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Business Law > Partnerships and LLPs > Flashcards

Partnerships and LLPs Flashcards

LLP = member Partnership = partner

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1
Q

Can partnership agreements be implied by conduct?

A

Yes

(partner acted certain way over period and no one objected)

’ income and capital will be shared equally subject to contrary agreement, express or implied
(s 24 Partnership Act 1890).

e.g. shared in same proportions for many years combined with their initial contributions amounts to implied agreement

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2
Q

What may wish to include in written partnership agreement?

(not job contract - partnership agreement)

A
  • **Full attention/no side hustles **
    (nb: non-compete clause implied under PA)
  • Decisions: decide more can be taken unanimously or delegated
  • initial capital contributions and any future expected contributions
    (capital = initial contribution to business)
  • Ownerships of capital and if interest on contributions
  • ‘drawings’ (i.e. income profits) entitled to
  • How much income can draw out in what period
  • Ownership of assets
  • Expulsion
  • Retirement/termination conditions (notice period, in writing, not in first year)
  • Partial dissolution
  • Payment outgoing partner’s share
  • Indemnity for outgoing partner
  • Build in time to find buyer
  • Restraint of trade clause
  • Disputes no courts re agreement interp
  • Terms agreed between selves
  • Repeat parts of P Act
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3
Q

If in practice a partnership commences before the date on Partnership Agreement, what is partnership governed by?

A

PA 1890 UNTIL date in agreement - then agreement applies

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4
Q

If partnership continues after expiry date on agreement, what are they governed by?

A

pre-existing agreement not the PA

so some partnerships are only intended to last for a fixed term, e.g. for a specific purpose
so the partnership agreement will last for a fixed term

if stop carrying on business at that point, partnership ends

if carry on business after fixed term and don’t enter into a new agreement, presumed to be partners on same terms as before

(so its the pre-existing agreement)

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5
Q

Three exceptions where decisions in a Partnership don’t not to be made by a majority and how must be made?

A
  1. Changing nature of the business🌸🐒
  2. Introducing new partner 👩‍💼
  3. Changing terms of the partnership agreement 📜

Unanimously

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6
Q

Default PA 1890 position on capital, income and losses, and when can rebut?

Common provisions rebutting PA.

A

Default: share capital, profits and losses equally

May vary

eg if one contributed more capital - more capital
eg interest on capital contributions to encourage investment
eg works more - more income
eg if make loss - will salaries be awarded?

Case law = may imply by course of conduct that OWN (!) capital profits unequally
(nb: only capital - think 3 C’s, capital/case law/conduct)

(capital = money contributed, capital profits = one-off gains e.g. inc value to premises, income profits = eg trading profit/rent)

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7
Q

What is word for income profits which general partners receive?

Do they get a salary under PA?

Alternative to receiving a salary in a partnership?

A

Drawings

No - just equal share in income profits
(but some partnerships can also receive salary)

Share in surplus profit

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8
Q

Can a partner ever be expelled?

(default under PA and how often amended)

A

PA: No, unless the partners have expressly agreed to it
(usually in a partnership agreement)

So often partnership agreement will include expulsion clause
(eg acted in certain way/poor performance)

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9
Q

Who owns partnership assets?

A

Even if owned by partners, becomes partnership property if:

  1. brought into partnership stock
  2. bought on account of firm
  3. acquired for purposes of partnership business

^ presume if partnership money

^ agreement can state what regard as partnership assets

^ all about intention if rebutting

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10
Q

Default position under PA - when does partnership end?

A

Any partner can end at any time by giving notice of intention that wish partnership to end
(still need to give notice)

  • immediate effect and not need to be in writing😳
    (aka a partnership at will)

Automatic dissolution:
- Any partner retires 👵
- Expiry of fixed term 📆
- DEATH or BANKRUPTCY any partner ☠️ 💷
- something happens which makes unlawful to continue business (e.g. no licence) ⚖️
- If one partner has granted legal charge over their share of partnership property for debt owned by them personally and other partners give notice of dissolution to them 👨‍⚖️

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11
Q

When can partners apply to court to DISSOLVE (!) partnership under PA1890?

Better alternative?

