Assignment
Problem A
John, Paul, George and Ringo have been conducting their tax accounting business as a partnership over the last couple of years. The partnership trades under the name 'Fab Four Tax', and the partners are very proud of their clever logo incorporating this name. The logo is used on their letterhead, business cards, webpage etc. The partnership agreement stipulates that either John or Paul has authority to make contracts on behalf of the firm.
The partnership has managed to build a solid database of clients and in order to protect their client base, the partners recently decided to include a clause in their partnership agreement in terms of which none of them would be permitted to practise as a tax accountant within a 15km radius of the Adelaide CBD for a two-year period, should any of them decide to resign from the partnership.
George, feeling very happy about the partnership's success, decides to surprise the other partners and orders luxurious office furniture for everybody on behalf of the partnership from Elite Offices. George makes a point of using Elite Offices as they are a client of Fab Four Tax and George likes to 'support the people who support us'. He pops into their showrooms with his son, Ryan, one Saturday afternoon and orders the furniture at the same time as picking up a new study desk for Ryan.
Unfortunately, the partnership subsequently experiences a number of setbacks, the first of which is Ringo's resignation. Soon after Ringo's resignation it also becomes apparent that the partnership's use of outdated tax planning software over the last two years caused the wrong advice to be provided to clients. Numerous clients made imprudent business decisions on the basis of this advice and suffered significant damage as a result. These clients are now investigating the possibility of holding the partnership liable.
The office furniture that George ordered eventually arrives. George is very disappointed in John and Paul's reactions - instead of sharing his joy they are upset about the expense and tell George that he will have to pay for the furniture from his own pocket. John, Paul and George cannot agree as to who should pay for the furniture.
In light of everything that has been happening, John, Paul and George decide to approach you for advice. The potential claim for damages by some of their clients is a cause for concern. John, Paul and George are worried that their insurance will not be sufficient to cover these claims and want to know who will be liable if the partnership has insufficient assets to make up the shortfall. They also wish to resolve the issue as to who should be responsible for payment of the office furniture. John, Paul and George do not want their relationship to disintegrate as a result of this disagreement and indicate that they will be satisfied to abide by your opinion in respect of who should bear the expense for the luxurious office furniture that George ordered.
Your first step is to check whether the partnership have registered Fab Four Tax as a business name. They have not.
Advise John, Paul and George in relation to the following:
a) Legal consequences of clients having suffered harm due to use of outdated tax planning software;
b) Liability for the contract that George made on behalf of the firm;
c) Legal consequences of not having registered a business name.
Problem B
Peter Blake and Donald Thomson are directors of a company called Party-on-the-Run Pty Ltd. Shares in the company are held by Peter (40 ordinary shares), Donald (30 ordinary shares), Peter's son, Malcolm (20 shares) and Donald's wife, Alicia (10 shares). The business of the company is managed on the basis of a combination of a constitution and the replaceable rules in the Corporations Act 2001 (Cth). The constitution contains only three clauses, namely:
a) The business of the company is only to provide hiring equipment for parties and all types of corporate and social events.
b) Any director can make contracts on behalf of the company.
c) Any shareholder who wishes to sell his/her shares must first offer the shares for sale to other existing shareholders of the company.
Only if none of these shareholders are interested in purchasing the shares, may the shares be offered for sale to non-shareholders.
Unfortunately, the business relationship between Peter and Donald has taken a turn for the worse, with Peter wishing to expand their business to include a catering arm and Donald resisting the idea. Peter's wife, Lorna, is a wonderful cook and he is convinced that having her in charge of a proposed new catering division of the business will result in even better profits for the company. Donald is satisfied with the business as it is and does not want the company to take on any more than what it is currently doing. Donald draws Peter's attention to the clause in the constitution describing the business of the company and is convinced that this clause would be sufficient to prevent Peter from proceeding with his plans to expand the business of the company, but decides to approach you for advice to double-check.
Advise Donald. Explain the legal effect of the clause describing the company's business in detail. Distinguish between a scenario where -
a) Peter is considering making a contract on behalf of the company that is not related to its business as described in the constitution, but has not done so yet;
b) Peter has already made a contract on behalf of the company that is not related to the business of the company as described in the constitution.