Question 1

According to the case, as the Partnership Act defines, ‘a partnership is the relation which subsists between persons carrying on a business in common with a view of profit’ (Turner, Australian Commercial Law,25th, 2001, p630), Donna, Carmel and Susan have a partnership agreement on running a carpentry business, there is no doubt they are trade partners who have unlimited liabilities. If want to deal with the relation of partners to third parties, it is necessary to consider two important principles which under s 8 are ‘real authority’ and ‘apparent authority’ .No matter ‘real authority’ or ‘apparent authority’, if a partner’s action within his authority buys goods on behalf of the firm, then the firm(the rest of the partner)is bound because the Partnership Act had set it before. 

Real authority and apparent authority

To assume that, Carmel signs a contract for the purchase of the fish is the actual authority given by Donna and Susan, then these three people are liable since the partnership’s liabilities are equally and unlimited. In this case, the partnership agreement has set that up to a maximum value of＄1000,but Carmel purchases fish worth＄25000.It is obviously that Carmel has exceeded her actual authority. So the real authority is not applied. Under s 8, when partner acting exceed in three parts, the firm will not be bound. ·the kind of business carried on ·whether the transaction was conducted in the usual way ·the proviso-which deal with whether the third person knew of the lack of authority or whether the third person knew the acting partner was in partnership. Primarily, ‘the kind of business’ means the basic power of a partner in an ordinary trading firm, which include:‘he(a partner)may pledge or sell the partnership property; he may buy goods on account of the partnership; he may borrow money, contract debts and pay debts on account of the partnership; he may draw, make, sign, endorse, accept, negotiate, and procure to be accounted, promissory notes, bills of exchange, cheques and other negotiable paper in the name of and on account of the partnership.’(Story, J‘Treatise on agency’, cited in Fletcher, KL 2001, Higgins and Fletcher: the law of partnership in Australia and New Zealand, 8th edn, Lbc Information Services, Sydny). That is to say, a partnership should be a business carried on in common with a view to profit.’ A business includes a trade, occupation and profession’ (Queensland Partnership Act 1891,S 1B).  Obviously, the problem of ‘the kind of business’is whether a carpentry business will sell fish in common for profit? It seems not. Although Carmel owns right to sign a contract, it is not a reasonable scope within a particular kind of their business. From this question to say, Carmel exceeds her authority to acting as a partner. If the contract is not bind, it is can be seen that this contract is signed by Carmel herself but not relate to the firms. That means Donna and Susan need not to be liable to Charlie who is the third party. 

Further more, Carmel is not using a usual way to buy the fish from Charlie.      ‘A usual way’ indicates an act is reasonably necessary and not just convenient for carrying on that type of business. In Goldberg v Jenkins ,a rate of interest over 60％ was not acting in ‘the usual way’, so Carmel purchase fish and gets ＄2000 commission is not in ‘the usual way’ either, as it is not a common and legitimate method to run a business and also unfair to other firms. If every partner just makes profits for him or herself, it is can not to be considered a common acting to the partnership. Under the s 6,       ‘sharing of profits is the most common, but sharing of property do not necessarily indicate a partner. Normally also sharing of losses’ (Law 2106 N/A Of Business Organization, 2006,P1.4).Carmel does not share the commission with the firms but uses this money to reduce her mortgage, it is a personal trade acting clearly, not a action of a partner.

Additionally, the proviso has limited knowledge and belief of the third party.

        ‘Partnership not bound if third party knew the partner had no authority, or did not know or believe he was acting as a partner’(Law 2106 N/A Of Business Organization, 2006).

Charlie does not know whether Carmel is lack of authority or not; therefore, it can be seen Charlie did not breach the first proviso. Not all the partners need to be known by the third party, if the third party willing to sign a contract with a firm but not known he or she has no authority or does not believe he is a partner. However, assume that if Charlie knows Carmel has no authority or does not believe he is a partner but still sign the contract, then firms are no liable to him but Carmel dose. In the case, Charlie knows Carmel is one of the partners since he approaches and offers he to sell fish, these conducts proved Charlie knew the acting partner was in partnership. As the result, the second proviso is satisfied.

In this case, although the proviso is apply, because of ‘the kind of business’ and ‘in the usual way’ are not apply, ,the firm is no liable and the third party just can try to bind Carmel as an individual.

