Question 4 (10 marks)

Toma was the owner of a restaurant called "Luau-Talo Bar and Restaurant". He had been fortunate enough to buy the premises in which the restaurant was situated and to furnish it as he had wanted. Due to a huge increase in recent competition in the surrounding area, Toma's profits declined and he struggled to meet costs. He approached his friend Simi for a loan of $100,000 and they agreed to draw up a loan agreement which included the following:

The lender will receive a share of the profits and losses to the extent of 40%

The lender has the right to examine the business books at will

The lender has the right to a quarterly business statement

The lender has the right to be consulted and contribute to any major decisions regarding the business.

With the injection of money into the business, Toma and Simi decided that the way to improve trade was to refurnish the restaurant. Most of the money was spent on this and the business improved and made a profit. Simi spent considerable time at the restaurant and came to know many of the suppliers, some of whom thought he was in a partnership with Toma.

Three years later, Toma decided he wanted to retire and sell the business. he consulted with Simi who told Toma he would be happy to buy out Toma's share of the partnership. Toma was surprised. He had never considered Simi to be a partner although Simi obviously thought himself to be one. Simi argued that the $100,000 was the equivalent of of the capital that Toma had contributed and that he was therefore entitled to of the proceeds of the sale of the assets of the business.

Using the relevant sections of the Partnership Act 1975 and the ILAC format, discuss whether Toma and Simi are in a business partnership.