Peter James and Jenny Shorter are in business together designing and producing ladies hand-made clothing to order. They are based in Chelsea and trade under the name of J & S Fashions. They have not drawn up or signed any documents to form the business, or registered it with anyone. J & S Fashions has recently set up its own web page on the Internet, intending to gain customers that way and to expand. It has been suggested to Peter, by a friend in a pub, that it would make "sound business sense" to run the business as a limited company.
A] What legal sort of business organisation do Peter and Jenny currently have, with what financial implications for them and others?
B] What would Peter and Jenny have to do to form a company? Explain to them what procedures and documents would be involved, what would need to be contained in them and what the legal implications are for them of this change of type of business organisation.
a) Peter and Jenny are currently trading as a partnership. A partnership is created in law when two or more persons agree to carry on a business together. This agreement can either be put in writing or oral. The law relating to partnerships is largely contained in the Partnership Act 1890 (hereafter "PA 1890"). Section 1 of the PA 1890 defines a partnership as "the relation which subsists between persons carrying on business in common with a view to profit. "It is important to note at the outset that, unlike a company, a partnership does not possess a separate legal personality distinct from its members. Generally speaking, Peter and Jenny can be advised that partners enter into a partnership agreement on the terms that they themselves have established through negotiation and accepted. They are contractually bound by those terms as a consequence, and those terms are susceptible to enforcement at law in the same way as ordinary contractual terms. This is the case unless a term is in conflict with the express provisions of the PA 1890, in which case it is unenforceable. Although a partnership agreement is contractual in nature, at law the partnership is complicated by the fact that it also establishes a principal/agency relationship. Partners are simultaneously both agents of the other partners and the firm, and principals as regards their fellow partners. As a consequence, Peter and Jenny should be informed that partners owe equitable duties and possess equitable rights that flow from their being in a fiduciary relationship in relation to one another.In addition to the general fiduciary duties to act with bona fides (good faith) in all dealings, sections 28-30 of the PA 1890 set out various specific duties.
Section 28 establishes a duty of disclosure. This stipulates that Peter and Jenny must render true accounts and give full information in relation to all partnership dealings and matters to each other. For example, in Law v Law (1905) one partner accepted an offer from another partner to buyout his share of the firm. Later the selling partner discovered that certain partnership assets had not been disclosed at the point of sale and he applied to court to have the contract set aside. It was held that there had been a breach of the duty of disclosure and that the contract could be set aside. Section 29 sets down a duty to account. Peter and Jenny should be informed that partners must account to the firm for any benefit obtained from any transaction concerning the partnership directly or indirectly unless full disclosure has been made and consent has been obtained in advance. In common with all fiduciary duties, this duty is far reaching. In Pathirana v Pathirana (1967) A and R were partners in a garage that was owned by a company of which they were agents. R terminated the partnership and formed a new arrangement with the company in his sole name. The court held that the agency agreement was in law a partnership asset and R's use of it for his own purposes was in conflict with his...
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