Advice to Anton, Martin and Kelly on Who is Responsible for the Contract with ‘Designers Supply Ltd.?
- b) Who is responsible for the contract with ‘Beautiful Windows Ltd.?. 3
- c) The legal effect of incorporation and the consequences it will have on the company’s insurance claim and the arguments raised by the company against compensating Anton from the company compensation scheme. 6
According to the partnership facts in the agreement by Anton, Marin and Kelly, the agreement outlined the procedure to perform purchases on behalf of the partnership. The partnership agreement that the three partners signed was clear that any purchases for the business ought not to exceed £2,500 unless through the consent of the other partners. In this case, Martin completed a purchase for a chandelier worth £3,500, which broke the first agreement regulation, which restricted purchases to £1,000 less that amount. In light of the agreement, it anything above the purchases restriction was supposed to be communicated to the other partners, but Martin failed to make the commutation. While the action of making a purchase exceeding the laid down limit could have been corrected through communication, the omission of the disclosure to the partners makes the entire action in breach of partnership rules.
The role of the partnership agreement is to make the provisions of partners’ protection legally binding particularly in dealing with responsibility over liability when it occurs. Partner’s negligence in operations should not be condoned as outlined in the guidelines that define the operations of the business. Sensitive operations such as those touching on financial elements require stringent compliance since it implies that future transactions are likely to be marred by uncertainty, which can easily bring the business down crumbling. It is therefore admissible for the partners to consider placing the extra consideration of £1000 for the chandelier’s purchase at Martin’s expense, for the breach of express partnership agreement. Alternatively, the other partners have the right to wholly place the cost of the chandelier on Martin’s expense for the same reason of breach of partnership regulations. The most practical and just option however, is to charge the extra cost element of £1,000 on the errant partner. The difficulties occasioned by lack of communication are interpreted to constitute extra engagements that are unauthorized by the partnership thereby occasioning an agency restriction.
In general, partnership operation is guided by the laid down agreement, which plays the most important part of the definition of individual partners’ obligations as well as rights. Among the vital definitions in the agreement signed by the partners are the administration roles that each of the partners should take care of in the running of the partnership. Whereas every partner ought to contribute towards the smooth operation of the business, the agreement usually clearly states the specific roles that the various partners ought to play in terms of the business oversight. It is not a necessity for a partner to disclose to the other partners every action taken on behalf of the business, if it squarely lies within their docket of responsibilities defined by the agreement. Communication and disclosure however becomes an integral part of the daily running of the business to avoid confusion in case a conflict of roles appears. Among the advantages of entering into a partnership is the capacity to assist each other in terms of carrying out some important decisions, which include daily running of the business; referred to synergy in decision making. In light of such a case, it is always important to ensure that communication makes the regulations outlined in the agreement are followed and consensus reached in case they become compromised in some inevitable ways.
b) Who is Responsible for the Contract with ‘Beautiful Windows Ltd.?
Anton made purchases for curtain fabrics on behalf of the partnership at an undisclosed fee, which will be assumed to be within the set limit to avoid a conflict such as the one that Martin committed with the purchase of the £3,500 chandelier. The fundamental question in this question therefore does not directly involve a partner’s conduct in contravention of the partnership deed. At the time when Beautiful Windows Limited was engaged to supply the business with curtain fabrics, Kelly had already undertaken the communication to the effect that she was quitting the partnership. The other two partners, Anton and Martin were contemplating and had taken initial steps to incorporate the partnership in order to transform it into a private company. However, the actual incorporation had not taken place at the initial contact between the partnership and Beautiful Windows Limited, which implies that the business existed as a partnership. It is alternatively clear that the newly incorporated company was involved in the ratification of the contractual engagement entered with Beautiful Windows Limited. In light of the contractual engagement that the incorporated company, under the name of Smart Designs Limited had with Beautiful Windows, it was purely a corporate engagement since Kelly had left at that time.
Determination of the status is important in order to define the obligations and rights of the three parties at the time of the contractual undertaking entered with Beautiful Windows Limited. It is not clear whether the exit procedure provided for in the agreement had been followed to the later in order for the exiting partner to legally be relieved of her obligations and liabilities to the extent that the partnership and the incorporated business were involved. In light of these facts, the advice to the partners will be constructed with regard to exiting procedure and liability immediately after the exit of a partner, although incorporation of the business attracts considerations that would not bind Kelly.
