D The Formation and Constitution of Business Organisations Flashcards
What is an agent and their role
An agent (A) is a person who is authorised to act for another the principal (P) in the making of legal relations with third parties.
Resulting contracts are made between the principal and third party and not directly with the agent
An agency relationship exists in lots of situations:
A director acts as an agent for the company
A partner acts as an agent for the partnership.
An estate agent
A travel agent
How is an agency relationship formed
The formation of the agency relationship:
Express/implied:
Express agreement where P actually appoints A as an agent, orally or in writing
Implied agreement where P has not expressly agreed but can be implied from parties conduct or relationship
By necessity:
Requires four conditions to be satisfied
Ps property is entrusted to A
An emergency arises making it necessary for A to act
Its not possible to communicate with P
A acts in the interest of P
By ratification:
If a properly appointed agent exceeds their authority, or a person with no authority acts, the principal has no liability on that contract unless the principal ratifies the contract meaning backdating As authority to act
By estoppel:
Arises where P holds out that A is their agent even though they are not, P is then stopped from denying As authority
What authority does an agent have
Authority determines the power the agent has on behalf of the principal and for which acts the principal is liable
Authority can be given in 3 ways:
Express actual authority - explicitly given from P to A
Implied actual authority - an agent has implied authority to do things incidental to performance, or acts which havent been prohibited or that an agent would usually do
apparent/ostensible authority arises where A is held out by P as having authority, representation by P may arise from previous dealings etc
Breach of warranty of authority:
The principal may ratify the contract and become liable, but if not then the agent will be liable because they did not possess that authority
Explain the potential liability of both principal and agent
The potential liability of both principal and agent -
Where the agent acts for a disclosed principal:
Principal is disclosed where the existence of the principal has been made known to the third party
In general the contract is between principal and third party and the agent is not liable under the contract except from in exceptional circumstances e.g. where the agent showed intention to undertake liability, refuses to identify the principal etc
Where the agent acts for an undisclosed principal:
An undisclosed principal is where its existence has not been made known to the third party the third party can then elect to treat P or A as bound by the transaction once discovered
Agents fiduciary duty:
Has a fiduciary relationship with their principal , position similar to that of a trustee with consequences such as A must not allows personal interests to conflict, A must always act in best interests of P and not make a secret profit
When an agent is in breach of fiduciary duty remedies such as repudiating the contract, dismissal of A or refusal to pay A
Principals liability to the agent:
Agent has the right to claim remuneration or commission for services performed, to claim an indemnity against p for all expenses reasonably incurred in carrying out obligations, or exercise a lien over Ps property
Define a partnership and the partnership act
A partnership is a relationship which subsists between two or more persons carrying on a business in common with a view to profit: s1 Partnership Act 1890
Partnership types
Partnership types:
General or ordinary which is the default position if a partnership is not formed under either of the 2 acts below
Limited partnership is governed by the limited partnership act 1907
Limited liability partnership is governed by limited liability partnerships act 2000, legally separate from its members
Types of partner
Types of partner:
General partner involved in day to day business
Sleeping partner not involved day to day but jointly and severally liable for the debts and contracts of the business
Limited partner (in a limited partnership) contributes a specific amount of capital with limited liability to that amount, cannot take part in management of the firm
Salaried partner will receive a fixed income, not a real partner unless he also receives a share of the profits
Characteristics of a partnership
Characteristics of a partnership:
A business carried on with a view to profit, where the partners are entitled to share
Does not always include joint ownership of property, gross returns, expenses
The formation of a partnership procedure
The formation of a partnership:
No formalities required to form general partnerships, no documentation or registration
The partnership act 1890 applies to every partnership whether written or oral, many of the acts provisions apply unless excluded by a partnership agreement
PA provides that partners will share profit equally but in cases where partners contribute different amounts of capital this may not be appropriate and profit sharing agreements will be agreed within the partnership agreement
Partners are bound by the terms they have agreed even if they conflict with PA 1890
Limited partnership act 1907:
A limited partnership must fulfil the following conditions
Must be at least one partner with unlimited liability
Partnership must be registered with the registrar of companies
