Partnerships

Question 1

When is a partnership formed?

Answer 1

When two people start to venture into business with the aim of making a profit.

Question 2

Are there any formalities in creating a partnership? What are they?

Answer 2

No, there are no formalities.

Question 3

What is the default guidance for the running of a partnership?

Answer 3

The Partnership Act 1890 - provides a default contract for all partnerships. Can be overridden by a partnership agreement.

Question 4

What 2 sections of the partnership act cannot be overridden?

Answer 4

1) The clauses which govern when the partnership came into existence;

2) The clauses which govern the relationship between the partners and third parties (in particular, liability for debts)

Question 5

What is the default provision for work input in the Partnership Act? What is a common override of this clause?

Answer 5

Default: Partners may take part in the management of the business, but are not required to do so;

Override: Partners must devote their whole time and attention into the business and shall not engage in other businesses

Question 6

Does the partnership act cover sickness, maternity and holidays?

Answer 6

No. This must be included in a partnership agreement.

Question 7

What is the default provision for the role of partner in the act? What is a common override?

Answer 7

Default: No defined role;

Override: Clearly set out each partners role (E.g. finance partner) and any restrictions on their authority

Question 8

What is the default stance for voting on resolutions? What are the three exceptions?

Answer 8

All decisions must be taken by a majority.

The four that require unanimous voting are:

• Changing the name;
• Changing the nature of the partnership;
• Introducing a new partner; and
• Changing the terms of the partnership agreement.

The partnership agreement can include more provisions that require unanimous agreement.

Question 9

What is the default provision for shares in income, profits and losses? What is a common override?

Answer 9

Default: The partners share equally in the capital, losses and profits of the business;

Override: Vary to give some partners a higher share of the profits and of the liability

Question 10

Are partners entitled to a salary under the act?

Answer 10

No. They must provide for the provision of salaries in the partnership agreement, otherwise they’re not entitled to anything.

Question 11

What is the default position regarding expulsion of another partner? What is a common override of this?

Answer 11

Default: Unanimous vote needed to expel a partner;

Override: Expulsion clause in the PA allowing the partners to expel another

Question 12

When is a partnership dissolved under the Act?

Answer 12

• When a partner retires;
• death or bankruptcy of the partners;
• partner gives notice of dissolution to another partner who has granted a charge over their share of the partnership property

Question 13

What does it mean for a partner to ‘retire’?

Answer 13

It means they leave that partnership. It doesn’t mean they retire altogether.

Question 14

How can a partner end a partnership? What is a way around this?

Answer 14

A partner can end a partnership by simply stating the partnership is over, no notice required;

The way around it is to include a provision for when the partnership can be brought to an end.

Question 15

What is the effect of dissolution and how does a partnership agreement mitigate this?

Answer 15

If a partner leaves, the partnership is automatically dissolved and all assets are sold.

The partnership agreement can state that the partners can still carry on the partnership even if one partner leaves

Question 16

Does a partnership have to dissolve if one partner leaves?

Answer 16

No, it will only dissolve if another agreement can’t be reached.

E.g. a partner can request that their share is bought out and the partnership continue.

Question 17

What if a partner is unable to be bought out of a partnership and there is no partnership agreement?

Answer 17

Then via s39 the partner can insist on all of the partnership’s assets being sold.

Question 18

What is the distribution of proceeds of sale in a partnership?

Answer 18

(1) Creditors;
(2) Partners who have lent money to the partnership;
(3) Partners are paid the share of capital to which they are entitled;
(4) Surplus is shared between partners in accordance with their partnership agreement

Question 19

What is the acts position on ‘restraint of trade’ when a partner leaves the partnership?

Answer 19

No default provision. No restraint.

PA can include a restraint of trade clause, provided it protects a legitimate business interest - otherwise it is illegal.

Question 20

What is the default provision regarding competing against the partnership?

Answer 20

Competition is not allowed and any private profits earned, without prior consent from the partner’s, must be accounted to the partnership.

Question 21

When is a partnership liable to third parties?

Answer 21

Actual authority - Bound by contract or deed entered into by partners;

Apparent authority - Firm is bound when an agreement, though not authorised by the partnership, had apparent authority to be entered into (normal contract partners would usually do and other party believed the psuedo partner to be a partner);

Question 22

What liability is incurred when a partner acts with apparent authority?

Answer 22

The partnership is liable to a third part under the contract;

The partner is liable to indemnify their fellow partners.

Question 23

What is the nature of partner liability for partnership debts?

Answer 23

Each partner is liable jointly with other partners for debts incurred whilst they were a partner.

They are jointly and severally liable. One partner can be sued on behalf of the partnership and be indemnified by the other partners.

Question 24

What is a novation agreement? Is it common?

Answer 24

Retiring partner is released from existing debt by entering into a contract with the creditors and other partners.

Not common, though. Creditors rarely agree to such a contract.

Question 25

What is a partners liability after they leave the partnership?

Answer 25

They remain liable for future debts unless they give direct actual notice to whoever the firm has dealt with before, and a notice in the London Gazette for people the partnership have not dealt with before.

If notice is not given, the partner remains liable for future debt.

They still remain liable for debts incurred as a partner.

Question 26

What happens with a creditor if a particular person, who wasn’t a partner, held themselves out to be a partner?

Answer 26

That person may be held liable for the firm’s debt.

Question 27

What are the 3 ways to enforce a partnership liability?

Answer 27

(i) Claimant can sue the partner with whom they made the contract;

(ii) Claimant can sue anyone who was a partner at the time the debt was incurred;

(iii) Claimant can sue the firm in the firm’s name. Anyone who was a partner when the debt was incurred is jointly liable.