Partnerships Flashcards
PA 1890: Sectio n 1
When does a partnership come into existence?
What should you advise a person who has planned to work in the partnership but has not yet started trading?
When two or more persons carry on a business in common with a view of profit’.
The partnership is likely to have come into existence already.
PA 1890: Decision-making
How are partnership decisions made?
By majority, unless in relation to:
- Change of nature of business
- Introducing a new partner
- Varying partnership terms.
These require unanimous consent.
PA 1890: Sharing capital
What is capital and how is it shared under PA 1890?
How much interest is paid on capital under PA 1890?
The amount a party invests in the company. Capital is shared equally under PA 1890.
None.
Think of interest on capital like dividends. Under the Act, a partner does not have greater ownership by investing more into it and doesn’t receive any further payout than the others. Therefore, the default terms are unlikely to be suitable where there are unequal capital contributions.
PA 1890: Sharing profits and losses
What is a capital profit? Include an example.
What are income profits? Include an example.
How do the partners share capital profits and income profits, and losses according to PA 1890?
Capital profits - one-off gains such as partnership property increasing in value.
Income profits - recurring profits such as trading profits or rent.
Equally.
Capital profits should be drafted to reflect the partner’s contribution to buying the asset.
Income profits should be drafted to reflect the partner’s working hours.
Loan from partner
How much interest is paid on a loan from a partner?
5% per annum
Expulsion
How can a partner be expelled under PA 1890?
By majority (including the partner being expelled).
Therefore this should be varied - impossible to expel without outgoing partner’s consent.
Dissolution
How is the partner dissolved under PA 1890?
- By a partner giving notice (retirement).
- By a fixed term partnership ending
- Death or bankruptcy
- Partners giving notice to dissolve due to a partner granting a charge over partnership profperty for a personal debt.
Application to the court where
- a partner is permanently incapable
- a partner’s conduct is prejudicial to the business
- a partner has wilfully or persistently breached partnership agreement
- can only be carried out at a loss
- just and equitable in the court’s opinion.
Unlawful acts would also cause dissolution.
Note: dissolution does not mean trading stops. A partner might leave and the others continue on the business, but technically it is a new partnership.
Dissolution
What is the effect of dissolution?
What is important then from a drafting perspective?
The assets are sold and the outgoing partner receives their share (at 5% per annum interest until received).
Drafting: ensure that if a partner leaves, the remaining partners continue = partial dissolution.
Other drafting notes:
- whether other partners must buy the outgoing partner’s share, or whether they have the option to do so; how the partnership share should be valued, and when that should be paid.
- whether outgoing partner should be indemnified if liabilities already taken into account when share being valued.
Distribution of proceeds of sale
When sold, how are the proceeds of sale applied under the Act?
Cannot be disapplied
- Creditors
- Partners who have lent money
- Partners’ share of capital
- Any surplus shared in proportion to partners’ share of profits.
What are some of the partners responsibilities under PA 1890?
- account for private profits earned (concerning the partnership) without the other partners’ consent
- must not compete with the firm
- indemnify partners who have borne more than their share of liability connected with the partnership.
Firm’s liability to third parties
When is the firm liable to third parties?
When a partner had:
(1) Actual authority
- contract entered in firm’s name, and
- expressly or impliedly authorised by the firm
(2) Apparent authority
- acted in the usual way of business of the kind carried on by the firm
- a third party did not know the partner had no authority; and
- that third party believed he was a partner.
Note: from a creditor’s perspective, it is always best to sue the firm (i.e. all partners of the firm, so that partnership assets are used first, and then personal assets).
Personal liability: apparent authority
As above, the firm will be liable to the third party. What about the partner who acted with apparent authority?
The partner is personally liable to indemnify the other parties for liability or loss incurred.
Note on tort: firm also liable for partner’s tort, e.g. negligence if in the ordinary course of firm’s business or if done with the authority of the partners.
Personal liability: escaping liability
How is each partner generally liable for the partnership’s debts?
Joinly and severally liable for debts incurred by the partnership while they were a partner
A claimant can sue any or all of the partners. Note: not as risky as it seems - e.g. for solicitors, professional negligence claim is most likely, but they will be covered by professional indemnity insurance. On the ther hand, a manufacturing business that buys millions of pounds of materials would not be run as a partnership: if there is a sudden decrease in demand, the partners will all be personally liable to pay the partnership’s debt.
Personal liability: escaping liability
What is a novation agreement
An agreemeent between a retiring partner, the creditor and the other partners (including any new partner) for the original partners to be released from the liability.
Rare
The newly constituted firm will take on the liability.
Creditor rarely agrees to this, and it is disadvantageous to incoming partners as well.
If no incoming partners, a deed needs to be executed, or consideration given to the creditor.
Personal liability: escaping liability
How can a retiring partner be released from liability for future debts?
- Giving actual notice to those dealing with the firm before the retirement; and
- Place a notice in the London Gazette to notify those who have not had dealings with the firm.
If by death or bankruptcy, no notice required. Estate not liable.
