Partnership Flashcards
What is required for a partnership to exist under Section 1 of the Partnership Act 1890?
A partnership exists when two or more persons carry on a business in common with a view to profit. This requires:
- Carrying on a business: A continuous series of activities rather than isolated actions.
- In common: Joint activity by the parties rather than separate efforts.
- View to profit: The intention to make profit, regardless of whether profit is achieved.
What rules does Section 2 of the PA 1890 provide for determining the existence of a partnership?
Section 2 states:
- Sharing of gross returns does not, by itself, create a partnership.
- Receipt of a share of profits is prima facie evidence of a partnership, but not conclusive.
- Other factors include:
* Participation in decision-making.
* Names on title deeds of property.
* Methods of profit sharing.
What is the relationship between the default provisions of the PA 1890 and a partnership agreement?
The PA 1890 provides default terms that apply unless overridden by a partnership agreement. Agreements can be:
- Written, oral, or implied by conduct.
- Specific terms in an agreement often override PA 1890 provisions.
- Some provisions of the PA 1890, like sections 1 and 2 (existence of a partnership) and sections 5–18 (relations with third parties and in particular, liability for debts), cannot be overridden.
Why is it beneficial to seek legal advice when starting a partnership?
Legal advice ensures:
- Awareness of default terms in the PA 1890.
- Creation of a written agreement to prevent disputes.
- Drafting of specific provisions for roles, profit-sharing, and dispute resolution.
What default rules does the PA 1890 provide for decision-making in partnerships?
Section 24 states that:
- Decisions are taken by majority vote, except for:
- Changing the nature of the business.
- Introducing a new partner.
- Amending the partnership agreement.
These require unanimous agreement.
- Partners may delegate decision-making authority for efficiency.
How does the PA 1890 address dissolution of a partnership?
Under the PA 1890, a partnership dissolves:
- Automatically due to:
- Death or bankruptcy of a partner (s 33).
- Expiry of a fixed term (s 32).
- Illegal continuation of the business (s 34).
- By notice: Any partner can give notice to dissolve (s 26).
- Court order (s 35): Grounds include incapacity, prejudicial conduct, persistent breaches, or ongoing losses.
What provisions should be included in a partnership agreement to handle financial matters?
Key financial provisions include:
1. Capital contributions: Initial amounts and obligations for future contributions. 2. Profit and loss sharing: Allocation of income profits and capital profits. 3. Drawings: Limits on the amount partners can withdraw periodically. 4. Ownership of assets: Clear terms regarding individual versus partnership-owned assets.
What are the implications of goodwill in a partnership?
Goodwill represents the partnership’s reputation and client relationships. Key points include:
1. Goodwill is valuable when selling the partnership as a going concern.
2. It is challenging to value but often estimated at two years’ profit.
3. Partnership agreements should specify how goodwill is treated during dissolution or sale.
What does Section 24 PA 1890 state about partner duties and responsibilities?
Partners must:
1. Share losses and profits according to their agreement.
2. Indemnify partners who bear excessive liabilities or expenses.
3. Operate with fairness and good faith.
4. Account for private profits derived from partnership-related transactions.
5. Avoid competing with the partnership business without consent.
How can partnership agreements address disputes?
Dispute resolution clauses often include:
- Requirement to use arbitration or alternative dispute resolution (ADR).
- Specification of matters suitable for ADR, such as contract interpretation.
- Steps for escalating unresolved disputes to formal court processes if needed.
What are restraint of trade clauses, and how are they used in partnership agreements?
Restraint of trade clauses restrict former partners’ activities to protect the business. Types include:
- Non-compete: Prevents competing with the partnership.
- Non-solicitation: Stops soliciting partnership clients or employees.
- Non-dealing: Prohibits contracts with clients/employees, even if approached by them.
What are the default rules for distributing proceeds after partnership dissolution under Section 44 PA 1890?
Proceeds are distributed as follows
- Pay off creditors.
- Repay loans made by partners, with interest.
- Return capital contributions to partners.
- Distribute any surplus among partners based on the partnership agreement.
How can partnership agreements address partner expulsion?
While Section 25 PA 1890 requires express agreement for expulsion, agreements can include:
- Conditions for expulsion (e.g., misconduct or underperformance).
- Procedures for voting on and implementing expulsion.
- Terms for buying out the expelled partner’s share.
Under the PA 1890, what provisions should a partnership agreement include regarding partners’ work input, and why?
- The PA 1890 allows partners to manage the business but does not require them to do so.
- The partnership agreement should clearly specify:
- Working hours or a requirement for full-time commitment to avoid disputes.
- A clause ensuring partners devote their full time and attention to the business.
- A restriction on partners engaging in other businesses to prevent distractions.
- Non-compete clauses may be included or are implied by default under the PA 1890.
- The agreement should also address holiday entitlement, sickness, and maternity/paternity leave, as these are not covered by the PA 1890.
How are capital, profits, and losses shared among partners under the PA 1890, and how can the partnership agreement modify these defaults?
- Default Provisions (PA 1890):
- Partners share capital, income profits, and losses equally, regardless of their contributions.
