Partnership agreement

Question 1

Varying the Partnership Act 1890

Answer 1

The partners’ rights and obligations (under an agreement or PA 1890) can be varied at any time by their unanimous consent and this can be express or inferred from a course of dealing

Question 2

Commencement and duration

Answer 2

• A partnership commences when persons carry on a business in common with a view to making a profit
• date can be fixed
• if partners begin work before date, the standard provisions apply.
• If the agreement has a fixed term but partners continue business after the term expires without new agreement, they are presumed to be partners on the same terms as before.

Question 3

How do partnerships own property?

Answer 3

• As a partnership does not have a separate legal personality, each partner is deemed to own a share in the property belonging to the partnership. An individual partner does not have a right to any particular partnership asset.

Question 4

What is deemed partnership property

Answer 4

-All property brought into the partnership whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property – s 20

-All property bought with money belonging to the firm/partnership is deemed to have been bought on account of the partnership, unless the contrary intention is shown – s 21

 Whether or not an asset is partnership property is a question of fact, depending on the intentions of the partners at the time they acquire it. This subjective element can be difficult to prove, so it is sensible for partners to agree which assets are partnership property to minimise the potential for dispute later.

Question 5

Shares in income and capital and profits and losses- default

Answer 5

Equal shares

Question 6

Drawings/ Salary

Answer 6

Drawings- equally
Salary- no entitlement

Question 6

Drawings/ Salary

Answer 6

Drawings- equally
Salary- no entitlement

Question 7

Work input and roles; limits on authority

Answer 7

Every partner may take part in management

Partnership agreement should set out the requirements for each partner in terms of the work they do for the business and define the limits on authority to act for the firm.

Question 8

Decision making
What required unanimous?

Answer 8

All partnership decisions must be decided by a majority, other than the following which require unanimity:

• Changes to the nature of the partnership business
• Introducing a new partner or removing a partner
• Varying the rights and duties of partners

Question 9

What is the the effect of a partner leaving?

Answer 9

‘technical dissolution’. This means that a new partnership is formed by the remaining partners who continue the business. However, it is open to any of the partners to apply to court to have the old partnership wound up (i.e., sale of the assets for the repayment of the partnership debts and for the distribution of the assets or liabilities amongst the partners).

• To prevent dissolution when a partner retires, the partnership agreement should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave (which may include a provision in the event of death) or be expelled without the partnership being wound up. This would usually include a mechanism for the remaining partners to buy out a departing partner’s share and for calculation of the value of such share.

Question 10

Non- compete

Answer 10

• Default provision: duty not to compete with the firm
• if a partner, without the consent of other partners, carries on business of the same nature as and competing with that of the firm, they must account to the firm for all profits made by them in that business.

Question 11

Restrictions on outgoing partners

Answer 11

Partners may wish to also put limitations on the powers of outgoing partners to compete with the partnership after leaving. There are no such default clauses in PA 1890.

Restrictions on outgoing partners can be provided for in the partnership agreement by using any of the following:
* Non-compete clauses: prevent former partners competing with the business
* Non-solicit clauses: prevent former partners from soliciting business from the partnership’s clients
* Non-dealing clauses: prevent former partners from entering into contracts with clients, former clients, or employees of the partnership.

• These types of clauses are known as restraint of trade clauses and will only be enforceable if they are reasonable in terms of duration, geographical area and scope, and are necessary for the protection of a legitimate business interest of the partnership.

Question 12

Collecting in and distributing assets on the dissolution of a partnership

Answer 12

Where a partnership is wound up, once all debts and liabilities have been paid, any assets left will be distributed so that each partner is paid back their original capital first then any surplus after that is shared equally (or under an agreed ASR/PSR)

Question 13

Automatic dissolution

Answer 13

Subject to contrary agreement – under:
-expiry of fixed term
- completion of specific venture
- death or bankruptcy of any partner

Question 14

dissolution of partnership by notice

Answer 14

dissolution of partnership by notice from any partner. This applies where the partnership has no fixed duration

Question 15

dissolution of if business is unlawful

Answer 15

dissolution of partnership if the partnership business becomes unlawful