Partnership and Potential Liabilities

Area Of Law

The issue here is to discuss partnership and potential liabilities and legal rights with partners. The area of Law in this particular problem is that laws on all matters pertaining to Partnership in regard to potential partnership. Including laws prescribed their legal rights and liabilities: Partnership Act 1895, Limited Partnership Act 1909 and the Corporations Act 2001. The leading case on partnership is Cox v Hickman case.

Discuss The Law

Partnership Act 1895 has prescribed the real meaning of partnership. Partnership according to the law means legal relationship between two or more parties on the purpose of profits generating from common business (David and Terence, 1983, 2). Partnership dispute are rarely simple to resolve (Thomas, David, and Andrew, 1992, 401). In order to set up partnership relationship the two or more parties should sign a contract which reflecting the real intention of the two party. By real intention it means that there is no cheat or deceive. This contract signed by both parties has legal binding on them. To become a partner, a person should be contributive in either forms which includes property, cash, intellectual property, expertise and so on. All parties share common responsibilities, costs and profits of business. “… all the persons interested in such partnership shall be liable for all the engagements of the firm as general partners (Fred, 1950, 347)”. That definition of partnership makes it different from registered company or joint-stock company under the Corporation Act (Roman, Stephen and Rob, 2002, 30). Shared profit is really important in identifying a potential partnership. However, in the case of Cox v. Hickman (1860), the House of Lords clarified that the sharing of profits only created a rebuttable presumption of partnership (Mark, 2009, 78). Hickman attempted to sue Cox who never acted in the position of trustees but he failed in this case because there was no intention of Cox to set up paternal relationship with Hickman. Only by shared profits can not determine there was partnership between them, so it was supported by the court when Cox denied liability. Partnership should meet all requirements prescribed by law instead of judging from shared profits. The opening words of s. 4(c) arguably codify the position in Cox v. Hickman. Persons entered into partnership could form a firm with no more than 20 persons in it. The same restrictions on size of partnerships can be seen in section 115(2) of the Corporations Act 2001. No partnership or association could have more than 20 members in it. According to the definition of limited partnership in limit partnership act 1909, a limited partnership shall not consist of more than 20 persons. Every partner has joint liability with his copartners, and also severally liable for the firm. In general they have the following personal liabilities: liabilities of tort, partnership wrong, misappropriation of funds and misapply trust money.

As for the liabilities of incoming and outgoing partners, it should be clear that there are differences. If a person is admitted by others in this partnership firm, this person does not thereby withdraw himself from the liabilities accrued or anything done before entering this firm. If there is mutual consent on this issue and this has been witted on the contracts, the incoming person therefore do not have the liabilities to creditors before admitted by co-partners. The same principle applies to outgoing partners. Any liabilities can not be discharged even if any person who retires from a firm. However, if there is mutual agreement on this issue, the situation would be different. So, it has no liabilities to debt accrued after the person retires from the firm. If there is no advanced agreement or contract, all debt accrued before the person retires from the firm should on their responsibilities. The agreement or contracts can be in either form. In can be a formal document with signatures and it can also be in an informal way that expressed by partners in oral. And it can also be inferred from facts. Those creditors have the legal right to claim their loan to those people no matter they are in the firm or not if it accrued before the person retires from the firm. The purpose of this prescription is to protect creditor’s rights. And it is become a common practice in lots of countries that every one should be responsible for deed of him. Moreover, any incoming partners should with consents from all existing partners. However, as to the outgoing partners, there is no need to obtain consents from all existing partners. The mutual rights and duties of partners can be defined by mutual consent if there is no violation of law. The mutual consent should either be in a formal way of partnership agreement or inferred from fact. Every partner has exclusive rights towards to partnership property.

