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This law business organisations assignment has been drafted with the purpose of reflecting upon the provisions of the applicable partnership act. The various aspects of a partnership such as the liability of the partners and the limitations of the liability have also been addressed with the help of this report. The latter section of the report emphasizes on the consequences of non ratification of a contract by the other parties or the other partners.
Liability of Partner
As per Partnership Act, 1891 (Queensland Legislation), each partners of a partnership firm, except an incorporated limited partnership, is jointly liable for any sort of obligations or debt incurred, with the other partners and will be liable for them till the time they remain unsatisfied despite his actual involvement with any activities with the creditor (Fletcher and Fletcher, 2007). Even after the death of a partner, his estate will be severally liable to meet the unsatisfied debt or obligations of the creditor but with respect to the early payment of separate debts of the partner. The essential elements of Partnership defined under Section 1 of Partnership Act are,
- conducting business,
- in common,
- with an intention of making profit.
In case any of these three elements are unmet, the arrangement cannot be termed as Partnership. In a Partnership business each and every partner is personally liable for any obligations or debt arising there from. This means if the partnership business fails to meet the debt of creditors, partners individually will be responsible for those and it can be to the extent of their personal assets such as bank accounts, home, cars, etc.
For example, suppose Partnership firm ABC, gets dissolved and they have $3 million outstanding debt against a creditor X. X has all the right to approach all the partners of the firm, irrespective of the fact who dealt with him, for meeting his debt. The debts will also expose personal assets of the partners.
The liabilities of partners in a Partnership firm under Partnership Act, 1891 are illustrated as below:
- Joint and several liability: in this case if one partner incurs debt in the name of the partnership firm all other partners will be liable for the debt as well. Although the partners have shared liability in the partnership but they are jointly and severally liable means that each of the individuals is personally liable to meet or satisfy those debt, incurred in the name of the partnership.
- Contractual liabilities to third parties: according to Partnership Act, 1891, liability exist jointly on every partner for any business debts or obligation conducted without any knowledge or authority of the any of the partners (Woodgate, Black and Owens, 1997). This means if a partner enters into a contract with a supplier without knowledge of the other/others, the partner or all the other partners will be liable for meeting the debt incurred irrespective of their involvement in it.
- Liability for wrongs to third parties: even after the retirement of a partner they will be liable for the debts and obligations of the firm unless an alternative agreement has been made between the existing partners and the creditors. The partners who have likely to join are not liable for the debts and obligations occurred prior to their arrival, unless they agree to take them up.
- Liability to account: being a partner it is his obligation to inform others about everything.
Establishment of Liability
The liability arising despite the knowledge of a partner or without any real or actual authority of the partner dealing with the outsider is termed as Contractual Liabilities to third parties. Under this type of liability the partner might become liable for debt incurred by any partner without his knowledge in the name of partnership. This liability could be established either by death of the partner who entered into a contact with the creditor (i.e. a supplier, lender, etc.) in the name of their partnership business or if after the retirement of the partner incurring debt in the name of business the existing ones establish new contract, thereby discharging him of all existing liabilities of the firm and creditors or by a new entry of a partner who was not present in the business organisations when such debt was taken (Austlii Edu, 2016).
Limitation of Liability
A partner trying to limit potential liability to the extent of their personal properties is by limiting the liability of the partner. On being a partner limited by liabilities the partner will be responsible to the extent of liability shown in the register and the amount cannot exceed this. A limited partner has the following obligations:
- the partner must not get involved in conducting the partnership business;
- the partner should enter into any contract on behalf of the partnership firm;
The extent of liability of the partner will be to the extent of the amount mentioned in the Register and if any unpaid amount is there from the amount mentioned in the Register.
There are certain provisions which are concerned with the contribution of the limited partner as per Partnership (Limited Liability) Act, 1988. These areillustrated as below:
- The contribution made by the limited partner towards discharging of his liabilities in the limited partnership must always be in the form of money
- If any contribution is made by the limited partner towards discharge of liability will not be counted for the purpose of reducing the liability under the section 10(1) (SEPTIMO, 1988).
- In case a limited partner makes contribution towards limited partnership with an intention of reducing the limit of liability of the firm or have got a refund of the contribution to a certain extent, this amount will be treated as the amount referred in Section 10(1) which is not paid.
Marlin Fishing Pty Ltd and Commercial Vessels Pty Ltd
Merlin Fishing Pty Ltd. is company dealing in commercial fishing. The company has four directors including father, Michael and his three sons Dan, Terence and Pat. As per the constitution of the company if a contract is signed on behalf of the company it has to be approved in a meeting by the directors and the company seal must be affixed. The company’s seal needs to be accompanied by signature of atleast two directors. However, it is seen that Michael, one of the directors enters into a contract with Commercial Vessels Pty Ltd. for purchase of a boat, which might prove beneficial to their company, Merlin Fishing Pty. Ltd. The owner of the company Commercial Vessels Pty Ltd. enters into a contract with Michael being unaware of the norms of the constitution of Merlin Fishing Pty. Ltd. After the contract has been entered into the other three directors of the company refuses acceptance of the contract on the grounds that they are not in a position to fund for the boat.
