Partnership Law

• a partnership is defined in UK law as “the relationship which subsists between two or more people carrying on business in common with a view to profit”

• much of present-day partnership law is contained in the Partnership Act 1890

• partners may agree amongst themselves how their firm is to operate, so long as their arrangement is legal

• the business must be being “carried on“. It should be more than a one-off transaction, and must be continuing

• it must be “with a view to profit” and is more than the simple sharing of gross revenues

• if a business relationship satisfies the definition, the courts may well determine that a partnership exists, regardless of any written documentation (or intention of the parties) to the contrary

• as a general rule, partners in a firm are jointly and severally liable for partnership debts

• every partner is an agent of the firm and the other partners for the purpose of the business of the firm

• the acts of every partner done in the course of the firm’s business bind the firm and the partners unless the partner was exceeding his authority and ……

• ... the other party knew that fact, or was not aware that the person was a partner

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1 The Agreement

• partnerships are formed by agreement, and the internal arrangements are a matter for agreement amongst the partners

• partners can agree to do anything - so long as it’s legal

• because a partnership is formed by agreement, it is also capable of being amended by agreement ....

• and terminated by agreement

• typical matters to be agreed upon include:-

  • accounts and audit

  • division of profits and, therefore, also sharing of losses

  • drawings allowed to be taken in advance of being credited with a share of profits

  • capital of the firm and respective contributions of each partner

  • interest payable on capital contributions or chargeable on overdrawn current accounts

  • salaries of partners before profits are shared

  • current accounts as well as fixed capital accounts, or just one combined account for each partner

  • goodwill computation basis

  • time period for which the partnership is to last. If no time period is specified, this is a “partnership at will”

2 1890 Act

in the event that partners fail to make an arrangement about some matter which is later disputed, then the Partnership Act 1890 establishes what should happen. The main provisions are :- (medics in bed)

• management entitlement for all partners

• equality of profit share

• derived benefit, without consent of the other partners, should be paid back into the firm

• indemnity by other partners where one partner incurs a personal liability when doing anything necessary to protect the firm or its property

• competing business profits, gained without consent, should be paid back into the firm

• salaries - no automatic entitlement

• interest on capital not payable, but interest at the rate of 5% per annum is payable on loans and advances

• made to the firm over and above agreed fixed capital

• no new person may be introduced into the firm as a partner

• books of account shall be available for inspection by any partner at any time

• expulsion of a partner requires unanimous consent

• disputes concerning the business of the firm are settled by majority vote but no change in the nature of the firm’s business may be made without unanimous consent

3 Dissolution Grounds – Automatic and by Court Order (dissolutions)

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• death of a partner

• insolvency of a partner

• sending notice in a partnership at will

• share pledged by partner to settle private debts

• object of a joint venture is complete

• lapse of time where partnership formed for a specific period

• unable to carry out one’s obligations created by the partnership agreement

• termination by the Court under the principles of “just and equitable”

• insanity of a partner

• only able to carry on the business at a loss

• naughty conduct calculated to affect the carrying on of the firm prejudicially

• shirty conduct - persistent breaches of the partnership agreement

• the first six are all objective matters of fact, whereas

• the last six have to be proved in a Court and the dissolution is as a result of the Court’s subjective decision

• on dissolution, firm assets are applied to outside creditors, partners’ advances, capital and then any surplus; a retiring partner remains liable for existing debts unless released and should give notice to existing and potential creditors

4 LPA 1907 and LLPA 2000

• Limited Partnerships Act 1907 main features are :-

  • at least one general partner (with unlimited liability) and one limited partner (with limited liability)

  • must be registered with the registrar of companies

  • limited partner should take no part in the management of the firm

  • if the firm becomes bankrupt, only the general partners are liable for the firm’s debts

• Limited Liability Partnerships Act 2000 main features are :-

  • combination of the advantages of a partnership with those of a limited company

  • must be registered with the registrar of companies

  • an LLP is a separate legal person; it must register and file accounts and confirmation information, but may be audit-exempt

  • as a separate legal entity, the partners are not liable for the firm’s debts, thereby protecting themselves from personal disasters. However, the provisions relating to wrongful and fraudulent trading apply.

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5 Partnership compared with company (learn fast rats)