3): The interests, rights, obligations and powers of stakeholders in a business (Partnerships and the PA 1890) Flashcards
When does a partnership commence?
can be commenced without the parties realising of they have started a business in common with a view of profit
Does a general partnership have separate legal personality?
No.
What is the function of the Partnership Act 1890?
provides default contract
How can a partnership agreement be formed?
Written,
Orally,
OR
implied by conduct where a partner has acted in a certain way over time and the other partners have not objected.
what is needed when starting a partnership? (brief)
no formalities required
what is a solicitor’s duty when drafting a partnership agreement?
ensure parties are aware of what is being agreed
ensure the agreement reflects the clients’ wishes and needs.
What are the required elements of a partnership agreement?
name of the partnership
place and nature of business
commencement and duration
Work input and roles for each partner
Decision making process
initial capital contributions
how income and capital profits/losses are shared
ownership of assets
When the partnership ends/dissolution
If the partnership commences early, what applies?
The provisions of the PA 1890 apply until the commencement date in the partnership agreement is reached
Can partnerships continue after a fixed term?
Yes, they are presumed to be partners on the same terms as before
Can partners engage in other business whilst being partners?
No.
How are decisions made in a partnership?
all decisions must be made by majority with 3 exceptions needing unanimity:
changing the nature of the business
introducing a new partner
changing terms of partnership agreement
What is the difference between capital profits and income profits?
capital: one off gains
income: recurring in nature
Can a partner be expelled?
only if it is agreed expressly in the partnership agreement which is unlikely
OR
if there is an expulsion clause in partnership agreement
How do partners share in profits and losses?
they share equally in the capital and profits/losses
What is dissolution?
contractual relationship between partners ends
BUT
doesn’t necessarily mean that partners will stop trading
What is the default position regarding dissolution under the PA 1890?
any partner may end the partnership at any time by giving notice of their intention to all of the partners
What is a partnership at will?
a partnership that continues indefinitely until notice is given
What should a solicitor advise regarding the default position of notice for dissolution?
clients should include notice period in partnership agreement
AND
stipulate that notice should be given in writing.
When is a partnership dissolved under the PA 1890?
when a partner retires
on expiry of a fixed term (can be disapplied)
by death or bankruptcy of any partner (can be disapplied)
Notice given to a partner with a court-ordered charge over their partnership share for personal debt
When does a partnership dissolve automatically?
if something happens which makes it unlawful for the business to be carried on (cannot be disapplied)
What can the partners do if they wish to have the partnership dissolved under s 35 PA 1890?
apply to the court for an order if:
a partner becomes permanently unable to perform their duties
a partners’ conduct is prejudicial to the business
partner wilfully/persistently breaches partnership agreement
partnership can only be carried on at a loss
the court thinks it is just and equitable to allow dissolution
What is the better alternative to relying on s 35 of the PA 1890?
include clear provisions allowing for expulsion of a partner
What is the effect of dissolution?
partnership ends
all assets sold
OR
partnership sold as going concern
outgoing partner receives their share.
what can an outgoing partner do under s 39 PA 1890? (Annoying partner should do this).
insist on the business being sold so the other partners cannot continue the business
What is a partial dissolution and what is the advantage of it?
when the partnership allows the business to continue in the event of a partner leaving
advantage is that partnership is technically dissolved but will continue with one less partner
What is the default position on the payment of an outgoing partner’s share?
they are entitled to either:
5% interest per annum on their share until they receive their share from the other partners
OR
a sum the court deems that represents their share of the profits
What is the common value of goodwill when a business is sold as a going concern?
2 years’ profit
What is the default order of priority when distributing the proceeds of a sale of a business or its assets?
First: creditors of the firm paid in full (if there is shortfall, partners pay balance from private assets)
Second: partners who lent money to the firm repaid fully(plus interest)
Third: partners paid their share of partnership capital
Fourth: any surplus shared amongst partners in accordance with partnership agreement.
