trusteeship, Wheatcroft also resigned after six months. However after a designation, the other trustees incurred certain debts to Hickman. He initiated the present action against Cox and Wheatcroft claiming them to be partners in the business and as a result liable for the debts. The court stated that it had been argued that the creditors including Wheatcroft and Cox are interested in the profits. And as a result, they should be considered as partners. It is generally stated that the test regarding the presence of a partnership is to see if such person is entitled to receive out of the profit made by the business. The court stated that generally this test is sufficiently accurate, and the right to take part in the profits provides cogent evidence regarding the fact that such business was carried on, in part for or on behalf of the person. However, the real basis for the liability is if the trade has been carried on by the person acting on his behalf. Therefore, only in such a case the person can be held liable for the obligations of the business and entitled to the profit made by the business or to share it.
Under these circumstances, the court arrived at the conclusion that in the present case, Wheatcroft and Cox cannot be considered as the partners in business and as a result, they cannot be held liable for the debts of the business.
In the present case, the agreement created between Rose and Violet provides that Violet will lend $20,000 to the partnership and in return, a loan agreement will be drawn between the parties which provide that the lender (Violet) is going to receive a share of 20%, out of the profit or the loss made by the business. The agreement also provided that the lender was going to receive quarterly business statement as well as the right to examine the partnership books. However, it was also mentioned in the agreement that the lender should not be considered as a partner in the business. But by applying the test of partnership mentioned above, it can be concluded in the present case that Violet is a partner in Busy Bee Florist Shop even if the agreement concluded between the parties provides that Violet should not be treated as a partner.
On the other hand, Sonny had also agreed to lend $10,000 to Mary, but the ones interest on the loan. Therefore, according to the agreement between the parties, Sonny was going to receive a salary along with one eighth share out of the profit made by the business. However, as mentioned above, only the fact of receiving a share of the profits of the business is not conclusive proof that the person is a partner in the business and therefore liable for the debts of the business. On these grounds, in the present case, the elements necessary for the creation of a partnership are not present in this case. As a result, Sonny cannot be held as a partner in Busy Bee Florist Shop. Hence, Sonny is not liable to Friendly Bank regarding the debts owed by Busy Bee Florist Shop.
It can be concluded that while it can be treated as a partner in the business and therefore liable to Friendly Bank regarding the debt owed by the business, but Sonny is not a partner and therefore is not liable to the bank for the debts.
References
Cox v Hickman (1880) 8 HL Cas 268
Cribb v Korn (1911) 12 CLR 205
Green v Beesley (1835) 2 Bing N C 108
Lang v James Morrison & Co Ltd (1911) 13 CLR 1
Re Spanish Prospecting Co Ltd [1908-10] All ER Rep 573
Smith v Anderson (1880) 15 Ch D 247
Television Broadcasters Ltd v Ashtons Nominees Pty Ltd (No 1) (1979) 22 SASR 552
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