A
  • Partner becomes permanently incapable of performing their part 🫁
  • Conduct prejudicial to business 🐍
  • Wilfully or persistently breaches agreement 👊👊👊👊
  • Can only carry on at a loss; or ➖
  • Court thinks just and equitable for other reasons 🧚‍♀️

Provisions in agreement stating when can eXPEL

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12
Q

Effect of automatic dissolution

(ie where outgoing partner ends partnership)

A

UNLESS ALL PARTNERS AGREE OTHERWISE:
- Partnership ends
- All assets sold OR partnership sold as going concern
- Outgoing partner has to receive their share

Outgoing partner can insist on business sold
^ meaning no option to continuing in businses and paying them

e.g. leaving partnership, setting up new business, needs money - asks for his share/being bought out - they can’t afford to do it straight away, so he insists on assets being sold

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13
Q

What should be included in PA regarding dissolution

A
  1. If one partner leaves, the remaining partners will continue in partnership.
  2. Do remaining partners have option to or must they buy outgoing partners share?
    - how valued?
    - when paid? instalments preferable.
  3. Indemnity for outgoing partner if their liabilities taken into account when their partnership share was valued

(e.g. I think if when they were working out how much to entitled to on exit, they deducted some to keep in bank account to pay creditors)

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14
Q

If partnership agreement does not state how to pay outgoing partner’s share, what is the default?

A

either
- interest at 5% per annum on the value of their share until they receive their share from the other partners, or
- such court considers attributable to the use of their share.

E.g.
- 3 partners, each contributed 30k, one is leaving
- assets are worth 210k but owe 60k to creditors
- therefore entitled to 50k (210k - 60k divided by 3)

E.g.
- 3 partners, 330k income profits and debts of 60k
- 330,000 / 3 = 110,000 income profits each
(^ income profits will include any salary entitlement!)
- 60,000 / 3 = 20,000
- 110,000 - 20,000 = 90,000

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15
Q

If no partnership agreement, what could retiring partner who needs the money do?

A

Insist on all partnership assets being sold

(could mean need to sell to a third party)

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16
Q

What does it mean if partnership is sold as a going concern?

Impact on partnership agreements?

A

Part of PP reflects reputation and value of clients/contacts

No goodwill if just selling assets individually

So build in time to allow to find a buyer rather than having to sell assets

own idea:
e.g. DISSOLUTION
1. The Partners are entitled to 12 months commencing on the date of dissolution to find a buyer to purchase the Partnership as a going concern.

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17
Q

How can you increase likelihood of business being sold as going concern?

A

Don’t sell partnership assets separately

Terms in PA that build in time to find buyer instead of having to sell assets individually to raise money quickly

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18
Q

When partnership sold, how are proceeds of the business and assets to be used (unless specified otherwise)?

A
  1. first pay creditors in full and if shortfall, private assets (sharing losses as agreed)
  2. Repay partners loans inc interest
  3. Pay partners their share of entitled capital (!!!)
  4. Share surplus as agreed

(ahh so creditors loans, partners loans, partners capital contributions, surplus)

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19
Q

Do partners have authority to act in winding up?

A

Yes, as long as not bankrupt or deceased

If they are, their trustees or PR can make an application

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20
Q

What is a restraint of trade clause and when will it be enforceable?

A

Restricts partners dealings once left

Only if protects legitimate business interest (e.g. confidential info, goodwill)

No wider than reasonable

  1. Non-poaching (employees)
  2. Non-solicit (not solicit business from clients i.e. approach directly)
  3. Non-compete (with business)
  4. Non-dealing - can’t enter CONTRACTS with clients/former clients or employees - even if they approached u (more restrictive)

(non-compete, non-solicitation, non-dealing)

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21
Q

Duties of partners to each other under PA 1890

A
  • Open with relevant info
    (e.g. Becky - he was on the land calling B)
  • Account any private profits earned via partnership without others consent
    (e.g. did stp cls without tleling u and kept th e£ for jacquem bag)
  • Not compete without consent - if so, account for and pay over any profits
    (Made MBW)
    (will transfer u now bbe x)

(bound even if do not include in agreement)

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22
Q

When is THE PARTNERSHIP (!!!) OR LLP (!!) liable to third parties?

A
  1. Contracts (signed by all partners or just one)
  2. Actual authority
    - Express
    - Implied
  3. Apparent authority
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23
Q

Implication of partnership being liable

A

Gives creditor right to sue many one or all of partners for entire amount instead of just the one who signed the contract

24
Q

When will a party have ACTUAL authority to sign on partnership or LLP’s behalf? (meaning firm bound)

A
  • Expressly given one partner permission to do on firm’s behalf (e.g. partnership agreement)
    e.g. purchasing partner in control of raw amterials
  • Impliedly accepted
    regular course of dealing where don’t object, or
    all partners run partnership without limitations

note express / implied usually responsibility for a specific thing

25
Q

When will a partner have APPARENT authority to bind partnership or LLP?

A

(apparent to a TP even though they weren’t)

  1. Relates to business carried out by firm
    (e.g. trucks)
  2. Would expect partner to have that authority;
    (e.g. cos director)
  3. They didn’t know partner didn’t have authority; AND
    (e.g. didn’t know u coudln’t ffs jo!)
  4. know or believe to be a partner
    (e.g. dealt w u before!))

