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Partnerships & Trusts > Partnership > Flashcards

Partnership Flashcards

1
Q

What is a partnership?

A

A relationship between people, arising out of an agreement or an association of two or more persons to carry on as co-owners of a business for profit.

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2
Q

What are the two theories underpinning partnerships?

A

Entity and aggregate theories.

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3
Q

What is the entity theory?

A

The partnership is viewed as an entity separate from its members and can acquire its own rights, liabilities and assets.

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4
Q

What is the aggregate theory?

A

A contractual association of persons, which does not possess legal personality and does not exist separately from its members. The rights and obligations of the partnership belong to the partners in undivided shares.

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5
Q

What are the four requisites of a partnership as laid down by Pothier and reiterated in Muhlmann v Muhlmman?

A
  1. Each of the partners brings something into the partnership or binds himself to bring something into it
  2. Joint benefit
  3. Object is to make profit
  4. Legitimate contract?
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6
Q

What are the characteristics of the entity theory?

A
  1. Separate legal entity
  2. Limited liability protection
  3. Continuity and succession
  4. Pass through entities for tax purposes
  5. Legal rights and obligations
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7
Q

What are the characteristics of aggregate theory?

A
  1. Contract establishes partnerships
  2. Lack of separate legal personality
  3. Rights and obligations belong to the partners
  4. Partnership agreement governs oblgiations
  5. Joint and several liability
  6. Partners report share of partnership’s profits or losses on their individual tax returns
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8
Q

What are the four types of partnerships?

A
  1. General/ordinary partnership
  2. Anonymous partnership
  3. Commanditarian partnership
  4. Universal partnership
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9
Q

What is a general partnership?

A

Partners are liable jointly for the debts or profits of a partnership.

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10
Q

What is an anonymous partnership?

A

The anonymous partner is not known to the public and is liable to the partners for pro rata share.

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11
Q

What is a commanditarian partnership?

A

The partner is a purely financial participant with a restricted liability similar to a shareholder in a company and shares in the profits and losses but their liability is restricted to their specific contribution or an agreed amount.

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12
Q

What is a universal partnership?

A

A type of partnership where the partners contribute all of their present and future assets to a common business purpose.

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13
Q

How does a universal parntership different from other types of partnerships?

A

UP extends beyond specific assets or projects and encompasses the entirety of the partner’s assets.

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14
Q

What are the characteristics of a universal partnership?

A
  1. Agreement
  2. Common ownership
  3. Joint management
  4. Sharing of profits and losses
  5. Unlimited liability
  6. Dissolution and termination
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15
Q

Does a UP have to comply with Pothier’s essential elements?

A

Yes (Butters).

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16
Q

When does a partnership exist?

A

If the essentials are present and there is a clear intention to form a partnership.

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17
Q

What are the natural consequences of a partnership in the absence of agreement?

A
  1. Proportions in which profit is shared is in proportion to the value of the partners’ respective contributions and in equal shares
  2. Losses in the same proportion as profits
  3. Representation
  4. Compensation for partnership expenses paid out of the partner’s own pocket
  5. Co-ownership of partnership assets in the same ratio as profit shares unless otherwise stated.
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18
Q

What are the rights and duties of partners?

A
  1. Duty to commence business
  2. Duty to observe good faith
  3. Contribution to the business
  4. Sharing profits and losses
  5. Use of partnership assets
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19
Q

What are the four components of the duty of good faith?

A
  1. Duty to accept and fulfil partnership obligations
  2. Duty not to compete with the partnership
  3. Duty to guard against a conflict of interest
  4. Duty of full disclosure of information which may affect the partnership business.
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20
Q

What are the rights and duties relating to the management of the partnership?

A
  1. General management powers
  2. Representation
  3. Access to information
  4. Rendering of accounts
  5. Exercise reasonable care in managing the partnership
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21
Q

What are the differences between partnership and co-ownership?

A
  1. Agreement
  2. Community of profit and loss
  3. Profit
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22
Q

What is agency?

A

When a partner contracts with a third party, in the name of the partnership, thereby acting as an agent of the partnership.

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23
Q

What are the requirements for agency?

A

Partner must be acting within the scope of the partnership business and the scope of their authority.

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24
Q

In what aspects of the partnership does the partner act as both an agent and a principal?

A
  1. Principal in relation to third party
  2. Agent in relation to the partnership.
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25
Q

Which case explains the concept of partner encompassing the concept of agent?

