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PARTNERSHIPS

Partnership Act 1890

IDENTIFYING A PARTNERSHIP Partnership Act 1890 defines a partnership as "the relation which subsists between [two or more] persons carrying on a business in common with a view of profit" (S1(1) PA 1890). Business includes "every trade, occupation or profession" (S45 PA 1890). In other words, a partnership is two or more persons who on the basis of a contract (whether written, oral, or implied by conduct) between them: (a) share the right to be involved in making decisions which affect the business or the business assets (b) the right to share profits of the business and the responsibility for sharing the debts of the business. (c) the right to examine accounts of the business (d) the ownership of the assets of the business However: o s.2(2): “…sharing of gross returns does not of itself create a partnership” o s.2(3): “…receipt by a person of the profits of a business is prima facie evidence that he is a partner in the business, but receipt of such a share, or payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business”  Check level of input/nature of payments to establish whether they are a partner.  Those in partnership are collectively called the firm. FORMATION There are no formalities needed to establish a partnership; it comes into existence when the above definition is satisfied. FORMS OF PARTNERSHIP 1. individuals 2. corporate - partnership with one or more corporate members 3. group partnership - partnership between two or more partnerships 4. sub-partnership - partnership within a partnership (i.e. partnership with a share of another partnership) PARTNERS RELATIONSHIP TO EACH OTHER: The rights and duties of the partners in a partnership are governed by: 1. Partnership Agreement; or  Regulates the rights and obligations of the partners  Usually rules of formation of contract apply:  express/implied  written/oral  partners can agree whatever terms they wish (S19 PA 1890) 2. In the absence of an agreement, Partnership Act 1890 3. However, the rights and duties of partners may be varied by the consent of all the partners either expressly or by the course of dealing (S19 PA 1890 ). DUTIES TOWARDS OTHER PARTNERS 1. Good faith/account for private profits The most fundamental duty of partners is the duty to act in good faith towards all co-partners in all partnership dealings and transactions (Helmore v Smith (1886) - "there is no stronger relationship than that which exists between partners"). S28 PA 1890 S29(1) PA 1890

S30 PA 1890 S19 PA 1890

Partners must render true accounts and full information to each other (e.g. when selling their share to another partner, even if this affects the price he will receive). Partners must account to the firm for personal benefits (e.g. unauthorised profit) received through the use of: a) partnership name, b) partnership property, c) partnership connections, d) competing against the partnership business while still a partner. Partners must not set up a business which competes with the partnership. Partners can exclude S28-30, but there is no authority to disapply the equitable duty of good faith.

2. Time and attention Express Term Devote time and attention to partnership affairs  Neither PA 1890 or common law imposes such an obligation, and so an express term dealing with this issue is essential.

3. Duty not to compete with the firm Express Term Prevent partners competing with the firm when they leave.  S29 PA 1890 obligation to account for profits made from a competing business when in the partnership;  BUT, Act or common law places no restraints on a partner who has left the partnership. Express term to that effect will prevent a partner: (a) setting up a business in a certain geographical area; or (b) refraining from work for a specified period.

Bridge v Deacons

Can't be enforced unless the restriction (a) does no more than is reasonable as between the parties; and (b) is a legitimate interest

RIGHTS AND OBLIGATIONS These rights and obligations are automatically implied into a partnership agreement, unless there is an express provision otherwise S24(1) PA 1890

