Business Law Partnership Act 1958

Question: Describe about the Business Law for Partnership Act 1958. Answer: 1. Type of business organisation: The type of business they are operating is a partnership firm. They have inherited the firm from their Great Grandfather. Their Great Grandfather was the only owner and was running the same concern as a sole trader. Since they have been running it as a going concern, they may legally not have changed the nature of the firm under the Australian Securities and Investments Commission. But their profit sharing makes it a partnership firm by nature. It is clearly mentioned that they share profits equally. Hence they are practically running a partnership firm under the guise of a sole trader firm. They need to change the nature of the business and get the firm registered under the Partnership Act 1958. They need to have a Tax File Number and follow all the stipulate laid down in the website of the Australian Government, Department of Industry, Innovation and Science. The stipulate of law clearly mentions that one is required to change the business structure if the owners wish to move from a sole trader format to partnership format[1]. Business structure: The current business structure that Dilara and Aysha are following is not as per the law. They need to amend their structure and then continue with the selling activity. Since Polat wishes to buy a part of the vinery, it means he will become a part owner of the establishment. In other words he will also be a partner in the organisation along with Dilara and Aysha. The percentage ownership will depend on the amount invested by him. This calculation is fairly simple. The net worth of the vinery as of today, under the management of Dilara and Aysha needs to be established. The amount Polat wishes to invest will be split into two parts. One part will be the amount he wishes to pay for part ownership of the vinery and the other part is future investment in the vinery for its restoration of working capital, modernisation and expansion of operations. Polats share of ownership will be the percentage of money he has invested in the vinery, vis-a-vis the net worth of the concern prior to his i nvestment. The new valuation will be a sum total of the older net worth and the investment made by Polat in the concern. The share of profits may be entirely different as Polat will be an investor and a working partner. He will work as the chief wine maker in the concern. On the contrary, Dilara and Aysha will continue to be sleeping partners as their job role in the concern is unknown[2]. All this cannot be achieved as long as the concern remains to be a sole trader concern. Dilara and Aysha first need to transform their concern from sole trader to partnership. This is relatively easy as per the Australian laws. The Australian Business Number(ABN) is a unique number that is allocated to all businesses, be it sole trader, or partnership or company or trust. The vinery understandably has an existing ABN. This is an assumption since it is an going concern and must have had complied to the law till date. For changing the business structure, Dilara and Aysha first needs to cancel the existing ABN of the vinery and apply for a new ABN. The personal details of the partners along with the details of the new partner need to be updated in the system of the Australian Taxation Office and Australian Securities and Investment Commission. The ABN details can be changed with the ATO through online transaction. This enables trouble free transition from one form to another. They need to change the nature of the business and get the firm registered under the Partnership Act 1958. They need to have a Tax File Number and follow all the stipulate laid down in the website of the Australian Government, Department of Industry, Innovation and Science. The stipulate of law clearly mentions that one is required to change the business structure if the owners wish to move from a sole trader format to partnership format. The new business structure needs to be as per the requirements mentioned in the Australian taxation website. We assume that the going concern had a registration under the GST. Hence it need not be done once again. There needs to be a corporate governance plan in place that includes all the three partners. There will be changes in the relevant tax structure and for that Dilara and Aysha need to visit a chartered accountant with relevant experience in tax laws. Notification to the government departments need to be done regarding the changes. Advisory services need to be solicited by Dilara and Aysha for this change. They need to consult the website of Australian government for this purpose[3]. In the final analysis it is seen that Dilara and Aysha need to consider another form of business, which is partnership form of business. Rights of a shareholder/member: Leo has been a share holder of the company and is the non-executive director after purchase of the share value of $500000. The case in general seems to be one of gross discrimination. Leo is entitled to certain rights and privileges as the non-executive director of the company. Hence he is not employed by the company, but is a part owner as he has bought shares of the company. However, as per the Corporations Act 2001, all executive and non-executive directors are required to comply with the legal requirements. Non-executive directors do face some challenges in operations vis-a-vis executive directors as they are non-employees and only shareholders. Non-executive directors have the right to attend the general body meetings of the companies and also enjoy voting rights. They can vote for or against motions being debated in the Annual General Body Meeting. Also they have the power to inspect the book of accounts and object to or ask questions on the conduct of the company affairs. The company, Thomas The Tank Engine Pty Ltd, made a 300% increase in revenue. The understanding derived from this information is that it must have also had made substantial increase in the profits. However, the profit information has not been shared in the case and hence it is difficult to comment on the same. However, the assumption is not base less, as the case reports the Executive directors vote themselves substantial rise and bonuses. Moreover, they decide to lease themselves individual expensive cars at the cost of the company. The Corporation Act 2001 spells out the rights of the shareholders and/or members in the dividend of the company. However, Amanda and Ruby cunningly has not