Posted: September 14th, 2015

Case study : partnership


Question 1

Indri runs a soil-testing business. He decides to form a company to take over the business. He is the

sole shareholder and sole director. Indri sells his business to the company at an inflated price and

lends the company $90,000 to help meet the cost of purchase. As security for the loan, Indri

arranges a mortgage over a vacant block of land, which he transferred to the company as part of the

business sale. In the first year of operation, the business makes a small profit (after paying both Indri

and his 20 daughter’s wages), but by the end of 2012 it is clear that the building industry is going

through a major slump. Indri becomes desperate and works even harder. While working late into the

night, Indri badly lacerates his hand and needs micro-surgery. His efforts to keep the business afloat

are in vain and the company is forced into liquidation. On realisation of the assets, it is found that

the company has approximately $95,000 to go towards meeting creditors’ claims of $210,000:

(a) If Indri is the only secured creditor, will he get back his $90,000?

(b) Can Indri claim workers’ compensation, assuming that he is otherwise entitled to it?

Question 2

Mr Shifty, Ms Avoider and Mr Marginal call to make an appointment with your firm, Fees Ruthless,

solicitors. You have been asked to establish their new company (No-Tax Agents Pty Ltd). You advise

them not to bother with their own constitution, but instead to rely on the replaceable rules in the

Corporations Act. Advise who should be appointed as directors of their company in view of the

following information:

(a) Mr Shifty states that he does not want to be appointed a director or secretary. He suggests

instead that:

his family company be appointed as a director; and the company not have a company secretary;

(b) Ms Avoider is currently unavailable for meetings as she has five months still to serve for her last

conviction for falsifying company accounts;

Mr Marginal is 72 years old and has Alzheimer’s disease. A trustee has been appointed to administer

his estate.

Assume that Mr Shifty’s family company subsequently goes into liquidation. In her report to ASIC,

the liquidator states that the secured creditors have been repaid in full, but the unsecured creditors
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will not receive more than 20 cents in the dollar. The liquidator does not find any evidence of

wrongdoing on the part of Mr Shifty or any of his fellow directors.

What (if any) ramifications does this have for Mr Shifty, assuming that ASIC’s records show that Mr

Shifty has, over the last nine months, had a similar track record with two other small, proprietary


Question 3

Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) which distributes

and sells yachting clothing and equipment. As well as a warehouse and attached shop, Sailaway

owns a large block of waterfront land which it uses for storage. Alan is also the chairman and

majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land for subdivision into

hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase. It already has a

large overdraft and has no unencumbered assets to use as security for another loan. Alan organised

a loan of $1.5 million to Broadacres from ABC Finance Ltd (ABC Finance) on the basis that Sailaway

wouldguarantee the loan by executing a mortgage over its waterfront land. Alan signed the

mortgagedocuments as a director of Sailaway and forged Bill’s signature as the other signatory. Tom,

the local manager of ABC Finance, had been involved in earlier dealings with Sailaway and knew that

its business did not include property development. However, Tom was away at the time the

documents and the transactions were organised by a relieving manager who did not ask any

questions about Sailaway’s involvement. Broadacres is now in financial difficulties and has defaulted on the loan from ABC Finance. ABCFinance is seeking to enforce its rights under the mortgage against Sailaway.

Advise Sailaway whether it is bound by the mortgage.

Question 4

Andy, Bob and Chris were old school friends. Bob and Chris were running a surf shop together. The

business was having financial difficulties. Andy had recently inherited a lot of money and Bob and

Chris asked him to lend the business $100,000 to enable them to buy sufficient stock for the summer

season. Andy wanted to help his friends but also wanted to ensure that he would get his money

back.He agreed to lend Bob and Chris the money in return for a payment of $10,000 per year out of

the gross returns of the shop. The terms of the loan also provided that Bob and Chris would consult

Andy about any major contracts entered into by the business and gave him a right to inspect the

accounts at regular intervals.

Discuss whether or not a partnership exists between Andy, Chris and Bob.

Would it make any difference if the terms of the loan provided for Andy to be paid $10,000 per year out of the profits of the business?

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