The issue is whether Violet and Sonny are partners in, rather than creditors to, Busy Bee as represented by Rose and Mary to Friendly Bank and if they are determined to be partners, whether they would be liable for Busy Bee’s debts to Friendly Bank because of the agency relationship between partners in a partnership. Rules
In determining whether there is a partnership, the essential elements of a partnership must first be satisfied, that is: a business is being carried on;
the business is carried on ‘in common’; and
there is ‘a view to profit’.
If these definitional elements for a partnership are met, one can next consider the rules for the determination of the existence of the partnership: co-ownership of property, which does not necessarily indicate a partnership; sharing of gross returns, which does not necessarily indicate a partnership; and sharing of profit and losses, which can indicate a partnership unless it is: •debt paid out of profit;
•payment to agents and employees;
•payment to a deceased partner’s widow, widower or child; •payment of interest; or
•payment of goodwill.
If one is found to be a partner, there would be joint liability for debt contracts entered into by any partner with actual authority with creditors of the business because of the agency relationship in a partnership. The agency relationship between partners means that ‘any act of a partner done within the scope of the partnership business and in the ordinary course of business is binding on all other partners.’ A general partner would have unlimited liability for the debts of the business but a limited partner would be liable for only the amount of capital he or she invested into the business. References would be made to the Partnership Act 1892 (NSW).
Case law that will be considered would be Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511.
A partnership is already established with Rose and Mary as partners but whether Violet and Sonny are creditors or, in fact, also partners of the business can be decided by looking at the terms of the loan document. Examining the loan agreement between Violet and Rose first, the sharing of profits and losses to the extent of 20% by Violet strongly suggests a partnership. This presumption, however, is subjected to exceptions, the most applicable of which are debt paid out of profit and payment of interest. The loan agreement does not state that the share in profits and losses is a payment of debt or interest. These exceptions allow for the sharing of profit but not for the sharing of loss. The sharing of profit and losses is a right of partners. The right to examine the partnership books at will is consistent with the right of a partner as well. A creditor may be allowed to examine the partnership books but it is unlikely that the examination can take place at will. The right to receive a quarterly business statement is a reasonable right for a creditor for the protection of interests. But a partner is also entitled to such a right. A limited partner is allowed to access the partnership books at will and ‘examine the state and prospects of the business of the partnership’.
Violet and Rose have expressed that Violet, by providing a loan, is not a partner. The courts however, have demonstrated that they would not take the label of a relationship by the parties at face value. This is evident in Megevand, when the courts decided that Delhasse, who made a loan to Megevand and Schoeppi on terms highly similar to the current case, such as an entitlement to share in profits and losses to an extent of 25%, a freedom to examine the partnership books at will, a right to receive a quarterly statement and an expression that the advance by Delhasse was a loan and he would not be taken to be a partner, was in fact a partner. The terms of the loan agreement between Rose and Violet confer rights on Violet that are consistent with the type of rights of a limited...