Partnership Liabilities: A Case Study in Corporations Law LLW2004

This case study examines a partnership dispute involving Rose, Mary, Violet, and Sonny from the Busy Bee Florist Shop, focusing on whether Violet and Sonny should be considered partners and held liable for the partnership's debts. Rose and Mary, facing financial difficulties, seek loans from Violet (in exchange for a share of profits, access to books, and quarterly statements, but with a clause denying partnership status) and Sonny (an employee, in exchange for a share of the profits). The analysis applies relevant partnership law principles, including the Partnership Act 1958 (Vic) and key case precedents, to determine the status and potential liabilities of Violet and Sonny, concluding that Violet is likely to be considered a partner despite the express clause, while Sonny is not, based on his role as a lender and employee.

Running head: BUSINESS LAW
Business Law
Name of the Student
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Author Note

1BUSINESS LAW
Partnership depicts structure of business that is formed for the purpose of operating a
business with a view to generate profit. With respect to the business operations the structure
and function of a partnership is identical to other structures including companies and sole
proprietorship. In the territory of Australia there are several legislations that has been enacted
for the purpose of regulating the relationship of partnership. The running of the partnership
business is regulated and defined under the under the Partnership Act 1958 (Vic)1 (PA 1958).
However, the definition provided by all the legislations prevailing in Australia comes down
to a certain essentials relating to partnership. One of the basic essentials of a partnership
business is the presence of at least two partners carrying out the business on behalf of the
firm. There needs to be an agreement between the partners for the purpose of carrying out the
business on behalf of the farm and that agreement needs to have the status of a valid contract.
The motive of the partners needs to be the earning of profit from the running of the business
of partnership. The joint ownership of the business and its properties as well as the running of
the business in a common capacity is another requisite of a partnership business. It also needs
to be stated in this regard that an agency relationship is required to be present in a
relationship between the partners to be rendered as a partnership business.
Issue
The facts of the case presents and issue that waiter Rose, Violet, Mary and Sonny can be
treated as partners or the relationship between them can be treated as a partnership
relationship u/s 5 of the Partnership Act 1963 (Cth)2.this existence of the partnership between
these partners are required to be assessed for the purpose of assessing there liabilities as well
as status under the given set of circumstances. For the purpose of such determination all the
essentials of a partnership needs to be applied to a particular situation to arrive at a
1 The Partnership Act 1958 (Vic)
2 The Partnership Act 1958 (Cth), s. 5

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conclusion regarding the existence of the partnership between certain partners as well as their
liabilities under section 13 of the PA 19583.
Rule
As per the definition provided by the common law partnership implies relationship
between two or more individuals acting in a comment capacity while running a business
which has been continued for the reason of generating profit. This relation requires a contract
between the parties that can be enforced legally and is binding upon the parties. As per the
definition provided in the case of Kendall v. Hamilton, 4 App. Cas. 504, 544 (1879)4 a
partnership is said to have formed when there is a mutual participation existing between the
partners while running the business in the absence of any formation of an entity of legal
nature. On the other hand, the principles established in the case of Re Ruddock (1879) 5 VLR
(IP & M) 515, points towards a relationship where atleast two persons r associated with each
other under a contractual obligation to carry out a business mutually with a motive of
generating profit or loss, which needs to be shared among them with respect to the agreement
between them. On the other hand limited partnership is formed as per the requirements
provided under the Corporations Act 2001 (Cth)6 and the number of partners permissible is
also determined accordingly. As held in the case of Elkin & Co Pty Ltd v Specialised
Television Installations Pty Ltd [1961] SR (NSW) 1657, in a partnership relationship the
partners are treated as agents of the partnership as well as agents of each other and all the acts
carried out by them is required to be treated as binding upon the partnership as a whole as
well as other partners as per section 9 and section 10 of the PA 19588.
3 The Partnership Act 1958 (Vic), s. 13
4 Kendall v. Hamilton, 4 App. Cas. 504, 544 (1879)
5 Re Ruddock (1879) 5 VLR (IP & M) 51
6 The Corporations Act 2001 (Cth)
7 Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW) 165
8 The Partnership Act 1958 (Vic), s.9,10

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The meaning of the word partnership has been provided u/s 13 of the PA 19589. Under this
section any association between two or more individuals carrying out business with
commonly derived motive of earning profit is required to be treated as a partnership for the
purpose of this Act10.
It has been held in the case of Wiltshire v Kuenzli (1945) 63 WN 4711 even if the
partnership agreement strictly excludes a person from being a partner but the relationship
between the person with other partners as well as with the business constitutes the presence
of a partnership, person needs to be render the status of a partner and will be imposed with all
the liabilities and duties under a partnership business.
It has been held in the case of Smith v Anderson (1880) 15 Ch D 247 at 273 12, whether a
person is to be treated as a partner will not only be depending upon the agreement between
them or the requisites of the statutory definitions given. The court strives to apply the
objective test, which will be based upon the circumstances of the cases as well as the
statutory definitions.
The most important factor regarding the existence of a partnership relationship is the
factor introduced in the case of Green v Beesley (1835) 2 Bing N C 10813. In this case it has
been held that the sharing of the profits and loss of the business which is not contingent upon
the happening or non-happening of an event will be required to be treated as the existence of
a partnership relationship and all the persons associated will be required to be treated as a
partner in this furtherance.
9 The Partnership Act 1958 (Vic), s. 13
10 Callison, J. W., & Sullivan, M. A. (2012). Partnership Law and Practice: General and Limited Partnerships.
West.
11 Wiltshire v Kuenzli (1945) 63 WN 47
12 Smith v Anderson (1880) 15 Ch D 247 at 273
13 Green v Beesley (1835) 2 Bing N C 108

