Corporate Law For Section 6 Of Partnership Act – Discussion And Comparison Of Partnership And Company Legal Structures

Partnership

Discuss about the Corporate Law for Section 6 of Partnership Act.

In accordance with the information provided in the case, a successful business is being operated by Jack, Jill and Max from the last one year and it deals with truck sale. But for future growth and sustained progress, the formal definition of business structure is mandatory as the underlying liabilities associated with each are different. There are a host of options with regards to business structure ranging from sole proprietorship to partnership, however considering that there are three owners, hence the choice gets constrained to company or partnership (Latimer, 2005). A brief discussion on the two options and their potential benefits and limitations has been carried out below.

Section 6 of Partnership Act, 1963 defines partnership as any relationship where atleast two people (known as partners) provide agreement with regards to engaging in an activity with the profit intention. As highlighted in the Birtchnell v. Equity Trustees (1929) 43 CLR 384, the partners owe each other fiduciary duties as a result of the partnership relation. Also, indicated in the verdict of the Green v. Beesley (1835) 2 Bing N C 108, partnership structure is governed by the concept of mutual participation.

The potential benefits associated with running a business as partnership are mentioned as follows (Davenport & Parker, 2014)

The structure can be put in place without time delays and at minimal cost as only a partnership agreement is required to be signed between the partners.

There is division of work as compared with sole trader where all the functions have to be discharged by the owner. Also, due to presence of more people, higher sharing of knowledge occurs which deals to better decision making.

The partnership agreement tends to define the profit sharing and also liabilities in an objective manner..

The partners are liable for the actions and decisions made by the partners on an individual basis as indicated in the verdict of the Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11 case.

In the event, that an individual partner wants to exit the business by stake sale, it cannot be executed without prior approval of the other partners.

The potential liabilities of partners in this structure theoretically is infinite as partnership firm is not a legal entity as indicated in the arguments of the Re Buchanan & Co (1876) 4 QSCR 202 case.

Benefits

A company legal structure gains legal sanctity in accordance with Corporations Act 2001 and is one of the most popular structures which has the following implications.

As highlighted in Section 124, Corporations Act 2001, a company is a legal entity and hence business is conducted in the nature of the company and not the shareholders.

The above ensures that the company is held liable for its activities and actions and the personal liability of the shareholders is minimized except is cases where there has been extension of personal guarantee.

It is easier for this structure to dilute equity and raise capital from the financial markets where the shares of certain companies is frequently traded.

The company structure for inception has higher formalities and these are typically time consuming and also costly.
The financial reporting norms tend to be more stringent for this legal structure in comparison with other forms such as sole trader and partnership.

Recommendation & Conclusion

While both the above legal structure have potential benefits and limitations, it is advisable for the current truck business to prefer the company option. This is justified on account of the following reasons.

The truck business typically has high requirement of capital and hence company structure could allow raising incremental finance required for business expansion. (Harvey, 2009).

Also, considering the nature of the business, the liabilities could be potentially significant and hence to ward off the personal liability of the owners, the company structure would be preferred.

Going forward, the corporate tax rate would result in lower tax liability as compared to the personal income tax rate applicable in the partnership structure (Lindgren, 2011).

To opine on the existence of any corporate liability that arises for the employer (Child Toys Pty Ltd) due to actions undertaken by Betty.

To opine on the course of action that the employer (Child Toys Pty Ltd) can pursue in wake of actions taken by Charles.

There is an agency relationship which tends to exist between the employers and employee where employees tend to act as the agent of the employers who in turn act as the principal. With regards to actions taken by the employees, the employers are bound by those actions irrespective of the fact whether those actions were in line with the instructions extends by the employer or not. This is clear from the arguments made in the Amaba Pty Ltd v Booth [2011]. The employees as agents are immune to the liabilities arising from their conduct even though the employer in case of misconduct may initiate legal action against the employee who acts in a manner that is detrimental to the interest of the employer (Paterson, Robertson & Duke, 2015).

Also, the employer tends to be superior party in the relationship as is apparent from the verdict of the Keramianakis v Regional Publishers Pty Ltd, [2009] and hence would be held accountable for the actions of the employee (Lindgren, 2011). In accordance with the Section 5Q, Civil Liability Act, 2002, if any work of delegable nature is being done than any liability on account of the same would rest on the party delegating the work (Pathinayake, 2014). Besides, as is apparent from Maxwell v Highway Hauliers Pty Ltd, [2014] case, in case of execution of contract by the employee or agent with an external party due to misrepresentation , the external party’s interest are safeguarded and any liability on account of the contract would have to be borne by the employer.

Limitations

In relation to the restrictive covenant that are applied, the basic intent is to ensure that the employee leaving the firm should not start a comparable business by exploiting the confidential information that employee may have on account of the privilege position that he/she occupied with the previous employer. This is ethically and principally justified since the agent owes responsibility towards the principal even after the relation has terminated (Latimer, 2005).

Based on the verdict of the Aristocrat Technologies Australia Pty Ltd v Allam, [2013], it is apparent that every business has come confidential information and the employee should not act in bad faith and hurt the legitimate business interests of their previous employer. Even though restrictive covenant has limited utility but in case where the employee tends to act in bad faith, the covenant is considered to be enforceable as is apparent from the decision reached in the Wingfoot Australia Partners Pty Ltd v Kocak, [2013] case. Thus, while the scope of restrictive covenant is not expansive, it does provide protection to the business interests of employers which may be harmed due to actions by ex-employee which are enacted with the intention of harming the employer (Pathinayake, 2014).

The given information indicates that Betty is a salesperson with Child Toys and has executed a contract based on fraudulent misrepresentation since she knew that she was conveying false information. As a result of the contract being enacted, serious injuries were sustained by a child s the toys had chemicals present. Even though Betty did not consult the employer before entering the contract and misrepresenting information but still liability due to the injury would be borne by the company. However, the company may initiate action against Betty for she is in violation of the fiduciary duties directed towards the company.

The given information indicates that Charles was occupying a senior position in the company and therefore had information about the major customers and their respective requirements. When Charles leaves the organization, the company enacts a restrictive covenant with him whereby he could open a similar business to Child Toys only after the passage of two years. Still Charles went ahead and established a business in the same field and is also approaching the major clients of Child Toys. Clearly, this amounts to the restrictive covenant being violated and also Charles is acting in bad faith as he has decided to exploit the contacts he built due to the position occupied at the ex-employer Child Toys. Hence, in the situation presented, the restrictive covenant will be held enforceable by the court and the company can initiate legal action to prevent Charles from approaching the clients of Child Toys and also damages may be claimed in case of losses.

Conclusion:

The employer Child Toy would have to bear the liability arising out of contract enacted by their employee Betty.

In this case, the restrictive covenant enacted with Charles will be legally valid thus allowing the previous employer Child Toys to take reasonable actions for ascertaining the firm’s interests.

References

Statutes and Case Laws

Section 20, Partnership Act, 1963

Section 6, Partnership Act, 1963

Section 124, 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