Limited partners may not participate in the management of the business, if they do they forfeit their limited liability
A limited partner has no power to bind the firm to contracts unlike unlimited partners they are not an agent of the firm
Authority of partners
Agency relationship:
When entering into a contract to carry out the business, each partner is acting as the agent of all the partners
The express authority of a partner is set out in the partnership agreement
The implied authority is set out in PA 1890 meaning every partner is assumed have implied authority to sell/buy goods, receive payments of debts due, engage employees, employ a solicitor
A partner may have apparent authority where the other partners have allowed that partner to enter into certain transactions such that the partner has been held out has having the authority to enter into those transactions
Analyse the liability of partners for partnership debts
The firm is liable for contracts made by a partner if they were acting with their express, implied or apparent authority
Holding out:
Every person who by their words or conduct represents themselves as a partner is liable as if they are a partner to anyone who thereby gives credit to the firm
Liability in tort:
The concept of vicarious liability was discussed, the same principles apply in the context of a partnership where a tort is committed during the ordinary course of the partnerships business, or by a partner acting with the authority of the other partners. The partners are jointly and severally liable to the person who has suffered loss
Misapplication of money or property:
The partnership is liable to make good the loss where a third partys money or property is misapplied e.g. after being received by a partner within their express, implied or apparent authority, and while it is in the custody of the firm such as in the partnership bank account
Termination of a partnership
Dissolution:
Without court order: partnership will automatically end with the expiry of a fixed term enterprise, or when the partner gives notice, or death or bankruptcy and where continuation of the partnership is illegal
With court order: the court can bring a partnership to an end where a partner has permanent incapacity, engages in prejudicial activity, breach partnership agreement, the business can only be carried at a loss or it is just equitable to do so
Which partners are liable:
General rule: every partner is jointly and severally liable for the debts and contracts of the business - outsiders can sue one partner alone or the firm and one partner does not bar subsequent action on the other partners
New partners: not personally liable for debts prior
Retiring partners: remains liable for debts incurred while they were a partner, if no notice of retirement is given the firm continues to be bound by their actions
Change in partners: where a third party deals with change in partners, all partners of the old firm are treated as partners still until third party receives notice of change
Novation: a creditor agrees with the outgoing/continuing/incoming partners that liability for an existing debt will be that of the continuing/incoming partners
Indemnity: the continuing and incoming partners may agree to indemnify the outgoing partner against debts incurred pre and/or post retirement
Distinguish between sole traders, partnerships and companies
The doctrine and veil of incorporation:
The company is a separate legal entity from its shareholders, directors, managers etc
Lifting the veil of incorporation:
Means that in certain circumstances the courts can look through the company to the identity of the shareholders
Usual result is that the members or directors become personally liable for the companies debts
Consequence of incorporation:
Limited liability: the company is fully liable for its own debts and if a company fails the liability of the shareholders is limited to any amount still unpaid on their share capital
A company enters into contracts in its own name and can sue or be sued in its own name
A company owns its own property
A company has perpetual succession irrespective of the fate of shareholders
The management of a company is separated from its ownership
A company is subject to the requirements of the companies act 2006, small business enterprise and employment act 2015
Where a company suffers an injury its the company itself that must take the appropriate remedial action
Company promoters role and duties as well as breaches and remedies
Promoters:
No statutory definition but according to case law is a person who undertakes to form a company and who takes the necessary steps to accomplish that purpose - excluding people acting in a professional capacity e.g. accountants and solicitors
Fiduciary duties of promoters:
Disclose interest in transactions to the company and not to make a secret profit
Disclose any benefit acquired to an independent board/shareholders
If promoter does make a secret profit the company may rescind the contract, obtain damages or recover the profit
Pre incorporation contracts meaning of and rules relating to
Pre incorporation contracts:
Where a person enters into a contract before a company has been registered
The promoter is personally liable under any such contract, as the company does not legally exist until it is incorporated
Promoter can protect themselves by buying an off the shelf company which is one that has already been formed, is cheap and can trade immediately
