7.3 Partnerships Flashcards
What is a partnership?
A relationship which subsists between two or more people carrying on a business in common with a view to profit.
No registration process to form a partnership and no requirement for a written agreement.
How can partners regulate their business arrangements in a partnership?
By drafting a written partnership agreement - they can regulate their business arrangements however they choose, provided it is not inconsistent with the Partnership Act
When is unanimous consent required in a partnership consistent with the Partnership Act 1890?
Unanimity is required to:
- make changes to the nature of the business,
- to admit a new partner,
- to expel a partner (including partner being expelled) or
- to alter the partnership agreement
When does technical dissolution occur in a partnership consistent with the Partnership Act 1890?
Death, bankruptcy and notice (DBN) can cause a partnership to immediately dissolve (technical dissolution) subject to contrary agreement.
Retirement and expulsion for good cause from a continuing partnership will only be available if the partnership agreement allows.
What are the implications of the PA 1890 provision: equal profit and loss sharing
There is equal profit and loss sharing between the partners under the PA 1890.
This can be excluded under a written partnership agreement.
What are the implications of the PA 1890 provision: partnership liability
There is unlimited liability under a partnership - partners have joint and several liability. Partners in a ‘traditional’ business partnership, as opposed to a limited liability partnership (LLP), take on joint and several liability for the debts and obligations of their business whether there is a partnership agreement in place or not.
LLP can be set up to create limited liability
What are the implications of the PA 1890 provision: unanimous consent
Unanimous consent is required to:
- make changes to the nature of the business (varying rights and duties of partners etc.),
- admitting a new partner,
- expel a partner or
- alter the partnership agreement
Can be excluded under the partnership agreement
What are the implications of the PA 1890 provision: expulsion issue
Partnership Act does not permit expulsion (must be by express agreement) - partner being expelled must agree too.
Can be excluded under the partnership agreement
What are the implications of the PA 1890 provision: retirement
Partner must give notice of intention to all other partners
Requirements can be varied under the partnership agreement
What are the implications of the PA 1890 provision: admitting new member to the partnership
In the absence of an express provision in the partnership agreement, a new member may be admitted only with the unanimous consent of all existing members
Can be excluded under the partnership agreement
What are the implications of the PA 1890 provision: renewal
Where fixed term partnership continues after fixed time, presumed to continue on same terms
Can be excluded under the partnership agreement
What are the events triggering the PA 1890 provision: technical dissolution
1) Fixed term expiring / single venture or undertaking termination
2) Any partner giving NOTICE to other partners of intention to dissolve
3) Death or bankruptcy of any partner
4) Where it is unlawful for the business to carry on - this provision cannot be excluded (illegality)
5) On application to the court, after relationship of partners has broken down
All provisions except for illegality can be excluded under the partnership agreement
What are the implications of the PA 1890 provision: interests of partners?
Payment BEYOND capital advanced for partnership - entails partner to interest at 5% per annum from date of payment
Partner not entitled to remuneration (a salary) - can be excluded and salary inserted into the partnership agreement
Day-to-day decisions approved by simple majority - can be excluded
What are the implications of the PA 1890 provision: distribution of assets
Liabilities are paid:
- First out of profits
- Second out of capital
- Finally out of the partners’ personal proportion to their capital investment
Assets to be applied as follows:
- Pay debts to persons who are not partners
- Pay to each partner proportionately as to advances made
- Pay to each partner proportionately as to capital investment
What are the responsibilities of the partners in a partnership?
Duty of utmost fairness and good faith:
- [Disclosing material information] Partners must divulge to one another true accounts and all relevant information connected with the business
- [Account for profits] Partners are accountable for any private profits that they make. Must share any profit/benefit received in connection with the partnership, business or its property unless they have the consent of the other partners
- [No competition] Duty not to compete with the partnership, without the consent of the other partners - must account for and pay over to the firm all profits made from the competing business
What is the indemnity principle in a partnership?
Firm has an obligation to indemnify fellow partners against bearing more than their share of any liability or expense connected with the business.
All partners will equally share capital and profits and losses.
How is partnership liability determined?
Is the partnership liable - actual or apparent / ostensible authority?
Which partners are liable - Sections 9 (unlimited joint and several liability) and 17 PA (liability of incoming and outgoing partners)
Liability for existing debts - release / novation / indemnity
Liability for future debts - Section 36 (notice to creditors and advertisement in London Gazette) and 14 PA
What is the agency principle in a partnership?
Every partner is an agent of the firm and their other partners.
1) They have the power to bind the firm for the purpose of the business of the partnership.
2) A transaction related to the firm’s business and done or transacted in the firm’s name by an authorised person (irrespective of whether that person is partner) will bind the firm and all the partners.
3) If a partner extends the firm’s credit to a third party, provided the transaction relates to the firm’s ordinary course of business, the firm will be bound by that agreement.
Conversely, the firm will not be bound if the transaction was not connected with the firm’s business, unless the partner was specially authorised by the other partners to extend credit.
N.B: Partner who entered the transaction may still be personally liable.
What is actual authority?
If a partner in the firm has authority from other partners to enter into transactions, the firm will always be liable for those contractual obligations. (Express / Implied Authority)
What is apparent authority?
The partner does not actually have actual authority from their fellow partners but to a third party (outsider), the partner appears to be so authorised. Firm will be liable for this partner’s acts if:
a) transaction relates to type of business the firm carries on
b) transaction is of the kind that it would be usual to expect the partner to have authority to enter
c) Third party was unaware that the partner had no authority to act and dealt with a person whom they knew or thought was a partner
Consequence: Partner acting without authority will be personally liable to the third party under the contract and will be liable to indemnify their fellow partners for any loss sustained.
What is the liability of a new partner entering into a partnership?
Person admitted as a partner into an existing firm does not become liable to the firm’s creditors for anything done before they became a partner unless they agree to it.
What is the liability of a retiring partner?
They remain liable for the debts and obligations pursuant to contracts already entered into even when the debt has not yet become payable.
What is a novation agreement?
3-party agreement (outgoing partner, existing/new partners and each creditor).
A partner can be discharged from existing partnership liability by negotiating and agreeing with fellow partners and firm’s creditors to settle liabilities (novation agreement)
What notice must a partner place after retirement?
To avoid liability for contracts entered into after retirement, departing partner must provide notice to creditors with whom they had dealings prior to leaving the firm and to the world at large:
1) sending notification to those they had dealings prior to leaving (e.g. creditors), informing them of their retirement or departure;
2) putting a notice in the London Gazette announcing their retirement/departure.
