Business Partnership Within Organization

Question: Describe about the Business Partnership Within Organization. Answer: 1. a. Type of Business that Dilara and Aysha are operating The type of business organization that is being operated on by Dilara and Aysha is a partnership. A partnership is a business organization that is managed and operated by two or more people. The people who are managing the partnership must share profits and losses together. In the identified scenario, Dilara and Aysha were sharing profits and losses that the organization was making. It is important to explain that the 1963 Partnership Act provides a definition of what a partnership business is[1]. Section 6 (1) of the act defines a partnership as a business organization that is managed by more than two people, with the aim of getting a profit[2]. Additionally, Section 7 (4) of the partnership act identifies the circumstances when an individual is a partner or when he is not a partner[3]. The section denotes that the proof of sharing of profits is an indication that the business organization is a partnership. Furthermore, the two were actively involved in the management of the organiz ation, and that is the reason they were looking for money that they could use to improve the business operations of the company. 1 (b): Whether their current business structure is suitable or they should form another type of business structure? Which one? The current business structure is not suitable for the sale of Brothersglen Winery to Polat. It is important to assert that Dilara and Aysha are the managing directors of the organization; hence, this makes the business organization to be considered as a partnership. Furthermore, as general partners, their liabilities are unlimited. For instance, section 13 of the 1958 Partnership Act denotes that every partner in a business organization is liable to the debts and obligations of the business under consideration. However, in a limited liability partnership, not every partner is liable for the debts and obligations of the business organization. A limited partner is a passive member of the business organization, and he is only limited by the contributions that he is making to the organization. Furthermore, they are not allowed to manage the affairs of the business organization, this is in accordance to section 98 of the 1958 Partnership Act. This is a provision contained in section 60 of the 1958 Partnership Act[4]. Under this section, the liability of a limited partner should not exceed the amount of contribution he made and one that is contained in the registry. From the provision of these laws, it is possible to denote that any form of a partnership is not possible, because Polat seeks to make some contributions into the business affairs of the organization. The two partners are also interested in allowing Polat to engage in running the business and this is because he has experience and expertise in the wine making industry. Therefore, the two partners want to involve him in running the affairs of the business. In fact, P olat wants to become a chief winemaker and with this contribution, Brothersglen Winery cannot qualify to become a partnership. Basing on these facts, the best business structure that the Dilara and Aysha should consider is forming a company. In the 1896 case of Solomon v Solomon[5], the court defined a company as a distinct legal organization that is separate from its shareholders. Therefore, the assets of the company belong to it. There are two major types of company, and these types are a private limited company and a public limited company. Another name for a private limited company is a proprietary company. Section 45A of the 2001 Corporations Act provides a definition of a proprietary company and its elements[6]. For instance, the members of a proprietary company are always limited by their share. If they are not limited by their shares, the members of the company have unlimited liability, but with their share capital. Furthermore, section 45A denotes that the maximum number of shareholders that a proprietary company should have is 50. Furthermore, the number of employees that a proprietary company should have is not more than 50. Furthermore, a proprietary company must not have revenue of more than $ 25 million or the value of the assets of the organization fall at less than $ 12.5 million. Another type of a company is a public limited company. A public limited company is a large company, and the process of forming such kind of a company is complex. This company has more than 50 employees and they are always allowed to raise capital from the public. Section 112 of the 2001 Corporations Act provides the characteristics of a public limited company. It identifies a public company as an organization that is limited by shares and guarantee. Furthermore, it is also an organization that is unlimited by share capital. Basing on these facts, the best company that Dilara and Aysha should form is the proprietary company. This is because they do not have employees who are more than 50 and the assets they control is less than $ 12.5 million. Furthermore, because it will be a company that is limited by shares, liabilities of Aysha, Dilara and Polat will be limited by the value of shares they control. 2: Issue As a minority shareholder, what are the remedies that Leo can bring against the directors of the company for failure to pay dividends and unfair dismissal from the board of directors? Relevant Law Despite being a minority shareholder, he can still find protection in the 2001 Corporations Act. This act provides a number of remedies that minority shareholders can get, when they are oppressed by the directors of the company or the majority shareholders. The 2001 Corporations Act requires the directors of a company to exercise their powers in a prudent manner, and to the interest of all the shareholders[7]. It is important to note that minority shareholders do not have the ability to influence the policies of an organization. However, the directors of the company have the mandate and they are required to advance the interests of all the shareholders of the company. They must therefore act in a fair manner. Application This action by the directors of the company can be termed as an oppressive conduct. An important common law principal that defines oppression is Wholesale Society Ltd v Meyer (1959)[8]. Under this case law, an act of oppression is one which is burdensome, wrongful and harmful. From this scenario of Leo and the two directors, the decision to remove Leo as a board member was a wrongful act. Furthermore, coming up with policies that aim at catering for the needs of the directors of the company is wrong and harmful to the interests of the minority shareholders. Section 232 of the 2001 Corporations Act identifies the behavior and activities