BLP - SGS 1-4 Flashcards
Explain the traditional partnership.
- Defined simply as a relationship between persons carrying on a business in common with a view to making a profit (section 1(1) Partnership Act 1890)
- Partnerships Act 1980 regulates traditional partnerships
- Case law to supplement it
- However, these are generally only used as fall-back provisions where there isn’t a partnership agreement or where the agreement is silent on any matter. We
How do you determine the existence of a partnership?
- Section 2 PA 1890 contains a list of rules for determining the existence of a partnership
- Northern sales (1963) Limited v Ministry of National Revenue (1973) provides that if there is an agreement to share losses as well as profits makes the existence of a partnership more likely.
- Case law also held that if the person is being ‘held out’ as a partner this makes the existence of a partnership less likely - Walker v Hirsch (1884)
- There just be at least two persons to form a partnership. PA doesn’t distinguish between actual and legal persons so a company can be a partner
The Partnership Agreement / Deed
Most partnerships will have some variation of express agreement (minimum provision for sharing profits and on dissolution, the capital)
If there is no express agreement, the PA 1890 contains a default code which applies in the absence of any contrary agreement.
Partners mutual rights and obligations can be varied at any time by their unanimous consent (s.19 PA 1890) can be expressed or inferred from course of dealing.
S.24 contains ‘fall back’ provisions for dealing with the internal regulation of partnership.
24(1) profits, entitled to share equally in profits, even where the parties contribute to capital unequally (ideal to have PSR clause in agreement)
- 24(6) remuneration, without an agreement a partner is not entitled to a salary
- 24(8) decisions arising in ordinary course of business are decided by majority but s.25 says that a partner cannot be expelled by majority vote (expulsion provisions should be agreed before).
Partnership Property
As a partnership is not a separate legal entity, each partner is deemed to own a share of the property belonging to the partnership.
- An individual partner does not have a right to any particular partnership asset.
- Section 20 PA 1890 - All property brought into the partnership in the course of the partnership business is partnership property.
- Whether a particular asset is partnership property is subjective, depending on the intentions of the partners at the time they acquire. Difficult to prove, therefore its recommended that partners agree which assets are partnership property beforehand.
- Section 21 PA 1890 - all property bought with money belonging to the firm/partnership is deemed to have been bought on account of the firm/partnership unless contrary is shown
Fiduciary Relationship - Partnership
- overriding duty of good faith in a partnership
The equitable principles are reflected in the following sections of the PA 1890:
- s.28 honest and full disclosure
- s.29(1) unauthorised personal profit
s. 30 conflict of duty and interest
Contracts Binding The Firm in a Traditional Partnership
- Explain the different sections
- Explain what happens if the partners are happy
Whether or not a firm is bound by a particular contract will differ depending on whether the individual acting on the firm’s behalf is a partner or not.
- If the agent is a partner of the firm - APPLY SECTION 5 PA 180-
- If the agent is NOT a partner - apply common law rules
A. If the Partners are content with the agent’s act
- generally, an individual acting as a firm’s agent (whether partner or not) )will simply have to put into effect the wishes of the firm as a whole. If all partners are happy and have given express or implied authority then the firm will be bound.
If the partners are happy to be bound and the agent had no authority at the time then the firm is still bound.
Explain what happens in a traditional partnership in the following situation:
A. PARTNER bind the firm to a contract with a third-party against the others’ wishes
- Apply section 5
A partners unauthorized act will bind the firm, if, viewed objectively:
- the act is for carrying on business of the kind carried on by the firm (is this the kind of contract that one would expect to be done in the course of business of this kind?)
- the act is for the carrying on of the business in the usual way (is this the kind of contract that a partner acting alone would usually make on the firm’s behalf)
The firm will NOT be bound if
- the third party knew that the partner in questions was not authorised to enter into the contract (objective) or
- if the third party did not know or believe that the partner was in fact a partner
A partner who binds his firm without actual authority may be liable to the other
partners for breach of contract
Explain what happens in a traditional partnership in the following situation:
A. NON-PARTNER bind the firm to a contract with a third-party against the others’ wishes
APPLY COMMON LAW RULES OF AGENCY
An agent who has no actual authority may still bind a firm if he has apparent authority to enter into the contact
Apparent authority arises where the principal (here the firm) represents or allows a representation to be made to a third party that the person in question has authority to bind the firm
EXAMPLE- if a firm employs somebody under the title ‘marketing manager’ that title confers on that person apparent authority to bind the firm on marketing decisions. Once the principal’s representation has been
made to, and relied upon by, the third party, the principal is bound by the actions of that person.)
if the representation is that a particular person is a partner (when they are not), then the firm is said to be ‘holding out’ that person as a partner. A
person who has been held out as a partner has apparent authority to bind the firm in the same way as a real partner can.