^ first 2 objective, second 2 subjective ^

(basically was it sensible for the other party to think this person could bind the partnership - first 2 objective)

26
Q

If a partner acted with apparent authority, will the firm have to bear all losses to TP?

A

Firm liable

Partner liable to indemnify

27
Q

Would partnership or individual partner be liable for TORTIOUS act of individual partner?

A

Always partner

Under PA firm liable too if partner acts:
- ordinary course of firm’s business or
- authority
(e.g. we all kept the ferry like that)

28
Q

How does joint and several liability work?

A

Claimant can sue any or all and collect damages from any or all of them

D left to seek a contribution from any the other partner(s).

29
Q

What’s a novation agreement?

A

Between retiring partner, creditor and other partners (inc any incoming) - usually re loans

Retiring partner won’t be liable for existing debts (from when were partner) - new version of firm liable

Need consideration for creditor if no incoming partner OR execute as deed

(deed not require consideration!)

Pretty rare

30
Q

Difference between indemnity and novation agreement

Disadvantage of indemnity?

A

Creditor not party to indemnity

Indemnity re existing debts between exiting and remaining partners

Creditor can still sue retiring partner - then claim indemnity to meet liability

Remember for indemnity it is only as good as the remaining partners

31
Q

When will retiring partner escape liability?

A
  1. Novacation (exempt from liability)
  2. s36 PA 1890
    (i.e. notice given that partner is leaving)
32
Q

s36 PA 1890

when is it not needed

A

Retiring partner escapes liability if they weren’t a partner at time contract was entered and actual notice given, i.e.:

  • If had dealings - once told them
  • Not had dealings - Gazette notice

no notice required if reason for ceasing to be a partner is death or bankruptcy
estate of deceased or bankrupt is not liable if incurred after death or bankruptcy

33
Q

When will someone have held out and when will they be liable?

A

They or someone else (with their knowledge) described as partner to creditor

(e.g. when not a partner or retired)

Can be:
- in writing (eg name on letterhead/website)
- oral (e.g. aware others telling still partner and not corrected); or
- conduct (eg representing firm in previous dealings)

Creditor can personally sue that person if show:
- held self out or allowed to be held out; and
- gave credit to firm as a consequence

e.g. not objecting if fail to remove from letterhead

this is why it is important that comply with s36 - if fail to, would be holding out and personally liable if creditor relied on

34
Q

Possible defendants for creditor?

A
  1. Partner contracted with
  2. Any partner at time entered
    - they can claim indemnity from others
  3. Partnership as a whole (i.e. all partners in firm name)
    - jointly liable
    - can use partnership assets and personal if nothing else

If against one partner, court can order another to pay contribution.

35
Q

What tax must partners pay?

A
  • VAT, National Insurance and either income or corporation (depending on if partner is individual or a company)
36
Q

What happens if partnership insolvent?

Can they use rescue procedures?

A

Wound up as unregistered company

Can use rescue procedures
e.g. voluntary agreement with creditors
apply to court for administration order

37
Q

Liability between partners when one leaves - how is it resolved?

A

Partnership Agreement: should set out mechanism for valuing outgoing partner’s share

Often leave money in bank account to satisfy any outstanding liabilities

If partners and outgoing partner both sued by creditor for debt incurred before left, outgoing partner may have to pay TP because always remain liable to TPs
(even if left money in bank account)

However may have contractual right under partnership agreement to be reimbursed

OR could try and claim indemnity under PA on basis that have already incurred liabilities in ordinary and proper conduct of business

see example 1 makes sense

e.g. 1.:
- 3 Partners. Each contribute 10k.
- One is leaving. Assets are now 100k. I am entitled to 100k/3.
- But there are debts of 10k. Divide by 3. That amount is deducted.
(that is the amount I’ve left in)
- If creditor comes for me after left for debt from when I was partner, will need to pay
- Can claim indemnity via PA or Partnership Agreement s 24, presuming those debts ordinary/proper course.

eg
sued from debt when he was a partner
left money in bank account
will have to pay to TP but then claim against remaining partners for indemnity on basis left money in bank account

38
Q

Enforcement against partner who can’t pay for debt (either TP or other partners)

A

TP - enforce in usual way (charge over property and order of sale or seize assets)

Partnership - same as above but may also have right to expel

39
Q

LLP - when will members be liable for insolvent LLP?

A

Misfeasance (carelessness), fraudulent trading and wrongful trading

40
Q

LLP - no LLP agreement, what applies?

A

LLP Regulations 2001

41
Q

What must LLP do with admin re charges?

A

Keep at registered office a register of charges

Any creditor or member inspect for free

42
Q

Formalities: how can an LLP add or remove a member?

A

add LL in front of stuff. same with IN01. and bobs your uncle.

