LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

LAW2106 LAW OF BUSINESS ORGANISATIONS Assignment - template Semester 2 2012

Name: David Stephen Student number: 61016704 Question answered (1- 2): 1 and 2 Word count (without footnotes) (maximum allowed 2000): 1978 State any approved extension date (and attach the course leaders approval):

ASSESSMENT CRITERIA Question 1 HD Analysis Legal Problem Solving Communication & presentation Total Comments 7.5 3.75 3.75 A 6 3 3 B 5 2.5 2.5 C 4 2 2 F 3 1.5 1.5 No Attempt 0 0 0

1| Page

LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

Question 2 HD Analysis Legal Problem Solving Communication & presentation Total 7.5 3.75 3.75 A 6 3 3 B 5 2.5 2.5 C 4 2 2 F 3 1.5 1.5 No Attempt 0 0 0

Comments

Marks according to criteria: Less any penalty for late submission: Total marks awarded:

2| Page

LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

Question 1 This case involves Melanie and Carol who conduct a beauty salon business. Polly agreed to lend Melanie and Carol $10,000 to get the business started, with profits being distributed between Melanie and Carol equally. Claire, a client, purchased goods from Melanie and Carol that caused severe facial burns. Claire brought a tort of negligence against the business. Claire is claiming damages against Melanie and Polly as Carol has no funds. Melanie and Polly claim they are not liable as the negligence was solely the responsibility of Carol. The first issue is a partnership is involved, and if so who are the partners. We look to the Partnership Act (1981) (Qld) to determine the definition of a partnership, in s5 (1) of the Partnership Act (1981) states Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. 1 To further break down this definition and determine what is meant by the terms carrying on business, business in common and in common with a view to profit. The dictionary of the Partnership Act (1981) defines a business as including every trade, occupation and profession2. The term carrying on business can be determined by looking at precedent see Smith v Anderson (1880), in this case the court found The expression carrying on implies a repetition of acts3. The next issue to determine is the phrase in common with a view to profit. To break this down we look for the definition of in common, this was determined to mean that there was an agency agreement between partners. It was stated in Lang v James (1911) Now in order to establish that there was a partnership, it is necessary to prove that JW McFarland carried on the business of Thomas McFarland& Co. on behalf of himself, Lang and Keates, in this sense, that he was their agent in what he did under the contract with the plaintiffs.4 The next we determine with view to profit this phrase means that business was established to making a profit and the willingness to bear losses. The definition of profit is unclear in the Partnership Act (1981)but the most commonly accepted definition is derived from Fletcher Moulton LJ in Re Spanish Prospecting Co Ltd Profits implies a comparison between state of a business as two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year.5
1 2 3 4 5

Partnership Act 1981 (Qld) Reprinted 15 March 2006 Section 5 (1) Partnership Act 1981 (Qld) Reprinted 15 March 2006 S3 Dictionary Smith v Anderson (1880) 15 Ch D 247 Lang v James Morrison and Co Ltd (1911) 13 Clr 1 at 11 Re Spanish Prospecting Co Ltd (1911) Ch92

3| Page

LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

Looking at the law, who are the partners? We can conclude that since Melanie and Carol share the profits equally they are partners s5 (1) Partnership Act (1981). The question is if Polly having lent money to the business, can be considered a partner. The Partnership Act (1981) s6 (c)(i) states the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of business does not make itself make the person a partner in the business or liable as such6 This rule embodies the decision in Cox v Hickman (1880) where Wightman J at 443 stated it is said that a person who shares in net profits is a partner; that may be so in some cases, but not in all; and it may be material to consider in what sense the words sharing in the profit are used. In the present case, I greatly doubt whether the creditor, who merely obtains payment of a debt, and no more, out of the profits of the business, can be said to share the profits.7 In our case Melanie and Carol can be considered in partnership as they are carrying on a business with the view to profits, this is confirmed by the statement Profits are to be shared between Melanie and Carol equally. The question of Polly being a partner, even though no loan repayments are mentioned is considered by the fact even though Polly may receive profits from the business, they would be considered to be loan repayments which would exclude Polly from being a partner of the business. Partnership Act (1981) s6 (1) (i) On establishment of who are the partners, we now look at the issue of the tort of negligence brought by Claire. We can establish that Polly is not a partner, from s6 of the Partnership Act (1981)8, this would imply that Polly could not be held liable for in the action against the partnership. Lastly since the negligence was caused by Carol can Melanie be held liable in the tort of negligence? We have determined that Melanie and Carol are in business and have also shown that a test of partnership is the ability of a partner to Partnership Act (1981) as an agent for the other partners. Lang v James (1911)9. This is further defined in the Partnership Act (1981) at s12 (1) Every partner in a firm, other than an incorporated limited partnership, is liable jointly with the other partners for all debts and obligations of the firm incurred while a partner.10 We also look the Partnership Act (1981) in s13 (1) if, by any wrongful act or omission of any partner in a firm, other than an incorporated limited partnership, acting in the ordinary course
6 7

