Company Law CML2001F University of Cape Town

PROBLEM SCENARIO (1/2): ‘CYRIL, PATRICIA & HELEN’

Cyril, Patricia and Helen agree to start a business growing and selling plants from a large
greenhouse that they rent with a view to sharing the profits between them. Each contributes
R5,000 startup capital; Cyril enters into a lease with Julius on behalf of the partnership for the
use of a greenhouse (owned by Julius) at R4,000 per month; and Patricia purchases a number
of pots and seeds (for R2,000), which she plants and leaves in the greenhouse.
The partners decide that they will not spend any further money until such time as they are
able to generate profit from the sale of the initial batch of plants. Without the consent of the
other partners, Helen purchases fertilizer that she sees on sale at her local nursery and
fertilizes the plants in the hope that they will grow faster. The fertilizer, however, has a very
high nitrogen content and the plants all die.
1.1 Explain whether the contract of sale entered into by Helen with the nursery will be
binding on the partnership.
1.2 Who owns the dead plants? Describe fully.
1.3 Assume that the partnership runs low on its cash reserves and defaults on its rent.
Explain what procedure would be followed if Julius were to apply to court to have the
partnership sequestrated, particularly with regard to where Julius could look for
settlement of the debt.

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Company Law CML2001F University of Cape Town

PROBLEM SCENARIO (2/2): ‘THE GIGI-BYTE PARTNERSHIP’

Gigi and Byte decide to start doing business together. Gigi is a skilled computer programmer
and Byte has a business science degree and is an experienced recruiter. The two enter into a
partnership agreement in terms of which:

- Gigi will offer her skills as programmer, and Byte offers his business experience;
- Gigi contributes all the computer equipment that they will require (value: R70,000);
- Byte contributes a lump sum of R100,000 to cover rent and expenses during the first
year of the business’ lifetime. This sum must be paid back to him with interest.

At first, the business seems to be doing well, but soon a big client suffers a loss when an app
that Gigi developed malfunctions. The two have to defend this action in court and, although
Gigi is vindicated, the legal costs and the impact on their reputation take a toll on the
business. It is soon clear that the partners are no longer able to pay their debts as they
become due. One of the creditors applies to have the partnership sequestrated.

1. How would the creditor go about applying to have the partnership sequestrated? I.e.
who would be the defendant/s?
2. What will be the consequences? I.e. what will the creditors be able to lay claim to
assuming that the sequestration order is granted.

Gigi and Byte manage to stave off the sequestration application because two further
partners see potential in the business and decide to join forces with Gigi and Byte. Meg and
Terra each contribute an amount of R50,000. Terra only enters into the agreement subject
to the condition that he is to remain anonymous and will only ever be liable up to R50,000
should the partnership ever face legal liability again.

The partners then decide to improve their office space. Gigi comes across a stunning
antique oriental carpet. She explains to the seller that she represents the partnership and
agrees to buy the rug for R250,000. When the others hear about this they are
understandably infuriated. Terra meanwhile has forgotten all about his aims to remain
anonymous and has been actively managing the partnership along with the others. When
the shop owner demands payment, they deny liability on the contract.

3. What will the effect of the new partners joining be on the partnership between Gigi
and Byte?
4. What kind of partnership is this and why?
5. Would the contract for the purchase of the rug be binding on the partnership?
6. Assuming that the partnership agreement makes no provision for it, how will profits
and losses be divided/shared?
7. Assuming that the partnership was liable to the shop owner and became insolvent
again:
a. Will Terra be liable and to what extent?
b. Could Terra insist on payment of the full amount by Gigi?