declared any dividend. Hence, there is a scope of an argument that since no dividend has been declared, the shareholders and members are entitled to no payouts. Leo, being a non-executive director falls in the category of shareholders whilst deciding the dividend payout. Hence, as per the norms, he has neither received dividend nor any other payout. A shareholder will not have the right to a separate board representation. But they will have voting rights on basis of their shareholding. They can exercise their powers if they feel their commercial interests being marginalised. This is also a part of Leos case, wherein, the company has benefitted in capital allotment, from the sum invested by him through purchase of shares earlier in time. The same capital has resulted in production and increase of revenue due to both, employee cont ribution and shareholder capital. Employee contribution has been handsomely rewarded as the Executive Directors have got a raise, a bonus and luxury car at company expense. But the reward to the investor was denied. The capital that helped create the wealth (300% increase in turnover is no doubt wealth creation) has been overlooked. It is pertinent for Leo to understand that his share of the capital was a cause for the company performance. Hence he needs to be rewarded. Enjoyment of share of profits is a matter of right for a shareholder. Amanda and Ruby are the executive directors of the company. In other words they are the directors within the ambit of definition of director by the Corporation Act 2001. The duties of the directors must be to act in good faith. Since Good Faith cannot be legally proven or enforced, it is left to the good judgement of the directors. However, in the recent times courts have identified conducts that have been done in bad faith. The matter is debatable and takes an adjudication authority to specify the deed. The good faith should be towards the genuine interest of the company and not as favouritism towards self or anyone else to receive improper gains. The act specifies that any deed done in an improper manner is invalid and may require compensation to be paid by the company. One assumption that we started off with needs to be reiterated again. It is hoped, that, Amanda and Ruby have not cooked up the books of accounts to show meagre or no profits for the year, in order to justify the non-declaration of dividends. However, if they have done so, still the dividend payout strategy can be questioned for the huge rise in salary and bonus and luxury car lease for the directors. What contribution resulted in that is the question. Leo was removed as the non-executive director of the company for questioning the dividend policy of the company. The questioning of such policy in the Annual General Meeting, whether for clarification of doubts or for discrepancies, is a matter of right of shareholders/members. Leo only exercised the rights vested upon him by law. The impeachment due to exercising ones right is not as per principles of natural justice. The case does not specify how Leo was removed, so procedural lapse on part of the directors cannot be specified. We assume that the procedure was followed since as per the Corporations Act, removal of a non-executive director from the board in much easier in case of a private limited company as compared to a public company. The advice to Leo is to file a complaint under the Corporations Act contravention as per contravention to receive benefit without member approval. The impeachment of Leo also can be clubbed under the suit. The justice that will be sought will be to restore his candidature as non-executive director as his shares are still there in the company. He was wrongfully impeached for exercising his rights of questioning the dividend decision. He was not given a share of the profits which was his right[4]. 3. Liability of the directors of TACH Ltd: The company TACH Ltd is a public company that has been functional in the food sector producing coffee beans. It is listed on the stock exchange and hence is a public company. The company has two executive and one non-executive director. The non-executive director is a partner of one Executive Director. The situation is one of family owned business, though it is registered ad a public company. The other director also happens to be the CFO of the company and manages all the finances. Reading the case, it seems, the other Executive Director does not understand much about finances, or does not care much about activities of the CFO. The gross callousness on part of Vanessa not to read the financial statement before all important board meeting can be read in the case. Erol made a mistake and the same went unheeded by Vanessa who should have audited the work of Erol. Why Erol made the mistake is still unknown. It may have had been an inadvertent error or a purposeful one. The failure on part of both to represent the correct health of the company cannot be overlooked. The board will never go into the depths of calculation of the profit and loss and run a check on the directors report. The board decides the payout to the directors basis their responsibilities and that must have been the case for Erol and Vanessa too. They were paid to do a correct job professionally and not misguide the board. The liabilities of the directors of TACH are to accept complete responsibility of the misrepresentation of data that happened in the Board meeting, due to which wrong management decision was taken which led to the insolvency of the company. The Corporations Act 2001 clearly spells out the general duties of the directors and officers of the company. The act states that care a diligence has to be exercised while conducting business and carrying out the duties on behalf of the company. The care a diligence has to be exercised like a reasonable person. Section 180 draws out the requirements very clearly. It also states that the directors and officers who make business decisions should act as mentioned above and should be considered equivalent to their job duties. The aspects the directors need to consider are to make judgement in good faith and without personal material interest in the decisions. They should be well informed before taking and recommending decisions. The judgements should be rational in the interest of the corporation. Also the section 181 specifies that care and diligence should be accorded in all business decisions that are taken by the directors[5]. We can see that Erol and Vanessa violated all these. They, simply put, did not carry out their duties as desired. In other words, they did not do justice to the chairs they were holding and did not act in a professional manner. They were casual and nonchalant in their conduct. Corporation Act: There was gross breach of Corporations Act under sections 180 and 181 as conducted by Vanessa and Erol. The provisions of the act specify that this failure to conduct in a proper manner expose the two directors to only Civil Liabilities only as per Section 1317E of the Civil Penalty Provision. The directors can be booked by the board under the Civil Liabilities for the debacle under sections 180 and 181 amounting to unprofessional conduct and gross negligence of duties[6]. 