Partnership

Question 1

What is partnership ?

Answer 1

1. 2 or more persons are carrying on a business in common with a view of profit.
2. No formalities required to start a partnership
3. In case of no partnership agreement default provisions under PA 1890 will be applied

Question 2

Default provisions of PA 1890

Answer 2

1. Equal share of profit and loss
2. Non-compete
3. Decision making: all decisions must be by majority, except the follow must be unanimously:
   a. change nature of business
   b. introducing new partner
   c. changing terms of partnership agreement.
4. At the expiry of fixed term, if the parties still carry on business, it is assumed that partners on same term as before.
5. No majority of partners may expel another partner unless partners have expressly agreed to this (usually in a written partnership agreement)
6. Partner may end the partnership at any time by giving notice (may be oral and no notice period).
7. An outgoing partner can insist on the business being sold, entitled to 5% per annum interest on th value of partnership share or a sum the court decides.

Question 3

Dissolution under PA 1890

Answer 3

7. Dissolution:
   a. a partner retires/death/bankrupt
   b. expiry of term
   c. if a partners give notice of dissolution to a partner who has (by order of court) granted a charge over their share in partnership property for their own debt.
   d. it is unlawful to carry on the business of the partnership
   e. a partner may apply to court to dissolve when
   - a partner becomes incapable of performing their part
   - a partner’s conduct is prejudicial to th ebusiness
   - a partner willfully or persistently breach partnership agreement
   - partnership can only be carried on at a loss
   - court think it is equitable

Question 4

Distribution of proceeds of sale

Answer 4

The proceeds of sale will be applied as follows:
1. creditors must be paid in full.If there is shortfall, partners will pay by private assets
2. partners who lent money to partnership including interest
3. Partners must be paid share of partnership capital
4. any surplus is shared between partners.

All of partners (unless they are bankcrupt) have authority to act in winding up the business affairs.

Question 5

Partners’ responsibilities under PA 1890

Answer 5

1. Partners must be completely open to each other regarding partnership
2. must account to the firm any private profits they have earned without the other partner’s consent from any transaction concerning partnership
3. mus not compete with firm
4. shall bear any loss made by the business
5. indemnify fellow partners who have borne more than their share of liability

Question 6

When the firm is liable to third parties?

Answer 6

1.Contract may be made by all partners or just one partner
2.Actual authority: action may be authorised by
a. partners acting jointly
b. express authority
c. implied actual authority: e.g. all partners are involve in business without limitation.
3. Apparent authority: action were not authorised but appear to outsider to be authorised:
a. transaction is one related to business of kind carried by firm
b. is one which a partner would usually be expected to have authority to act
c. the other party to transaction did not know that the partner does not have authority
d. the other party deals with a person they know or believe to be a partner

Question 7

Personal liability

Answer 7

1. where partner acted with apparent authority, such partner is liable to indemnify their partners for any liability or loss
2. Liability in tort: the firm is liable for any wrongful act of a partner actis in ordinary course of firm business or with authority of their partners
3. Partners’ liability for partnership debts: unlimited

Question 8

When was debt incurred?

Answer 8

1. If debt incurred while partner was still a partner, they will remain liable except where creditors signed novation agreement to extinguish the partner liability to debt.
2. If debt incurred after they left, they will not be liable if they have complied with s 36 PA 1890:
   a. actual notice must be given to anyone the firm has dealt before (directly)
   b. notice to whole world: notice on London Gazette (Edinburgh or Belfast)

Question 9

Holding out

Answer 9

1. a creditor of partnership relied on representation was a partner in the firm (holding out) can sue that person for debt owed by the firm
2. A person who never been a partner or retired before contract was made (holding out may be oral or in writing or conduct by such person or another person but he/she knows but not object)

Question 10

Enforcing the firm liabilities

Answer 10

1. Sue the partner who signed the contract
2. Sue any partner at the time debt incurred
3. Sue the firm (all partners)

Judgement can be enforced against partnership assets and if necessary partners personal assets. If the claimant sue 1 person, the other partners can be made to contribute some or all of the judgement.

Question 11

Insolvency

Answer 11

1. partnership is not a legal person but can be wound up as unregistered company or may use rescue procedures available to companies.
2. individual partners may be made bankcrupt if an obligation is enforced against their personal assets

Question 12

Tax

Answer 12

May need topay VAT, national insurance and either income or corporate tax

Question 13

Liability between partners

Answer 13

1. The partnership agreement shoud set out a mechanism for valuing an outgoing partner share.
2. Retiring partner remain liable to third parties but they may have contractual rights to be reimbursed (if any) or claim an indemnity under PA 1890 on basis that they have incurred liabilities in ordinary and proper conduct of business of the firm