Business Law & Practice Notes PDF

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Business Law & Practice TYPES OF BUSINESSES Incorporated business – these are separate legal entities which include private limited company, public limited company and limited liability parentship. Unincorporated business – these are usually treated as being the same as the owner e.g. sole trader or partnership. Sole trader – a person who runs their own business as a self-employed person. It can be one person who owns and runs the business but employs others. The business has no legal entity of its own and it is unincorporated. The sole trader is personally liable for all the debts of the business. Partnership - where two or more persons agree that they will run a business together and actually do so. Limited partnership – unincorporated business established by the Limited Partnership Act 1907. It allows the partnership to have one partner whose liability is limited to the amount he initially invested in the business, provided: -

He does not control/manage the partnership He does not have power to make binding decisions He does not remove his contribution to the partnership

Company – this is formed by completing formalities under the Companies Act 2006. The company has a separate legal personality. Directors run the company on a daily basis and the shareholders who own the company usually only get involved in the most important decisions. Unlimited company – the owners of this company are personally liable.

Business Law & Practice PARTNERSHIPS Partnership – where two or more persons agree that they will run a business together and actually do so. A partnership describes no more than a business relationship based on an agreement (i.e. contract). An agreement for a partnership can be oral or in writing or can even be implied by conduct. The existence of a partnership does not have to be recognised by the parties so long the definition in s1 of the Partnership Act 1890 applies. S1 PA 1980 – ‘Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.’ Khan v Miah – The HOL held partnership had commenced even though the restaurant in question had not opened before the partnership between the parties had broken down. Young v Zahid – A partner in a law firm who was paid only a fixed salary and not a share of the profits was held to be a partner under s1. Rowlands v Hodson – A solicitor who had sold her interest in the partnership to a successor but had retained a supervisory role in order to satisfy Law Society requirements was held to be a partner and therefore liable for the debts of the partnership. Ilott v Williams & Others – There must be more than a mere agreement or setting up a partnership to form a partnership. There must be the carrying on a business in common. This means that two or more persons share responsibility for the business and for the decisions which affect the business, there must be two or more proprietors. Debts A partnership does NOT have a separate legal existence whereas a company does have a separate legal existence. The partners therefore have unlimited liability for the debts of the partnership. If partnership fails, then creditors can pursue not just the assets used by the business but the personal assets of the partners too. This liability is joint and several among the partners, allowing a creditor the choice of seeking the full amount of debt from any one individual partner or from all the partners together. There is no limitation on the size of a partnership. The partnership can include a statement which states that a full list of partners is available at the principal place of business (s1203 CA). Duration A partnership can be created for a specific purpose or for a pre-determined period of time or to continue without reference to duration (partnership at will).

Business Law & Practice Characteristics Typical rights and responsibilities include: (s24 PA 1890) -

Right to be involved in decision making which affect the business Right to share in profits of the business Right to examine the accounts of the business Right to insist on openness and honesty from fellow partners Right to veto the introduction of a new partner The responsibility for sharing any losses made by the business THE PARTNERSHIP AGREEMENT

Setting up a partnership There is no necessary formality to create a partnership as it is based on the definition provided in s1 PA 1890. A written agreement is valuable as evidence of the relationship and of its terms. It can also be the written constitution that partners may refer to. Ham v Ham & Another – COA critisised poorly drafted partnership agreements and stated it was to be hoped that in the future those preparing partnership agreements would take note of the anxiety, delay and expense caused by imprecise drafting. The case arose out of one of the partners leaving could have been avoided if the agreement had clearly addressed the issue. Business names Where s1192-1206 of the CA 2006 apply, there are controls over the choice of partnership name (s1193-s1194) and requirements as to revealing the names and business address of the partners (s1201). These controls and requirements do not apply if the name of the partnership business consists simply of the names of the partners. Joint ventures Where two or more companies wish to combine forces to start a new venture together, a partnership can be formed. Although the partners are companies and not human beings, the law remains the same. Commencement date The existence of a partnership occurs when the statutory definition in s1 PA 1980 is satisfied so the date specified in the agreement will not always be correct. It is desirable to specify a date from which the parties regard their mutual rights and responsibilities as taking effect. Name The name of the partnership should be stated as it means its fixed and any partner can insist as a matter of contract on there being no change to it. The company may

Business Law & Practice be different from the business name in which case both names should be stated in the agreement. Financial input Each partner is likely to put capital into the business as this is one of the ways in which the partnership will finance the purchase of assets needed to run the business. The agreement should state how much capital each partner is contributing and possibly, deal with the question of future increases in contributions, if such increases are anticipated. Shares in income profits/losses Partners could be content with sharing income profits equally. If there was not such a term in the agreement, then this would be implied under s24(1) PA. Any losses in the business may be shared equally and again this could be implied under s9 PA. Tha partnership agreement may provide for various possibilities in dividing profits such as; -