One further important point is,       ‘if a partner orders goods for a retail business which are clearly not of the kind of business but the other partners accept the goods, then they are taken to have ratified the actions of the acting partner and they cannot set up s 8 as a defence’(Law 2106 N/A Of Business Organisation, 2006,P1.10).This indicates that, if Donna and Susan think these fish is useful to them and accept it after signs the contract, it is can be thought they allow this acting happened and willing to share the equal liability. However, in this case, there is no information to provide that Donna and Susan will accept the fish , that means they might reject to ratified and still want to have rights to set up under s 8.

 

Remedies

First of all, as the Partnership Act sets, Donna and Susan can sue for breach for partnership agreement and fiduciary duties to Carmel. Carmel signs the contract to ＄25000 is breached the partnership agreement which sets a maximum value of ＄1000.And she makes commission for she breached the fiduciary duty since this kind of duties required trust, honesty and loyalty. What is more, Carmel could share the commission with firms. If they accept it, it means ratified. Because as Partnership Act s 27(a)sets, ‘rules as interests and duties of partners subject to agreement’, they will not only share interests and profits equally , but also the expenses and liabilities in all respects. To assume that, Carmel shares her commission as profits to Donna and Susan, if they willing to accept the money, it means they could not sue Carmel under s 8 any more, and this trade acting will be treated as a common trade acting with the partnership then each partner has liability to Charlie. If it not, Carmel would still be liable to Charlie personally. 

Termination

Under s 29, even though the partnership has not a fixed term agreed, they can terminate the partnership at any time by giving notice to the other partners. As long as Donna or Susan who is unsatisfied or dose not believe the partnership any more about their present conditions, they can raise to terminate the partnership to stop their loss whatever they like. The key point which needs to be paid attention is Donna or Susan should make notes to the other partners during the period of the agreement set; otherwise, Donna or Susan would be liable as well. 

Dissolution

About dissolution, normally partnership agreement will provide it clearly. Partners should follow the grounds and procedure strictly, and if there is a dispute between partners they can applicate to arbitration. In this case, there is no mention whether Donna, Carmel and Susan have a dispute between them, so it is can been seen the firm knows the affair after it happened and sue it directly. Under s 38, ‘the court will dissolve the partnership when the partner unable to perform duties; partner’s conduct prejudices business; wilful and persistent breach of partnership agreement; business can only be run at a loss; just and equitable’ (Queensland Partnership Act 1891). Carmel buys something useless to the partnership and gets commission for herself, these acting great prejudices business because it may reduce business’s cash and loss the opportunities to trade with the others or breakdown the trust and confidence between partners, even break their personal relationship. It is also about ‘just and equity’, the firm should apply to a court for a dissolution order is sufficient evidence of the breakdown of the trust and confidence when he or she has taken the trouble. In conclusion, Carmel is liable to Charlie as an individual and Donna and Susan can consider several methods to protect their legal rights which include suing the breach of partnership agreement and terminating the partnership by notice and applying to the court for dissolution. 

Question 2

‘A trust may be defined as an equitable obligation binding a person(the trustee) to deal with property over which he or she has control(the trust property)for the benefit of persons(the beneficiaries or casuist que trust)who may enforce the obligations created by the trust’ (Turner, Australian Commercial Law,25th,2001,p775).In this question case, Pinnacle Pty Ltd(PPL) was incorporated by Michael and Georgina Jones, they are also its directors. On the other hand, PPL carries on business as a trustee of the Jones Family, which is a discretionary trust and beneficiaries are Michael, Georgina and their children Elizabeth who are not adults. As PPL is a ＄2 nominee company, it means that the trustee’s liability is limited to its share capital but in all other respect it operates as if it were a natural person trustee. However, even though the shareholder’s liability is limited, in some circumstances the assets of the trust may be available or the trustee’s director may be personally liable.