All partners will share profits/losses and capital equally (regardless of capital injected into the business at outset) S24(4) PA 1890 A partner is not entitled to interest on the capital subscribed by him before the ascertainment of profit. However, where a partner who for the purpose of the partnership contributes capital beyond the amount of which he has agreed to subscribe, he is entitled to interest of 5% per annum on that excess, beginning from the date of the payment on (S24(3) PA 1890) S24(5) PA 1890 Every partner may take part in the management of the business S24(6) PA 1890 No partner shall be entitled to remuneration. S24(7) PA 1890 No person can be introduced as a partner without consent of all existing partners S24(1) PA 1890 All ordinary partnership decisions are made on a simple majority, except decisions which change the nature of the business or where a new partner is to be introduced, which require the unanimous consent of all the partners. If the partners wish for any of these terms to be amended, then they should include a term in their partnership agreement to that effect. PARTNERSHIP PROPERTY S20 PA 1890 All property brought into the partnership for the purposes and in the course of the partnership is partnership property S21 PA 1890 All property bought with money belonging to the firm is deemed to have been bought on account of the firm unless contrary intention can be proved. EXPULSION OF A PARTNER S25 PA 1890 A partner cannot be sacked unless there is a provision for so doing in the partnership agreement. PARTNER LEAVING If there is no partnership agreement or if the agreement is silent on retirement or termination then the partnership is deemed a ‘partnership at will’ and the effect of a partner leaving is that the partner must give notice and the partnership is fully dissolved and has to be wound up. To avoid this, the partners must agree expressly that in the event of the departure of one partner the partnership will continue as between the remaining partners.

PARTNER'S LIABILITY The firm does not have separate legal personalty and partners have unlimited joint liability. This means that if partnership assets are not sufficient to satisfy a debt of the partnership, the partners are personally liable for that debts (S4(1) PA 1890). Tortious liability S10 PA 1890 The firm is liable for loss and damage caused by any wrongful act or omission of a partner who acts: (a) within the ordinary course of the firm's business; or (b) with the authority of his partners. S12 PA 1890 Every partner is jointly liable with his co-partners for everything which the firm while he is partner becomes liable, and also severally liable for the whole debt as an individual . The Rules of Agency The question as to whether the firm is bound by a contract entered into by one of the partners on behalf of the firm will depend on the rules of agency. Flow Chart 1. Did the partner, X, have actual authority? YES

NO

2. Did the partner, X, have apparent authority? Did the transaction relate to business of the kind carried on by the firm? YES NO

Would a Partner in such a firm usually be expected to have the authority to do this? YES NO

Did the other party know that X had no authority? NO YES

Did the other party know or believe X to be a Partner? YES NO 3. Who is potentially liable? The firm is bound and therefore also all those who were Partners at the time and possibly others as per below.

X (because he made the contract) is liable but no one else

1. Did the partner have actual authority? S6 PA 1890 Any agent of the firm (whether a partner or not) can bind the firm if he enters into a contract for which the (other) partners have given him actual authority. Actual authority can be express or implied.  Express authority from all of the partners at a partners’ meeting  Implied authority by regular course of dealing  Implied authority as it is incidental to the expressly authorised action  Implied authority as it is usual to the nature of the position of the person (marketing manager)  The partners have acted jointly in making the contract 2. Did the partner have apparent authority? S5 PA 1890 Where a partner does not have actual authority, or goes beyond the limits of their authority, the firm will still be bound by the unauthorised act if: a) the act is of the kind carried on by the firm (i.e. relates to the type of business in which the business is apparently engaged); (i) this is a question of fact (ii) depends on practices normally adopted in businesses of that type b) the act is for carrying on such business in the usual way.

(i)