Salary

Salaries of different fixed amounts might be suitable before any surplus profit is divided between the partners. Their purpose is to ensure that certain factors are reflected in the partners incomes. (e.g. sleeping partner, part-time partner, different degrees of skill and experience) -

Interest

Interest (at a specified rate) could be allowed on partners’ capital contributions before any surplus is divided between the partners. This would be to reward partners in proportion to their contribution to the financing of the partnership. -

Profit-sharing

A suitable ratio in which the way the remaining profit is to be shared should be stated. If salaries and interest on capital have achieved sufficient fine tuning, then equal shares may be appropriate. However, the longer-serving partner may negotiate for a higher share to reflect, for example, seniority in the business. It should also be stated what is to happen in the event of a loss. Are salaries and interest on capital still to be awarded? Drawings A partnership agreement will state a monthly limit on how much money each partner can withdraw from the business in respect of their shares of the profits, perhaps with provision for periodic review. It could also include the consequences of exceeding the stated limit.

Business Law & Practice Shares in increases/decreases in asset values If a fixed asset of the partnership is sold, giving an increase or decrease in its value, how is this to be shared between the partners? If the assets are revalued, without the disposal to show their current value in the accounts, how is this increase/decrease to be reflected in the value of each existing partner’s share in the business as shown in the accounts? Partners may have consented to sharing increases/decreases equally and if this was not a term in the agreement then it would be implied under PA 1890. Place and nature of business The agreement may contain clauses which describe the place of business, the geographical area and nature of business. Ownership of assets This is an asset where beneficial ownership rests with all partners, but it is not necessarily in equal shares. To avoid dispute the agreement should stipulate what are the assets of the partnership. A dispute is likely to arise in a dissolution when it becomes necessary to establish how much each partner is entitled receive. The value of an asset owned by just one partner will not be shared. It may be that a profit is made out of a particular asset. Again, a profit owned by one partner will not be shared. Any or all partners may incur liability to capital gains tax or inheritance tax by reference to a particular asset and wish to claim certain reliefs. Liability to tax and the availability or amount of certain reliefs will depend on whether the asset is or is not a partnership asset. Input The PA 1890 will imply a term into a partnership agreement in the absence of a contrary agreement, that all partners are entitled to take part in the management of the business without any obligation to do so. There is no implication that a partner must devote his full time and attention to the business. Wilful neglect of the business may mean that the other partners are entitled to be compensated for the extra work undertaken by them. There must be qualification to the main statement as to the amount of work required of a partner. There must be provisions dealing with holiday entitlement, with sickness and other reasons for being absent from work. The PA Act offers no guidance as to what would be implied here in the absence of express provision. Roles The agreement should describe each partner’s function. For example, a sleeping partner’s role might be defined as being limited to attending meetings of the partners and the agreement would state that he has no authority to enter into contracts on behalf of the partnership. The agreement might state that a certain partner only has authority to make contracts therefore defining their role.

Business Law & Practice Decision-making Unless the agreement provides to the contrary, all partnership decisions will be made on the basis of a simple majority except that decisions on changing the nature of the business or an introduction of a new partner require unanimity. Anything contained in the agreement is a term of the contract between the partners and therefore cannot be altered without the consent of all parties to the contract. Death and bankruptcy Under s33 PA 1890 unless there is a contrary agreement, the death or bankruptcy of a partner will automatically cause dissolution of the entire partnership. It is suggested to add a further provision in the agreement that on the death or bankruptcy of a partner the remaining partners will automatically continue in partnership with one another on buying out the deceased or bankrupt’s share in the business. Retirement This means leaving the partnerships maybe to follow other business opportunities. The PA 1890 provides for retirement but only for a partnership at will by dissolving the partnership under s26. Even if there is no provision on duration, strictly a partner’s exit route is by dissolving the entire partnership by giving notice. It would then be for the others to re-form the partnership if they could reach agreement with the outgoing partner for the purchase of his share. It is desirable to have express provision governing retirement and payment of share by other partners. Expulsion Expulsion amounts to terminating the partnership agreement with the outgoing partner without his consent. It’s important sanction for breach of the agreement stipulated forms of misconduct. There should be a provision in the agreement dealing with expulsion. It should state on what grounds the right to expel is allowed to be exercised and how it will be exercised. It should also deal with the question of payment for the outgoing partner’s share. Payment for outgoing partner’s share Where a person ceases be a partner by reason of retirement, expulsion, death or bankruptcy and others continue in partnership together, the remaining partners will need to pay for the outgoing’s share in the business. To avoid negotiation the agreement should contain appropriate terms. If the agreement is silent on this and an agreement cannot be reached, then s42 PA 1890 becomes relevant. Under s42, if a person ceases to be partner and others continue in partner but there is delay in final payment of the former partner’s