A

Muller v Pienaar.

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26
Q

Which branch of law are external relationships of a partnership?

A

Agency.

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27
Q

What kind of authority must have a partner have when entering into a contract on behalf of the partnership?

A
  1. Actual
  2. Ostensible
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28
Q

What remedy is available to a bona fide third party prejudiced by the actions of a partner acting without authority?

A

Doctrine of estoppel.

29
Q

What is the requirement for the partnership to be bound by the contract?

A

It must have been entered into in the name of the partnership.

30
Q

What is the Turquand rule?

A

A third party who contracts with a partnership is entitled to assume that the partner entering into the contract on behalf of the partnership has compiled with all internal rules of the partnership unless the third party knows of the rule and that it has not been complied with. The partnership can be held to the contract.

31
Q

When can a crime committed by a partner be imputed to the other partners?

A

In terms of section 332(7)while carrying on or furthering the interests of the partnership.

32
Q

What is implied authority based on?

A

The assumption that certain actions are necessary for the partnership to function effectively.

33
Q

What is apparent authority?

A

Authority which arises when a partner’s actions lead a third party to believe that they have the authority to act on behalf of the partnership, even if that authority was not explicitly granted.

34
Q

What happens if the partners want to change the scope of authority or add new partners with varying levels of authority?

A

They would need to amend the partnership agreement and follow the necessary legal procedures.

35
Q

What are the implications for both the partner who acted and the entire partnership?

A
  1. Personal liability of the partner
  2. Liability of the partnership, if the partner’s actions fall under the concept of apparent authority
  3. Bound by transaction, if partner’s actions led a 3rd party to reasonably believe they had the authority to act on behalf of the partnership
  4. Impact on relationships
  5. Legal disputes
  6. Financial consequences
  7. Reputational damage
  8. Potential dissolution
36
Q

What steps should the partners take to mitigate the risks of partners acting outside their authority?

A
  1. Clearly define the scope of each partner’s authority in the partnership agreement
  2. Establish a process for obtaining unanimous consent or specific approvals for major decisions
  3. Educate partners about their responsibilities and limitations
  4. Regularly communicate and update partners about their partnership’s activities and decisions
  5. Consider obtaining liability insurance to protect against unexpected liabilities.
37
Q

What happens if a partner incurs personal debts, can that partner’s creditor seize and sell partnership assets in order to recover the debt owed by the partner?

A
  1. Partnership assets cannot be seized by the personal creditor of a partner (Std Bank v Wentzel and Lombard)
  2. Partnership assets can be seized and sold by the personal creditor of a partner
  3. The individual partner’s share of the partnership assets can be attached and sold but not the share themselves (Bothma v Windsor)
38
Q

What are the ways in which partnership debts and obligations can be enforced against both individual partners and the partnership by third parties?

A
  1. Garnishment
  2. Execution of partner’s interest
  3. Priority of debts
  4. Surety agreements or personal guarantees
  5. Judgments
  6. Piercing the partnership veil.
39
Q

What is it to pierce the partnership veil?

A

The court treats the partnership as an extension of the individual partners’ personal assets i.e. looking at the substance behind the entity by removing the protection provided to the partners due to SLP.

40
Q

What is dissolution?

A

The formal end of a partnership’s business operations, the process of terminating the partnership agreement and ceasing the partnership’s activities.

41
Q

What are the causes of dissolution?

A
  1. Effluxion of time
  2. Impossibility of performance
  3. Agreement
  4. Unilateral termination
  5. Change in membership
  6. Death
  7. Sequestration
  8. Illegality or change in law
  9. Court order
42
Q

What is dissolution by effluxion of time?

A

When the partnership dissolves because it has reached the specified end date or has accomplished the purpose outlined in the agreement.

43
Q

What happens if the partners remain in business after the partnership has ‘expired’?

A

The partners must reach a new agreement and possibly amend the existing partnership agreement to reflect the changes.

44
Q

What happens if the partnership agreement does not specify a term or purpose?

A

The partnership is considered to be at-will

45
Q

What is a partnership at will?

A

A partnership that continues indefinitely until one or more partners decide to dissolve it.

46
Q

How is a partnership at will dissolved?

A

Any partner can give notice to the others of their intent to withdraw from the partnership, leading to its dissolution.

47
Q

What is dissolution by the impossibility of performance?

A

Where a partnership dissolves because circumstances arise that make it difficult or impossible for the partnership to continue its intended operations or achieve its objective.

