Partnerships Chp 1-6 Flashcards
Name the three types of partnership, a defining feature and the law that governs them.
Ordinary / unlimited partnership (partners remain personally liable for debts of partnership) Partnership Act 1890
Limited partnership (rare, specialist investment purposes)
Limited Liability Partnership (LLP) Limited Liability Partnership Act 2000
What is the definition of a partnership?
s1(1) PA 1890“Partnership is the relation which subsists between persons carrying on a business with a view of profit.”
There must be:
A business in common
Carried on for profit
By or on behalf of the partners
One of the two key elements of a partnership is ‘business in common’. What is the definition, statute and relevant case law?
- s45 PA 1890 a business in common is ‘every trade, occupation or profession’.
- Normally a continuing activity (Mann v D’Arcy 1968) but can be one-deal venture e.g. purchase/re-sale of property.
- Business needs commercial recognition (i.e. plumbers/solicitors)
- s2 joint ownership of property does not itself create partnership unless they carry on business with respect to it
- Preparatory steps to get business going before company formed not sufficient Spicer v Mansell 1970
- A partnership may exist before trading Khan v Miah 2001
The second key element in the definition of a partnership is carrying on ‘with a view of profit’. Define
Intention to make profits essential (although badly run no profit business could still be partnership)
s2(3) PA 1890 A share of profits implies partnership but other factors must be taken into account. Cox v Hickman 1860
Walker v Hirsch 1884 - although sharing profits facts pointed towards employee rather than partner
Hodson v Hodson 2009 - did not receive share of profits but court found partnership based on clear intention of parties
When someone lends money to a business in return for share of profits, is the lender a partner?
No, s2(3)(d) states this does not by itself make the lender a partner as long as the contract for the loan is in writing and signed.
If not, the lender is taken to be a partner Re Fort 1897
or alternatively court must examine the relationship to decide the matter
Is tax planning deemed a profit motive for the partnership test?
Yes, tax planning is deemed a profit motive for the partnership test Newstead v Frost 1980
In the ‘view of profit’ partnership test, what case is useful to provide an overview of the factors relevant to determine a partnership?
Geary v Rankine 2012 - No partnership
Owner R of guest house managed by G, not paid salary nor held our as partner.
- Not paid salary may have suggest partnership, however
- Business accounts described ‘sole trader’
- No evidence of intention to share profits
- No held out as partner
- No joint bank account
- R told G would remain sole name so as to prevent G becoming personally liable for debts
What is typical in a partnership agreement?
- Names of partners and business
- Address
- Capital and increases in
- Duration
- Division of responsibility
- Management - equal partner say?
- Staff employment / dismissal
In what forms can you have a partnership agreement?
A partnership agreement is governed by PA 1890 and any agreement between the parties.
The agreement can be express (general law of contract applies)
It can be implied (PA 1890 will govern)
It cannot be formed for illegal or immoral purposes or against public policy
Is it unlawful to discriminate in partnership?
Yes, it is unlawful to discriminate in partnership
Equality Act 2010 s44 can apply to a two partner firm
Unlawful to discriminate when deciding offering/not offering positions
In a partnership what are the requirements around the name?
May trade under own name or use business name
Part 41 CA 2006 governs use of business names
Offence to use name suggesting connection with gov/local/public authority without Sec or State consent
In a partnership where must the names of business/partners be displayed?
In a partnership the names of business/partners must be displayed
- business letters
- written orders
- written demand for payment
- on a notice anywhere carry on business
- over 20 partners names not needed as long as address and stmt names can be inspected there
What are the three types of ordinary partnership?
- Single venture or undertaking
- Fixed term
- Undefined time
How do you dissolve a partnership for a single venture or undertaking?
Dissolved by completion of venture or undertaking
How do you dissolve a partnership for a fixed term?
Dissolved by expiry of that term
How do you dissolve a partnership for an undefined time and what are the two relevant cases here?
A partnership for an undefined time can be dissolved by notice ‘partnership at will’.
s26 PA 1890 - partner can also dissolve where no fixed term has been agreed.