This means that they are co-owners of partnership property. Partner’ share refers to the proportion of existing partnership assets. Every partner has the legal rights to convert partner’ share into cash in any time and then their liabilities and debts can be discharged form partnership business. There are rules to distribution of profits. All interests, rights and duties of partners should be determined according to partnership agreement. And as prescribed in the law there are several rules for this issue. All partners share profits and losses equally. That means they have shared interests as well as shared risks. The proportion of profits a partner may get from the firm is determined and in complied with the proportion of losses a partner may shoulder. All advanced costs expended by partners for the purpose of partnership and business running should be regard as common costs and payments. And anyone who pays for partnership in advance is entitled to a 6% interest per annum. Every partner has the legal rights to take part in the management of partnership business. They have the duty of care and duty of diligence to the partnership business. All partners are asked to faithfully devote themselves to partnership business and use their skills and intelligence for the purpose of generating utmost benefits. They also have rights to claim reimbursement or salaries for management. If there are different opinions among partners, all decisions should be made according to the point of view from the majorities. However, every partner in this firm is entitled to express their own points of view in decision making process. Moreover, every partner is entitled to inspect partnership books. Financial reports or anything else those in relationship with partnership business management are also included. Without majority consents from existing partners, there is no changes in partnership business management is permitted. If anyone would like to withdraw from the partnership business, there are several ways. They can retire from it when met the fixed term according to partnership agreement or retire from partnership at will by giving a written notice to other partners which shows his intentions. It is forbidden by law that any partner without consent from majority partners take other similar business may compete with current partnership business. Otherwise, all profits generated from those similar business should hand over to partnership business, or in other words, to all other partners. If partner’s share is assigned to others, the assignee has both same liability and legal right as the assignor. If any partner died or mentally disorder that cannot in charge of the partnership business during the continuance of partnership, it is lawful for the other partner or partners within six months to terminate the partnership by expulsion notice.

Apply The Law To The Problem

In this case, it is lawful to three partners who wish to enter into a partnership arrangement to pool their expertise as medical practitioners. According to law, they are permitted to pool expertise to enter into a partnership. As prescribed in section11, the number of persons in firm may not exceeding 20. According to section 115(2) of the Corporations Act 2001, there are also restrictions on size of partnerships. “A person must not participate in the formation of a partnership or association that has more than 20 members unless the partnership or association is incorporated or formed under an Australian law” “The regulations may specify a higher number that is higher than the number specified in paragraph (1)(b) for the purposes of the application of that paragraph to a particular kind of partnership or association”. In this case, they believe that there is scope to increase their services throughout Australia and can see a time when they might have 300 partners. However, it is illegal for them to form a partnership firm which has 300 partners.

According to the definition of partnership in Partnership Act 1895, Partnership means legal relationship between two or more persons. If they want to enter a partnership they shall sign a contract or a partnership agreement that has legal binding on all of the partners. The contract or agreement shall reflect the real intention of persons. This means the three of them shall have real intention to partnerships and none of them could cheat each other. For those potential partners, they shall sign on the contract or partnership agreement which shows that they are consent with all articles and terms in the agreement. In order to be a partner, a person should contribute to the partnership business in either form. They can pool expertise or contribute capital, no matter what kind of contribution they would made to the partnership business, it shall all prescribed in partnership agreement in detail and shall take the form of written document. All persons in partnership business have joint responsibility and shared profits generated form businesses or transactions of partnership business. In this case, the three partners believe that they should be entitled to 50% of all the profits of the partnership split equally between them. They can obtain 50% of all the profits and split it equally if they have consents from majority or prescribed it on the partnership agreement. If there is no such agreement, there would be no such arrangement. Therefore the expectations of obtain 50% of all the profits and split it equally would violated relevant laws for the reason that shared profits shall split equally among partnership without no detailed prescription. Or else it shall be split in accordance with their amount of contribution to the partnership business according to common practice. Only by shared profits can not identify that there is partnership between them, there should be common responsibilities and liabilities. Every partner has joint liability with his copartners, and also severally liable for the firm. In this case, the three partners who wish to pool their expertise to enter a partnership can be regard as initiators of this partnership business. Therefore anyone who want enter this partnership shall be regard as incoming partners. And if they want to be a partner, they shall be admitted by at least two of them. With consents of two co-partners they can enter this partnership. However, as to their liabilities it should be clear that this person thereby have liabilities for partnership debts or obligations incurred before entering this partnership business unless there is a mutual agreement or contract that can discharge liabilities of them.