Partnership Act 1981 (Qld) Reprinted 15 March 2006 Section 6 (c)(i) Cox v Hickman (1880) 8 HL Cas 268 8 Partnership Act 1981 (Qld) Reprinted 15 March 2006 Section 6 (c)(i) 9 Lang v James Morrison and Co Ltd (1911) 13 Clr 1 at 11 10 Partnership Act 1981 (Qld) Reprinted 15 March 2006 Section 12 (1)

4| Page

LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

of the business of the firm, or with the authority of his or her co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable for the loss, injury or penalty to the same extent as the partner so acting or omitting to act11 This was upheld in the High Court If, in assuming to do what is within the course of that business, he is guilty of a wrongful act or default, his partners are responsible. Polkinghorne v Holland (1934) 12 In our case Carol was acting in the usual course of business in providing and packaging beauty products, so Claire would have a case against Carol and Melanie. In conclusion we have determined that Carol and Melanie are partners in a beauty business, with Polly not being a partner, on the basis that Polly only loaned money to start the business and, even though has a right to profits, it is for repayment of the debt (Partnership Act (1981)s6). Claire has a case of tort of negligence against the partners Carol and Melanie even though Carol does not have the financial resources.

11 12

Partnership Act 1981 (Qld) Reprinted 15 March 2006 Section 13(1) Polkinghorne v Holland (1934) CLR 143 at 156-157

5| Page

LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

Question 2 In this case we have a $2 company Brodie Pty Ltd acting as trustee for Brodie Family Trust. The company holds property on behalf of the trust and the nature of the business is running a liquor store. Larry as sole director of Brodie Pty Ltd orders $15,000 of wine and spirits from Winit Pty Ltd, making it clear he was signing on behalf of the trust as trustee. At the time the store was seriously in debt and the trust had insufficient funds to meet its commitments. The store has now gone broke and unable to meet its commitments. The issues we need to determine are whether the transaction was made in the normal course of business; are Winit Pty Ltd liable as they were informed Larry was signing on behalf of Brodie Family Trust and, if not is Larry able to claim indemnity from the trust. To apply the law we look at the fact that Larry told Winit Pty Ltd at the time he entered into the contract that he was acting on behalf of the trust. It was held in Watling v Lewis (1911) that A covenant by a person "as trustee" does not render the trust estate liable; it is a covenant by himself13 In effect as the trust is not a legal entity it can enter into a contract, so the contract entered into is with the trustee. The second issue to determine is whether Larry has a right of indemnity against the trust as Larry incurred the debt in the normal course of business; does Winit Pty Ltd have the right of subrogation. In the Trusts Act (1973) s72 reads A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers This was held in Commissioner of Stamp Duties (NSW) v Buckle (1998) where the justices of the High Court stated Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement: if he has not discharged yet, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration."14 The last issue is that Larry entered the contract with Winit Pty Ltd knowing the trustee company was trading insolvent. Under the Corporations Act ss588G sets out that Directors of

13
14

Watling v Lewis [1911] 1 Ch 414 at 423

Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245-6

6| Page

LAW 2106 2012 S2 Assignment 1 Stephen D

61016074

companies are responsible to stop insolvent trading, ss588G 3A states For the purpose of an offence based on subsection (3), absolute liability applies to paragraph (3)(a)15 Having examined the law we can see in this case that Larry is entitled to indemnity against the trust assets but Winit Pty Ltd has a case under the Corporations Act ss588G that he traded while insolvent so they have the right to damages against him personally. Larry does not have a defence using that he entered into the contract with Winit Pty fully aware he was acting as a trustee as this has been disallowed by Watling v Lewis (1911). Winit Pty Ltd can enforce the right of subrogation against the trust which will place it in a better position in the creditors list behind the mortgage holder for recovery of monies owed above other unsecured creditors. As mentioned Winit Pty Ltd will be able to seek damages from Larry personally for any shortfall of debts owed as he, as director of the company, traded while the company was insolvent.

15

Corporations Act 2001 Section 588G (3a)

7| Page