that subjects a minority shareholder to the notion of commercial unfairness[9]. Under this act, an oppressive behavior occurs when a conduct of the company is against the interests of the members of the company, or it is discriminative and prejudicial against a shareholder. In Wayde v NSW Rugby League, the court was of the opinion that an action by the board of directors would be oppressive[10], if the action breached the provisions identified in section 232 of the 2001 Corporations Act. To efficiently come to a conclusion that a member has been oppressed, the court will apply the objective test, which involves whether a commercial bystander would view the activities of the organization as fair or not fair. Furthermore, in the identified case, there is a breach of the directors duty, and this also amounts to an oppressive behavior. Sections 181 and 183 of the 2001 Corporations Act talks about the breach of duty by directors and how they amount to the development of an oppressive behavior[11]. For instance, section 181 denotes that a director of the company has an obligation of acting to the best interest of the organization, and he must not exercise their power in a manner that that will benefit him. Therefore, this section can be applied to the case of Leo, because the directors of the company were using their powers to benefit themselves, and not the minority shareholders. It is important to note that on a general perspective, the shareholders of an organization have competing interests. Therefore, it is difficult for the directors of the company to act in a manner that satisfies all the shareholders. However, there are some decisions that directors of the company may enact, which violates the rights of other shareholders. For instance a decision to remove a shareholder from the board based on his objections of the activities of the directors is a breach of the right of the shareholders, and a duty of the directors. Remedies Moreover, section 233 of the Corporations Act provides a remedy when the rights of a minority shareholder are breached. Some of these remedies include, the appointment of a receiver manager, allowing the shareholder to sale his shares to the company or a shareholder of the company and providing an injunction to the company from acting in a manner that will harm the interests of the shareholder[12]. Additionally, it is important to note that while choosing the type of remedy to pursue, there are a number of factors to put into consideration. These factors include, the identification of the advantages and disadvantage of the oppressive remedy against actions from the statutory derivatives, they type of company involved and the effects of the choice under consideration. Conclusion Therefore, in the case of Leo, there is a clear violation of his rights, and this includes his right to getting dividends, and a fair treatment from the directors of the company. Leo can seek an injunction, stopping the directors of the company from removing him from the board, or he can sale his shares to other shareholders of the company. Preferably, he can sale the shares to the directors of the company or other members of the board of directors. 3: Issue: The remedies against the directors of the company for engaging in insolvency trading and the possible defenses they can invoke against conviction. Relevant Law The main applicable law in this scenario is section 588G and section 588H of the 2001 Corporations Act. Other laws to supplement the main law are section 9 and section 198, section 180, 181, 182 and 183 of the Corporations Act. Application Section 198A of the 2001 Corporations Act denotes that a business organization is governed and managed by the directors of the company[13]. Therefore, all the directors of the company have a legal obligation and duty to govern an organization. Section 9 of the 2001 Corporations Act provides a definition of who a director of the company is. This is a person who is validly appointed to the position of directorship, or an individual who acts as a director of the company[14]. Furthermore, section 180 to section 183 identifies the four important duties of a director of an organization. For instance, in section 180, a director has a duty to act in care and diligence, to the degree in which a reasonable person will judge the degree of care and diligence that the director engages in. Section 181 denotes that a director of the company has a duty to engage in good faith. Under this section, a director of the company must act in a manner that will promote the best interests of the company they are managing. This includes avoiding any conflicts of interests and ensuring that good managerial practices are implemented and adopted. On the other hand, section 182 requires the directors of the company not to use their position as an advantage for themselves, and to the detriment of the organization. Furthermore, section 183 of the legislation prevents the directors of the company from improperly using the information under their care. From this case, Erol, Kurt and Vanessa as the directors of the company, breached the provisions of the 2001 Corporations Act, regarding their duties, roles and obligations. For instance, the three directors have breached section 180 of the Corporation Act that requires the directors of a company to act in due care and diligence[15]. For instance, the preparation of the financial statements by Erol amounted to negligence, and he did not pursue due care while preparing the statements. Furthermore, Vanessa failed in her duty to act in due care and diligence by failing to read the financial statements and demanding an explanation from Erol. Constant absence of Kurt from the meetings of the organization was a breach of section 181 of the 2001 Corporations Act, because her behavior was not in good faith, and did not promote the interests of the company. It is important to note that because of their failure to act in the best interests of the company, the company became insolvent, when they authorized investments in the loss making businesses that were not reflected in the financial records of the company. It is important to note that section 588G of the 2001 Corporations Act places liability to the directors of the company if they engage in insolvency trading[16]. In this section, the directors of the company have a mandate of preventing the company from incurring debts if it is insolvent at the time it was incurring the debt, and if by taking that debt, the company will become insolvent, and if there are reasonable grounds that the company is insolvent, or it will be insolvent if it incurs the debt under consideration. In this case, there was reasonable ground that the company would become insolvent if it continued to invest in the loss making business venture. Therefore, the directors of the company can