Corporations Law and Partnership Law - Coursework Example

PARTNERSHIP LAW: CORPORATIONS LAW AND PARTNERSHIP LAW STUDENT NAME: COURSE: TUTOR: DATE: Corporation law and the partnership law though considered to differ on the basis of a separate legal entity a common aspect to both of them is the issue of agency1. An agent is usually considered to be a person who acts on behalf of the principal as well as an agent does have the power to bind the principal and third persons2. The agency relationship that does exist between an agent and the principle is fiduciary in nature that is; there needs to be a clear consent by the principal to the agent and that the agent is to act on the principal’s behalf and subject to the principal’s control and consent of the agent to Act in that manner3. The main elements of determining whether a partnership does exist is that the A partners have a valid agreement, that they carry on a business in common with the view of making a profit4. However, in Salomon v A. Salomon & Co Ltd5 a corporation exists as a separate legal entity that can sue and be sued, has limited liability, there is perpetual succession as well as it can own property6. The fiduciary relationship that exists is to ensure that there are obligations of trust and confidence and that the fiduciary (agent) should act in the best interest of the principal and place his duties ahead of any other personal business7. It is an accepted principle in the law of equity developed to counteract the rigors of common law that the fiduciary is to have undivided loyalty8 and that where there are acts or omission done by the agents then this has an effect on the partnership or corporation. A partnership or a principal is only liable for the acts done by its agents if there is authority either apparent or actual authority and will not be liable authority is absent9. It therefore follows that if the agent acted on behalf of the principal for the benefit of the company with authority to perform the act the principal would be bound by the act and would have to indemnify the third party10. It therefore follows that the effect of the liability can either be joint or several depending on the act or omission done by the agent. Who can one consider to be an agent of a partnership or a corporation? The Australian Partnership Act at section 9 (2) states that every partner in the business is considered to be both an agent and principal of the firm and for other partners of the firm for purposes of the business11. A partner who acts with no authority in a particular matter12 and the person with whom the partner is dealing either knows that the partner has no authority or does not know or believe the partner to be a partner of the firm does binds the partner13. A partnership or a corporation does have a way of sharing its profits, and partners can usually evade liability on the basis that they are not partners in business14. In the case of English case of Cox v Hickman15 the House of Lords stated that sharing of profits is considered to be a prima facie evidence that a person is a partner but a receipt of such a share does not make him a partner. A contrast is drawn in corporation law that a director is an agent of the company and that regardless of whether there is profit, he must act in utmost good faith and where he acts ultra vires then the director would have the full responsibility as opposed to the company16. The agent as a fiduciary has a duty or obligation to the partnership to act in a particular way through the agency principal relationship. The business judgment rule set out in Re City Equitable Fire Insurance Co17 there are particular standards set by law for directors to perform their duties; honestly, due care and skill, competence and in an open minded manner. In acting as agents as stated in Re Lee, Behrenms & Co Ltd18 the tests for a director acting as an agent is that the transaction must be incidental to the company’s business and with authority19. Importantly a partnership and a corporation since they are abstract cannot make contracts and facilitate business transactions on their own as opined in the case of Rolied Steel Product (Holdings) Ltd v British Steel Corporation20. In cases therefore where the act done by the agent were authorized and for the benefit of the company then the partners or the company are liable for the loss either jointly or severally as stated in Re Horsely & Weight Ltd21. The extent of the act or omission of the agent must at no time be of personal benefit as this would mean that the agent would be personally liable22. The liability incurred by an agent for a principal or by the principal would be considered as debts and obligations of the firm incurred while the partner is a partner23. In the law of partnership, the partner must indemnify any partner against liabilities incurred in the ordinary and proper conduct of the partnership business or in anything necessarily done for the preservation of the partnership property or business24. The partnership agreement on the other hand can give a threshold for which the partners can divide their liability or each other but a third party can recover whole or part from one of the partners. The Act does provide that all partners are entitled to share equally in the capital and profits as well as contribute equally to the losses that are incurred by the partnership25. In corporation law, the practice in the United Kingdom a company exists as a separate and distinct legal entity as opposed to an individual. In the English case of Salomon v Salomon & Co Ltd 26 where the House of Lords held that the