There are several ways to retire from the partnership business. They can retire from it when met the fixed term or at will. If any partner died or mentally disorder that cannot in charge of the partnership business during the continuance of partnership, it is lawful for the other partner or partners within six months to terminate the partnership by expulsion notice. If any of them would like to retire from the partnership business, he or she shall hand in a notice to declare his or her purpose. A partner who retires from a firm does not thereby cease their liabilities for any debts or deed done occurred before retirement. They can negotiation on terms in partnership agreement. Legal rights and duties of each person can be varied by agreement even if there is mutual consent and there is no violation of law. Every partner has exclusive rights and is co-owners to partnership property. This means that everyone who enters the three partners business can have a share on common property. And he or she can convert his or her partner’s share into cash in any time and thereby discharged themselves from existing liabilities and debts. Whoever purchased this partner’s share would take over all liabilities and debts from the former partner. All expenditures on partnership business shall be putted into business account, as for the reason that all profits and losses are shared by all partners. And according to law, anyone who pays for partnership in advance is entitled to a 6% interest per annum. So before any potential partner enter partnership, they can reach an agreement on this issue, including how much profits they can get from partnership business and to which degree they should shoulder responsibilities. In general, profits are in relationship with how much contribution a partner can give to the partnership business. Anyone who was admitted by this partnership can take part in the management processes. There are some activities that a partner can do under the name of partnership. And in this situation, anyone who believes this person is a partner of this partnership business and signed contracts with him can be regard as valid and can be protected by law even if this person turned out no longer a partner of this firm. This is for the purpose of protecting the innocent third party. As a partner, everyone has duty of care and diligence. They should devote their efforts to generate upmost profits. Everyone should contribute their skills, expertise and intelligence to partnership business. And nobody is permitted to carry on similar business that could compete with current partnership business. If there is any violation of those duties, this partner can be fired. As for their management, this firm should pay their salaries. Besides, every partner in this firm is entitled to inspect partnership books and financial reports or anything else those in relationship with partnership business management. If anyone want a change in business management styles or any thing else that have significant effect on partnership business arrangement, he or she shall obtain majority consents from other partners.

Conclusion

Form analysis above it can draw conclusions. The three partners are permitted to enter into a partnership arrangement to pool their expertise as medical practitioners. It is understandable that they have great expectation on their business. According to principle and spirits of law, every partner shall devote themselves to prosper of partnership business. Therefore, it is illegal for them to form a partnership firm which has 300 partners. The number of persons in firm may not exceeding 20. All persons in partnership business have joint responsibility and shared profits generated form businesses or transactions of partnership business. The three partners can obtain 50% of all the profits and split it equally if they have consents from majority or prescribed it on the partnership agreement. If there is no such agreement, they can not obtain 50% of all the profits. And profits should be split equally. Obligations and legal rights are also discussed above in details.

References

David, M. and Terence, F. 1983.Modern partnership law. Great Britain: Routledge.

Fred, W. F. 1950. Partnerships: Limited: Failure to Comply with Statutes as Basis for Unlimited Liability. Michigan Law Review. 48 (3): 347-351

Limited Partnership Act 1909

Mark, G. 2009. Notes on Business Associations, Chapter Six Partnership II

Relationships between partners and other persons. http://www.law.uvic.ca/mgillen/315/documents/Ch6-PartnershipII.pdf (accessed January 28, 2010)

Partnership Act 1895

Roman, T. Stephen, B. Rob, M.2002. Corporations law in Australia. Sydney: Federation Press.

Thomas, L, Forbes. David, D, C. Andrew, M, S. 1992.Trials of Professional Partnerships. Advocators’ Quarterly 13 (4): 401-443

The Corporations Act 2001.