Two assumptions will be made regarding the consideration of the contract that the business involved Beautiful Window Limited; some contractual obligation under the partnership and another after incorporation. Firstly, partners are expressly deemed to be the agents of the partnership in their dealings, if they act within the provisions of the partnership deed. It will be assumed that the contractual agreement that Anton had with Beautiful Windows Limited was appropriately done. This is due to the fact that the partners have an obligation to act as agents of the partnership if they perform such processes as can be identified within the usual way of operations to constitute actions that legally bind the partnership. Having factored in the involved consideration as a direct partnership engagement, focus shifts to the actual membership of the partnership at the time of the contractual agreement with Beautiful Windows. In light of the case facts, it is not clear if the appropriate procedure was followed by Kelly in making her exit. Technically speaking, a notice of a partner’s exit out of the partnership spells the beginning of the dissolution process, where the fate of the business is defined by incidental agreements to determine if the business closes shop or it continues in a different form.
In many cases, a partnership with only two partners is dissolved resulting in disposals, debts clearance, liability and surplus sharing according to individual sharing capacity. Where many partners carry out business, the business status is valued as if the business is closing down in order to evaluate the financial responsibility or rights that the leaving partner has on the business to facilitate buying out process for the business to continue. Anton, Martin and Kelly must consider whether this actually happened in order to release Kelly out of the partnership.
To determine the legality of Kelly’s exit, the partnership deed must be consulted to give guidance on the admissibility of her exit. This is important particularly to ascertain a partner’s intentions such as escaping liability. Admissibility will qualify only of the partnership deed allows leaving the partnership on personal will such as on grounds of getting married, otherwise the contractual obligation entered after her alleged exit will be legally binding on her as it does on the other two partners. An agreement can however be reached among the partners in case she is completely incapable of continuing being a partner, to avoid legal and technical complexities from the deed. Such an agreement will take care of the actual date of her legal exit to assist in determination of her financial obligation expected from the contract with Beautiful Windows. In case personal will is allowed in partnership exit, the appropriate communication must be made for the procedures to be initiated immediately to avoid unnecessary conflict.
Secondly, following the decision to incorporate the business, Kelly was not party to the decision since her input and approval are not availed. Further developments on the financial obligations that the business had under the incorporated body can directly be placed on the parties at inception. To this far, Kelly is out of any liability or gain arising from the contractual element held under the incorporated entity. This implies that if the first assumption of the partnership having financial obligation towards Beautiful Windows Limited does not apply, or if Kelly had procedurally left the partnership, the second assumption holds with full responsibility lying on Anton and Martin.
c) The Legal Effect of Incorporation and the Consequences it will have on the Company’s Insurance Claim and the Arguments Raised by the Company Against Compensating Anton from the Company Compensation Scheme.
The period under consideration in this question is after incorporation of the business by Anton and Martin under the name Smart Designs Limited. Anton had made relatively higher contribution towards the beginning of the private company, through becoming managing director and chief designer as well as becoming a major shareholder. Anton had also been a lone full time employee at the company besides having taken insurance cover for the business long before incorporation. A theft incidence threatening to close the company on bankruptcy has also completely incapacitated Anton following attacks from the buglers. Insurance company reluctance to compensate Anton is mainly based on insurable position that he has at the time of the incidence, which makes his claim remotely uninsurable.
Perhaps the most conspicuously missing link in the fateful episode is the preparedness for the company to have the right cover for a corporate entity. It is clear that at the time of the burglary, the same insurance cover that Anton had insured the business with before incorporation was assumed functional. To launch a compensation claim, the insured must satisfy some principle conditions that guide in the regulation of insurance contracts. Apparently, due to the several distinctions that the two types of businesses have, there is no relationship between a partnership cover and a corporate cover. In order to make a justifiable claim, the company ought to have made the appropriate adjustment from a partnership to a corporation. Besides such details as insurance cover for various legal entities, several other considerations come into the equation to ensure that the business moves from an earlier business form into the incorporated state.
Legal effects of incorporation include changes in legal requirements, which increase as the business moves from the simple partnership form to the relatively more complicated form of a private limited company. While a partnership is formed through the partnership agreement or deed, a company must be incorporated through registration procedure that is completed through submission of two main documents namely, the articles of association as well as the memorandum of association. Certificate of inception must be obtained after the incorporation for operations to commence. Whereas legal liability is higher in a partnership in terms of the extent to which liability can be reclaimed from the owners, owners of a company have protection against legally binding liability. Companies must file their returns after the completion of every financial period in order to be authorized to continue in operations while it is not a necessity in partnership business forms.