- Capital profits: One-off gains, like property value increases.
- Income profits: Recurring earnings, like trading profits or rent.
- Modifications via Partnership Agreement:
* Partners may agree to share capital and capital profits in proportion to their contributions.
* The agreement may also:
* Pay interest on capital contributions to reward and encourage investment.
* Allocate income profits based on working hours or contribution to the business. - Loss Sharing:
* The default is equal sharing of losses.
* The agreement should specify if salaries or interest on capital will still be paid in case of losses.
Under what circumstances is a firm liable for contracts made by its partners according to Section 6 of the PA 1890?
The firm is liable when:
- The contract or deed is made in the firm’s name.
- The partner acted with actual authority or apparent authority.
- Express actual authority: Explicit permission from other partners to act on behalf of the firm.
- Implied actual authority: Arises when:
- A partner consistently performs certain actions without objection from other partners, or
- A partner undertakes tasks implied by their role in the ordinary course of the firm’s business.
What is apparent authority, and how does it differ from actual authority under Section 5 PA 1890?
Apparent authority arises when a partner’s actions appear authorized to a third party, even if not actually authorized. The firm is liable if:
- The transaction relates to the type of business the firm conducts.
- A partner would ordinarily be expected to have authority for such a transaction.
- The third party is unaware the partner lacks authority.
- The third party reasonably believes they are dealing with a partner.
- Key Tests:
- Objective test: Whether the transaction aligns with the firm’s type of business.
- Subjective test: Whether the third party’s belief about the partner’s authority is reasonable.
How does Section 10 PA 1890 address tortious liability in partnerships?
A firm is liable for torts (e.g., negligence) committed by a partner if:
- The act or omission occurred in the ordinary course of the firm’s business, or
- The partner acted with the authority of the other partners.
What is the liability of partners for partnership debts under Sections 9 and 17 PA 1890?
Partners are:
- Jointly liable for all debts incurred while they were partners.
- Creditors can sue one, some, or all partners for the full amount owed.
- Jointly and severally liable for obligations arising from wrongful acts (torts) by a partner in the ordinary course of business.
- A partner paying the full debt can seek contribution from other partners under the Civil Liability (Contribution) Act 1978.
What is the purpose of a novation agreement, and how does it release retiring partners from liability?
A novation agreement:
1. Transfers liability for existing debts to the remaining or incoming partners.
- Requires agreement between the creditor, the remaining partners, and possibly the incoming partner.
- Releases the retiring partner from liability.
- Limitations: Rarely used, as creditors prefer not to reduce the number of parties they can sue.
What steps must a retiring partner take to avoid liability for future debts under Section 36 PA 1890?
A retiring partner must comply with specific notification requirements to avoid future liability. These include:
- Actual Notice to Existing Creditors:
* What is required: Direct communication with all existing creditors of the firm to inform them of the retirement.
- How this protects the retiring partner: Ensures creditors cannot rely on the assumption that the retiring partner remains liable for future debts.
- Notice to the Public (Constructive Notice):
- What is required: Publish a notice of the retirement in the appropriate official Gazette:
- London Gazette for England and Wales.
- Edinburgh Gazette for Scotland.
- Belfast Gazette for Northern Ireland.
- Effect: Acts as notice to anyone who has not previously dealt with the firm, ensuring third parties are aware that the partner is no longer associated with the business.
- Consequences of Non-Compliance:
* Failure to provide actual notice to existing creditors means they may continue to treat the retired partner as liable for debts incurred after their retirement.
- If constructive notice is not published, new creditors (those who did not previously deal with the firm) may assume the partner is still active and hold them liable.
- Exceptions:
* No notice required:
* If the partner leaves due to death or bankruptcy, no notification is necessary.
- In these cases, the estate of the deceased or bankrupt partner is not liable for future debts of the firm.
What is “holding out,” and when does it create liability under Section 14 PA 1890?
Holding out occurs when:
1. A person represents themselves as a partner (or allows others to do so).
2. A third party relies on this representation and extends credit to the firm.
3. Liability applies even if the person was never a partner or had retired before the transaction.
Examples of holding out: * Being listed on the firm’s stationery, website, or promotional materials. * Acting in a way that implies partnership status (e.g., negotiating contracts for the firm).
How can creditors enforce liabilities of a firm under the Civil Liability (Contribution) Act 1978 and the PA 1890?
Creditors may:
1. Sue the specific partner with whom they contracted.
- This partner can seek contribution from other partners for shared liability.
- Sue any or all partners jointly, as all are liable for debts incurred while they were partners.
- Sue the firm in its name, allowing enforcement against both partnership and personal assets of the partners.
- The Civil Liability (Contribution) Act enables partners to seek equitable contributions from co-partners after paying debts.
What happens if a partner cannot pay their share of a partnership debt?
If a partner cannot pay:
1. Creditors can enforce the debt by seizing the partner’s personal assets or obtaining a charge over their property. 2. Other partners may be forced to cover the shortfall and can then pursue the defaulting partner for reimbursement. 3. The partnership agreement may include provisions for expulsion in cases of non-payment.
