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This paper answers the following 3 questions –
*1. Darren and Samantha met at culinary school and shared a common goal to own a restaurant specializing in desserts. Three years after graduation they opened the ‘Sweet Tooth’. They each contributed 50% of the starting capital and verbally agreed to share all profits and loss of the business equally. Initially the business does very well, but begins to lose custom after two years, at which point Darren and Samantha engage Tabitha, a very famous pastry chef, paying her salary and 15% of any increased profit she generates. Business quickly improves and Tabitha gradually assumes increasing managerial responsibility within the business. Six months after commencing work at the Sweet Tooth, Tabitha confronts Darren and Samantha and demands her existing partnership share be increased to one third, and she be placed on an equal partnership footing. Darren and Samantha are shocked.
(a) Can a partnership exist between Darren and Samantha if there is no written agreement? Give reasons for your conclusion.
(b) Is Tabitha already a partner? Give reasons for your conclusion.
*2. Peter, Lois and Stewie have owned and operated the ‘FamilyRock’ restaurant in partnership for 10 years. Recently, declining custom and some business decisions have caused conflict between the partners.
Lois decided that the FamilyRock needed greater promotion and so without consulting Peter and Stewie, she entered into a contract with the local commercial radio station for radio advertising for a total sum of $30,000. The partnership ran a similar advertising campaign three years ago. When Peter and Stewie hear the radio commercials and receive the invoice they are very unhappy and contact the radio station, stating that they had not given permission for the contract to be entered into and the partnership refuses to pay for the advertising.
Meanwhile, Peter has decided the restaurant requires a fresh look and so, without the knowledge of Lois and Stewie, contracts with Brian the Painter to repaint the premises for a sum of $35,000. When Lois and Stewie are informed of the contract with Brian the Painter they are furious and inform Brian the Painter that they are not bound by the contract as there is a term in their partnership agreement which limits each partner’s authority to enter into contracts on behalf of the firm to $30,000. Stewie has customarily been responsible for purchasing the beverage supplies on behalf of the partnership from the local supplier, Meg. At Stewie’s last purchse, the amount outstanding and owed to Meg was $20,000.
Stewie decided to resign from the partnership on the 1st of May to travel overseas. No one outside the partnership has yet been informed of his resignation. Meg has continued to supply the FamilyRock with beverages but now demands payment of her outstanding account which has risen since the 1st of May to $40,000. After Stewie left the partnership, the business of the FamilyRock has deteriorated.
(i) Are Peter and Stewie correct in arguing the partnership is not bound to the contract with the radio station? Give reasons for your answer.
(ii) Are Lois and Stewie correct in arguing the partnership is not bound to the contract with Brian the Painter? Give reasons for your answer.
(iii) Discuss the liability of all of the partners in relation to the debts owed to the radio station and Meg.
(iv) Would your answer be different if Peter was personally very wealthy but Stewie and Lois had no assets?
*3. Olivia is a director of Beds For All Pty Ltd, a company whose business is owning and managing a chain of hotels. Olivia has not attended the last three board meetings of the company and does not know that the company is about to become insolvent. Olivia enters into a contract with Elliot, the managing director of Greedygood Ltd to supply computers to Beds for All Pty Ltd for $100,000. Elliot has heard rumours in the market place of the poor financial position of Beds For All Pty Ltd, but he is very keen to meet his sales budget and agrees to the contract. Elliot, who is an old friend of Olivia, also informs her of the intention of Greedygood Ltd to merge with another very successful company LotsforMe Ltd and suggests she buy shares as quickly as possible, as he has done.
Six weeks later, the computers have been delivered and installed, but no payment has been made and Beds for All Pty Ltd is insolvent and going into liquidation. The merger has occurred between Greedygood Ltd and LotsforMe Ltd and both Olivia and Elliot have made a $40,000 profit.
(a) Could Olivia, the director of Beds for All Pty Ltd be held personally liable for the unpaid debt and if so why?
(b) Could Elliot, the managing director of Greedygood Ltd be personally liable for the unpaid debt, and if so why?
(c) Have Olivia and Elliot properly fulfilled their duties as directors? If not what duties have they breached and what are the possible consequences of their conduct?