The applicable rates of taxation are also considerably adjusted when businesses become incorporated and fit in the corporate class of taxpayers. Whereas partnerships management is not defined by law, incorporated entities are guided by law in that there must be directors who must meet certain requirements. Such requirements include the level of shareholding, which is clearly defined by the law, as well as the direct roles that the directors ought to play in the management of the company. This implies that the partnership is fundamentally different from a partnership in terms of legal liability, which should also be reflected in the insurance cover for the businesses. In light of these differences, it is clear that Anton had not met some of the regulations that define incorporated bodies.
Declining to award insurance compensation to Anton for being a full employee of Smart Designs Limited has no legal basis, particularly under common law. While it is not directly assumed that directors are employees of the company thereby bound by the regulations that bind the employees within the company, there is no restriction of managers to participate in the capacity of full time employees. The director of a company who must also be a major shareholder would have the best interests of the company if a closer access were allowed which can be facilitated as an employee. Modifications of companies’ articles must however be clear in that the board of directors authorizes the awarding of service contracts to majority shareholders. Such service contracts awarded for the best interests of the company are admissible before the law. There are special modifications in the regulations of service contracts to such shareholders as the directors with regard to fixed term service contracts. Under such arrangements, directors are deemed permanent and pensionable employees besides their roles as directors, which come with its special treatments. This implies that the insurance company can only refute the claim if it can demonstrate before a court of law that the director (Anton) had not been contracted as an employee despite being a manager.
- Gage, D. The Partnership Charter: How to Start Out Right with Your New Business Partnership (or Fix the One you are in), Basic Books, New York, NY, 2004
- ‘362.190 Partner agent of a partnership as to partnership business’, US Government, 26 June 2006, viewed on 24 August 2011 <http://www.lrc.ky.gov/KRS/362-00/190.PDF>
- Bernstein, D. & Wang, C. ‘Code of Ethics and Business Conduct for Officers, Directors and Employees of Orient Paper Inc.’, Orient Paper, Inc., 29 October 2009, viewed 24 August 2011 <http://www.orientpaperinc.com/images/The%20Code%20of%20Business%20Ethics%20and%20Conduct.pdf>
- Deards, E. & Deards, R. Practice Notes on Partnership Law, Cavendish Publishing Ltd., London, UK, 1999
- Baxt, B. & Baxt, R. Duties and Responsibilities of Directors and Officers, AICD, Sydney, 2005
- Honds, J. Directors’ Duties in the Context of Insolvency, GRIN Verlag, Norderstedt, Germany, 2006
- Company Law Club, ‘Directors as Employees’, Incorporation Services Limited, 2011, viewed on 24 August 2011 <http://www.companylawclub.co.uk/topics/directors_as_employees.shtml>
- TMP UK, ‘Treatment of Directors’ Claims as ‘Employees’ in Insolvencies’, Society of Practitioners of Insolvency, 2010, viewed on 24 August 2011, <http://tmp.co.uk/downloads/creditors-guide/technical-releases/directors-as-employees/>
-  D Gage, The Partnership Charter: How to Start Out Right with Your New Business Partnership (or Fix the One You are In), Basic Books, New York, NY, 2004, p. 41
-  ‘362.190 Partner agent of a partnership as to partnership business’, US Government, 26 June 2006, viewed on 24 August 2011 <http://www.lrc.ky.gov/KRS/362-00/190.PDF>
-  Gage, op. cit., p. 6.
-  D Bernstein & C Wang, ‘Code of ethics and business conduct for officers, directors and employees of Orient Paper Inc.’, Orient Paper, Inc., 29 October 2009, viewed 24 August 2011 <http://www.orientpaperinc.com/images/The%20Code%20of%20Business%20Ethics%20and%20Conduct.pdf> p. 4
-  E Deards & R Deards, Practice Notes on Partnership Law, Cavendish Publishing Ltd., London, UK, 1999, p. 52.
-  Ibid, p. 54.
-  B Baxt & R Baxt, Duties and responsibilities of directors and officers, AICD, Sydney, 2005, p. 171
-  J Honds, Directors’ duties in the context of insolvency, GRIN Verlag, Norderstedt, Germany, 2006, p. 16
-  Company Law Club, ‘Directors as employees’, Incorporation Services Limited, 2011, viewed on 24 August 2011 <http://www.companylawclub.co.uk/topics/directors_as_employees.shtml>
-  TMP UK, ‘Treatment of directors’ claims as ‘employees’ in insolvencies’, Society of Practitioners of Insolvency, 2010, viewed on 24 August 2011, <http://tmp.co.uk/downloads/creditors-guide/technical-releases/directors-as-employees/>