Partnerships - Lecture notes 1 PDF

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Partnerships DEFINITION

CHARACTERISTICS

A partnership is defined in s.1 Partnership Act 1890 as - ‘Partnership is the relation which subsists between persons carrying on a business in common with a view of profit - if any of these parts are missing then it is not a partnership o Partnerships can often be established unintentionally o Cannot includes charitable partnerships - No formalities to set up- no reg at CH - Partnership will not have SLP o Cannot enter into contracts o Contract would be with the individual, not the partnership o Liability on breach of contract would rest with the partners if the partnership cannot remedy the breach itself - No limited liability o Personally liable/ assets at risk o All liable for each other’s negligence- so should choose partners carefully -

RELATINSHIP BETWEEN PARTNERS

Involvement in making decisions that affect the business Share of profits and losses o Negotiated between the partners, sharing of net profit Right to examine the accounts Fiduciary relationship with other partners Can veto the introduction of a new partner

Contractual relationship - Written partnership agreement- advantages o Evidence of what they agree o Helps anticipate future issues- encourages them to think about issues that they may not have otherwise - Oral or written agreements does not deal with duration Equitable relationship - Duty of good faith - Partners fiduciary duties to each other - Duty of Full disclosure- s28- ‘partners are bound to render true accounts and full information of all this affecting the partnership to any partner or his legal representatives’ - Duty not to make a secret profit s29(1)- “every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from an use by him or the partnership property, name or business connection” - Duty not to complete- s30- “if a partner without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm” he must account for and pay over the firm all profits made by him in that business” o S30 only restricts partners activities while they are still partnerspartners might want a restrictive covenant once they leave the firm

RESPONSILBITIES OF A PARTNER

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Must divulge all information regarding the business or relationship s28 Must share all profits derived from the business or property Must share all profits derived from the business or property

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Must bear their share of the losses made by the business s(24)(1)) As a firm, must indemnify fellow partners from bearing more than their fair share of any liability

OUTGOING PARTNERS

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Where one person ceases to be a partner but the others continue in business Until a partner is bought out, they are entitled to either (s49) Interest of 5% per annum on their share; or o To continue to receive their share of profits o Want to be bought out at a good price, but must include in agreement (may otherwise opt for full dissolution to sell assets and realise capital)

PROFIT SHARES AND CAPITAL S24

(1) All the partners are entitled to share equally in the capital” and profits of the business, and must contribute equslly towards the losses whether of capital or otherwise sustained by the firm”  Relevant where partnership dissolves and necessary to share out of the assets (3) Entitled to interest rate of 5% per annum on any payment or advance from the date of the payment (4) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him” (6)no partner shall be entitled to remuneration for acting in the partnership business  Needs to be agreed expressly

Issue

Partnership Act

Agreement

Finance

S24(1) – All partners share the profits and losses equally.

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All partners must contribute equally to the capital.

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Employment

S24(5) – Partners may take part in the management but there is no positive duty to do so

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Consider if one partner is devoting more time to the business Consider if one partner has invested more into the business Should profit share reflect seniority? Should interest be paid in proportionate to capital contributions? Consider what will happen in the event of a loss If an asset is sold how will the proceeds be split? How much time should be devoted to the partnership? Are they allowed to carry on other business? Should the partners be limited as to what contracts they can enter into on behalf of the firm?

Duration

S26 – The partnership can be dissolved at any one time by giving notice to all other partners S33 – Death or bankruptcy will automatically dissolve the partnership S25 – There is no provision for retirement or expulsion

S26 – The partnership can be dissolved at any one time by giving notice to all other partners S33 – Death or bankruptcy will automatically dissolve the partnership  S25 – There is no provision for retirement or expulsion

Decision making

If a partner wishes to introduce a new partner then they must have the consent

Unanimous decisions are required for:  Changing the nature of the partnership

of all the other partners to do so (s24(7))

 Introducing a new partner  Change the terms of the partnership  Other day to day decisions can generally be changed by way of simple majority as long as they are not on the list

LIABILITY FOR DEBTS The firm will be liable for all the partner’s actions – including the debts – if they act with actual or apparent authority. The debt is due on the date stated on the contract, not the date of the invoice. Actual Authority

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Apparent authority

Under s6 PA the firm will always be liable for actions that were authorised: o The agent acts on behalf of the firm o The agents act within its authority, or implied authority based on prior conduct. Ensure you establish that the partner acted within authority.

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Under s5 PA the firm may be liable for actions that were not actually authorised by may have appeared to an outsider to have the authority to act. Objective Test The transition must relate to the type of the business the firm is apparently engaged in. The transaction is one which a partner of a firm would be expected to have the authority to engage in.

Subjective Test  The other party to the transaction did not know that the partner of the firm did not actually have the authority to act.  The other person deals with a person whom he knows or believes to be a partner. No authority

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The firm will not be liable for the actions and the individual partner who entered into the contract will be personally liable.

Limitations

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Under s8 PA partners can agree to restrictions as to the acts that bind the firm. Should they then act in contravention to such a restriction the firm will not be bound if the third party had notice of such a restriction. If the third party had no notice then the partner at fault may have to indemnify the other partners.

The firm as a whole

This will include  Any person who was a partner at the time the debt or the obligation was incurred (s17(2)), or if they have since died, their estate (s9)  A partner who has joined the firm since the debt was incurred if they have entered into a novation agreement. o This is an agreement between the creditor, the firm and the outgoing partner. The creditor will release the outgoing partner from liability and the new partner will incur the liability. o If there is no new incoming partner then the agreement must be executed as a deed and the firm must give some consideration for the creditor’s promise to release the outgoing partner.