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An employee or agent employed with a partnership business will not be rendered as a
partner of the business for the mere fact that he has been earning a remuneration out of the
share of profit, which has been accrued from the partnership business as has been provided
u/s 6 of the PA 195814. Moreover, if a person being an employee or an agent of the business
extends a loan towards the business and claims a rate of interest out of the profit will not
confirm him with the status of a partner.
It has been held in the case of Federal Commissioner of Taxation v Whiting (1943) 68
CLR 19915 the advancing of money in form of a loan will not render a person to be a partner
in the partnership firm and other requisites of the partnership relationship is also required to
be established.
Application
The facts of the case involves Rose and Mary who were running a business called as Busy
Bee Florist Shop as a partnership business. This makes them a partner in the partnership and
confers them with the power of an agent in binding the firm as well as each other by the acts
they were committing in the course of the partnership business. Again due to certain
unseasonal weather there have been certain losses caused to their partnership business. This
has made them to avail a loan from Friendly Bank. This loan need to be treated as binding
upon both the partners as well as the partnership business. Moreover as there has been no
agreement between them regarding the sharing of profit and losses it needs to be assumed
that the profits and losses will be shared equally between them. In the furtherance of the
losses incurred, Rose approached Violet who is one of her friends for the purpose of availing
a loan and Violet has agreed to extend such a loan in return of a share of profit from the
partnership business. As Rose has the power to effect the contract on behalf of the
14 The Partnership Act 1958 (Vic), s. 6
15 Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199

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partnership, the contract between Rose and Violet is said to be valid. On the other hand, Mary
approached for a loan to Sonny who is an employee in the business and the loan has been
extended by her in return of a profit from the business. Owing to the, declining condition of
the business, Rose and Mary left for vacation informing the Friendly Bank that Violet and
Sonny are the partners in the business now.
In the present situation violet has agreed to avail the loan to Rose of $20,000 for certain terms
that needs to be imposed upon the partnership of Rose and Mary. One of the terms contains
the sharing of profit and losses of 20% to be allotted to violet in return of the loan. Another
term mention the right to be given to Violet regarding the enquiry of the books related to
accounts with respect to the partnership. Another term that violet has claimed is the statement
of business quarterly to be furnished towards her for an enquiry. Lastly she has inserted or
condition regarding her contribution to be treated as a loan and not to treat her as a partner in
the farm. All these conditions has been inserted in a document and has been duly executed
and signed before the extension of the loan buy Violet. Analysing these set of facts, it can be
said that the main motive of Violet was to share the profits and losses and to avail certain
extra control upon the business. Moreover, her unwillingness to shared the status of a partner
in the business has been expressly stated in the agreement. Applying the principles stated in
the case of Wiltshire v Kuenzli (1945) 63 WN 4716. It can be stated that violet will be
rendered as a partner in the partnership business irrespective of her condition in the contract
restricting for status of a partner. By virtue of the additional control and the profit sharing
motive will render her with the status of a partner. The fact that she has expressly denied
liability of being a partner will not successfully severe her from her liability as a partner.
Hence she will be treated as a partner and will be conferred upon with all the rights and
liabilities in relation to the partnership business.
16 Wiltshire v Kuenzli (1945) 63 WN 47

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In the given situation, Sonny has been an employee in the business of the partnership and
has agreed on being approach by Mary to extend a loan of $10,000 to the partnership. In
return of such a loan, Sonny has claimed to avail a share of one-eight of the profit that the
farm has been making as a consideration for the loan extended by her. Applying the principle
established in the case of Federal Commissioner of Taxation v Whiting (1943) 68 CLR 19917
it can be said that the mere sharing of profit will not be rendered the status of a partner upon a
person. Addition to that provisions of the Act also renders a person to be not held liable for
the purpose of her sharing profits of the business as a partner. Sonny extended the loan
towards the partnership business for the purpose of availing a share in the profit. However,
she never intended to exercise any control over the business or have any other authority in the
furtherance of the business. Moreover Sony never had the intention to carry out the functions
of a business jointly with the other partners. Hence, it can be stated that although there has
been profit sharing motive but the other requisites of the partnership are not satisfied and will
not confer upon Sonny the status of a partner.
Conclusion
Hence, in the light of the above discussion, it can be stated that Violet is a partner of the
partnership business as Rose and Mary but Sonny cannot be construed as a partner in the
business along with them. The law relating to partnership requires all the partners to be
treated as a agent of the partnership firm as well as the other partners. All the actions taken by
each of the partner will be binding upon the farm as well as upon the partners individually.
Mary and Rose has left for a vacation leaving the business to include more losses. However
this close to the bank has availed loan that Violet partner in the business and in in the real
sense Violet is also regarded as a partner of the business irrespective of a restriction in the
17 Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199

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contract. Violet will be liable to all the liabilities of the business and in this case she will be
liable towards the loan availed from the bank. Hence, she will be liable for the loan.

8BUSINESS LAW
Reference List
The Partnership Act 1958 (Vic)
Kendall v. Hamilton, 4 App. Cas. 504, 544 (1879)
Re Ruddock (1879) 5 VLR (IP & M) 51
The Corporations Act 2001 (Cth)
Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW) 165
Wiltshire v Kuenzli (1945) 63 WN 47
Smith v Anderson (1880) 15 Ch D 247 at 273
Green v Beesley (1835) 2 Bing N C 108
Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199
Callison, J. W., & Sullivan, M. A. (2012). Partnership Law and Practice: General and Limited
Partnerships. West.