CH6 Types of Trade

Question 1

What are the four fiduciary duties that partners have to the partnership?

Answer 1

1. Act in GOOD FAITH
2. Not exercise a LEGAL RIGHT (e.g. to expel a partner) for an improper motive
3. Not to KEEP PROFITS without consent from the other partners
4. Avoid CONFLICTS OF INTEREST without full disclosure

Question 2

If a partner breaches any of their fiduciary duties, what might happen?

Answer 2

The partner responsible may be liable to ACCOUNT for any MONIES received or MAKE GOOD any other loss suffered

Question 3

In terms of the Partnership Act, what does Capital Deficiency mean?

Answer 3

What a partnership owes but cannot pay back

Question 4

If capital deficiency arises, how should the remaining partners share it according to the Partnership Act?

Answer 4

Not as a loss, but in ratio to the amounts of capital which they originally contributed

Question 5

According to the Partners Act, which partners are entitled to take part in managing the firm’s business and how many are required to make ordinary management decisions?

Answer 5

Every partner
Majority of partners

Question 6

According to the Partners Act, who can make a decision on changing the nature of the business?

Answer 6

Unanimous agreement of all partners

Question 7

According to the Partners Act, who can make a decision on introducing a new partner?

Answer 7

Unanimous agreement of all existing partners

Question 8

According to the Partners Act, who can make a decision on varying the partnership agreement?

Answer 8

Unanimous agreement of all partners

Question 9

In terms of the Partnership Act, what does indemnity refer to?

Answer 9

The firm must pay back the partner any expenses they have incurred in the ordinary and proper conduct of the partnership business or in doing anything necessary for the preservation of the partnership property or business.

Question 10

In terms of the Partnership Act, what is the rule about remuneration?

Answer 10

No partner is entitled to a salary for acting in the partnership business

Question 11

According to the Partnership Act, what is the provision regarding interest on capital?

Answer 11

None is paid on capital except by agreement
BUT a partner is entitled to 5% interest on advances beyond their original capital (i.e. if they loan the partnership more capital).

Question 12

According to the Partnership Act, where must records and accounts be kept and who must be allowed to inspect them?

Answer 12

Main place of business
All partners

Question 13

According to the Partnership Act, when may a partner be expelled but only if done in what and for what?

Answer 13

A partner may only be expelled by a majority of votes when the partnership agreement allows.
Must only be used in good faith and for good reason.

Question 14

According to the Partnership Act, how long does the authority of the partners continue after dissolution?

Answer 14

So far as is necessary to wind up the partnership affairs and complete transactions already begun.

Question 15

According to the Partnership Act, what can any partner insist upon in relation to winding up?

Answer 15

Realisation of the firm’s assets, payment of the firm’s debts and distribution of the surplus.

Question 16

Strictly, according to the Partnership Act, the partnership will end when a partner retires and they would have to start a new one. What tends to happen to get around this?

Answer 16

Most partnership agreements will have a provision that says that when a partner retires, the partnership will continue.

Question 17

In a partnership, each partner is the agent of the partnership and their fellow partners for the purpose of the business of the partnership. What does this mean?

Answer 17

Each partner can enter into contracts in the partnership’s name and all partners will be bound by that contract

Question 18

In a partnership, each partner is the agent of the partnership and their fellow partners for the purpose of the business of the partnership. I.e. Each partner can enter into contracts in the partnership’s name and all partners will be bound by that contract. What are the two exceptions?

Answer 18

1. They have no authority to act for the partnership in that particular matter AND
2. The person with whom they are dealing either knows that they have no authority or does not know/believe them to be a partner.

Question 19

If a restriction is placed on a partner’s authority to bind the firm, are acts done in contravention of that restriction binding on the firm? Only if what?

Answer 19

No - if the third party KNOWS about the restriction.

Question 20

Will a firm be bound if a partner pledges the credit of the firm for a purpose which has no apparent connection with the firm’s ordinary business? Unless what?

Answer 20

No, unless the partner has ACTUAL EXPRESS authority.

Question 21

Is a partner liable for debts of the partnership before they join the partnership?

Answer 21

No.