the transaction is one which a partner in such a firm would usually be expected to have the authority to act However, the firm will not be liable for the unauthorised act of the agent where the other party: a) knew that the partner in question lacked authority to act on behalf of the firm; or b) did not know or believe that the person with whom he dealt was a partner. How do you prevent this? Express limits in the Partnership Agreement on the authority of partners. Note, however, the use of such clauses is limited:  Third parties are not bound by such clauses unless they have actual notice of them (S8 PA 1890). If, therefore, a Partner ignores a limit on its authority, and a third party is not aware of that limit, the firm will be bound if the Partner's act is within its apparent authority as above. But, Partnership Agreements can deal with this problem by including: (a) Indemnity clause - partners agree to indemnify their co-partners for any debts or obligations  However, an indemnity clause does not affect a third parties rights: they could still pursue the debt or obligation against an indemnified party.  In addition, indemnity clauses are only of value where the partner has the funds to indemnify the other partners. (b) Expulsion clause - an express right to expel any partner who breaches the Partnership Agreement. 3. AGAINST WHOM CAN THE FIRM'S LIABILITIES BE ENFORCED? 1. PARTNER WHO MADE THE CONTRACT - Contractual liability Any claim can be commenced against the individual by virtue of privity of contract between them (this will only be applicable where he acted without authority in entering the contract) 2. THE FIRM & CURRENT PARTNERS - Contractual liability Any claim should be commenced against the partnership if: (a) it has a name; (b) it is appropriate to do so (CPR Part 7, PD 7, 5A.1 and 5A.3) All the partners who were partners at the time when the debt or obligation was incurred are (a) jointly; and (b) severally liable to satisfy the judgment (S9 and S17 PA 1890, S3 Civil Liability (Contribution) Act 1978). 3. NEW PARTNERS S17(1) PA 1890 A new partner is not liable for debts incurred by the firm before he joined, except where he has given his consent. 4. FORMER PARTNERS - debts incurred while partner S17(2) PA 1890 A partner who retires remain liable for debts was incurred while he was a partner S9 PA 1890 The estate of a partner who dies remains liable for debts was incurred while he was a partner (subject in England or Ireland to the prior payment of his separate debts). S17(3) PA 1890 Is there a Novation Agreement in place?  Agreement with creditor to release outgoing partners from debts incurred while partner;  Requires creditor's consent - impractical, except in long-term and substantial liabilities where the remaining debtors are a good credit risk. 5. FORMER PARTNERS - debts incurred after the partner left S36(1) PA 1890 A former partner remains liable for debts incurred after his departure if: (a) he fails to give proper notice to third parties of his departure; (i) Give actual notice to all those who have dealt with the firm prior to his leaving (S36(1) PA 1890) (ii) Place an advertisement in the London Gazette for all those who have not dealt with the firm prior to his departure (S36(2) PA 1890). Once such notice is given, a former partner will not be liable for debts incurred after leaving the firm. (b) he knowingly allows representations that he is still a partner ("holding out") o The representation may be made:

o

 by the person himself; or  provided that it is made with the person's knowledge, another person. The representation may be:  oral (e.g. where the person is described as a partner in conversation),  in writing (e.g. headed notepaper),  or by conduct (e.g. in a previous course of dealing).

If a creditor has relied on a representation that a particular person was a partner in that firm, and gives credit on that basis, then that partner may be personally liable for that debt. S36(3) PA 1890

The partner’s liability after retirement is limited to those persons who knew of his position as a partner

7. NON-PARTNERS – HOLDING OUT S14 PA 1890 A person who has never been a partner , but who is represented as being a partner, will also be liable for the debt. o The representation may be made:  by the person himself; or  provided that it is made with the person's knowledge, another person. o The representation may be:  oral (e.g. where the person is described as a partner in conversation),  in writing (e.g. headed notepaper),  or by conduct (e.g. in a previous course of dealing). What if a Partner cannot pay?  A creditor can sue the firm as a group of persons or can sue individually any of the persons who are liable as partners. (a) If creditor obtains judgment against a partner individually, and that partner cannot pay, the creditor can commence fresh proceedings in order to obtain judgment against the firm. (b) If creditor obtains judgment against the firm, and the firm cannot pay, the judgment can be enforced against the private assets of any person liable as partner. (c) If the claim of the creditor cannot be satisfied in any of these ways, it follows that the firm is insolvent and all the individuals liable as Partners are also insolvent, so insolvency proceedings are likely to follow (governed by Insolvent Partnerships Order 1994 and the Insolvency Act 1986)

DISSOLUTION OF THE PARTNERSHIP S39 PA 1890 Every partner has a right to demand the partnership to be wound up and for the assets of the partnership to be sold.  limit the partner's right to only a partial dissolution  include option to have their share purchased by continuing partner/new partner S37 PA 1890 Every partner has a unilateral right to publicise the dissolution of the firm

