Partnerships

Question 1

What is a Partnership?

Answer 1

2 or more persons carrying on a business with a common view of profit.

Question 1

Do partnership agreements need to be written?

Answer 1

Does not need to be in writing.

This can be done orally.

However, a written partnership agreement is the most desirable and easiest to fall back on.

Question 2

3 ways partnership agreements can be formed…

Answer 2

1) Through conduct;
2) In writing;
3) Orally

Question 3

List the sections of the partnership act which cannot be overridden by a partnership agreement?

Answer 3

S1 and 2 (forming a partnership/ governs when it comes into existence);

Sections 5-18 (relationships between partners and third parties, particularly focused on liability for debts).

Question 4

How does liability work in a general partnership?

Answer 4

Partners are jointly and severally liable for debts and actions of the partnership (and importantly this includes the other partners).

Question 5

List restrictions on the names of general partnerships.

Answer 5

Partnership names must not:
- include limited, ltd, limited liability partnership, LLP, public limited company, PLC ;
- be offensive;
- be the same as an existing trade mark;
- contain a sensitive word or expression, or suggest a connection with government or local authorities (unless permission is obtained).

Question 6

All decisions taken in a partnership are taken by a majority. There are three exceptions to this rule within the Partnership Act, where decisions need to be taken unanimously.

What are these three exceptions?

Answer 6

1) Changing the nature of the business (s24);
2) Introducing a new partner (s24);
3) Changing the terms of the partnership agreement (s19).

Question 7

What is the significance of capital contributions in the partnership agreement?

Answer 7

Often, partners contribute differing amounts (known as capital contributions). As a result, it may often be the case they share profits in accordance with their initial contributions. This would mean they have unequal shares, therefore overriding the partnership act.

Separate provisions will usually be included in order to set out the share each partner receives. This is likely to be influenced by their initial capital contributions, as well as their input.

Question 8

Can partners be entitled to a salary?

Answer 8

Yes if provided for within the partnership agreement.

Question 9

How to ownership of assets and property work within a general partnership?

Answer 9

• Should be governed by the partnership agreement.
• Property registered at LR will show who the legal owners are, but other assets will not have this.
• Important to clarify in agreement who owns what - especially if an asset belonging to a particular partner is used by the business.

Question 10

Explain how expulsion works within partnerships.

Answer 10

This is not provided for within the partnership act. As such, the agreement needs to specify how this works. In the absence of a partnership agreement, there is no way to expel a partner.

Question 11

What is an expulsion clause in a partnership agreement typically linked to?

Answer 11

Effort and poor performance of a partner.

Question 12

1) Under the partnership act, what will result in dissolution of the partnership?

2) Can a written partnership agreement disapply any of these provisions?

Answer 12

1) The following:
- a partner retiring (s26));
- expiry of a fixed term (s32);
- death or bankruptcy of any of the partners (s33);
- partners give notice of dissolution to a partner who has (by court order) granted a charge over their share in the partnership property, for a debt owed by them alone and not the partnership as a whole (s33).

2) Sections 32 and 33 can be dissaplied. The retirement provision at s26 can be circumvented however this needs to be done in a specific way in the agreement.

Question 13

How can a partnership dissolve automatically?

Answer 13

If something happens which makes it unlawful for the business of the partnership to continue (eg losing a licence needed in order for the partnership business to operate). This is in s34 of PA 1890 and cannot be disaplied by a partnership agreement.

Question 14

In relation to leaver provisions, what is it important to include in the partnership agreement?

Answer 14

The right to pay a leaving partner for their share and then subsequently continue the business.

Circumvents s39 of the PA 1890 which automatically dissolves the partnership if one partner leaves.

Question 15

Define partial dissolution.

Answer 15

Clause in the partnership agreement which allows the remaining partners to continue the partnership if one of them leaves.

Question 16

If a partner leaves and partial dissolution is allowed under the partnership agreement, what it is important the agreement specifies?

Answer 16

Whether the remaining partners are obligated to buy out that leaving partner, or if they have a choice whether or not to do so.

Question 17

What happens if the partnership agreement does not contain provisions about paying an outgoing partner?

Answer 17

a) The outgoing partner will be entitled to either an interest rate of 5% pa on value of their partnership share until they have received the share back in full; or
b) any such sum that the court decides.

Question 18

Does payment to an outgoing partner for their share need to be a lump sum?

Answer 18

No, it can be paid in instalments provided the agreement specifies as such.

Question 19

What can goodwill typically be described as?

Answer 19

A business’s reputation and the value of its clients/contracts.

Question 20

How is goodwill valued?

Answer 20

Commonly valued as two years profit.

Question 21

When is goodwill not considered on a sale of partnership?

Answer 21

If assets are being sold individually to be used elsewhere.

Question 22

Unless the partnership agreement provides otherwise, how does the PA 1890 govern how the proceeds of sale of the business are distributed/ paid?

Answer 22

1) Firstly creditors must be paid in full. If shortfall;, partners must pay balance from private assets. They share losses in accordance with their partnership agreement;

2) Second, partners that lent money to the firm must be paid back outstanding amount including interest.

3) Third, partners must be paid share of partnership’s capital to which they are entitled;

4) Last, surplus (if any) shared between partners in accordance with the terms of their partnership agreement.

Question 23

What is a restraint cause?

Answer 23

Clause which restricts outgoing partner’s business dealing once they leave partnership. Typically prevents them taking clients/ contracts or operating within a specific geographical area within certain period of time.

Commonly referred to as limitation/ non-compete clause.

Question 24

Is a restraint clause implied into partnership through PA 1890?

Answer 24

No. It must be included in a partnership agreement to exist.

Question 25

What would a typical dispute resolution clause provide for in a partnership agreement?