According to the constitution of the company it is clear that in order to finalize a contract, the offer needs to be discussed in the board meeting and contract must have company seal accompanied by signature of two directors. This case falls under Section 127 of Corporations Act. A contract in order to be a valid, binding and enforceable contract must be backed by proper execution. A company, in order to ensure that their contract valid, must execute according to Section 127 of Corporations Act 2001 (Bostock, 2012). According to Section 127(1) a document can be executed by a company without using common seal are stated below:
- the document must be signed by two directors of the company;
- the document must be signed by one director and one secretary of the company;
- if a company has a sole director and he is the only sole secretary of the company, then he can sign the document himself.
According to Section 127(2), a company which seeks to execute a document needs to affix its company common seal with it and at the same time witness the same by any of the three persons mentioned in the above list.
Since, many companies in Australia do not use common seal it is better to follow Section 127(1).
Again, under 127(4), a company may execute a document in ways in which the company has set under its constitution. There may be separate method mentioned under the company’s constitution and it has all the right to follow the same. Thus, Section 127 does not limit the scope of execution of document by the company (Bostock, 2012).
While going through these sections under Section 127 of Corporations Act 2001, Section 127(1), Section 127(2) and Section 127(4), it is clear that by signing a contract with Commercial Vessels Pty Ltd., Michael has failed to comply with the regulations of the Corporations Act. The contract which he has entered into is invalid, non binding and unenforceable. He does not have the sole right to decide and enter into a contract which is connected to the business. Since, he and his three sons are the only shareholders and each of them holds equal interest their consent was important in a board meeting and signature of atleast two directors, including Michael. As the contract is not valid therefore the company has no legal bindings on accepting the same.
The consequence of Michael can be well understood through the following case law:
Case Law: Knight Frank v Paley (Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd  SASCFC 103 (Paley))
Under this case the Supreme Court had considered a contract having several clauses of execution. Under on clause there was permission for execution by the company purchasing (Section 127) and the other by ‘officer’ as an agent having the power to enter into contracts. The director of the company while signing the contract struck out the words ‘Sole Director/Sole Secretary’, which implies that the company on behalf of which the officer has signed has another director or secretary whose signature is also required. The other director of the company disagreed to sign the contract as a result of which the contract was declared void. The court found the contract was not executed under norms of the Section 127 as the second signature was missing. The next consideration for the court was whether the director who signed the contract was liable personally for breaching the implied warranty according to which the director was authorized to execute the contract (Gilligan and Bird, n.d.). The director was not claiming to act as an agent by signing Section 127 execution clause. The contract which the director was expecting to enter could not be considered as a complete contract by the court as it required the signature of the other director or secretary of the company.
Hence, the contract executed by Michael could not be enforceable on the ground that it was not signed by another director of the company. Even the execution did not comply with constitution of the company. The contract will be considered void as Michael have breached Section 127 and constitution of the company.
The report highlights on different forms of business, partnership and corporation in Queensland. In a partnership business the liability of the partner may exceed to the limit of his personal properties irrespective of the fact whether he has any involvement in the transaction or not. Hence, partners seek to limit their liability to the extent of the amount mentioned in the register of partnership so that they can avoid any such situation where they have to meet the obligations of the firm with their personal belongings under Partnership (Limited Liability) Act, 1988. The other part of the report reflects a case which will in understanding Section 127 of Corporations Act 2001. According to this section a director alone cannot alone execute a contract. In order to execute a valid, binding and enforceable contract proper procedure must be followed.
Austlii Edu, (2016). PARTNERSHIP ACT 1891. [online] Austlii.edu.au. Available at: http://www.austlii.edu.au/au/legis/qld/consol_act/pa1891154/ [Accessed 13 Aug. 2016].
Bostock, T. (2012). The Corporations Act 2001. ac, 2002(39).
Fletcher, K. and Fletcher, K. (2007). The law of partnership in Australia. Pyrmont, NSW: Lawbook Co.
Gilligan, G. and Bird, H. (n.d.). Financial Services Misconduct and the Corporations Act 2001. SSRN Electronic Journal.
SEPTIMO, A. (1988). Partnership (Limited Liability) Act 1988, No. 78. [online] Legislation Queensland. Available at: https://www.legislation.qld.gov.au/LEGISLTN/ACTS/1988/88AC078.pdf [Accessed 13 Aug. 2016].
Woodgate, R., Black, E. and Owens, D. (1997). Legal studies for Queensland. Indooroopilly, Qld.: Woodgate Black Owens Partnership.