Liability of trustee to creditors

(ⅰ)The trustee is liable personally for all debts of the trust.(ⅱ)Creditors sue him personally, not the trust.(ⅲ)Creditors have no direct right against the trust assets.(ⅳ)If creditors get judgment against a trustee, they can sell up his personal assests, not trust assets.(Law 2106 N/A Of Business Organization, 2006,p2.7).Firstly, PPL is normally personally liable for all debts of the trust when it carries on business by legal owner of the property. The law provides that’ The trustee is liable at common law on all contracts into which he enters with third persons even though his actions are for the benefit of the trust’ (Law 2106 N/A Of Business Organization, 2006, 2006, p2.7) .PPL is simply a proprietary limited corporation as a trustee for the Jones Family Trust enters into contracts with third parties in PPL’s own name. It has powers and duties deal with the creditors, debtors, clients and others who might trade with the business. Even though PPL’s acting’s are for the benefit of the trust, it as well as liable for all debts personally. Secondly, creditors can sue PPL personally but not Jones Family Trust because the trustee is the legal owner but the trust is not; therefore, the creditors just has a right to against the trustee (Vacuum Oil Co Pty Ltd v Wiltshire and Octavo Investments Pty Ltd v Knight). Thirdly, creditors can not require to indemnity from the trust assets directly. As the Trust Act set up, creditors have no right of indemnity against the trust funds; however, they can ‘subrogate’ trustee’s rights of indemnity, and sue in his name to satisfy their debts, this is called subrogation. But first, if a trustee goes outside his powers of investment or borrows money in unauthorized, the creditor will have no right of subrogation. Oppositely, if PPL did not breach the trust, then the creditors can have the right of ‘subrogated’ for the trustee’s personal assets but not trust assets. In this case, there is no enough information to say whether PPL has breach the trust or not; therefore, the ‘right of subrogated’ of creditors will be discussed later either.Liability of beneficiaries/Trustee’s right to indemnity from beneficiariesFurther more, beneficiaries can be liable to indemnity the trustee for his liability but not liable to third parties.       Because of Elizabeth and Tyrone only aged 8 and 6, although they are beneficiaries, but not adults, they are not liable to the trustee. On the other hand, usually, adult beneficiaries will be liable to indemnity the trustee. However, ‘In discretionary trust, adult beneficiaries will not be liable to indemnity the trustee unless they requested the trustee to act as trustee or to breach the trust; or where discretionary trust is used to evade creditors’(Sweeney, B & O’Rielly, J 2004, Law in commerce, 2nd edn, LexisNexis Butterworths, Sydney, pp.385-400). (Mclean v Burns Philp). Assume that, Michael and Georgina as beneficiaries requested the trustee to outside its power, such as no carries its daily business as a trustee, or they set PPL just for evading creditors, then they will be in trouble because they breach trustee’s power and might be liable to the trustee. But there is no detail to say whether Michael and Georgina have any unequal action, as the result, the trustee can not sue the beneficiaries. However, in some situations the trustee may contribute to trust debts on behalf of the creditors. To assume that, the trustee is a company and is insolvent, the liquidator who takes action will usually against the beneficiaries.

