Corporate Law And Partnership Act: Discussion And Recommendation

Partnership

Discuss about the Corporate Law for Partnership Act.

The question states that Jack, Jill and Max have managed to establish a healthy business which is related with the sale of truck and are now searching for a suitable legal structure to propel their business ahead. In order to capture on the future growth opportunities provided. It is imperative that the business structure must be appropriately defined. In the given case, sole trader is not possible as there are three owners have stake in the business and thus the viable alternatives for the current business are a partnership structure and a company structure (Latimer, 2005). A critical analysis of these structures along with implications is discussed below.

In accordance with the relevant act of the Partnership Act, 1963, partnership refers to the relationship that exists between individuals or partners in relation to carrying on with a particular activity with the prime intention of deriving gains from indulging in the same. Also, there are some features of partnership as highlighted below.

Partners tend to have fiduciary duties that are directed toward each other (Birtchnell v. Equity Trustees (1929) 43 CLR 384)
The governance of partnership is driven by underlying idea of mutual participation (Green v. Beesley (1835) 2 Bing N C 108)

The advantages of a partnership business are briefly outlined as shown below (Davenport & Parker, 2014)

There are minimal legal formalities (less cost and consumption of time) associated with its inception as potentially the execution of partnership agreement gives rise to a partnership firm.
Since there are partners who are looking after the business, thus it potentially leads to better work load division in comparison with sole trader and enhances the decision making prowess owing to broader set of suggestions.
There is objectively in relation to the sharing of benefits and liabilities which are driven directly from the partnership agreement and the underlying statute..

There is mutual liability of partners and hence the partners tend to bound by individual decisions taken by a particular partner with or without the consent of others (Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11).
There is lack of liquidity in terms of the exit option since a particular partner cannot sell the stake to another investor without consent on the same by the existing partners.
There is infinite personal liability on the partners as the partnership firm does not have a separate legal identity and is known by its partners only who have to personally bear all business related liabilities (Re Buchanan & Co (1876) 4 QSCR 202)

The business is in the company’s name as it has a separate legal entity as prescribed by the Corporations Act 2001.
The shareholders have no personal liability for the activities of the company and for any issue the company would be held responsible and may also face liquidation
It is convenient to alter the ownership structure by the issue of the shares and hence aids is raising of incremental capital

There is higher requirement of time and cost with regards to inception of the company.
The company typically has higher reporting obligations as compared to the other structures which may be resource consuming.

Recommendation & Conclusion

In the given case, the owners should choose the company structure owing to the reasons attributed below.

Considering the nature of business, capital requirements are expected to be high and hence company allows for convenient raising of capital through equity dilution (Harvey, 2009).
In case of a faulty truck, the potential liabilities for the business can be sizable and thus the company structure would provide immunity to the personal wealth of the owners in case of any adversity
As the business is expected to witness rapid growth, the tax liability in case of company would be lower than the individual tax obligation paid by the owners at the highest marginal rate (Lindgren, 2011).

To ascertain whether the employer (Child Toys) would have to necessarily bear the liability arising from the wrong actions taken by employee (Betty).
To advice the employer (Child Toys) on the possibility of taking legal course of action against the potential violation of restrictive covenant by previous employee (Charles).

It is noteworthy that employer-employee relationship is a prime example of an agency relationship where the employer acts as the principal and employee tends to act as their agents. In such relationships, both the parties have fiduciary duties towards each other. In this context, the employee needs to ensure that he/she should act with care and adequate due diligence and seek to take only those actions which further the valid interests of the employer (Paterson, Robertson & Duke, 2015). Further, the employer need to provide immunity to the employee for their actions and bear any liabilities that may arise from the same (Keramianakis v Regional Publishers Pty Ltd, [2009] ). However, this immunity is limited only when the employee has acted in good faith (Lindgren, 2011).

But, this however does not matter for the external party client who is entering into contract with the company through the agent. The agent acts as a representative and essentially the contract is executed with the company which needs to bear any contractual liabilities arising from the same. This is the case even when the employees have acted in a manner that is detrimental to the interest of the principal and that too without the knowledge or instructions from the principal to engage in the same (Amaba Pty Ltd v Booth [2011]) (Pathinayake, 2014).This understanding with regards to the liabilities being borne by the employer is also explicitly mentioned in the Section 5Q, Civil Liability Act, 2002. Further, in cases where the contracts have been executed by employees or agents through misrepresentation (innocent or fraudulent), the potential liabilities that arise from the same in the form of claims by the external party would necessarily be borne by the employer even when the it has given no instruction to the employee to engage in misrepresentation (Maxwell v Highway Hauliers Pty Ltd, [2014]). This understanding is also advocated by Section 128 and Section 129 of the Corporations Act 2001 (Davenport & Parker, 2014).

Benefits

With regards to the enactment of restrictive covenant, these are put in place by the employers to ensure that the employee in the aftermath of termination of employment do not engage into competing activities by leveraging the privileged information that they gain access to owing to their superior position at the previous employer. In most cases, restrictive covenants are not enforceable especially when they tend to be highly restrictive in scope and intent (Latimer, 2005).

It is noteworthy that businesses have privileged information that may be accessible to top executives and it is imperative that on retirement or termination of employment contract, these employees do not act in bad faith by leveraging this information to cause harm to the interests of the precious employer (Australia Pty Ltd v Allam, [2013]) (Lindgren, 2011). In such cases, when it is apparent that conduct of the employee is driven by bad faith and intent, then the restrictive covenant is held enforceable by the court of law (Wingfoot Australia Partners Pty Ltd v Kocak, [2013]). Thus, it may be fair to conclude that while the restrictive covenant is not wide and highly intrusive in its scope but still in selective circumstances, it can potentially protect the employer’s business interests especially when the previous employee is acting on bad faith (Pathinayake, 2014).

Based on the case information, it would be fair to conclude that Betty is an agent of the company (Child Toys) and has entered into a contract based on fraudulent misrepresentation. Due to this contract, a child got severely injured as presence of chemicals in toys was confirmed. While the agent did not inform or take permission from the company before misrepresentation of facts, but despite that the employer would be liable for the injuries sustained by the child. However, in case of betty indulging in misrepresentation without instructions from the company, then she has breached her fiduciary duties and could be held liable by Child Toys.

It is apparent that Charles had a privileged position at Child Toys which provided access to clients and a better understanding of their individual requirements in terms of toys. Despite the enactment of a restrictive covenant which extended to two years, Charles immediately after leaving the company opened a rival business and started doing business with the clientele of the previous employer. Ideally, Charles should not have approached these clients directly and this amounts to acting in bad faith due to which the enforceability of the restrictive covenant would be hailed by the court and the company can take legal course of action to seek damages or get an injunction order to prevent Charles from repeating it.

Conclusion:

The company (Child Toys) has to bear the losses and damages claimed due to misrepresentation by Betty.
The restrictive contract is considered enforceable as Charles acted in bad faith by directly seeking business from the previous employer’s clients and hence legal actions can be undertaken by Child Toys.

References

Statutes and Case Laws

Partnership Act, 1963

Corporations Act, 2001

Amaba Pty Ltd v Booth [2011]. 283 ALR 461;

Aristocrat Technologies Australia Pty Ltd v Allam (2013) 297 ALR 406

Birtchnell v. Equity Trustees (1929) 43 CLR 384

Green v. Beesley (1835) 2 Bing N C 108

Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11

Keramianakis v Regional Publishers Pty Ltd (2009) HCA 18. 237 CLR 268

Maxwell v Highway Hauliers Pty Ltd (2014) HCA 33

Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511