business was owned by and its debts were liabilities of the company and therefore Salomon was not liable to the company and its creditors, his debentures were validly issued. This has also been upheld in Lee v Lee’s Air Farming Ltd27. It can therefore be barely contrasted that as opposed to agency issues in partnership, in companies limited by liabilities, the promoters of the company cannot be required to contribute if the company is insolvent anymore that the amount outstanding if there is any on their shares. On the other hand if it is a company limited by guarantee they cannot be required to contribute any more that the amount of their guarantee. A grey area in partnership law is that of capital (amount paid by the promoters to start a business or partnership)28 should liability be shared based on the proportion of the capital employed by the partners. The Act at Section 34 (2) provides that the partners are to indemnify the partners for payments made and personal liabilities incurred in the ordinary and proper conduct of the business. However if it is a company with limited liability it may not ordinarily distribute capital to them but usually retains it as a fund to ensure that the company is able to meet its debt29. In other words contrasted to a partnership where the profits are usually shared in a particular way a company does retain most of the profits and adds it to the capital to cover any liabilities incurred by the company in future. The Act at Section 34 (3) provides that if a partner advances a greater contribution then an issue arises of how to share liabilities either based on the share of contribution30. It has been stated in the English case of Joyce v Morrisey and Others31 that where there are profits and losses they are to be shared equally in the absence of an agreement. However in cases where there is a partnership agreement and it stipulates how profits are to be shared then it would be considered that losses are to be shared in the same proportions32. The partners share the deficiency not as a loss but in the ratio of the amounts of capital which they originally contributed to the firm a rule established in the Garner v Murray33. The duty to account is a fiduciary duty that is imposed on an agent and that every partner is required to account to the firm any profit derived from him, without the consent of the partners from any transaction related to the partnership34. This duty is very broad and where there is a breach, the law of trust can issue a remedy known as tracing to know how the funds were spent35. A challenge however is presented in corporation law where the company is held liable but it fails to be liable since it hides behind the mask of “corporate veil”36. Ordinarily the company directors are not usually revealed but where a company is used as an instrument of fraud and avoids legal obligation and a director has breached a duty, then this rule is breached and the corporate veil is lifted to enforce legal obligation37. It can therefore be concluded that the partnership does provide a solution to the issues of agency since the liability of any partner would only be liable if the actions he undertook were not ordinarily done for the benefit of the business, it was fraudulent as well as where the partner was acting in bad faith. The issue of limited liability is also a critical aspect in the determination of liability in corporation where as a set principle in Salomon v Salomon where it was stated that a company is a separate legal entity different from the individual forming it and therefore the company will be liable for any issues that arise38. A key instrument in relation to agency relationship is that of authority to act under a principal as well as the fiduciary relationship that is created within a partnership. A breach in the fiduciary relationship gives rise to indemnity issues as well as the issue of apportioning liability amongst the partners within the partnership. REFERENCES Bray, J., Equity and Trusts, (J. Martin, & C. Turner, Eds.) (Oxford University Press, 2006) Carter, J., Carter's guide to Australian contract law ( Butterworths , 2010). Clements, R. and Abass, A. Equity and Trusts. (Oxford University Press, 2011) Duncun, W.,The Implication of a term of good faith in commercial leases. Australian Property Law Journal. 9 (3), pp. 209-227 Evans, M, Equity and Trusts. (Chatswood: LexisNexis Butterworths, 2003), p 122 Gamble, J.E. (2011). Expanding the Business Lineup. Alabama: University of Alabama Gibson, A., & Fraser, D. (2012). Business Law ( Frenchs Forest: Pearson, 2012) Greenhow, A., The Statutory Business Judgement Rule. Bond Law Review (2012), 11 (1). Latimer, P., Australian Business Law 2010. ( North Ryde, N.S.W: CCH Australia. 2011) McDermott, B. . Cases and Comments. (2006) Sydney Law Review , 28 (373). Partnership Act 1963 (Republication No 9 of May 28 , 2012) Sweeney, B., O'Reily, J., and Coleman, A., Law in Commerce ( Chatswood, N.S.W: LexisNexis Butterworths 2010). Terry , A., and Giugni, D., Business and the law (Cengage Learning Australia, 2010). Tomasic, R., Bottomley, S., & McQueen, R., Corporation Law in Australia. (Federation Press, 2002). Turner , C., and Gamble Rodger.,Concise Australian Commercial Law. ( Thomson Reuters (Professional) 2011). Turner, C., Australian Commercial law (Thomas Reuters, 2009) Vermeesch, R. B., and Lindgren, K. E., ' Business law of Australia , ( LexisNexis Butterworths, 2009) Warner-Reed, E., Equity and Trusts.(Pearson Publishers:2011) Watt, G. , Equity & Trusts Law (Oxford University Press, 2010) Western Australia Partnership Act (WAPA) Read More