Instructions to Candidates: STUDENTS ARE REQUIRED TO USE CASE LAW AND LEGISLATION WHEN ANSWERING THE QUESTIONS; WORD COUNT = 1,000; MARKS AWARDED 10% (10 marks)

Question:

Nick and Jack run a small florist shop called Flower Paradise. Nick does not take an active role in the day to day management of the florist shop and so Nick and Jack have agreed that Nick will only receive 30 per cent of the profits while Jack will receive 70 per cent. They have also agreed that Nick will only be liable for 30 per cent of the costs of the business. No one but Nick and Jack is aware of this arrangement. After some success, the business has suddenly failed and closed down. Jack has withdrawn all the cash from the Bank and gone to Italy. Before leaving, Jack also borrowed $10,000 from a finance company, Quick Loans Ltd, at very high interest rates. Jack told Quick Loans Ltd that he was authorised by Flower Paradise to borrow the money for the purpose of expanding the business. This was not true. However, Jack borrowed money on two earlier occasions which were duly paid back from Flower Paradise's account. The money disappeared along with Jack. Quick Loans Ltd now wants Nick to repay the $10,000. Nick claims that he is not responsible as the money was used for Jack's own purposes. Alternatively, Nick claims that, if he is liable, his liability is limited to $3,000 (that is 30% of the loan amount).

Required: Discuss whether the Flower Paradise can be considered as a partnership business. Advise whether Nick is liable to Quick Loans Ltd; and, if he is, how much he must pay to Quick Loans Ltd. You should support your answer with reference to relevant sections of the Partnership Act and, where relevant, to cases laws.