Lecture 2 - xxxc PDF

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Lecture 2: Company Law Partnership act 1890, defined as “Persons carrying on business in common with a view to profit” (Section 1) Contractual usually so normal contract principles : no formalities required

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But consider Dutia v. Geldof [2016] All ER (D) 190 (Mar) Created an enterprise, that would invest in African small businesses, called 8 miles. Equity investor, did he become a partner when he invested in these shitty businesses. Held he was not a partner.

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capacity – partners can include minors and companies

minors

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can be partners

partners who are minors are still agents of the partnership and can bind it in contract but debts are not recoverable from partners who are minors therefore, if all partners are minors there is no redress. Can enter into a contract under 18, so you can be a partner, but you cannot be sued. Mercantile Union Guarantee Corporation v. Ball [1937] 2KB 498 Ball was a minor. Entered into a contract to buy a small vehicle, credit company realised he was under age once he had defaulted on one payment. Contract cannot be enforced.

If partners are over age – contract can be enforced on them. Companies :

a company may be a partner.

If a company is an unlimited partner it is liable to the extent of its assets, but the shareholders continue to have limited liability in the company. If a group of companies forms a partnership it may take the form of a joint venture or syndicate. maximum number of partners – this used to be limited but the rules have now changed and there is no maxima -

Illegality – a partnership is automatically void if it is formed for an illegal purpose or by persons who cannot legally operate a business of that nature, or if either of these situations arises after formation. Foster v. Driscoll [1929] 1 KB 470 -America 20’s – prohibition. -Two Brits wanted to make money by smuggling alcohol. - One sued the other, this was void, held it was void, it is a crime to undertake the contract in the country where it is illegal.

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Duration – may be specified in the Partnership Agreement, or when the task for which it was set up is achieved, or there may be a provision for terminating with notice, or at will.

No formalities are required but partners usually draw up a written partnership agreement. The provisions normally include:  Business name  Partners’ names  Nature and purpose of the business  Capital contributions  Shares of profits and losses  Powers of partners Partnerships involve: Business Name A partnership ay requires a business name – (this will be covered in more detail later)   

if it trades in a name other than that of the partners the word “Limited” must not appear in the name. It can contain the words “and co.”

Purpose of the Business It can be important to establish the purpose for which the business is set up – this should be express in any agreement. It is relevant to a number of issues, such as   

the extent of the agency of the partners to make contracts, the fact that a partner may not compete with the business, the fact that the function of the business can only be changed with unanimous agreement. A partnership can however be formed in other ways : e.g. by estoppel where a person is “held out” to be a partner, or represents himself to be, he is not a partner but will be liable to any creditor who believed he was a partner. If a claim is brought in estoppel the process is:  is s/he a partner at all  was s/he a partner at the relevant time

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On the first point Stekel v. Ellice [1973] 1 All ER 465 Accountancy business

In the well-known case of Stekel v Ellice [1973] 1 WLR 191, a sole practitioner accountant, E, entered into an agreement with S that S should join the practice as a 'salaried partner' on a fixed salary, with a view to becoming a 'full partner' later. E was to contribute all of the capital and bear any losses, and S was to have no rights in the capital or profits of the practice. S was nonetheless found to be a partner, because of the following provisions in the agreement between them:

 The parties had expressly recited their intention to enter into partnership (but compare what happened in Sangster);  In certain events, either could give notice to the other of dissolution of the partnership;  In the event of E's death, S would be entitled to the entire practice, though obliged to pay E's capital account out to E's executors;  An arbitration clause contained an express power for the arbitrator to dissolve the practice. But compare Sangster v Biddulph [2005] PNLR 33, [2005] EWHC 658. – The claimant must satisfy the court that on the balance of probabilities the holding out or representation had a material influence on the claimant’s decision to proceed with the proposed transaction through those solicitors. The holding out or reliance does not need to have a decisive effect, but it must have been a contributing causative factor in the claimants decision to use the firm.

In Sangster, the two solicitors holding themselves out as 'partners' had entered into a document described on its front page as a 'partnership agreement', one of the provisions of which was 'the principal has invited the partner and the partner has agreed to be a partner with the principal in the practice'. Coming to that agreement for the first time, one might be excused for reaching the initial conclusion that these two individuals were partners. However, further review of the partnership agreement reveals that the 'partnership' was created expressly for the purpose of enabling the firm concerned to satisfy the requirements of a mortgage-lender client. The 'partner' did not share in the profits or losses of the practice but simply took a commission on the gross fees generated by the mortgage-lender client, irrespective of profit.