Question 22

Is a partner liable for debts of the partnership while they are part of the partnership?

Answer 22

Yes

Question 23

Is a partner liable for debts of the partnership after they have left the partnership?

Answer 23

No, BUT ONLY if everyone knows they have left AND their name is removed from from all documents

Question 24

In the absence of any express provision to the contrary in the partnership agreement, the Partnership Act 1890 provides that a partnership is dissolved in which instances? 6 of them.

Answer 24

1. DEATH/BANKRUPTCYof a partner (usually partnership agreement overrides this)
2. Expiry of FIXED TERM partnership
3. COMPLETION/TERMINATION of single joint venture
4. Subsequent ILLEGALITY
5. NOTICE given by a partner if indefinite duration
6. Order of the COURT

Question 25

To form an LLP, what document is required, who must it be signed by and who must it be submitted to?

Answer 25

Incorporation document Two members Registrar of Companies

Question 26

What information must be given on the incorporation document to form an LLP?

Answer 26

1. Name of LLP (must end in LLP) 2. Location of registered office (England and Wales/Wales) 3. Address of registered office 4. Names and addresses of all members 5. Names of two designated members 6. Registration fee

Question 27

In an LLP, what are the designated members responsible for?

Answer 27

Signing notices and accounts and delivering them to the registrar

Question 28

Do LLPs have to file their partnership agreement with the Registrar?

Answer 28

No

Question 29

What are an LLPs requirements around accounting records?

Answer 29

Keep and retain accounting records Prepare and publish annual accounts Have accounts audited

Question 30

What is the situation with audit and special rules for an LLP? Are they required to produce the equivalent of a directors report?

Answer 30

Special rules for small and medium sized LLPs and audit exemption rules apply as they do for companies No requirement for a directors report equivalent

Question 31

What must an LLP do with respect to register of charges?

Answer 31

They must maintain a register of charges and register charges with the registrar

Question 32

What must an LLP do if there are any changes to membership, designated members or registered office. Within what timeframe?

Answer 32

Notify the Registrar within 14 days

Question 33

What are the requirements of an LLP with respect to displaying its name?

Answer 33

The name must be displayed on correspondence and outside its place of business

Question 34

What are the requirements of an LLP with respect to confirmation statement? How often?

Answer 34

They must deliver a confirmation statement to the Registrar. Annually

Question 35

What is the situation with regards to applying to the court in cases of unfair prejudice and when can it be excluded?

Answer 35

As with companies, the members of an LLP can apply to the court in cases of unfair prejudice. This right can be excluded with unanimous consent for an agreed period.

Question 36

What can happen if a member attempts to continue trading when they know the firm is going to liquidate?

Answer 36

They can be found guilty of fraudulent or wrongful trading and may be liable to disqualification in the same way as a company

Question 37

What is the authority of partners in an LLP in terms of being bound by a contract? (as opposed to a normal partnership).

Answer 37

Each member is an agent of the LLP: they can bind the LLP and therefore each other.

Question 38

In terms of authority in an LLP, when will the LLP NOT be bound?

Answer 38

Where the member does NOT have authority AND The third party is aware that they do not have authority or does not know/believe them to be a member of the LLP

Question 39

What two things are needed for an LLP to be dissolved/terminated? Following what procedure?

Answer 39

Unanimous agreement of partners or in accordance with any agreement Following a formal procedure for winding up.

Question 40

What are the options when an LLP becomes insolvent?

Answer 40

1. Members may propose a VOLUNTARY AGREEMENT 2. Members may apply to put the business into ADMINISTRATION OR 3. Members may resolve to go into voluntary or compulsory LIQUIDATION

Question 41

The procedure to wind up an LLP is broadly the same as that for a company, with two exceptions. What are they? (withdrawals and assets)

Answer 41

1. Withdrawals made by members within TWO YEARS prior to winding up may be clawed back IF it can be shown that they (at the time of withdrawal) knew/had reasonable grounds to believe the LLP was/would become insolvent. (i.e. if a member knows the company will be going bust, and withdraws their money, it could be clawed back) 2. On winding up, past and present members could be required to contribute to the assets of the LLP to the extent that they have agreed to do so in any LLP agreement.