Chapter 2: General Partnerships

Question 1

Where is a partnership defined?

Answer 1

Partnership Act 1890

Question 2

What is needed for a partnership to exist?

Answer 2

1. 2 or more persons must
2. Carry on a business in common,
3. With the intention to make a profit

Question 3

What does the term ‘person’ refer to in respect to a partnership?

Answer 3

The term ‘persons’ is not limited to natural persons but also includes other business entities such as a company.

Thus, a person may form a partnership by carrying on a business with another human or by carrying on a business with a business entity, such as a company.

Question 4

What does ‘business in common’ mean?

Answer 4

Business - buying or selling goods or providing services for a fee.

In common - the people conducting the business are operating it together.
- They each have a right to make decisions about the business, share in its gains, and the like.

Question 5

What is needed re intention to profit?

Answer 5

If profit is not a goal, there is no partnership.

However, it is the intention to make profit that matters - the fact the business never actually makes a profit doesn’t prevent it from being a partnership.

Question 6

What intention is not needed when forming a partnership?

Answer 6

The parties need not have an intention to form a partnership.

The only intention required is the intention to carry on together a business for profit.

Question 7

What formalities are required to create a partnership?

Answer 7

There is no requirement of a written partnership agreement to create a partnership, although in practice many partnerships will have one.

Nothing need be filed with Companies House.

Question 8

What will the courts do if it is unclear whether a partnership has been formed?

Answer 8

Courts will look to the circumstances to determine whether it appeared the parties intended to carry on a business in common.

Question 9

Under the Partnership Act, what is prima facie evidence that a partnership exists?

Answer 9

If a party receives a share of the profits of a business, that generally is treated as prima facie evidence that a partnership exists.

Question 10

When does the presumption that a partnership exists if a part receives a share of the profits of a business not apply?

Answer 10

If:
i. the receipt constitutes a repayment of debt

ii. the receipt constitutes remuneration (payment) of an employee or an agent

iii. the receipt constitutes an annuity to a survivor of a partner on account of a partner’s share of the profits or to a person who has sold the goodwill of the business

Question 11

Under the Partnership Act, what circumstances do not create a partnership?

Answer 11

1. The mere fact that 2 or more people jointly own property, even if they agree to share profits from the property,
2. The sharing of gross returns does not of itself create a partnership.

Question 12

What is not needed of a partner in a partnership?

Answer 12

Partners often contribute money or property to the partnership, but a partner is not required to make any contribution

Question 13

How many partners can be in a partnership?

Answer 13

No legal limit on the number of partners that can be in a partnership

Question 14

When does the Partnership Act apply?

Answer 14

Most Partnership Act rules apply only if the partners have not agreed otherwise.

It is open to the partners to override or supplement the terms of the Partnership Act with a contractual partnership agreement.

Question 15

When can a partner bind the partnership?

Answer 15

Only if the agent (partner) acts with authority

Question 16

What types of authority does the Partnership Act provide for?

Answer 16

1. Actual authority, and
2. Apparent or ostensible authority

Question 17

How could actual authority be granted to a partner?

Answer 17

1. Through partnership agreements giving certain partners specific powers and responsibilities.
2. Partners could vote to give a particular partner actual authority to do a specific kind of act.
3. Implied actual authority

Question 18

How does a partner with actual authority bind the firm?

Answer 18

Under the Partnership Act, a firm will be bound by any act:
i. done in a way showing an intention to bind the firm,
ii. by any person actually authorised by the firm the undertake the act.

Question 19

When might implied actual authority arise?

Answer 19

Courts recognise implied actual authority if the partners have allowed a partner without express actual authority to regularly do an act.

Question 20

How is a firm bound by a partner with apparent or ostensible authority?

Answer 20

The Partnership Act provides that the act of a partner carrying on in the usual way business of the kind carried on by the firm will bind the firm and the other partners, unless:

1. The partner had no authority to act, and
2. The person with whom the partner was dealing either:
   i. knew the partner had no authority to act, or
   ii. didn’t know or believe the person they were dealing with was a partner

Question 21

What is the test for determining whether an act is carrying on in the usual way business of the kind carried on by the firm?

Answer 21

Test is objective.