Creditor’s rights of subrogation

As above says, creditors have no right to access the trust assets or sue the beneficiaries directly. So the most important point is, if creditors want to get back trade debts, they should consider another method which called ‘subrogation’. Since debts personal to the trustee, creditors can execute the indemnity rights instead of the trustee by using his name to satisfy their debts. Obviously, trust assets or the beneficiaries can be recovered against indirectly, and then creditors have opportunities to get back debts from trust assets or the beneficiaries. Even though the debt seems to be indemnity possible, it should be satisfied the condition which is the trustee would have been entitled to indemnity first. That means if PPL breached the trust without beneficiaries requesting it, there will be no indemnity for the trustee and therefore no subjection by creditors. However, Michael is one of the directors and beneficiaries of the incorporate at the same time, and it has been said sometimes directors are trustees in the performance of their fiduciaries duties. As this result, here will be discussed directors’ liability later.Trustee’s right to indemnity from trust assets(1)  Right to indemnity. The trustee who commits a breach of trust at the request of or with the consent of the beneficiary is entitled to indemnity(or contribution)from:·the assets of the trust;·a beneficiary who is of full age and legal capacity(sui juris)who has a agreed to the breach of trust; ·a co-trustee(2)  Right to reimbursement from the trust funds if he acted reasonably within his power under the trust deed and under the Trusts Act. The trustee can be reimbursed trust expense incurred in the proper exercise of the trustee’s power.(3)  Right to hold the trust property as security for his costs.(4)  It is possible to have a term in a trust deed that excludes the trustee’s right to an indemnity, but the courts may not uphold such a term if it is used to defeat creditors of the trust.(Ford,HAJ&Lee,WA1996.Principles of the law of trusts,3rd edn,LBC Information Services,Sydney,pp.1-20).First, PPL could have right to indemnity if PPL breached the trust at the request of or with the consent of the beneficiary is entitled. In this case, PPL is a company as the trustee owns trust assets amount to ＄50000,and the beneficiaries Michael and Georgina are adults and legal capacity. Hence, if PPL has breached the trust by Michael or Georgina’s order, PPL may get indemnity from the beneficiaries. However, it is unclear that whether Michael or Georgina has any unlegal to the trustee.Second, under Trust Act s 72,‘A trustee may reimburse himself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the powers’ Sweeney, B & O’Rielly, J 2004, Law in commerce, 2nd edn, LexisNexis Butterworths, Sydney, pp.385-400).In other words, the trustee has rights to require the indemnity which incurred in or within the trust of powers and has a lien over the trust estate to enable him to get reimbursement. That is to say, PPL could recover the trust assets directly if it did not breach its trustee power. What the action is outside trustee’s power, it should be included these:‘(1) outside his power as either contained in the trust deed or as laid down in the general law of trusts;(2) the trustee instrument or deed itself might specifically exclude the trustee’s right of indemnity-either absolutely or in certain situations’ (LAW 2106 N/A OF BUSINESS ORGANISATION, 2006,p2.8).This means if PPL conducts unauthorized Jones Family Trust, it is not entitled to be reimbursed . For example, if the PPL as the trustee has not carries on a type of business which is not under the deed of the trust, then the law indicates that PPL may lose its right of indemnity since it acted outside its power which prescribed in the trust deed. On the other hand, trust reasonable expense include payments to agents, taxes, litigation costs and so on. If PPL incurred these expenses, the trustee is entitled to be reimbursed from the trust estate. There is no clear detail says whether PPL has acted outside its power, it is can be seen that the trustee has right for indemnityThird, PPL can hold the trust as security for it indemnity. For instance, if debts incurred on trust, then the trustee would have the right to get reimbursement first.Fourth, PPL may have a term in the trust deed to exclude its indemnity right, but it would not be lawful when it is used to defeat creditors of the trust. Assuming that, PPL has set a term to exclude its indemnity right, but the courts found that this term is for avoiding creditors. In this situation, PPL can not exercise indemnity right. Also no information to describe that, so it is seems that PPL has not a term in the trust deed to exclude its indemnity right. 

Liability of directors of corporate trustee and insolvent trading

As s 197 states,

‘A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a)   has no discharged, and cannot discharge, the liability or that part of it; and(b)  is not entitled to be fully indemnity against the liability out of trust assets solely because of one or more of the following:(ⅰ)a breach of trust by the corporation;(ⅱ)the corporation’s acting outside the scope of its powers as trustee;(ⅲ)a term of the trust denying, or limiting, the corporation’s right to be indemnified against the liability.The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. (Australian Corporations Legislation,2006,p382).Instance, it is clearly that, PPL’s trade debts amount to＄150000 is much more than the trust assets＄50000.PPL can not pay it in full, it is can not discharge in that part. Additionally, according to the case, it seems the trustee is entitled to be indemnity of trust assets which has been proved it above. But s 197 set the director will be personally liable just when the trustee is not entitled to be indemnity fully out of trust assets. That is to say, if PPL has a trust deed to excludes indemnity right or has breached the trust, loss it right to indemnity, then the director will be liable personally. However, in this case, PPL did not breach the trust; it did not act outside its power which has been proved it above as well.In the last, if a term has limited or denied PPL’s right to be indemnified against the liability, then Michael and Georgina need not to take liabilities to creditors personally because of the trustee has right to indemnity. There is no enough information can be thought that a term has limited or denied PPL’s right to be indemnified against the liability; therefore, whether Michael and Georgina are liable should consider the other aspects. Obviously, although PPL can not discharge in debts part, it entitled to be indemnity fully out of trust assets, the result is Michael and Georgina will not be liable personally. Corporations Act s 197 is not apply in this case. Directors of a corporate trustee do not become personally liable just because the trust has insufficient funds to meet the debt. However, if a corporate trustee is unable to pay trust liabilities as and when they fall due, it is possible that insolvent trading has occurred. S 588G(1) This section applies if:(a)a person is a director of a company at the time