But he must know he is held out as a partner: Tower Cabinet Co Ltd v. Ingram [1949] 1 ALL ER 1033 • Partner retired • Tower cabinet received an order for goods on a partnership letterhead containing retired partner’s name • ** Ct held that the retired partner was not liable as he had not knowingly allowed himself to be represented

 Partners’ Role -

Group of people that form the partnership To own the business Profits and losses are shared equally unless agreed otherwise To manage the business

Voting is normally by majority for ordinary business matters. A unanimous vote is required to : (a) Change the nature of the business (b) Introduce a new partner (if within the agreement) (c) - if there is such a power – often to expel a partner All full partners are agents of the business

Relationship between partners : S.24 of the Partnership Act sets out the following rights of all full partners: (subject to any alternative provision the partners make) (a) To share equally in the capital and profits of the business (b) To be indemnified by the firm for any liabilities incurred or payments made in the course of the firm’s business (c) No partner shall be entitled, however to remuneration (though payments in the form of a salary may be deemed to be an apportionment of profits). (d) To take part in the management of the business (e) To see the books and accounts Books must be kept at the principal place of business of the firm and all partners must have access to inspect and copy them when they think fit. (f) To decide on the admission of new partners Byrne v. Reid [1902] 2 Ch 735: FACT: Pursuant to a partnership agreement, a father is empowered to nominate his son as partner. However when the father did so, the other partner refused to accept it HELD: The court held that the written agreement allowed the son to be the partners in the firm

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Any differences arising on ordinary matters connected with the business may be decided by a majority

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but

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no change may be made in the nature of the business without the consent of all partners.

S.25 - No majority of partners can expel any partner unless a power to do so is contained in the agreement between the partners.

Note – this is not in S.24 this is significant since the provisions of S.24 can impliedly be excluded by agreement this provision can only be excluded by very clear terms.

Types of partner You may come across different usages – these are some examples but are not uniformly used in this way; this is just an indication of the fact that not everybody who calls themselves a partner is necessarily a partner within the legal definition

(a) Senior, Equity …Partners These are “true” partner – those envisaged in the Partnership Act  They contribute capital  Receive a share of profits  Are liable for losses  Have the right to fully participate in management

(b) “salaried partners” or Junior In large firms are often not partners in the legal sense – they do not usually  contribute capital  have full management rights  may not be on the partnership stationery and are not held out as being liable.

(c) Sleeping, dormant … limited partners – see later

Partnership Property  

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normally belongs to all partners however it may be distinguished from property belonging to one partner – this is relevant if it is for instance not to be used exclusively by the partnership

Duties of partners Partners are agents of the partnership and therefore owe the following duties: (a) To act with care and skill (competence) (b) To adhere to fiduciary duties –  

To disclose all material facts To account

Law v. Law [1905] 1 Ch 140 Facts: William Law and James Law were partners in a manufacturing business. James was the active partner, and William agreed to sell his share to James for $10,000. After the sale William discovered that James had not disclosed to William all the partnership assets, and that William’s shares was in fact worth more than $10,000. Held: The court decided that James had breached his duty of disclosure  Not to compete  Not to have a conflict of interest  Bentley v. Craven [1853] 18 Beav 75 Bentley v Craven (1853) 18 Beav 75 Acquiring property AFTER becoming a fiduciary. Facts: one of the partners acquiring sugar for the partnership. He got sugar for himself & then sold it into the partnership & made a personal trust. H: breach of FD because his job was to acquire sugar. the profit he made was held on a constructive trust

Partners’ liability Partners are agents of the partnership and have authority to make contracts on behalf of the partnership. 1. Every partner is jointly and severally liable for all debts and obligations while s/he is a partner 2. A creditor can sue any, or all, partners, or sue the partnership in its business name 3. if one partner is sued they can join the others in the action and seek a contribution from them. Partners are liable  in contract for all contracts entered into by or on behalf of the partnership Partners are agents of the partnership – agents of one another. 1. Contracts by the partnership with third parties All full partners have the power to bind the partnership in contract. (i)

Actual Authority specific authority which a partner has, as a partner

(ii)

Apparent Authority The outsider dealing with a partnership cannot know the limitations on a partner’s authority. If o o o o

a contract is connected with the business, Normal for that business The outsider knows he is dealing with a partner of that business And has no knowledge that the partner lacks authority The contract will bind the partnership.

2. Apparent authority is implied by statute in trading firms: o o o o o

To sell goods To buy goods To draw, endorse, accept … Bills of Exchange To borrow money on firm’s credit The secure loans on firm’s property

3. All firms – partners have apparent authority: ▫ ▫ ▫ ▫ ▫

To buy and sell goods required To receive payment of debts To hire employees To insure the firm’s property To employ a solicitor to act for the firm Mercantile Credit Co v. Garrod [1962] 3 AllER 1103

A partnership agreement for a business which lets garages and repaired cars, however, their business does not involve the buying and selling of cars. Despite this, one of the partners sold a car. It was held that the partnership was liable. “In concluding that the partner had done an Act which was of the kind done in a garage business, the court looked at what was apparent to the outside world in general.” [13] The facts of this case are very close to Green & Co. Jane Gray had bought antique books. She had done an act which was of the kind done in an antique business. In addition to this, an adverse case is that of Niemann v Niemann [14] where a partner accepted, in payment of a debt by a third party to the partnership, shares in company. In that case it was held that the partnership was not bound since that method of repayment of a debt was not the usual.

4. There is no apparent authority to : o o o o

Give a guarantee of a debt on the firm Agree to go to arbitration (all partners must agree0 To sell partnership land To accept something different from a debt owed.