48
Q

What is dissolution by agreement?

A

Where the partners agree to dissolve the partnership at any time explicitly or implicitly

49
Q

What is unilateral termination?

A

When one or more of the partners unilaterally terminate the partnership provided that it is for a lawful reason and not in bad faith.

50
Q

What is the ability to unilaterally terminate the partnership based on?

A

The terms of the partnership agreement or applicable laws.

51
Q

What is change in partnership?

A

The automatic dissolution of a partnership when a partner joins or leaves the partnership.

52
Q

What is the position irt creditors when there is a change in partnership?

A
  1. Creditors are not obliged to accept the new partners as substitutes for the old partners
  2. Change in partnership composition could raise concerns for creditors as the creditworthiness, financial standing and reputation of the new partners may differ from those of the departing partners
  3. New partnership needs to renegotiate or re-establish credit arrangements with its creditors
  4. New partners must notify all creditors of the changes and seek their consent for substitution of the partenrs
53
Q

What happens if the partner dissolves by way of death?

A
  1. Surviving partners may immediately enter into a new partnership agreement to continue the business which was previously carried on by the partnership
  2. Partnership agreement may specify as to what the next steps are
  3. Surviving partners may enter into temporary new partnership to wind down the business in an orderly manner
54
Q

Can a partner appoint their successor through a will?

A

No because agreement is an essential element for a valid partnership.

55
Q

How is the interest of a departed partner handled?

A

Depends on the terms of the partnership agreement or relevant laws.

56
Q

What are the provisions regarding the retirement or transfer of a partner’s interest?

A
  1. Buyout or valuation process
  2. Right of first refusal for the other partners
  3. Criteria for admitting a new partner
57
Q

What legal principles guide the handling of a departed partner’s interest in the absence of an agreement?

A

Fairness and equity.

58
Q

What is sequestration?

A

The legal process of declaring a person or entity bankrupt.

59
Q

What happens if the partnership dissolves by way of sequestration?

A
  1. Assets and liabilities are managed by a trustee of appointed by the court to oversee the bankruptcy process
  2. Business operations will cease and the assets will be liquidated to satisfy the debts owed to creditors.
60
Q

How can partners escape personal sequestration?

A

By giving security in the form of assets, guarantees or other forms of collateral that the creditors can rely on to ensure their debts will be paid.

61
Q

What happens if the partnership dissolves by way of illegality or change in law?

A

The partners may need to wind up the partnership’s affairs, settle outstanding debts, distribute assets, and take appropriate legal measures to dissolve the partnership properly.

62
Q

What is dissolution by way of court order?

A

When a court orders the dissolution of a partnership if there is a dispute among the partners or if it is found that the partnership is operating unlawfully or in a manner detrimental to the partners or the public interest.

63
Q

What are the formalities for a dissolution?

A
  1. No statutory formalities
  2. Dispute regarding whether there has been dissolution= HC
  3. Dissolution should be publicised to prevent 3rd aprties raising estoppel against the partnership.
64
Q

What is the process of dissolution by insolvency?

A

In terms of the Insolvency Act:
1. Details of dissolution must be published 30-60 days before dissolution
2. Old partenrs remain liable for all debts for 6 months after date of dissolution.

65
Q

What is liquidation?

A

It is a process that occurs after the dissolution of a business entity that involves the systematic sale of the entity’s assets to convert them into cash or cash equivalents then the proceeds are used to pay off the entity’s debts and obligations to creditors and distribute any remaining funds to the partners or shareholders.

66
Q

How does liquidation come about in the context of partnerships?

A

If the dissolution results in the winding-up of the partnership’s affairs and the sale of its assets.

67
Q

What are the effects of dissolution?

A
  1. Each partner’s right of representation ceases except to the extent that it relates to the winding up of the partnership business
  2. Duties of good faith and to account to fellow partners remain until final liquidation
68
Q

What is the effect of dissolution on existing contracts and third parties?

A
  1. Contracts with 3rd parties remain enforceable after dissolution
  2. Members of the parntership may cede their claims against 3rd aprties to one partner who enforces or else all partners must join in the claim
69
Q

What is the position regarding liability after dissolution?

A
  1. Partnership remains liable to perform its contracts after dissolution; joint and several liability
  2. The partner who pays in such a case has a claim against their former co-partners to recover their proportionate shares.

Partnerships & Trusts (8 decks)

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