Would a reasonable third party think a business of this kind would usually do this act, and what authority would a reasonable third party expect a partner in such a firm to have?

Question 22

What has case law shown that third parties can assume partners have authority to do?

Answer 22

1. Buy and sell firm goods,
2. Receive debt payments due to the firm
3. Hire employees, and
4. Employ a solicitor to act for the firm

In addition, in the case of trading partnerships, the partners also have the additional power to borrow money + grant certain types of security.

Question 23

What is the effect of a third party giving notice to a partner who habitually acts in the partnership business?

Answer 23

E.g., a notice by a tenant to continue a lease.

The notice will be considered to be notice to the firm.

Except, of course, in cases in which the third party + partner have joined to commit a fraud on the firm.

Question 24

What happens if a partner enters into a contract with a third party and does not have authority?

Answer 24

That partner, and only that partner will be personally liable to the third party.

Technically, not on the contract but rather for breach of a warranty of authority, based on the principles of agency.

This is because the partner, by purporting to enter into a contract with the third party on behalf of the partnership, warrants that they have the authority to do so.

Question 25

What liability do partners have for the debts of the partnership?

Answer 25

Partners have unlimited personal liability for the debts of the partnership if the partnership itself is unable to pay its debts out of partnership property.

This liability is joint - a creditor can choose to pursue one or all of the partners for their debt

Question 26

What will an incoming parter be liable for?

Answer 26

Incoming partner will not become liable to the creditors of the partnership for anything done before they become a partner.

This can be agreed otherwise in a contractual agreement.

Question 26

What liability do partners have for torts?

Answer 26

Unlimited personal liability + joint.

Where any partner acting in the ordinary course of the business (or with the authority of the other partners) of the partnership commits a tort, the partnership is liable to the same extent as the partner, and the partners’ liability is joint and several

Question 27

What agreement is needed for a new partner to be added to the partnership?

Answer 27

No new partner may be added to a partnership without the consent of all existing partners

Question 27

What does an outgoing partner remain liable for?

Answer 27

1.Remains liable for any debts/obligations incurred before the partner leaves

2. Debts incurred after they retire unless they give:
   i. actual notice to existing creditors, and
   ii. notice by way of an advertisement in the London Gazette for new customers

Question 27

When do partners have the power to expel another partner?

Answer 27

Partners do not have the power to expel another partner unless that power has been expressly agreed to by the partners (e.g., in the partnership agreement)

Question 28

How can a retiring partner stop being liable for debts incurred prior to retirement?

Answer 28

The retiring partner + the continuing firm can agree that the partner will not be liable to the firm for these obligations.

E.g., by executing a release or a ‘hold harmless agreement’ under which the firm agrees to indemnify the retiring partner for liabilities.

However, such an agreement has no effect on the retiring partner’s direct liability to third parties unless the third party also agrees (a ‘novation’)

Question 29

What happens if a partner retires and they were not known to a person dealing with the partnership to have been a partner?

Answer 29

That retiring partner will not be liable for partnership debts contracted with that person after the date of their retirement.

Question 30

What might happen if a person holds themselves out as a partner of a firm even though the person is not actually a partner?

Answer 30

They may be held liable as if they were a partner to any third party who has given credit to the partnership on the strength of the holding out.

The same rule applies if a person knowingly allows another to hold the person out as a partner.

Question 31

When does ‘holding out’ apply to retiring partners?

Answer 31

Can apply to retiring partners if they haven’t given proper notice to existing and new customers, and if they have failed to ensure that their name is removed from any notices, websites, or stationery

Question 32

Why is it important to establish whether property being used by the partnership belongs to the partnership or remains in the ownership of individual partners?

Answer 32

It will affect how such property is treated on the dissolution of the partnership

Question 33

What is partnership property according to the Partnership Act?

Answer 33

Property originally brought into the partnership or acquired for partnership purposes + in the course of the partnership business.

Unless a contrary intention appears, property bought with money belonging to the firm is partnership property, and property titled in the firm name is partnership property

Question 34

What is the determining factor in deciding whether property used in the business has become partnership property?

Answer 34

The mere fact that the property is used in the business is not enough evidence that it has become partnership property.

Whether property brought into the partnership becomes partnership property or remains the property of an individual partner will depend upon the intention of the parties.