(form registrar CH 14 days)

Add:

Check LLP Agreement

Then deliver notice to Registrar within 14 days

LLAP01 (individual) LLPAP02 (corporate)
- form to CH - need same details as if adding

Remove:

LL TM01 or LL TM02 (individual/corporate) at CH 14 days

43
Q

What is default statute if no agreement in an LLP?

A

LLP Regulations 2001

44
Q

Default position LLP if no agreement

A
  1. Share capital and profits equally
    (losses irrelevant cos SLP)
  2. All members may manage, no £ for managing
  3. Unanimous for:
    - changing nature of business
    - terms of contract between members
    - adding new partner (?)
  4. Leave if reasonable notice
  5. Can’t expel
    - even if bankrupt
45
Q

Alternatives to automatic dissolution if no PA

(and u are the partner looking at going)

A
  1. remaining partners buyout share
    - could seek interest on outstanding sum and indemnity cos remain liable loans/debts
    (no replacement partner)
  2. treat capital as loan
    (could take security for the loan eg mortgage)
  3. offer to help find substitute partner
    (need to like each other)
    (partnership may improve)
  4. continue partnership but request improvements
    (strong bargaining position)
    (partnership agreement giving more control)
46
Q

Is there a right to retire under partnership act?

A

No

Just to terminate by leaving

47
Q

Entitlement of partner to interest under partnership act?

(what rate, what payments entitled)

A

5% per annum on:

1.
payments made by partner for purposes of partnership - not on capital which agreed to pay

must be to:
- a third party; or
- advance or loan to partnership

  1. outgoing partner’s entitled 5% interest on share until received from other partners
    (or court may order otherwie)

If want interest on capital, must be agreed by partners

48
Q

if got two partners, should decisions be made unanimously or majority?

A

unanimously

cos otherwise would never get a majority

49
Q

When would it not make sense for partners to amend partnership act so that they get interest on capital?

A

Invested same amount and share profits equally

Since would receive same amount of interest - same outcome as if no interest was made

50
Q

What to be conscious of when using word “retirement” in partnership agreement?

A

Is that actually the client’s instructions?

Or have they said they want it to terminate if one gives notice.

Is there only two of them - if one retires, won’t be a partnership anymore cos just one person.

READ below:
e.g. A and B run partnership. Either can leave by giving notice. Other party then has option to buy share.

This is a right to terminate, not a right to retire. (if buy new share, would constitute new partnership).

So should be:
“Right of Partner to Terminate the Partnership on Notice”

51
Q

What parts of Partnership Act can you NOT amend?

A
  1. when partnership comes into existence
    (i.e. two common view profit)
  2. reli with TPs (esp for debts)
    (I guess they aren’t parties to it !)
52
Q

What is applied by partnership act UNLESS AGREE OTHERWISE?

(so have right to amend)

what section is this?

A

s 24

  • each partner may take part in management
  • no renumeration for management
  • 5% interest p/annum on payment to partnership, other than initial capital
  • not entitled to interest on initial capital
  • share capital and profits and losses equally
  • indemnify if borne more than share of liabilities
  • Unanimous consent for introducing partner and changing nature of business
  • Each partner right to inspect partnership books
53
Q

Indemnity implied by PA

A

Proper / ordinary course of business. Incurred liability. Partnership (ie other partners) must indemnify u.

Also if acted with apparent authority and other partners been liable to TPs, indemnify.

Also civil contribution act allows court imply indemnity if borne more than share.

54
Q

PA checklist

A
  1. Name
  2. Commencement date and duration
  3. Termination
    - notice requirement
    - will not automatically dissolve if __
  4. Capital
    - must contribute XYZ
    - interest?
    - separate account?
  5. Partnership property
    - acknowledge as personal?
    - indemnify?
  6. Share of capital + income profits and losses
    - capital before and after dissolution
  7. accounts
    - who by? when? format?
  8. authority
  9. management
    - how often meetings
    - VRs?
  10. arrangements admitting new partner
  11. automatic dissolution?
    - circumstances
  12. retirement
    - notice
    - INDEMNITY to them
  13. expulsion
    - when? percentage required?
  14. restrictive covenants
  15. governing law and jurisdiction and ADR

could also inc:
- indemnity for contributions / potential liability incurred before the PA

55
Q

LLP agreement checklist

A
  1. capital and profits
    - not losses cos SLP
  2. management
    - default is no renumeration and can all manage
  3. decisions
    - default is unanimous to change terms between members or nature
  4. leaving LLP
    - default is reasonable notice and cannot expel
    - could amend so bankruptcy ends their membership
56
Q

What to consider if changing how can vote?

e.g. need unanimous

A

more cumberstone

reduce financial risk

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