Moss v Elphick 1910 - no duration but said ‘by mutual arrangement’. Partners can only serve notice where partners have not agreed any rule of their own about termination.
Walters v Bingham 1987 - fixed but indefinite term ‘until new partnership is agreed’ therefore cannot serve notice.
In partnerships what is the rule & statute about management?
S24(5) PA 1890: Every partner may take part in the management of the partnership business
Subject to express/implied agreement
What is the legal relationship in a partnership?
Contractual
PA 1890 confers rights and duties which may be altered by express/implied agreement
In a partnership, what underpins specific duties to which partners are subject?
Fundamental to the legal relationship between partners is the unexpressed principle of a duty of a utmost good faith.
What is the partnership majority rule statute?
s24(8) PA 1890
Decisions taken by partners are subject to majority rule
A change in partnership business requires unanimous consent.
Why is it important to determine what is partnership property (3 reasons)?
For partners - is the increased value to firm or partner
For creditors - firm pays firm creditors, persons themselves pay personal creditors
To those entitled to share of deceased partners estate
What are the three ways property can become partnership property?
Statute and three cases.
S20 PA 1890
- Brought into partnership stock
- Acquired on account of the firm. Wray v Wray 1905 contract signed in name of partnership held.
- Acquired for purposes of partnership & in course of business
Must be intention to use as partnership property Davis v Davis 1894.
Implied intention will not normally be applied unless necessary to give ‘business efficacy’ to partners agreement Miles v Clarke 1953
What rule governs the working relationship between partners?
S24 PA 1890, unless agreement to the contrary
What are the rules on partnership sharing profits & loss?
s24(1) PA 1890 Partners share equally both capital and profits but must contribute equally to losses
Capital: Unequal contribution = unequal share on dissolution
Profit: Equal unless otherwise agreed
Contribution to loss: same proportion as profit unless otherwise agreed
When does a partnership indemnify the partners in respect of payments made and personal liabilities incurred by them (two situations)?
s24(2) PA 1890
In the ordinary and proper conduct of the business of the firm; or
in or about anything necessarily done for the preservation of the business or property of the firm
What are the rules around interest payments in a partnership?
s24(4) No interest is payable on capital unless agreed
s24(3) Any money received in addition to capital contribution (i.e. loan) interest at 5% unless agreed otherwise
What are the rules about management and payment for management in a partnership?
s24(5) PA 1890 - every partner may take part in management
s24(6) PA 1890 - Partners are not entitled to payment for management (unless agreed)
Stekel v Ellice 1973 - salaried partner can be a full partner
Is a partner able to introduce a new partner without the consent of all the other partners?
Is this different from a company with shareholders?
s24(7) No person can be introduced as a partner without unanimous consent
If agreement provides partner may nominate a new partner - others are bound else specific performance entitlement Byrne v Reid 1902
Where must partnership books be kept?
s24(9) Partnership books must be kept at place of business and every partner must have access
Must not use extracts/copies for purposes hostile to firm Trego v Hunt 1896
How can you expel a partner?
s25 PA 1890 No majority can expel a partner without express agreement
Express power must be exercised in good faith for the benefit of the firm as a whole Blisset v Daniel 1853
If improperly expelled - injunction to reinstate
What are the duties of partners to each other?
Overriding duty of good faith
- s28 PA 1890: render true accounts and full information.
- s29 PA 1890: Account for any secret profit. May retain with consent on full disclosure
- s30 PA 1890: not to carry on business of same nature and competing (must account for and pay over profits)
- s31 PA 1890: can assign share in partnership, subject to agreement otherwise. Assignee will be entitled to profits but not admitted as partner or participate in mgmt, books and assignor still liable for debts until fully admitted as a partner
- Tann v Herrington 2009 - owe each other objective duty of care and skill (reasonable person). In negligence a partner may be liable if it was gross or culpable
What law governs the acts of partners to bind?
Governed by the law of agency as adapted to partnerships.
Partners who act do so as agents of the firm. They can only bind if they have authority.