What are the common law duties of partners?
- duty of the utmost fairness and good faith towards each other
- must be completely open with each other regarding information relevant to the partnership
- must account to the firm for any profits earned without consent of the partners in a transaction concerning the partnership
- must not compete with the firm
- must bear a share of any loss suffered by the business
- indemnify fellow partners incurring more than their share of any liability or expense connected with the partnership.
How are contracts made under a partnership?
by all partners acting together
OR
by just one of the partners
When is a firm bound by a contract?
when partners have entered into the contract in the firm’s name and were authorised to do so.
How can partners be authorised to enter into a contract on the firm’s behalf?
partners acted jointly in making the contract
with express actual authority
with implied actual authority.
What is meant by implied actual authority?
partners will be deemed to have implied actual authority if:
they enter a contract in the ordinary course of business
OR
by a regular course of dealings by one of the partners to which the other partners have not objected.
When can a firm be liable to third parties for unauthorised actions?
objective: transaction relates to business of the kind carried on by the firm.
objective: transaction is one for which a partner in such a firm would be expected to have the authority to act
Subjective: the other party did not know that the partner did not have authority to act
AND
Subjective: the other party deals with someone they know or believe to be a partner.
What is the liability of partners who act with apparent authority?
liable to indemnify fellow partners for any liability or loss they incur
partner has breached the partnership agreement by acting without actual authority
What is the liability for partners in the law of tort?
firm and individual partner in question may be liable for negligence
the firm is liable for any wrongful act or omission of a partner who acts in the ordinary course of business or with authority of the partners
What is the debt liability for partners generally?
unlimited liability for partnership debts
Are partners liable for debts incurred by the partnership before they leave the partnership?
yes.
each partner is jointly and severally liable for debts incurred while they were a partner
What is the procedure for a claimant taking legal action against a partnership?
can sue any or all of the partners
collect total damages awarded by a court from any or all of them
defendant will then be left to seek a contribution from any other partner/s
Are the partners’ personal assets safe from creditors?
No.
However, professional indemnity insurance may cover the cost of claims
What is a novation agreement?
a retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners/incoming partners
under this contract, the creditor will release the original partners from their liability under the contract and instead the firm as newly constituted will take over the liability
novation agreements are not common
Is a partner liable for debts once they have left the partnership?
they will remain liable only for debts incurred while they were partner
they will escape liability for debts incurred after they left as longs as s 36 PA 1890 is complied with
How can an outgoing partner protect themselves from liability for debts (to those who have dealt with the firm before the partner left)?
S 36 PA: must give actual notice to those who have dealt with the firm
if notice is not given, a person dealing with the firm is entitled to treat all apparent members of the firm as still being members
How can an outgoing partner protect themselves from liability for debts (to those who have NOT dealt with the firm before the partner left)?
S 36 PA: notice placed in London Gazette
When is no notice required for a partner ceasing to be a partner?
if partner died or became bankrupt
What is ‘Holding Out’?
when a creditor of a partnership has relied on a representation that a person was a partner of the firm
the creditor may be able to hold the person liable for the firm’s debt
holding out may be oral, in writing or by conduct
What must a creditor establish to be able to sue an individual partner for a debt owed by the firm?
the person held themselves out/allowed themselves to be held out as a current partner
the creditor relied on that representation
credit was given to the firm as a consequence
Partner’s liability for debts flowchart:
Answer:
What is the range of potential defendants for a person seeking to enforce a liability of the firm?
individual partner/s with whom the contract was made
anyone who was a partner at the time debt was incurred
the firm as a whole
If a person sues the firm, what can be used to satisfy the judgment?