TYPES OF DISSOLUTION 1. General/full dissolution  complete winding up of the partnership  cessation of its business  partnership assets used in payment of debts and liabilities  after deducting what they owe to the firm, surplus assets distributed between them 2. Technical/partial dissolution - the partnership agreement must provide for this as the PA does not  partnership continues despite change in membership  partnership before the change is dissolved, and a new one is created.  no break in the continuity of the business MEANS OF DISSOLUTION 1. Notice/Automatic In the absence of a provision to the contrary in a partnership agreement, full dissolution will occur in the following two situations (subject to being disapplied by a partnership agreement): (a) Automatic dissolution Subject to an express provision to the contrary, a partnership will be dissolved automatically: S33 PA 1890 Upon the death or bankruptcy of a partner S34 PA 1890 If the partnership business becomes unlawful (this section of the Partnership Act cannot be excluded) S32 PA 1890 (a) if entered for a fixed term, by the expiration of that term; or (b) if entered for a single undertaking, on the termination of that undertaking; or (b) Dissolution by notice S26 & S32 PA 1890 (c) Where the partnership is for an undefined term, any partner may dissolve the partnership at any time and with immediate effect by giving notice of his intention so to do to all the other partners.  It does not need to be in writing unless the agreement was by deed. 2. Agreement S19 PA 1890 The partners can agree to dissolve the partnership contrary to the original terms agreed or implied by the PA (requires unanimity). The partners can agree to full or partial dissolution. 3. Express power reserved by agreement Express Term Partners agree in advance how a partnership may be dissolved and who may make such a decision.  It is important to provide for this in the partnership agreement, to provide for events which are not covered by the PA 1890.  Retirement - usually desirable to contain an express provision governing (a) when a partner can retire and (b) payment of his share by the others (this prevents full dissolution by notice) (i) whether there is a binding obligation on the partners to purchase an outgoing partners share, or an option to purchase (ii) the basis on which a partner's share will be valued (iii) provision for professional valuation if the partners cannot reach agreement (iv) the date on which payment will be due (v) an indemnity for liabilities of the firm if these were taken into account in the valuation  Expulsion - usually desirable as a sanction for breach of agreement. There is no provision in the PA to expel a partner, and so an express provision is a necessity. It should describe: (i) the grounds on which the right to expel is exercisable; and (ii) how it will be exercised. 4. Court order S35 PA 1890 The court may order the dissolution of a partnership under in any of 5 situations including: (b) where a partner is incapable of performing his part of the partnership contract; (c) when a partner is guilty of prejudicing the business; (d) where a partner wilfully and persistently commits a breach of the partnership agreement, or acts so that it is not reasonably practicable to carry on in partnership with him (e) when the partnership can only be carried on at a loss (f) where the courts think it is just and equitable to dissolve the partnership.

5. Rescission for fraud or misrepresentation S41 PA 1890 Where there is a misrepresentation or fraud, which induces another partner into partnership, he may be entitled to rescind the agreement.

WHAT HAPPENS ON DISSOLUTION? S38 PA 1890 Each partners' authority continues for the duration of dissolution so that they can wind up the partnership. In settling accounts between the partners after dissolution, the PA determines what happens, subject to any agreement to the contrary: S44 PA 1890

(a) losses, including losses/deficiencies in capital, are paid out of 1. profits; then if necessary 2. out of capital; then if necessary 3. by the partners individually in the proportion in which they were entitled to profits

S44 PA 1890

(b) Assets are distributed in the following order (unless partners agree otherwise): 1. creditors of the firm (i.e. anyone with a claim against the firm except for partners themselves) must be paid in full. If shortfall and firm insolvent, partners must pay balance from private asset, sharing any loss in accordance with partnership agreement. 2. Partners who have lent money to the firm must be repaid, together with any interest to which they are entitled 3. Partners must be paid their capital entitlement 4. If there is a surplus, this will be shared between the partners in accordance with the partnership agreement.

Remember: the value of goodwill, which will be lost if the partnership is dissolved....