Partnerships frequently encounter difficulties and this can result in a partnership dispute.
What is a Partnership?
A partnership ‘is the relation which subsists between persons carrying on a business in common with a view of profit’
There are three types of partnership
- A Partnership created under the Partnership Act 1890
- A Limited Partnership established under the Partnership Act 1907 and
- A Limited Liability Partnership established under the Limited Liability Partnership Act 2000.
Does a Partnership exist?
Section 2 of the Partnership Act describes the key indicators of the existence of a patnership. They include the co-ownership of property and the sharing of profits and interest. Effectively, in the absence of the existence of a registered company then the Partnership Act definition will apply to any relation which subsists between persons carrying on business in common with a view of profit.
Partnerships created under Partnership Act 1890
A partnership agreement can come into existence orally, by agreement or through conduct. Partners have a wide discretion to decide the terms of their relationship. Where a formal contract exists then partners are bound to each other by its terms. In the absence of a contract then partners are bound under the auspices of the Partnership Act.
Who is a Partner?
Section 14 of the Partnership Act 1890 provides that:
Everyone who by words spoken or written or by conduct represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.
This is known as holding out. In other words a person allowing themselves to be represented as a partner by a firm would be as liable as if they were a partner. An example of this would be a solicitor or an accountant appearing on headed paper as a partner when in fact they are merely a consultant to the firm.
Power of Partners to Bind the Firm
Section 5 of the Partnership Act provides that every partner is an agent of the firm and as such the acts of every partner, when carrying on in the usual way business of the kind usually carried out by the firm will bind the firm. Section 6 of the Act provides that a single partner may execute contracts on behalf of the other partners. For example, a firm supplying paper would be bound by a contract signed by one partner to supply and deliver paper to a particular business regardless of whether the other partners were parties to that contract or had notice of it.
Liability of the Partners
Every partner in a firm is liable jointly with the other partners for debts and obligations of the firm incurred while he is a partner; and after his death his estate is liable. The Patnership Act also makes each partner liable for any wrongful act or ommission by any partner and the misapplication of any money.
Liabilities of Incoming Partners
Under Section 17 of the Partnership Act a person who is admitted as a partner does not become liable to the creditors of the firm for anything done before he became a partner. In other words, if the partners have run up debts prior to a new partner entering the firm then the new partner is not responsible for those debts.
Other Key Elements of the Partnership Act
On any issue about which any alternative contract is silent the Partnership Act will also apply.
Salaries (Section 24(6))
If any agreement in existence is silent then partners are entitled to equal salaries.
Interest (Section 24(3))
Partners are entitled to 5% on any capital they advance in excess off their obligations under the terms of the partnership. There is however, no entitlement to interest on capital until profits have been ascertained.
Capital Profits or Losses
These are shared equally in the absence of an agreement to the contrary. This can be particularly difficult in cases where partners have provided unequal initial contributions to the firm.
Management Section 24(8))
A simple majority prevails unless otherwise stated in any contract or agreement.
Utmost Good Faith
Section 28 creates a duty to render each other true accounts and full information of all things affecting the partnership to any partner or his legal representatives. This establishes a duty of utmost good faith.
Accounting to other Partners for any Benefit
Section 29 provides that ‘every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property
Section 30 creates a duty not to compete with the firm or enter into a similar business without the consent of the other partners in the firm.
Dissolution of the Partnership and Post Dissolution Issues
Duration of the Partnership
The Partnership Act provides that a partnership can be terminated at will at any time. This means that any partner can terminate the partnership with immediate effect. This is obviously unsatisfactory for the purposes of most firms.
Dissolving the Partnership
Death/bankruptcy and retirement have the effect of dissolving a partnership.
Expulsion of the Partners
This is impossible without an express provision having been made within a partnership agreement.
Paying for an Outgoing Partners Share
It is quite common for partners to have provided capital in unequal shares. In the absence of an agreement to the contrary the Partnership Act provides that all partners are entitled to equal shares of profits and losses.
Liability of Outgoing Partners for Debts
A partner retiring from a firm does maintain liabilty for debts and obligations incurred prior to leaving the partnership. It is normal in such circumstances for an agreement to be framed in a way that
Under the Limited Partnership Act 1907, Limited Partnerships are created with the aim of limiting a partner’s personal liability for debts incurred by the partnership. Partners are not responsible for any debts over and above their partnership capital. The firm is still liable on an unlimited basis.
Limited Liability Partnerships
Under the Limited Liability Partnerships Act 1990 Limited Liability Partnerships operate in a very similar way to limited companies. The key advantage of such partnerships is partners are prevented from being fully liable for a firm’s debt.