Partner left before incurring the debt

A partner who left the firm before the debt was incurred if they: Held themselves out as being a partner (s14(1)) ‘Making a representation that you were a partner’

Nationwide v Lewis  If X makes a representation that they were a partner, whether this be: o Orally o By conduct o By another person with the knowledge of X  This representation is relied upon by a third party  Who consequentially gives credit to the firm. Failed to give appropriate notice of departure S36 PA, Tower Cabinet Co Ltd v Ingram  If a third party has not received appropriate notice of a P’s retirement and subsequently gives credit to the firm or contracts with them, the outgoing partner may be liable for the debt unless: o X has given actual notice to all parties whom the firm have dealt with previously (s36(1)) o X has given notice to all future customers and suppliers by way of notice in the London Gazette.  The creditor is given the right to assume membership of a partner until notice is given. If they are not given notice then they can sue the partner for the firm’s debt.  Where there is death or bankruptcy there is no requirement to give notice. The estate will not be liable.

Ending a partnership Fixed term

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If the partnership agreement specifies a fixed term the partnership will come to an end upon expiration of the term. Should the partners agree to continue it will become a partnership at will.

Notice

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Notice may be given from one partner to the others – s26 & 32 No reason has to be given The notice will have immediate effect The notice need not be in writing unless the partnership was created by deed.

Retirement or expulsion

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The PA does not provide for retirement and therefore the partnership would come to an end.

Death or bankruptcy

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This will automatically terminate the partnership (s33) The estate will be liable for any debts owed by the partnership The estate or trustee in bankruptcy will be able to collect any share of the Partnership to which he was entitled to.

Illegality (s34)

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A partner is to be struck of a professional register A business license is lost This cannot be excluded by an agreement

Charging order

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This is a debt action whereby an order is taken over the partner’s assets. A judgment creditor may charge the partnership assets in order to recover a debt of the partner in a personal capacity (s23). This would mean the other partners would have to give notice to dissolve and re-form without the indebted partner.

 Court order (s35)

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This will normally occur where an agreement prevents dissolution without unanimous agreement.

Process

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The order will allow the partnership to be dissolved without any partner being liable for breach of contract.

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Contractual relationship between partners end Business is either broken up, or sold as a going concern Any partner (excluding those who are bankrupt) has authority to wind up the firm’s affairs Proceeds are distributed (s44): o Creditors o Partners who have lent money to the firm o Partners’ capital entitlement repaid o Any surplus is shared between partners.

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OUTCOMES 1.

Recognise and advise on the existence of a partnership, and the terms that regulate the running of the partnership business.  If the definition of partnership under s1 of the PA1890 is satisfied a partnership will exist regardless of the parties intentions  Definition can be broken into 3 elements o Carrying on a business (has a business started) o Business in common (are they working on the business together) o With a view to profit (do they intend to split the profit made)  To determine the regulation of the partnership you need to consult the PA 1890. The provisions of this act can be changed by a Partnership agreement, if an agreement exists consult this too

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Advise on key provisions of the Partnership Act 1890, especially in connection with the existence and duration of a partnership, profit-sharing, decision-making, retirement, expulsion and dissolution. Duration: s26(2)- last indefinitely, until notice is given by one of the partners Profit sharing: s24(1)- equal share in profit for income and capital Decision making: o changing the nature of the partnership:s24(8) requires unanimous consent o A new partner joining: s24(7) requires unanimous consent o Changing the terms of the partnership: requires s19 unanimous consent o Day to day decisions: s24(8) requires a simple majority Retirement: s26(5) can retire at will by giving notice, this will dissolve the partnership Expulsion: s.25 bi majority can expel a partner unless a power to do so has been conferred by agreement of every partner (including the one theywant to expel Dissolution: if a partner dies or is made bankrupt, the partnership will be automatically dissolved

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3.

Identify and explain key provisions typically included in a written partnership agreement, including those necessary to exclude or vary the terms otherwise implied by the Partnership Act 1890.  Likely to contain a provisions which excludes / varies: o The indefinite duration of the partnership and factors that result in automatic dissolution  Likely to include an option to purchase the leaving partners share o The way profits are shred, to represent the amount o time put into the business and the amount of capital invested o The ability to expel partners

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Recognise the professional conduct implications of advising more than one partner on the terms of a draft partnership agreement.  Conflict of interest: the parties are likely o have invested different capital amounts, meaning their objectives are likely to differ. Cannot act in the best interests of all the parties

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Advise on whether a former partner will remain liable for partnership debts. The key is to work out whether the debts were incurred whilst the partner was part of the partnership or after they have left. It is worth drawing a timeline.  Debts incurred whilst the partner was at the partnership o The leaving partner is liable for all debts which incurred during her time in the partnership o S9: partners are jointly and severally liable o S17(2): debts incurred during time in partnership o The partnership agreement may have a clause which states that when leaving the partnership, the amount the partner receives will take account of any debts left, should they be sued for the debts  Therefore the leaving partner remains legally liable for all debts incurred during their time at the partnership- but they may have an element of contractual protection if the above clauses are in the partnership agreement 

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Debts incurred after the partner has left the partnership o The partner can still be held legally liable for debts incurred after they have left the partnership in one of two ways o S14: if he is ‘holding out’ as a partner i.e. if s/he has failed o represent to 3rd parties that s/he is no longer a partner  This can be achieved by removing their name from all documentation, letter heads, signs… o Where 3rd parties knew that s/he was a partner in the past unless:  The partnership gives actual notice to all third parties who have ahd dealings  Would be achieved by writing to all the third parties  The partnership gives notice to everybody else  Would be achieved by putting a notice in the London gazette...