Answer 25

Disputes to be resolved through ADR and mediation as opposed to courts.

Question 26

List the specific duties of good faith and utmost fairness set out by the PA 1890.

Answer 26

Partners:
1) Must be completely open with one another regarding relevant info regarding the partnership;
2) Must account to the firm for private profits they have earned without the other partners’ consent from any transaction concerning the partnership;
3) Must not compete with the firm (classed as any other business of same nature).

Question 27

What are the two types of actual authority?

Answer 27

Express actual authority and implied actual authority.

Question 28

Define express actual authority.

Answer 28

Partners expressly give one of the partners authority to enter into a particulate transaction or type of transaction on behalf of the firm (eg one partner is given authority to purchase raw materials under the agreement).

Question 29

Define implied actual authority.

Answer 29

Partners have impliedly accepted one or more partners have authority to represent firm in a particular type of transaction (eg implied authority may be apparent if one partner has always sorted out a particular type of contract and no one has objected).

Question 30

What is apparent authority?

Answer 30

Where the partnership (firm or business) is liable for actions not actually authorised, but which appeared to a third party to have been authorised.

Question 31

What are the 4 requirements for apparent authority to exist and therefore make the firm liable?

Answer 31

Firm will be liable where:
1) The transaction is one relating to business of the kind carried on by the firm;
2) The transaction is one for which a partner in such a firm would usually be expected to have the authority to act;
3) The other party to the transaction didn’t know the partner didn’t have authority to act; and
4) The other party deals with a person whom they know or believe to be a partner.

Requirements 3 and 4 are subjective - requirements 1 and 2 are objective.

Question 32

Who is liable where a partner acts with apparent authority, binding the firm to a contract with a third party?

Answer 32

The firm is liable under the contract, however the partner who acted without the actual authority will also be liable.

The partner will be liable to indemnify fellow partners for liability/ loss incurred (as the partner will have breached agreement with the other partners to always act with actual authority).

Question 33

Are firms liable for negligent acts by its partners?

Answer 33

Yes.

The partnership will have liability for any wrongful act or omission of a partner who acts in the ordinary course of firm’s business/ with authority of their partners.

Question 34

Under s36 PA 1890, what does a partner need to do escape liability for for debts entered into after they leave a partnership?

Answer 34

• Anyone whom has dealt with the firm must be given actual notice of the partner leaving.
• This means they must be informed directly.
• Notice also needs to be placed in the London Gazette (effectively telling any potential customers/ clients that the partner is leaving).

Question 35

Is the estate of a deceased/ bankrupt partner liable for partnership debts?

Answer 35

No.

Question 36

Explain the principle of holding out.

Answer 36

Where a creditor of partnership relied on representation that a person was a partner in the firm, they may be able to hold that person liable for firm’s debts. This would be the case even if the person was never a partner/ had retired before the contract was made.

Question 37

Explain the three ways holding out occur (and give an example for each).

Answer 37

1) In writing (eg leaving partners name on letterhead);
2) Orally (eg that person is described as a partner during a conversation); or
3) By conduct (eg that person representing then firm in a previous course of dealing).

Question 38

What is the effect of holding out from a creditor point of view?

Answer 38

Allows the creditor to sue that person (the person purported to be a partner) for the firm’s debts.

Question 39

Are there any membership requirements for LLPs?

Answer 39

An LLP must have at least 2 members on incorporation.

Also, there must be two designated members (responsible for filings with companies house etc).

If only 2 members they have to be the designated members of the LLP.

Question 40

What happens if membership of an LLP falls below 2 members?

Answer 40

If this is the case after 6 months, that person is liable for any of the LLPs debts incurred during the period of the 6 month point onwards.

Question 41

What needs to be filed with CH to form an LLP?

Answer 41

Form LL IN01 and the applicable fee.

No LLP agreement needs to be filed.

Question 42

List the main duties of the LLP designated members.

Answer 42

• Signing off and filing annual accounts;
• Appointing, removing and remunerating auditors;
• Filing the annual CS01;
• Sending notices to registrar of companies (eg members joining and leaving);
• Winding up the LLP.

Question 43

Explain the effect of liquidation on an LLP.

Answer 43

The company liquidation regime under Insolvency Act 1986 applies to the LLP and its members.

As such members may be liable for misfeasance, fraudulent trading, wrongful trading etc, which may mean they need to contribute to the assets of the insolvent LLP.

Question 44

Does the Company Directors Disqualification Act 1986 apply to members of an LLP?

Answer 44

Yes

Question 45

Can an obligation to work full time be implied into a partnership (regardless of whether there is a written agreement)?

Answer 45

Yes.

Where it has been agreed each partner will bring a specific skill to the business and they intend that they alone are responsible for that that area of business.

This is particularly apparent if the parties have worked full time for a sustained period of time, as it is likely implied through conduct this is the expectation.

Question 46

Explain the procedure where one partner dies and there is no written partnership agreement providing for any specific actions.

Answer 46

In absence of a written agreement stating otherwise, the death will automatically dissolve the partnership but the remaining partners can negotiate with deceased’s PRs to buy out the share which, if successful, is an alternative ending to the business.

Question 47

In the absence of written agreement, does the capital contribution of a partner determine the share they will receive in retirement?

Answer 47

No.

Unless there are contrary provisions agreed otherwise, the partner will receive an equal amount as partners will share profits and losses equally. If a written agreement states otherwise however this will need to be obeyed.

Question 48

Explain liability for retiring partners for liability arising from contracts entered into during their time as a partner.

Answer 48

Unless a novation agreement is signed absolving them from liability, partners are liable for debts incurred before their date of retirement.

Question 49

What action can partners take against a fellow partner acting in a way exceeding their actual authority?

Answer 49

Bring an action for breach of contract against that partner.