Aside from express authority, what implied authority is conferred on a partner?
Implied authority on a partner is that reasonably assumed to be enjoyed with the agents position
s5 PA 1890: carrying on in the usual way AND business of the kind carried on by the firm.
What restrictions are there on a partners authority to bind with third parties?
Even if a partner is carrying on business in the usual way AND business of the kind carried on by the firm the firm will not be bound if
s5 PA 1890: the third party knows the partner has no authority or are not/believe not a partner
s8 PA 1890: Act done by a partner in contravention of an agreement between partners restricting authority and third party aware
Explain ‘carrying on in the usual way’ in relation to partnership implied authority
Carrying on in the usual way involves identifying usual activities within the authority of a partner of that type of firm
Trading firm (buying/selling goods) - borrowing, contracting debts, engaging staff, employing solicitor to act. Wider authority than below
Non trading firm (prof. or other services)(auctioneers, quarry workers) - cannot draw/make/accept/issue negotiable instruments. Cannot borrow or pledge property. No implied authority to bind in respect of debt (Higgins v Beauchamp 1914)
Explain ‘business of kind carried on by firm’ in relation to partnership implied authority
Includes not only usual business activities, but also those which are usually carried on by a firm of that kind.
For solicitors, it extends to investment advice - Polkinghorne v Holland 1934 but not to abnormal investment schemes - JJ Coughlan v Ruparelia 2003
What does s9 PA 1890 say about partnership liability?
s9 PA 1890: Every partner is jointly liable for all the debts and obligations of the firm incurred while they are a partner.
Each partner then has unlimited liability for the firm’s debts.
In what circumstances is a firm responsible for the wrongful act or omission of a partner?
s10 PA 1890
- Authorised by co-partners
- Occurs in ordinary course of firm’s business.
- Closely connected with acts they are authorised to do - Dubai Aluminium v Salaam 2003
It does not matter whether firm benefits from wrongful act.
s12 PA 1890 every partner is jointly and severally liable for wrongful act/omissions for which the firm as a whole becomes liable
What are the two circumstances in which under s11 PA 1890 the firm is liable for the misapplication of money/property?
S11 PA 1890
- One partner within scope of authority receives and misapplies it
- Firm in course of business receives and it is misapplied by one or more of the partners
In what circumstances if a person who is not a partner of a firm still be held liable as if they were?
s14 PA 1890
- If they represented themselves to be a partner
- They knowingly allowed others to represent them to be a partner.
In either case creditor claiming must show they gave credit in reliance on those representations.
A clear and unequivocal declaration of partnership is required if a claim is to be founded on S14 - Elite v Price 2005
What is the rule under s36 PA 1890?
Under s36 PA 1890 a person dealing with a firm after a change is entitled to treat all apparent members of the old firm as still being members until he has notice of the change
London Gazette advertisement constitutes notice.
Under s36(3) PA 1890 the estate of a partner who dies/bankrupt/retires is not liable for debts contracted after date of death/bankruptcy/retirement.
In what seven situations does a partnership come to an end?
- Mutual agreement (can be oral)
- Express agreement under terms of partnership agreement (e.g. guilty of flagrant breach of duties, Carmichael v Evans 1904)
- Expiration or notice s32 (if by mutual agreement only it’s not undefined term - Moss v Elphick 1910). Written notice not required Walters v Bingham 1987
- Death/bankruptcy or charges their share of partnership property for personal debt s33
- Illegality (event making it unlawful for firm to carry on) s34
- Arbitrator
- Court s35
On the application of a partner, what five situations does the court have jurisdiction to dissolve a partnership under s35 PA 1890?
- Permanent incapacity
- Prejudicial conduct (must cause in/direct damage to business/reputation)
- Persistent or wilful breach of partnership agreement
- Carrying on at a loss (insolvency not necessary)
- Where it is just and equitable (i.e. hostility, refusal to hold meetings)
What happens to a partner’s authority and duties after dissolution?
s38 PA 1890
After dissolution the partner’s authority/rights/duties continue to wind up affairs.