Question 35

When will property owned by 1 parter at the start of the partnership be treated as partnership property?

Answer 35

Only if it is expressly or impliedly agreed between the parties

Question 36

How can partnership property be used?

Answer 36

Partnership property must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

Question 37

What do creditors of an individual partner have no right to do?

Answer 37

Have no right to seek execution on partnership property to satisfy the separate debt of the partner.

Question 38

What may creditors of an individual partner ask the court to do?

Answer 38

May ask a court to make an order charging the partner’s interest in the firm .

If such an order is granted, the creditor will have the right to receive whatever distributions are due the partner, but the creditor doesn’t become a partner.

Question 39

What needs to be done if partners contribute unequal shares and want share of profits to reflect this?

Answer 39

If they want to share in any profits pro rata to their capital contributions, this would need to be specified in the partnership agreement.

Question 40

When do partners have the right to a distribution of the firm’s profit and capital?

Answer 40

Partners do not have any right to a distribution of the firm’s profit + capital before dissolution except as agreed by the partners.

Question 41

What is the effect of a partner’s right to a share of the profits being assignable?

Answer 41

The right to a share of the profits is assignable, but the assignment doesn’t entitle the assignee to participate in, or interfere with, management of the firm.

Neither does it make the assignee liable for the firm’s obligations.

Question 42

How can an assignee become a partner?

Answer 42

Only with the approval of all other partners (unless the partnership agreement provides otherwise).

Question 43

How do partners should losses?

Answer 43

Partners must contribute equally to the losses of the partnership, whether capital or otherwise, unless there is a provision in the partnership agreement that states otherwise.

However, if profits are shared unequally by virtue of a provision in the partnership agreement, on dissolution, any remaining losses will be paid by the partners in the proportion in which they were entitled to share profits

Question 44

How do the partners know what they are due and what they owe?

Answer 44

The partnership is required to keep its books at its place of business (or principal place of business if there is more than 1), and each partner has a right to inspect + copy them as the partner sees fit

Question 45

What interest is a partner entitled to on their capital contribution?

Answer 45

Partner is not entitled to interest on their capital contribution

Question 46

What interest is a partner entitled to if they make a loan to the partnership?

Answer 46

Entitled to interest at a rate of 5% per annum

Question 47

What remuneration is a partner entitled to?

Answer 47

Not entitled to remuneration for acting in the partnership business.

Partnership agreement may, however, contain provisions that deal with the situation whereby certain partners manage the business and get paid a salary, as opposed to sleeping partners who are merely investors + take no active part in the day-to-day running of the business.

Question 48

What rights to management does a partner have?

Answer 48

The Partnership Act provides that every partner has an equal right to take part in the management of the firm business.

Partners are free to agree otherwise.
- Is common for a partnership agreement to assign different roles + powers to the partners, ranging from active management to a sleeping partner in a pure investment role.

However, unless a partnership agreement has such provisions, the basic rule is one partner, one vote.

Question 48

When must a partner be indemnified by the partnership?

Answer 48

Under the terms of the Partnership Act, the partnership must indemnify partners for any payments made or liabilities incurred whilst acting in the course of the business of the partnership, or for anything done for the preservation of the business or property of the partnership.

Question 49

Typically, how are management decisions in a partnership made?

Answer 49

By simple majority vote, unless the partnership agreement provides otherwise.

Question 50

What decisions require a unanimous vote of all existing partners?

Answer 50

1. Admission of a new partner
2. Change in the nature of the partnership business, and
3. An alteration to the partnership agreement

Question 51

When can a majority of the partners expel another partner from the firm?

Answer 51

They cannot unless an express agreement to do so has been agreed between all the partners.

Question 52

What does it mean that partners in a partnership are under a fiduciary duty to each other?

Answer 52

They are required to act in good faith and to exercise their powers for the benefit of the partnership as a whole.

Fiduciary relationship = relationship of trust and confidence

Question 53

What is the partners’ duty to disclose information?

Answer 53

Partners are under a duty to disclose information on all things affecting the partnership to any partner of their legal representatives

Question 54

What is the partners’ duty to account for secret profits?

Answer 54

Every partner must account to the partnership for any profit or benefit obtained without the consent of the other partners from any transaction concerning the partnership, or from any use by the partner of the partnership property or the partnership name.

