It is not uncommon when starting or purchasing a business to want to share responsibilities and the risks of the venture. Different structures can achieve this, eg. incorporated companies, trusts and partnerships.
Each structure carries its own list of pros and cons.
One common structure is where several individuals elect to buy or take over a business together, and govern their conduct by way of a partnership agreement. Partnerships do not carry the same tax benefits as incorporated companies, but they can avoid the rigid organisation and rules provided by a company constitution and/or contained within the Corporations Act.
It is therefore important, if going into business with a partner, that the partnership deed is as comprehensive as possible – taking into account as many contingencies as can be foreseen – and that it fully addresses both the rights and obligations of all partners. An exit strategy, if the worst should happen, is also important.
It is all too common, however, for parties to dive in to a venture with gusto and enthusiasm without fully considering what may happen down the track. Often, partnership deeds are rushed or simply do not cover all the possible (likely or unlikely) scenarios that might affect the partnership venture.
When things go wrong with partnerships, and it is sad that it happens all too frequently, there is still hope even in circumstances where partnership deeds simply do not measure up.
The safety net lies in the nature of the partnership relationship. Justice Dixon in Birtchnell v Equity Trustees, Executors and Agency Co Limited (1929) 42 CLR 384, explained that the relationship between partners is a fiduciary one. The mutual confidence of partners, he said, was the lifeblood of the concern and it is only through trust between the partners that the business may go on.
Dixon J outlined a number of fiduciary duties that partners owe to each other. Firstly and primarily is that the parties must act in ‘good faith’ and honesty. This is a broad duty, and often encompasses a range of ill deeds perpetrated by less than scrupulous partners.
Next is the duty to provide full accounts of all information and assets in a partner’s possession or control that are material to the partnership business. No one partner can seize control of all the books and records of a business and seek to exclude the other partners from gaining access. To allow this, invites all manner of underhanded deeds.
Partners must also avoid conflicts of interest. By this, the Courts mean that a partner cannot set up a business under a partnership agreement and then simply turn around and set up a business in conflict or assist a business in conflict with that partnership business. When partners enter a business venture, it has been determined that they must, in furtherance of the trust between the parties, pour all reasonable focus and effort into that business.
Partners must avoid making personal profit from partnership opportunities and information, and must account for personal benefits obtained from the partnership business. A partnership venture is one of mutual gain or mutual loss, not necessarily in equal proportions but certainly to the same ends. For one partner to derive a benefit, without disclosing it to his fellow partners, is a direct breach of the implied duty of full disclosure within the partnership.
In cases where breaches of these duties occur, one partner may look to the Courts to determine the future of the partnership. If dispute in the partnership venture cannot be resolved between the parties, then a receiver can be appointed to wind up the business and send the parties, possibly sadder and wiser, on their way.
In short, while implied business obligations cover a wide range of behaviour, it is simply more practical, cost efficient and safe to take the time and legal fees at the start of the venture to ensure you have a proper, comprehensive and fully structured partnership agreement in place before rushing head first into the ‘next big thing’.
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