If court appoints receiver or receiver and manager, authority terminates
What is the definition of goodwill in respect of partnerships and can it be sold?
Definition of goodwill “advantage of reputation & connection built up by years of honest work or gained by lavish expenditure of money” Trego v Hunt 1896
Goodwill is a partnership asset and subject to agreement every partner is entitled to have it sold for the benefit of all parties. Re David and Matthews 1899
What are the rules for the distribution of assets in partnerships?
s44 PA 1890
-
Losses, including capital shall be paid out of
- profits
- capital
- last, if necessary, in proportion they share profits
-
Assets are to be used
- paying debts to persons other than partners
- paying to each partner rateably what is due for their advances (loans)
- paying to each partner rateably what is due in respect of capital
- anything left divided among in proportion in which profits are divisible
s44 applies in all circ. except where there is agreement to contrary, regardless of partner’s conduct Hurst v Bryk 2000
What can happen to an insolvent partnership?
May be wound up under Part V IA 1986 as an unregistered company.
Bankruptcy proceedings may be brought concurrently against partners.
Partners are treated as company directors and may be liable to disqualification from acting as directors in future.
What law governs limited liability partnerships?
Limited Liability Partnership Act 2000
Is the LLP a separate legal person?
Yes, the LLP is a separate legal person
In an LLP who is responsible for debts and liabilities?
The LLP, rather than its members, is responsible for its own debts and liabilities. The members enjoy limited liability.
Is the tax treatment of an LLP like an unlimited partnership or a company?
Unlimited partnership
What are the two possible causes of action open to a claimant in a tort action, against an LLP member?
- Contractual action against the LLP
- Tortious action against the partner
How many members do you need to incorporate an LLP?
Two members associated for the purpose of carrying on an lawful business with a view of profit.
When does membership of an LLP end?
- Death
- Dissolution
- Agreement with other members or in absence of agreement, giving reasonable notice
LLP member rights and duties are laid down in a partnership agreement. In its absence, or failure of provision what six rules apply and what regulation governs?
Reg 7 Limited Liability Partnership Regulations 2001
- Equal profit/capital share and participate in management
- Indemnify each member - payments & personal liabilities incurred in proper/ordinary course of business
- No entitlement to remuneration
- New members require unanimous consent
- Disagreements on ordinary matters - majority rule (bus. nature changes = unanimous)
- Must account for any benefit derived by them from anything concerning LLP, without consent
Do LLP members have authority to act? Are LLPs bound by the actions of their members?
Yes, under s6 LLPA, every member is an agent.
LLPs are bound by the actions of their members, unless no authority and third party knows.
Transactions with former member continue to bind LLP unless other party has been told no longer a member or Registrar has received notice to that effect.
Are LLPs wound up in the same way as companies?
Yes, under IA 1986
In what circumstances is a member of an LLP liable to contribute to the assets in the event of an insolvent winding-up?
- If they have agreed to do so
- Under s214 IA 1986 if within 2 yrs within commencement of winding up they withdrew any form of property and believed LLP was unable to pay its debts, would become unable to pay its debts on withdrawal
Do the provisions of Company Directors Disqualification Act 1986 apply to LLPs?
Yes, with appropriate modifications.
What are the main features of a partnership?
- Relationship between persons carrying on a business with a view of profit
- Governed by PA 1890 or terms agreed
- Debts - members generally liable jointly & severally without limit
- Ends on breakdown of personal relationships
- Assets - jointly owned by members
- Capital - can generally be freely distributed by or between partners
- Management - all partners free to manage & bind co-partners to contracts on behalf of the firm
What happens if there are two directors and one refuses to attend a meeting to make it quorate?
s306 CA 2006 the court can order a meeting to be held and specify the quorum, therefore using s306 to permit a meeting to take place with a single member present.
Union Music v Watson 2003 ordered meeting with one shareholder but only allowed one item of business; the election of an additional director.
Are unanimous and informed agreements equivalent to formal resolutions?
Yes, Duomatic 1969
