What is a partnership?
A partnership is defined in the Partnership Act 1958 “the Act” as “the relation which subsists between persons carrying on a business in common with a view to profit..”.
This newsletter is about partnerships under the Act.
It does not include:
– partnerships under tax law where they would not be partnerships under the Act;
– domestic partnerships between individuals;
– syndicate or joint ventures where the arrangements contemplate the division of the joint venture property (rather than the division of the proceeds of the business).
In a partnership the partners collectively are called a firm and the name under which a business is conducted is the firm name.
Must there be a written partnership agreement?
The answer is no – it is not necessary to have a written partnership agreement. It is, however, prudent to have a written agreement because it requires the partners to agree on matters which might give rise to a dispute before any such dispute arises. Clearly it is preferable to preempt any situation before a dispute about that situation arises.
Who can be partners?
Partners are normally individual persons. There is, however, no reason why a partnership cannot exist between companies, between trusts, or between individuals or any combination of these entities. Given that each partner has unlimited liability under the Act it would be unwise for an individual to enter into partnership with a limited liability company – the individual could finish up being liable for all the partnership debts.
If anyone who is not a partner represents himself, or knowingly permits himself to be represented as a partner, he is liable as if he was partner to anyone who has given credit to the firm on the faith of such representation.
What does a partnership agreement contain?
The contents of a partnership agreement will vary according to the requirements of each particular partnership. At its simplest a Partnership Agreement is likely to include
– the identification of the partners;
– the nature of the partnership business and the firm name;
– the shares in which partners share profits and losses;
– the procedures for entry of new partners and the exit of old partners;
– what decisions can only be taken by unanimous resolution;
– the taking of accounts, banking and cheque signing arrangements;
– financing the partnership business;
– a procedure for representing a partner (where one or more partners are companies or trusts).
The Act contains a set of rules which govern a partnership (but only to the extent that there is no contrary agreement between the partners). The rules include the following:
– all profits and losses are shared equally;
– the firm must indemnify all partners for liabilities incurred in the ordinary and proper conduct of the firms business;
– every partner may take part in the management of the firm;
– any disputes about ordinary matters are resolved by a majority vote but no change in the nature of the business may be made without unanimous consent.
How is a partnership terminated?
An allied question is how long does a partnership last. The answer to this question is that it lasts until it is terminated.
Termination of a partnership may occur:
– when the venture for which the partnership was established ends;
– if the partnership was for a fixed term, when the terms ends;
– by notice from a partner, if the partnership was for an undefined time;
– the death or bankruptcy of a partner (but this is subject to any contrary agreement between the partners.Normally death does not on its own terminate a partnership, it usually gives the continuing partners the right to acquire the interest of the deceased partner but only if the written partnership agreement so provides)
– by order of the court where a partner is mentally incapable or otherwise incapable of performing its duties;
– where a partner is guilty of misconduct such as to affect the firms business,
– were a partner persistently breaches the partnership agreement; or
– where there are other circumstances which render it just and equitable that the partnership be terminated.
On the subject of partners leaving the firm it is to be noted that unless there is express written agreement to the contrary no majority of partners can expel a partner.
Liability of a partner
First, each partner is an agent of the firm and his other partners for the purpose of the business of the partnership. Accordingly any act by a partner in the normal course of the partnership business will bind all the partners unless the partner in fact had no authority and the person he was dealing with it knew that to be the case.
Each partner is jointly and severally liable for all debts and all obligations of the firm which are incurred while he was a partner (and his estate is liable after his death).
An admission or representation by one partner about the partnership affairs and in the ordinary course of business is evidence against the firm.
Notice to one partner, who habitually acts in the partnership business of any matter relating to the partnership affairs operates as notice to the firm (except in the case of fraud).
Competing with the partnership
Section 34 of the Act provides that if any partner without the consent of the partners carries on any business of the same type as the partnership business in competition with a partnership business then he must account to the other partners (and pay to the other partners) all profits made by him in that other business.
Similarly, if any partner enters into any transactions concerning the partnership or using the partnership property, name, or business connections then he must account to the partnership for any benefit he makes. An allied obligation owed by all partners to one another is that they be just and faithful to the others.
Winding up the partnership affairs
When a partnership dissolves/comes to an end, the partners continue to have partnership rights and obligations to the extent necessary to wind up the partnership and to complete transactions which were unfinished at the time of the dissolution. If the partners cannot agree on the winding-up any partner may apply to the court to wind up the business and affairs of the firm – the court will appoint a receiver to carry out the winding-up.
On dissolution the partnership assets are applied, first in payment of the firm debts and any balance is to be paid to the partners in appropriate shares.
While the purpose of this newsletter is to generally discuss guarantees it should be noted that many guarantees contain explicit warnings about the risks assumed by a guarantor.
Unless the guarantee is essential, our recommendation is that guarantees should not be given – there is very little upside and there is very grave risk of a substantial downside.
The information in this newsletter is general. It must not be relied on without first obtaining specific advice from Henderson & Ball.