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To determine if Ronaldo would be considered a partner and hence liable to pay for the losses caused to the business using the relevant case law and legislation.
In accordance with the verdict of the Green v Beesley[1], partnership is defined as any relationship that tends to exist between two or more persons (referred to as partners) by virtue of carrying a business with profit intention. Further, the partners through the enactment of the partnership agreement tend to bind the various partners in a legal relationship that is of contractual nature[2].
The relevant legislation that governs the working of partnership is the Partnership Acts 1892 (NSW). In line with Section 1 of this act, in order for a business structure to be termed as a partnership, it must satisfy the following three conditions[3].
This implies that the activities of the business must be repetitive in nature and should not be mere isolated transactions. This need for continuity in the business activity has been inferred in the judgement of Ballantyne v Raphael[4] where the underlying transaction was of isolated nature and hence the arrangement or association was not termed as partnership.
In order to be classified as a partnership, it is imperative that the business is carried on in the name of all the partners as a common entity. However, as specified in the Lang v James Morrison & Co Ltd [5] case, it is not imperative that every partner should be actively engaged in the management of business[6]. In order to understand the commonality clause better, the Re Ruddock[7] should be discussed here.
Ruddock was a sole trader and was indebted to the grandmother (Mrs. Bear) of a particular employee. In order to end the debt owed to Mrs Bear, Ruddock enacted an agreement with her as per which she was gives 25% of the share in business and the benefit derived therein would accrue to the grandson. The relevant terms of this agreement are highlighted below[8].
Ruddock subsequently also diluted another 25% share of the business and in this transaction at every step of the negotiation, he not only kept Mrs. Bear in the loop but also took her consent before proceeding further. At a later date, the business went down into huge losses and as a result Ruddock became bankrupt in settling the business liabilities. Further, the creditors still unpaid approached Mrs. Bear to settle the pending debt. But she tried to gain immunity by indicating that Ruddock also owed her money and hence she was a mere investor in the business and not a partner[9].
However, in the given case, the court ruled in favour of the creditors and termed Mrs. Bear as a partner even though she did not take any onus of daily management and business affairs which were handled by Ruddock only. As per the honourable judge, the key principle deployed by courts in deciding such cases is that partner is an entity who has participation rights for profits. This holds true even when the individual does not participate in management and not responsible for losses. Further, a critical aspect in the given case was that the arrangement in the given case did not involve any loan as Ruddock had no intention of paying the loan back in the future and the share sale was a permanent settlement for the outstanding loan. Further, the grandson in the given case has no role since he had no rights with regards to the business and that Mrs. Bear acted as the partner[10].
It is apparent from the above verdict that the exact relation between partners in actuality is driven by the substantial rights of each of the partners and not by the wording of the partnership agreement. Also, the partner cannot escape the liability of losses when he/she has right to participation in the profits. Another noteworthy aspect is the fact that in the business dealings, Ruddock treated her as an partner and hence discussed the various decisions with her[11].
The business activities must be carried out within the intention of profit making
Partnerships are associations which are bound by profit intention. Thus, it is different from the associations such as clubs and societies that are formed with the intention of non-profit activities and thereby do not yield any profits for the various members as has been clarified in the Lord Linley in the verdict of the Wise v Perpetual Trustee Co Ltd[12]. It is imperative that the gain as desired from partnership relations refers to pecuniary gains and must not be intangible terms such as knowledge, skill and experience[13].
In the given case, Lee is carrying a business in the capacity of sole trade in NSW. She has to pay a total debt of $ 45,000 to Ronaldo. Lee gives a share of 33.33% in her business to Ronaldo for discharging the debt. The following conditions are agreed to between both parties.
While Lee continued to manage the day to day management, she took major business decisions only after consulting Ronaldo. Further, this agreement that the two has in place was without any expiry date. Lee consulted Ronaldo with regards to employment of apprentice in 2013 as the business increased in size. However, in 2015 due to competition from on line businesses, the business performance of Lee’s business suffered a downturn and hence faced financial difficulties. By March 2016, Lee had no personal assets left for business debt payment and hence entered into receivership. One of the major lenders to Lee’s business was Three Penny Bank. The bank considered Ronaldo as partner and hence wanted to establish a claim on his personally owned assets to settle their claim. However, Ronaldo stated that he himself was a creditor and has no partnership with Lee in the failed business.
It is apparent that the given business was a partnership. This is because the business was of continuous nature and not an isolated transaction. Also, the aim of conducting this business by the partners was to make profits. Further, the commonality principle is also satisfied as apparent from the verdict of the Re Ruddock (1879) 5 VLR (IP & M) 51. In view of the case verdict, it is apparent that the partnership that existed between the two was of indefinite tenure as Lee had no intention to repay Ronaldo at any future date. Further, irrespective of the terms of the agreement between the two parties, it is not possible for Ronaldo to have a share in the profit while not being responsible for the losses. Also, barring a couple of aspect, the relationship between the two was akin that of partners treating each other particularly since Lee consulted Ronaldo in all major decision making. Hence, it is apparent that Ronaldo is a de facto partner in the business irrespective of the agreement with Lee.
On the basis of the above discussion, it is apparent that Ronaldo cannot escape the liability arising out of the partnership in the business. As a partner, selective fulfilment of the clause is not possible and hence the personal assets of Ronaldo can be liquidated by the bank to recover their dues.
Davenport, Shayne & Parker, David, Business and Law in Australia, (LexisNexis Publications, 2nd ed., 2014)
Gibson, Andy & Fraser, Douglas, Business Law, (Pearson Publications, 8th ed., 2014)
Latimer, Paul, Australian business law, (CCH Australia Ltd, 24th ed., 2005)
Pendleton, Wayne & Vickery, Roger, Australian business law: principles and applications, (Pearson Publications, 5th ed., 2005)
Pathinayake, Athule, Commercial and Corporations Law, (Thomson-Reuters, 2nd ed., 2014)
Case Laws
Ballantyne v Raphael (1889) 15 VLR 538
Green v Beesley (1835) 2 Bing N C 108 at 112
Lang v James Morrison & Co Ltd (1912) 13 CLR 1
Re Ruddock (1879) 5 VLR (IP & M) 51
Wise v Perpetual Trustee Co Ltd [1903] AC 139
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