4. Auditors report: An auditor is a person who checks the book of accounts and financial statement of a particular concern. The checked books of accounts are certified by the auditors and are called Audited documents. These financial results are then published for mass consumption. The results portrayed in the audited results are considered to be authentic since they have been checked thoroughly by the auditors and then certified as correct. This certification is the responsibility which the auditors must owe to[7]. However, an auditors report can also be wrong! The debate that has rocked the commercial world is that, who then is responsible for the harm caused due to a wrong certification by the auditors. Prima facie the answer seems to that, if mistake is of the auditors, then the responsibility also lies on the auditors. But the general understanding is that the auditors responsibilities are always limited to the client. The third parties that use the reports are understandably out of the purview of the responsibility matrix of the auditors. The investors, creditors, borrowers, and even the clients of a company depend on the audited financial results of the company for their business decisions as to whether or not to invest, divest, lend or place orders with the company. In case of negligence on part of auditors resulting in wrong financial statements, the third party investor, borrower, client, etc may be adversely affected by making a wrong investment basis a wrong report. Do the auditors have any responsibility towards the inadvertent mistake the company makes believing the audited results of the auditors client? This is the question of the debate that spills two schools of thoughts. One that says the auditors liability is limited to the clients whom they serve. And the other that believes that morally the responsibility goes further wherein the auditor is responsible for any decision taken on the basis of the audited reports. I agree to the fact that auditors liability should extend from just the immediate client to anybody who takes decisions based on the audited results, since they are certified to be true. In Australia, the House of Lords has limited the extent to which auditors are liable for the third parties. However, the view of the Australian courts on the subject is awaited. The viewpoints have been elaborated basis their bandwidth. The narrowest possible view has been where the auditors are responsible of the clients only. As per law of tort, applying the privy test, there is not liability to third parties. It has been argued considerably that the liability should not be beyond the aspects of law. However, arguments that there are possibilities beyond the law of tort have been established. This has been argued as the duty of care. Reasonable foresee-ability test as applied has been directed towards the error of overlooking a financial outcome in the correct audit perspective. The argument against this test is that it results in too broad a view and cannot be specified to a particular result. This was initially adopted in UK, but owing to its erroneous nature has been dropped from there too. The other test was of actual knowledge that the audited results will be used by another concern, like an economic development council that will accord certain advantages or concession to a company due to contents of its balance sheet. The test opined that such prior knowledge no more limits the liabilities of the auditors to the client. They are now responsible for parties beyond. The third test is the specific knowledge of who will use the audited results for decision making. This provides even more liability not only towards the client but also towards the party who will use it. This liability follows the principles of natural justice, since the knowledge of the future user of the data was very much available with the auditor before the publication of the results. The other test has been the foresee-ability with proximity of the auditor with the user of the knowledge. The arguments narrow down to even more specifics of the matter. The misrepresentation of facts by the companies and the inability of the auditors to consider them, adds to the line of defence for the third parties towards auditors and any misgivings caused due to wrong information shared by the auditors. The concept should govern all parties other than the immediate clients of the auditors. The audit firms have been busy reframing their disclaimers to face save due to negligent report publication[8]. Bibliography: Asic. (2016). Members of a company. Retrieved 10 22, 2016, from ASIC: https://asic.gov.au/for-business/running-a-company/members-of-a-company/ Ato. (2016). Australian business number (ABN). Retrieved October 23, 2016, from Ato: https://www.ato.gov.au/Business/International-tax-for-business/Foreign-residents-doing-business-in-Australia/Australian-business-number-(ABN)/ Auasb. (2013). Auditors Report. Retrieved October 23, 2016, from Auasb: https://www.auasb.gov.au/admin/file/content102/c3/Jul13_Compiled_Auditing_Standard_ASA_700.pdf Companydirectors. (2013). Role of CEO MD. Retrieved 10 22, 2016, from Australian Institute of Company Directors: https://www.companydirectors.com.au/director-resource-centre/director-qa/roles-duties-and-responsibilities?page=2 CorporationAct. (2001). Corporations Act 2001. Canberra: Attorney-Generals Department. Davies, M. (1991). The Liabilities of Auditors to Third Parties in Negligence. UNSW Law Journal , 171-197. LegalVision. (2015). What are the rights and liabilities of a shareholder in a company? Retrieved 10 22, 2016, from Legal Vision: https://legalvision.com.au/rights-liabilities-shareholder-company/ Partnership. (2016). Retrieved 10 22, 2016, from Australian Government - Business: https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-structure/Business-structures-and-types/Partnership