Business Law & Practice share, then the former partner’s estate is entitled to received either interest at 5% on the amount of his share or such share of the profits as is attributable to the use of his share. Restraint on outgoing partner There will be no implied term preventing an outgoing partner from setting up in competition with the partnership or joining a rival business or even poaching the employees of the partnership to work in a rival business. There should be a provision ion the agreement limiting an outgoing partner’s freedom to compete with the firm to protect the business connections of the continuing firm and to protect its confidential information. PARTNERS’ RESPONSIBILITIES S28 – s30 PA 1890: By common law, partnership is a relationship onto which is imposed a duty of the utmost fairness and good faith from one partner to another. Broadhurst v Broadhurst – partner was held to be in breach of his duties of utmost good faith under s28 & s29 PA 1890. The partner in a car dealing business had not remitted all the sale proceeds for a consignment of cars into the business account. He had also caused cars to be impounded abroad and therefore not the imported into the UK in good time. S24(1) – the responsibility for bearing share of any loss made by the business S24(2) – the obligation as a firm to indemnify fellow partners against bearing more than their share of any liability or expense connected with the business.

LIABILITY OF DEBTS (S5, S6, S7, S8) Transactions which affect the partnership generally involve contracts. Contracts may be made by all pf the partners acting collectively or made by just one of the partners. Some or all of the partners may seek to deny that they are liable for a contract. In such cases, it’s necessary to identify whether the firm itself is liable and then if the firm is liable, to identify which individuals are liable. Hirst v Etherington – the debt incurred by one partner in a solicitor’s firm was held not to have been entered into the usual course of the firm’s business. His partner was therefore not also liable for the debt. Actual authority The firm will always be liable for actions which were actually authorised. An action may be actually authorised in various ways; -

The partners acted jointly in making the contract Express actual authority: partners have expressly instructed one of the partners to represent the firm in a particular transaction. Implied actual authority: partners have impliedly accepted that one or more of the partners are actively involved in running the business without any

Business Law & Practice limitations being agreed between them, it will be implied that each partner has authority. Apparent authority The firm may be liable for actions which were not actually authorised, but which may have appeared to an outsider to be authorised. This liability derives from application of the principle of agency law; base don the fact that each partner is an agent of the firm and of his fellow partners for the purposes of the partnership business. Even though as between the partners there is some express or implied limitation on the partner’s authority, the firm will be liable by application of s5 where; -

The transaction is one which relates to the type of business in which the firm is apparently engaged (objective test) The transaction is one of which a partner in such a firm would usually be expected to have the authority to act in (objective test) The other party to the transaction did not know that the partner did not actually have authority to act (subjective test) The other party deals with a person whom he knows or believes to be a partner (subjective test)

Personal liability If a partner was involved if any of the above, then the partner who has acted will be personally liable to the other party under the contract. Also, if the partner who has acted has done so without actual authority but has made the firm liable by virtue of his apparent authority, then he is liable to indemnify his fellow partners for any liability or loss which they incur. This is on the basis that he has broken his agreement with his fellow partners by acting without actual authority. Tortious liability S10 and s12 PA 1890 makes the firm liable for any wrongful act or omission of a partner who acts in the ordinary course of the firm’s business or with the authority of his partners. Dubai Aluminium v Salaam – HOL held that s10 covers all types of wrongdoing, including a dishonest breach of trust or fiduciary duty and is not limited to common law torts. JJ Coughlan v Ruparelia – COA held that ss5 and 10 did not make the other partners liable for breach of contract or deceit arising from fraudulent investment scheme. The solicitor in question was found guilty but his partners were not. Enforcing liability Potential defendants: -

The partner with whom the person made the contract can be sued individually because there will be privity of contract between them on which the potential claimant can rely.

Business Law & Practice -

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The firm can sued. All those who were partners at the time when the debt or obligation was incurred are jointly liable to satisfy the judgement. Any person who was a partner at the rime when the debt or obligation was incurred can this way, but any partner who is sued is entitled to claim an indemnity from his partners so that the liability is shared between them. Generally, someone who has left the firm before the debt or obligation was incurred or who has joined the firm since that time is not liable (s17 PA 1890) such a person may be sued or made liable ad a result of; holding out, failure to give appropriate notice of retirement or a novation agreement.

Holding out Where a creditor of a partnership has relied on a representation that a particular person was a partner in that firm, he may be able to hold that person liable for the firm’s debts (s14 PA). This would be so even though it transpires that the person has never been a partner or had been a partner but had retired before the contract was made. The representation in question may be in writing (headed notepaper), oral or by conduct. In Sangster v Biddulphs, the test relied on for liability under s14 was that from Nationwide Building Society v Lewis. This was that for liability there had to be a) holding out b) reliance thereon and c) the consequent giving of credit to the firm. Failure to notify of leaving The firm’s debts can be enforced against all those who were partners at the time when the debt was incurred. Although a person may retire from a partnership, he remains liable on those contracts already made. The terms for the purchase of his share in the business should include a provision whereby the purchasing partners indemnify him against liability for such debts. S36 PA 1890 – A part...