Question One Business entities - 24 marks

Alan was the owner of a restaurant called Peking Duck. 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 a recent competition in the surrounding area, Alan's profits declined and he

struggled to meet costs. He approached his friend Bing 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 a right to receive 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, Alan and Bing 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. Bing spent considerable time at the restaurant and came to know

many of the suppliers some of whom thought he was in a partnership with Alan.

Three years later, Alan decided he wanted to retire and sell the business. He consulted with

Bing who told Alan he would be happy to buy out Alan's share of the partnership. Alan was

surprised. He had never considered Bing to be a partner although Bing thought

himself to be one. Bing argued that the $100,000 was the equivalent to of the capital that

Alan had contributed and that he was therefore entitled to of the proceeds of the sale of the

assets of the business.

Using the Partnership Act 1891 (SA) and relevant cases discuss whether Alan and Bing

are in a business partnership

must use the partnership Act 1891 (SA) and other relevant cases in the answer !!!