be held liable for engaging in insolvency trading. This is a principle that is reinforced in the 2002 case of Scott v Williams Ors[17], where the court held that it is possible to hold the directors of a company responsible for breaching Section 588G of the 2001 Corporations Act and engaging in insolvency trading. Section 588G (2) and (3) identifies the consequences of breaching the law. Remedies Two consequences are identified and they can either be a civil penalty, and this is identified under section 588G (2) and a criminal penalty under section 588G (3). A civil liability will occur if the director failed to prevent the debt or the investment from occurring, and they were aware of insolvency, or there were grounds that could be used to suspect for insolvency. A criminal liability will occur if the directors of the company knew that at the time of incurring the debt, the company was insolvent, and they failed to prevent this debt because they were dishonest and their intention was to defraud. Under the law, the maximum penalty allowed for a criminal liability to insolvency trading is 5 years, and a fine of $ 200,000. In a civil offence, the director can pay a fine of $ 200,000 and compensation as determined by the courts to the company and its shareholders. Subsection 588J1 provides the method of determining the compensation that the directors should pay, in case they are held to be liable for insolvency trading under civil law. The compensation should be equal to the loss suffered by the company. Furthermore, section 206 disqualifies a person from acting as a director of a company. Possible Defenses In coming up with a defense against engaging in insolvency trading, the directors of the company can rely on section 588H of the 2001 Corporation Act[18]. For instance, the directors of the company can argue that the person responsible for providing information was competent and reliable, and he was fulfilling his obligations. This is an argument that Vanessa and Kurt can use to defend themselves. Furthermore, Kurt can argue that he was not available while the decisions to make the investments were made, and he did not have any suspicion that the company would be insolvent due to the investments. The 2002 case of Manpac Industries Pty Ltd v Ceccattini identifies the above factors as a possible defense against insolvency trading[19]. Part B 4. Issue: Can auditors be liable for the tort of negligence to third parties? If they are not, what are the conditions that may make them to be liable to third parties for the tort of negligence? Auditors Do Not Owe A Duty Of Care To Third Parties Negligence is an example of tort and the plaintiff has the responsibility of proving the balance of probabilities against the action of the defendant. The 1932 case of Donoghue v Stevenson identifies the condition that exists, for an action of negligence against a defendant to succeed[20]. Basing on these facts, for the courts to award remedies associated with negligence, the plaintiff must proof that a duty of care was owed to him by the defendant, and he has suffered harm because the defendant breached the duty of care owed to him. It is important to note that in the 2000 case of Agar v Hyde, the court made a ruling that duty of care is a legal obligation and its breach must result to a liability of damages[21]. Furthermore, professionals normally owe a duty of care to their clients. Therefore, auditors normally owe a duty of care to their clients, and not to any third party who may rely on the reports of the auditor. This is a principle that was established in the 1992 case of Caparo Industries v Dickman[22]. While making a decision I this case, he House of Lord ruled that for any duty of care to exist, there must be a proximate relationship. Basing on these facts, the notion of foreseeability is not enough in making a decision on whether to hold an auditor responsible to third parties, for providing negligent work. Therefore, shareholders who may rely on those reports to make future investments may not succeed in bringing a negligence case against an auditor. This is because they do not have any proximate relationship. Furthermore, this is a position that is reinforced in the case of Columbia Coffee v Churchill[23]. In this case, the court was required to make a ruling on two important issues. The first issue is whether an auditor owes a duty of care to a potential investor, and if they owe a duty of care to the existing shareholders of the company. In providing an answer to the first question, the House of Lords made a ruling that an auditor cannot be liable for acts of negligence to people who will rely on the information prepared by the auditors to make an investment. In as much as it is foreseeable that there are people who may rely on the statements for investments, foreseeability alone is not a sufficient ground, that can lead to holding an auditor liable for acts of negligence. Furthermore, the House of Lords concurred with the ruling made in Columbia Coffee v Churchill; in the case of Caparo Industries v Dickman, that a relationship must pass the proximity case, for an auditor to be held liable for a negligence case against a third party. On the second issue, on whether shareholders can rely on the information provided by the auditors, the House of Lords made a ruling that auditors owe a duty of care to shareholders in general, and not individual shareholders of the company. Exemptions: When Auditors Can Owe A Duty Of Care To Third Parties However, the court made a ruling that there are circumstances where a proximate relationship between an individual shareholder and the auditors of the company would exist. In the 1997 case of Esanda Finance Corporation v Peat Marwick[24], the court established three principles that must exist, for a third party to bring a successful case against an auditor under the tort of negligence. These principles are, the information prepared by the auditor will be communicated to a third party or an identified class of people, the information prepared by the auditor will be used by a third party to engage in a transaction and it is likely that the third party will enter in to the relationship, based on the advice of the auditor. Australian law under section 18 of the ACL prohibits any deceptive conduct a professional can have towards his clients[25]. If these are proved, a number of civil remedies emerge, and they are injunction, damages or other orders that the court sees fit to issue out. Opinion Basing on these facts, I agree that auditors do not owe a duty of care to third parties, unless, there is evident that the prepared report will be relied upon by the third parties, and they will use the results of the report to make a transaction and chances are high that their decision will be based on the contents of the prepared report by the auditors.