Traditional Partnership - Personal Liability for Partnership Debts (partners, new and former partners)
- Firm has no SLP therefore the partners are personally bound an d liable on contracts which are binding on the firm
- ss 9 - every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm incurred whilst he is a partner (contractual liability)
- ss 10 and 12 - the partners liability is joint and several (tortious liability)
Regarding new and former partner
- s.17(1) a new partner will not automatically be liable in relation to any debts incurred before he joined the partnership
- s.17(2) a partner will still be liable after he retired in respect of debts incurred by the partnership whilst he was still a partner
- s.17(3) in order to relieve a partner from liability a partnership may novate the relevant agreement (with the consent of the creditor)
Under s.36 it is still possible for a former partner to be liable for new partnership debts incurred after he left (if a partner leaves a third party can treat all apparent partners of the firm as it was before the change as jointly liable) UNLESS
- Actual notice was given to the third party (s.36(1)); or
- Constructive notice if given by virtue of a publication of the departure in the London Gazette under s.36(2)
However, a former partner will not be liable for debts to any third party who did
not know him to be a partner before he left. No notice at all has to be given to
such persons.
Traditional Partnership - Personal Liability for Partnership Debts (NON-PARTNERS)
Generally, a person who is not a partner has no personal liability for partnership debts.
However, s.14 sets out circumstances where a non-partner may be personally liable on a partnership debt if he has held himself out as a partner.
Elements required:
- there must have been a representation to a third party that the person is a partner
- the third partys action in response (i.e. giving credit to the firm by supply goods or services to the firm)
- the third party’s state of mind (believing or having faith in the representation)
REMEMBER: S.14 relates to the liability incurred by the non-partner, NOT the liability of the firm.
In a traditional partnership, what happens when a partner leaves?
s.26 PA 1890 - If there is no partnership agreement or if the agreement is silent on retirement
or termination the effect of a partner leaving
is that the partnership is dissolved .
In most cases this is a technical dissolution meaning that a new partnership is formed by the remaining partners.
To prevent dissolution when a partner leaves, the partnership agreement should state hat the partnership will continue as between the remaining
partners, and should contain details of how a partner can leave or be expelled without the partnership
being wound up.
This would usually include a mechanism for the remaining partners to buy out a departing partner’s share.
How can a traditional partnership be dissolved?
A partnership can be dissolved in a number of ways;
- automatic dissolution under s.32(a) and (b) expiry of a fixed term or specific venture;
- bankruptcy or death of partner s.33
- if partnership business becomes unlawful under s.34
- dissolution of partnership at will by notice under s.26 and s.32(c)
- dissolution by the court as a last resort s.35
Traditional Partnership - Winding up, collecting and distributing assets
Subject to any written partnership agreement, where a partnership is wound up, once all debts and liabilities have been paid, any money/assets left will be
distributed so that each partner is paid back his/her original capital first - S.44(b)(3))
- Common for a partnership agreement to have a provision dealing with the proportion in which any surplus assets are to be shared out following dissolution
- This is called the asset surplus ratio or ASR
- If there is no agreed ASR then s.44(b)(4) applies and surplus assets are shared in accordance with the agreed profit sharing ratio (PSR)
- If there is no PSR then they are shared equally per s.24(1) PA 1890
Taxation of traditional partnerships
Each partner is liable to tax as an individual on his share of the income or gains of the partnership
- HMRC requires a partnership to make single tax return of its profits which must be agreed with HMRC
- Partners submit their own individual tax returns containing all income received from the partnership as well as other income receipts
- Each partner is personally liable for the tax on his share of the partnership profits and they are not liable for the tax on other partners’ shares of partnership profits
- Normal capital gains tax principals apply on disposal of a capital asset by a partnership. Each partner is treated as owning a fractional share of the asset. This is known as tax transparency.
- A partner’s fractional share shall be based upon the agreed PSR or, if there is no agreed PSR, then
equally in accordance with s.24(1) PA 1890.
What is a limited partnership? Whats the difference between an LP and a traditional partnership?
- a limited partnership is an ordinary partnerships with but with certain modifications.
- They are regulated in accordance with the Limited Partnership Act 1907 (LPA). However, the PA 1890 applies to LPs except where its inconsistent with the LPA
- The main difference between a traditional partnership and an LP is that some partners in an LP have limited liability
- They are not separate legal entities
- LPs require at least two partners:
- at least one general partner and one limited partner
The general partner’s liability is always unlimited because they manage the business.
Limited partners have limited liability up to the amount of their contribution to the LP (s.4(2)) (only applies if they are not involved in the day-to-day running of the business (s.6)