(b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)  at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and(d) That time is at or after the commencement of this Act. (Australian Corporations Legislation,2006,p814). To begin, Michael and Georgina are always the directors of PPL, because it is a family company, and the other members are children, obviously they could not run a business. On the other hand, if the director did not appoint another person to be the new director, then it is can be seen Michael and Georgina are the directors at the time. Furthermore, when these $100000 debts incurred, the company becomes insolvent. The trust assets only amount to ＄50000,and the debts amounting to ＄150000. As s98A says, if a company is unable to pay its debts when they fall due, the company is insolvent .Hence; PPL is becoming insolvent by incurring that debt. What is more, under s 588H,(1)  This section has effect for the purposes of proceeding for a contravention of s 588G in relation to the incurring of a debt…(2)   It is a defense if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that is incurred at that time. (3)   Without limiting the generality of subsection (2),it is a defense if it is proved that, at the time when the debt was incurred, the person: had reasonable grounds to believe, and did believe…(4)   If the person was a director of the company at the time the debt was incurred, it is a defense if it is proved that, because of illness or for some other good reason, and he or she did not take part at that time in the management of the company.(5)   It is a defense if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.(6)   In determining whether a defense under s 5 has been proved, the matters to which regard is to be had include, but are not limited to:(a)any action the person took with a view to appointing an administrator of the company and;(b)when that action was taken; and(c)the results of that action(Australian Corporations Legislation,2006,p816).The first, this section has effect for purposes of proceeding because Michael and Georgina is reasonable person who aware at that time would for suspecting the debts. Michael and Georgina as the director ought to know if the debts happened, it would lead to insolvent. They have trading experiences and suspecting ability, they can avoid debts incurred but they did not at that time. As Michael and Georgina accountants and auditors can foresee the debts will incurred but at the end insolvent still happened, it is can be thought that they allow PPL to incur debts when it is insolvent. The second, if there were reasonable grounds to expect that PPL was solvent and would remain solvent even though the debt was incurred, or Michael and Georgina believed that PPL was solvent and would remain so, directors will have a defense to establish that as the time the debts was incurred. The third, many companies rely upon reports provided by accounting staff and others. It is so important because relates to Michael or Georgina ability to determine whether PPL is solvent. The best example of reliable person is accountants and auditors. In the case, it is not clear who is accountant or auditor; therefore, here does not discuss this point. The fourth, some good reason may reduce directors’ liability, such as illness, he or she did not take part at that time in management of company and so on. However, no apparent evidences can be proved Michael and Georgina who have some good reason to exempt their liabilities. The fifth, if Michael and Georgina took all reasonable steps to prevent PPL avoid the debts; they might need not to pay the debts. Finally, No matter what the result was, or any action did directors take, or when the action was taken, if Michael and Georgina have do some thing useful to prevent PPL from incurring the debt before, they would not be liable. According to the case, nothing can be proved that they took all reasonable steps for avoiding the debts, either. Last of all, PPL was incorporated in March 2000, but it is not sure that whether the debts were incurred at or after the commencement of this Acat. Because this assignment is for creditors to sue Michael to recover the monies owing to them, it assumes that the act is at the time. In conclusion, Michael and Georgina as the directors of PPL are liable to trustee.

Conclusion

The creditors can take actions to recover their debts from Michael. Though they have no rights of indemnity from the trust assets directly, creditors can think of subrogation to against Michael. Michael as a director of PPL is liable to the trustee; he should pay the debts which exceed the trust assets from his substantial personal fortune. As can be seen, Michael should take the major responsibilities to PPL because of Corporations Act s588, and creditors can get back the debts from both the trust assets and Michael’s substantial personal fortune. But if Michael as a beneficiary, then creditors can not take actions to against him but the liquidator can, because PPL trustee is a company and is insolvent.      Reference lists: Queensland Partnership Act 1891 Australian Corporations Act 2006 Ford, HAJ & Lee, WA 1996, Principles of the law of trusts, 3rd edn, LBC Information Services, Sydney, pp.1-20. Lindgren, KE & Ramsay, A 2001, ‘Partnership’, in RB Vermeesch & KE Lindgren (eds), Business law of Australia, 10th edn, Butterworths, Sydney, pp.499-552. Sweeney, B & O’Rielly, J 2004, Law in commerce, 2nd edn, LexisNexis Butterworths, Sydney, pp.385-400. Story,J‘Treatise on agency’,cited in Fletcher,KL 2001,Higgins and fletcher:the law of partnership in Australia and New Zealand,8th edn,Lbc Information Services,Sydny Turner,Australian Commercial Law,25th,2001 Law 2106 N/A Of Business Orgnisation, 2006