. Liability of incoming and outgoing Partners 

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Where a partner is admitted

s/he will not be liable for pre-existing debts but may enter into a Deed of Novation (not commonly) whereby they accept their liability to meet existing debts this is usually backed by a bond of security and may release retiring partner from liability at the same time. 

Where a partner retires

s/he remains liable until proper notice is given to creditors – (a) This must be actual notice to persons dealing with the firm (b) Actual notice or publication (e.g. in the London Gazette) to persons who knew or believed they were a partner but had no previous dealings. (see Tower Cabinet v. Ingram) Partners are also liable 

in tort

for all torts committed by partners or employees in the course of business – the partnership has vicarious liability Hamlyn v. Houston [1905] 1 KB 81 One side of the defendant’s business as grain merchants was to obtain, by lawful means, information about its competitors’ activities. Houston, a partner in the firm, obtained confidential information on the plaintiff Hamlyn’s business by bribing one of Hamlyn’s employees. Held: The firm was liable for the loss suffered by Hamlyn. If it was within the scope of Houston’s authority to obtain the information by legitimate means, then for the purpose of vicarious liability it was within the scope of his authority to obtain it by illegitimate means and the firm was liable accordingly. This was on the broad ‘risk’ principle: the principal having selected the agent, and being the person who will have the benefit of his efforts if successful, it is not unjust he should bear the risk of the agent ‘exceeding his authority in matters incidental to the doing of the acts the performance of which has been delegated to him’.

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Termination – partner leaving

Strictly involves two possibilities. If a partner leaves or joins the firm technically it is a new partnership. However this will not normally involve a complete reforming of the partnership.  Removal of a partner: As noted, before, there is no implied power to remove a partner – it must be in the agreement. In all cases of expulsion, there are three issues: i. Is it within the express power? ii. Did the remaining parties act in good faith? iii. Were rules of natural justice applied to the procedures (e.g. did the expelled partner have a chance to put his side)? Carmichael v. Evans [1904] 1 Ch 486 Generally, a strict interpretation of the agreement is applied but: Hitchman v. Crouch Butler Savage Associates [1983] 80 LSGaz. The courts will only uphold an expulsion where the power has been exercised in good faith in the interests of the firm. Therefore: If the power should be exercised solely for the financial gain of the remaining partners the expulsion will not be upheld – Blisset v Daniel (1853) 10 Hare 493 where the motive was the remaining partners' desire to acquire his share at a low valuation. FACTS: Blisset was a partner in a firm where a proposal was mooted to appoint one of the partner’s son as a co-manager of the firm. Blisset objected to such an appointment. The partner whose son was nominated complained to the other partners behind Blisset’s back and persuaded them to sign and serve a notice of expulsion to him. This was in keeping with a partnership clause that empowered a majority of the partners to expel any partner without citing any reason. Blissett contested the validity of the expulsion. HELD: The plaintiff’s expulsion was set aside. The court held that it was up to the partners and the majority to decide what was good for the firm but the partners are required to act in good faith when making use of such powers. The partnership agreement should deal with two elements: the grounds for expulsion and the procedure to be adopted.

Discrimination :

on the grounds of sex or, where there are six partners or more, race or other “protected characteristic” is unlawful and any offending provision is unenforceable under the Equality Acts  Resignation or retirement of a partner

A partner will retire where provided under the Partnership Agreement, but subject to age discrimination considerations (Equality Act). A partner may resign, subject to any provisions in the Partnership Agreement. Issues arise of continuing liability (as considered earlier under incoming and outgoing partners). Note also that Restraint of Trade clauses may apply Deacons v. Bridge [1984] 2 AllER 19 The Privy Council decision in Bridge v Deacons [1984] 2 All ER 19 remains the leading authority on the enforceability of restrictive covenants against partners. The partnership agreement in Bridge v Deacons included a five year restriction preventing former partners from acting for any client of the firm. However, given the passage of time and market developments since Bridge v Deacons, it is possible that if a similar case were decided today, the court would find such a restriction unreasonable. In order for any restrictive covenants to be enforceable against a former partner, the firm will need to establish that the covenants in the LLP Agreement are sufficiently limited so that they are no more than reasonable and necessary to protect the firm’s legitimate business interests. If the covenants are too wide they run the risk of being unenforceable. When reviewing each of your covenants and their enforceability, the three key aspects to consider are (i) duration (if it is too long it could be deemed unenforceable), (ii) type of restriction (some are more difficult to enforce than others) and (iii) scope (if it is too wide it could also be unenforceable) Typical restriction periods for professional services firms range from six months to up to two years (the latter being less common) (indeed, five year restrictions (as in Bridge v Deacons) are relatively unheard of).

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Termination – of partnership 2. Under the Partnership Act 1890 -

expiry of fixed time S.32 a specific duration or a specified term

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performance (achievement of purpose) S.32 (renovated house and sold it) Winsor v. Schroeder [1979] 1 29 NLJ 1266

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death or bankruptcy of a full partner S.33 the death of a general partner may dissolve the firm, but most partnership agreements provide that this will not happen. Bankruptcy of a full partner will also dissolve the firm, but could be exempted if the remaining partners are able to continue and there is a prior agreement to that effect.

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By notice S.32 Any full partner may termin...