This would include any business that came to the partner as a result of their involvement with the partnership.

Question 55

What must be done if a partner carries on a competing business?

Answer 55

If a partner, without the consent of the other partners, carries on any business in competition with that of the partnership, they must account to the partnership for all profits they made in that business

Question 56

What technically happens if there is a change in the partners?

Answer 56

This effectively brings the partnership to an end - it is dissolved.

Often, the business will actually continue, but it technically is a new partnership as the membership has changed

Question 57

How can dissolution arise?

Answer 57

1. Dissolution by expiration
2. Dissolution by notice in partnership at will
3. Dissolution by bankruptcy, death, or charge
4. Dissolution by way of a court order
5. Dissolution due to illegality

Question 58

When will a partnership dissolve by expiration?

Answer 58

If the partnership agreement provides the partnership will be for a certain term, it is dissolved upon the expiry of the term.

If the partnership was set up for a specific enterprise, it will be dissolved by the completion or termination of that enterprise.

Question 59

What may happen if a partner has paid a premium to another partner upon entering a partnership for a fixed term, and the partnership is dissolved early other than for death of a partner?

Answer 59

A court may order repayment of the premium or such part the court thinks is just

Question 60

When will a partnership dissolve by notice in a partnership at will?

Answer 60

If a partnership was not set up for a fixed term, any partner can give notice to the other partners of their intention to dissolve the partnership.

Dissolution will take place on the date set out in the notice.
If there is no such date, it takes place from the date of the communication of the notice.

Question 61

When will a partnership be dissolved by bankruptcy, death, or charge?

Answer 61

If a partner charges their share of partnership property for a personal debt, the partnership may be dissolved by the other partners, at their option.

Question 62

When will a partnership dissolve due to illegality?

Answer 62

A partnership will be dissolved if an event occurs which makes it unlawful for the business of the partnership to be carried on or for the partners to carry it on in partnership.

This provision cannot be modified by the partnership agreement

Question 63

When will the court dissolve a partnership?

Answer 63

Mental Capacity Act 2005 –> operates to dissolve any partnership where the court considers that a partner doesn’t have mental capacity.

A partner can also apply to court for an order that the partnership be dissolved in certain circumstances

Question 64

When may a partner apply to the court for an order that the partnership be dissolved?

Answer 64

1. If a partner becomes permanently incapable of performing their part of the partnership contract,
2. If a partner has been guilty of conduct that would prejudicially affect the carrying on of the business, with regard being had to the nature of the business,
3. If a partner wilfully or persistently breaches the partnership agreement, or otherwise conducts themselves in a way that means it is not reasonably practicable for the other partners to carry on in partnership with them,
4. When business can be carried on only at a loss
5. If circumstances have arisen which mean it is just and equitable for the partnership to be dissolved

Question 65

When would it be just and equitable for a partnership to be dissolved?

Answer 65

Often used in deadlock situations - where there are fundamental differences of opinion between the partners + they cannot agree on a way forward

Question 66

What is the effect of dissolution on a partner’s authority?

Answer 66

After dissolution, the authority of each partner to bind the firm, and the other rights and obligations of the partners, will continue in order to wind up the partnership and to complete transactions begun but unfinished at the time of the dissolution

Question 67

What is the effect of dissolution on distribution of partnership property?

Answer 67

After dissolution, partnership assets will first be used to pay off the partnership’s debts.

If the assets are insufficient to pay creditors, the partners are personally liable for any shortfall.

If assets are sufficient to pay creditors, the assets will be distributed in the following orderL
1. Outside creditors
2. Loans from the partners to the partnership
3. Partners’ contributions
4. Remaining profits divided among partners in the same proportion as profits (absent a provision in the partnership agreement).

Question 68

Under the Partnership. upon dissolution, how will losses be paid?

Answer 68

First out of profits,
Next out of capital, and
Lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits

Question 69

What governs the taxation of partners?

Answer 69

Governed by the Income Tax Act 2007

Question 70

How are partners taxed?

Answer 70

Each year, each individual partner must include in their personal income their share of the profit made by the partnership, whether or not the profit was distributed to the partner.

The income will be taxed at the appropriate rate for that partner.