Civil Liability Contribution Act
partners at the time debt was incurred may be made to contribute some or all of the amount
What is the advantage of suing the entire firm?
judgement can be enforced against the partnership assets and if necessary, the individual partners’ assets
What are the rescue procedures available to an insolvent partnership?
voluntary arrangement with creditors
administration order of the court
How is an outgoing partner’s share calculated?
total assets - total liabilities
the resulting number is then divided according to the initial percentage contributions of the outgoing partner
What happens if a partner cannot pay a judgment debt owed to a third party?
third party can:
obtain charge over partner’s property
apply for an order of sale to satisfy the debt
OR
seize partner’s assets
NOTE: the same options apply when a partner cannot pay their fellow partners.
Do LLPs have separate legal identity?
Yes.
What is the function of the Limited Liability Partnerships Regulations 2001?
provide a default contract for LLPs if there is no formal LLP agreement.
Do provisions of the CA 2006 apply to LLPs?
Some do.
LLP is hybrid between company and partnership.
What are the legal requirements for an LLP?
must have two members on incorporation
two designated members (if there are only two members they can be designated members)
File Form LL IN01 at CH
pay applicable fee
Name of LLP
Registered office/email address
What is the role of the designated members?
file docs at Companies House.
appointing/removing auditors
signing and filing accounts with the Registrar
filing annual confirmation statement
sending notices to Registrar
winding up the LLP.
Are LLPs required to file their LLP agreement?
No.
What happens after an LLP is incorporated?
CH will issue certificate of registration
What duty do designated members owe to the LLP?
duty of reasonable care and skill
What is the effect of limited liability in an LLP?
If LLP is insolvent:
members may be liable for misfeasance, fraudulent trading or wrongful trading
AND
members may be required to contribute to assets of the insolvent LLP.
Who does the Company Directors Disqualification Act 1986 apply to?
members of LLP
company directors
What is the position regarding the duties and responsibilities of members of an LLP?
mutual rights and duties governed by LLP agreement
if there is a matter that has not been agreed, LLP Regulations 2001 apply
What duties do the members of the LLP owe to the LLP?
fiduciary duties as agents of the LLP:
duty of good faith
duty to account for money received on. behalf of the LLP.
Duty to other members to to render true accounts and full info on matters concerning LLP
Explain the authority of members of an LLP?
members have actual authority (can be limited by LLP agreement)
principle of apparent authority applies and liability to third parties can be incurred the same as in a general partnership
How does ownership of property and granting charges work in an LLP?
LLP is the legal owner of the property not individual members
LLP can grant fixed and floating charges (general partnerships can only grant fixed charges)
LLP can issue debentures
Do LLPs have to keep a register of charges?
Yes, along with:
copy of every charge requiring registration at registered office
AND
registering charges with the Registrar of Companies.
What is the procedure for a new member joining an LLP?
notify Registrar of new member within 14 days of appointment
File Form LL AP01 (individual)
OR
File Form LL AP02 (corporate member).
What are the formalities required when a member leaves an LLP?
File Form LL TM01 (individual)
OR
File Form LL TM02 (corporate)
Within 14 days of member leaving.
What are common terms in an LLP Agreement?
how capital and profits are shared
management and decision-making
How members may leave the LLP
How do members of an LLP share in capitals and profits?
equally.
members can vary this default position.
What is the liability for loss in an LLP?
members are only liable for capital contributions they made
AND
any loans they made to the LLP
What is the default position on the management responsibilities in an LLP?
every member may take part in management
Are members entitled to remuneration in an LLP?
No.
can be varied by the LLP Agreement
How are matters decided in an LLP?
ordinary matters decided by majority of members
Except the decisions that require unanimity which are:
changing the nature of the business
AND
changing the terms of the contract between members
How can a member leave the LLP?
giving reasonable notice to other members
Formalities apply.
Can a member be expelled automatically?
No.
the right of expulsion must be included in LLP Agreement.
Main advantages for members of an LLP?
limited liability
can grant fixed and floating charges
leeway in management structure
can appoint an administrator
Main disadvantages for members of an LLP?
admin and accounting requirements
LLP subject to potential clawback provisions on insolvency.
