Unit 2 Partnership Flashcards
General Partnerships - What is a partnership?
When two or more persons are ‘carrying on a business in common with a view of profit’.
Partners often unaware they are in one.
No separate legal personality.
General Partnerships - Partnership Act 1890
Provides a default contract.
Agreements can also be implied by conduct, in circumstances where a partner has acted in a certain way over a period of time and the other partners have not objected.
Some sections from the act cannot be overridden e.g. ss 1 and 2, which govern when a partnership comes into existence, and ss 5– 18, which cover the relationship between the partners and third parties, and in particular, liability for debts.
General Partnerships - Starting a partnership
No formalities are required to start a partnership.
General Partnerships - decision making
All decisions in a partnership must be taken by majority.
Exceptions, must be made unanimously:
* changing the nature of the business
* introducing a new partner
* changing the terms of the partnership agreement
General Partnerships - Expulsion
No majority of partners may expel another partner unless the partners have expressly agreed to this.
Partnership agreements will often therefore contain an expulsion clause. This will sometimes be linked to poor performance.
General Partnerships - Dissolution
= partnership ending. Doesn’t mean have to stop trading. Contractual relationship between partners will come to an end.
Under the PA 1890, a partnership is dissolved (can be disapplied by agreement):
* s32 if entered into for undefined time when one partner gives notice
* s32 if entered into for single adventure or undertaking and that is terminated
* when a partner retires;
* s32 on expiry of a fixed term; or
* by the death or bankruptcy of any of the partners; or
* if the partners give notice of dissolution to a partner who has (by order of the court) granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole.
Partnerships also dissolve automatically if something happens which makes it unlawful for the business of the firm to be carried on.
Can also apply to court under s35 for an order of dissolution:
* a partner becomes permanently incapable of performing their part of the partnership contract;
* a partner’s conduct is calculated to be prejudicial to the business;
* a partner wilfully or persistently breaches the partnership agreement;
* the partnership can only be carried on at a loss; or
* the court thinks that, for other reasons, it is just and equitable to order that the partnership be dissolved.
General Partnerships - Dissolution - effect
Automatic dissolution undesirable = means partnership must end, all assets sold and outgoing partner receive their share, unless all partners agree otherwise.
An outgoing partner can insist on the business being sold. Partnership agreement should state remaining partners can continue = partial dissolution.
If agreement does not address issue of payment. Outgoing partner entitled to 5% per annum of the value of their share.
General Partnerships - Goodwill
= a business’s reputation and the value of its clients and contacts.
If assets sold individually goodwill will not be part of price.
If sell as going concern, part of its value will be goodwill.
General Partnerships - Distribution of proceeds of sale
- First of all, creditors of the firm must be paid in full. If there is a shortfall, the partners must pay the balance from their private assets. They will share the losses in accordance with their partnership agreement.
- Secondly, partners who have lent money to the firm must be repaid the amount outstanding on the loan, including interest.
- Thirdly, partners must be paid the share of the partnership’s capital to which they are entitled.
- Lastly, any surplus is shared between the partners in accordance with the terms of their partnership agreement.
General Partnerships - Restraint of trade
No implied restraint of trade in PA 1980.
Restrict outgoing partners is their business dealings once they have left the partnership.
Only be enforceable if it protects a legitimate business interest.
General Partnerships - Partners’ responsibilities under the PA 1890
Common law - partners owe a duty of the utmost fairness and good faith towards one another.
ss 28 to 30 PA 1890 -
Partners:
* must be completely open with one another regarding any relevant information regarding the partnership;
* must account to the firm for any private profits they have earned without the other partners’ consent from any transaction concerning the partnership; and
* must not compete with the firm. If the partner does so without the other partners’ consent, that partner must account for and pay over to the firm all profits made by them in that competing business.
Section 24 PA 1890 - partners must:
* bear a share of any loss made by the business, in accordance with the terms of their partnership agreement; and
* indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership.
General Partnerships - Actual authority
Firm bound by any contract or deed entered into by partners.
- Express actual authority:
the partners may have expressly given one of the partners permission to enter into a particular transaction or type of transaction, or instructed them to enter into a particular contract on behalf of the firm. - Implied actual authority:
the partners may have impliedly accepted that one or more partners have the authority to represent the firm in a particular type of transaction. Alternatively, authority may be implied by a regular course of dealing by one of the partners to which the other partners have not objected.
General Partnerships - Apparent authority
Even if between the partners there is an express or implied limitation on the partner’s authority, the firm will be liable to third parties under s 5 PA 1890 when:
1. the transaction is one which relates 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 did not know that the partner did not have authority to act; and
4. the other party deals with a person whom they know or believe to be a partner.
General Partnerships - Personal liability
The partner who has made the firm liable by virtue of their apparent authority is liable to indemnify their fellow partners for any liability or loss which they incur, because the partner has breached their partnership agreement.
In tort e.g. negligence.
Partners’ liability for partnership debts - unlimited.
Each partner is liable jointly with the other partners for debts incurred by the partnership while they were a partner.
In a novation agreement, a retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners, and possibly an incoming partner.
No liability for debts entered into after left partnership so long s complied with s36 - anyone whom firm has dealt with must be given actual notice of the partner in question leaving.
Notice must also be put in local Gazette paper.
When a creditor of a partnership has relied on a representation that a particular person was a partner in the firm (known as ‘holding out’), they may be able to hold that person liable for the firm’s debt. E.g. name on letter headed paper, still on website etc.
General Partnerships - Enforcing the firm’s liabilities
- The claimant can sue the partner (or partners) with whom they made the contract because there is privity of contract between them.
- The claimant can sue anyone who was a partner at the time when the debt was incurred.
- The claimant can sue the firm (ie all of the partners), in the firm’s name.
Under the Civil Liability (Contribution) Act 1978, the court may order another partner to pay a just and equitable amount by way of contribution to the debt, so if the claimant does sue just one party, the others can be made to contribute some or all of the amount of the judgment.
