Summary Partnership Law (Distinction)

THE UNIVERSITY OF LAW




PARTNERSHIP
NOTEBOOK
LUKE ROBINSON

, BUSINESS TYPES
BUSINESS ADVANTAGES DISADVANTAGES
 Very easy to form  Unlimited liability for debts
SOLE TRADER  Freedom to run as you like  Lacks ‘incorporated’ status
 All profits are the owner’s  No day-to-day support
 No formalities: very easy to form  Unlimited liability for debts (each partner
 Freedom to run as they like fully liable without limits)
 Allows commercial secrecy  Cumbersome decision making
PARTNERSHIP  Tax-relief for start-up losses  Uncertainty without agreement
 All profits are the Partners’  Can create fixed but cannot create a
 No prescribed management structure floating charge
 Apparent authority will bind the firm
 Limited liability for debts  Must register, formality, costs
 Greater status  More legal duties and liabilities
LIMITED COMPANY  Potentially many investors  Information is public
 Profits are the company’s
 Limited liability for debts  Must register
LLP  Freedom to run  Information is public
 Support of joint-decisions  Extra formality and costs




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, FORMATION & AGREEMENTS
 All decisions taken on a simple majority basis (s24(8))
DECISION-MAKING  Unanimity is required on three occasions:
1) Introducing a new partner (s24(7))
2) Change in nature of the business (s24(8))
3) Varying the Partnership agreement
 If a partner has entered into a contract, consider if it will bind the firm
 If Partner had actual authority, the firm is bound (s6)
ACTUAL & APPARENT  If the Partner had apparent authority (below) the firm is bound (s5)
AUTHORITY 1) Transaction relates to the business of the firm; (objective)
2) A Partner would normally be expected to have authority; (objective)
3) 3rd party did not know that X had no authority; (subjective) and
4) 3rd party knew or believed X to be a Partner (subjective)
 Fiduciary duty of utmost good faith (Const v Harris)
 Partners must not let their interests conflict with those they have fiduciary with
(negotiations through to winding up)
 Rights to examine the accounts (s24(9))
RIGHTS & DUTIES  Must bear their share in gross profits and losses (s24(1))
 Involved in decision making
 Veto/reject the introduction of a new partner
 Must account for any benefit derived without consent of other partners from transaction
concerning the partnership (s29)
 Share in profits they make from a competing business (s30)
 Insist on openness and honesty
 Where one person ceases to be a partner but the others continue in business
 Until a partner is bought out, they are entitled to either (s49)
OUTGOING PARTNER  Interest of 5% per annum on their share; or
 To continue to receive their share of profits
 Want to be bought out at a good price, but must include in agreement (may otherwise opt
for full dissolution to sell assets and realise capital)
 Can be written or oral
 Does not deal with duration (which thus includes where there is no agreement)
PARTNERSHIP AT  Must serve notice for dissolution (method of which is determined by whether it was a
WILL written or oral partnership) and no reason is required
 It is then terminated immediately
 Contractual relations between the Partners will end
 Either broken up and assets sold or it is sold as a going concern (which will be better
POST DISSOLUTION because you will get more money for goodwill)
 Partners continue to have authority to wind up affairs (s38)
 Proceeds are distributed in the order outlined in s44




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, PARTNERSHIP AGREEMENT
 Essentially forms a binding contract between Partners (breach will permit a claim)
GENERAL  Used to vary/dis-apply provisions of the Act (include terms already covered by statute)
 Under s19, Partners may be able to alter an existing agreement to facilitate a buy-out
ISSUE POSITION IN ACT INCLUDE IN AGREEMENT
 Whether one dedicates more time
 Whether one should draw a salary before profit
 All partners share equally in the  Whether they share proportionately to capital
FINANCE capital profits (current and investment
investment value difference) and  Whether profit-sharing should reflect seniority
losses of the business (s24(1)) (see  What happens in the event of a loss
s24)  Monthly limits on drawings
 Consequences of exceeding drawings
 How capital will be shared if an asset is sold
 How much time each partner should devote
 All partners may partake in the  Whether this should be reflected in a salary
EMPLOYMENT management of the partnership, but  Whether they are allowed to do other business
there is no positive duty to do so  What the position is on holiday leave
(s24(5))  Whether you want to limit a certain partner’s ability
to contract on the firm’s behalf or specify roles
 Consider creating a fixed term partnership
1) Dissolved at any time by giving  Provide for the non-dissolution of the partnership
notice to the others (s26) upon death, bankruptcy, expulsion and retirement
2) Death or bankruptcy will  Specify that notice must be in writing
DISSOLUTION & automatically dissolve the  Specific a notice period to ensure security and
DURATION partnership (s33) stability (6 months and not within the first year of
3) There is no provision for retirement trading)
or expulsion (s25)  Provide for the buy-out of a partner’s share
4) Notice in writing is only required if  Consider how outgoing partner’s share will be valued
the partnership was created by a  Restraint of trade clause must be expressly included
deed (s26) and must be reasonable (must protect a legitimate
interest (employees/business
connections/confidential information) and be
reasonable to protect that interest)
 Provide for dispute arbitration (as opposed to court)




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, WHO 3RD PARTY CAN SUE
CONTRACTING  Contracting Partner under the doctrine of privity of contract (contractual damages)

 Firm as a whole is liable if the Partner had actual or apparent authority (see above)
 Can include a Partner who joined post-debt if they entered into novation

 If no actual or apparent authority, firm is not liable but contracting partner still is (and must
FIRM AS WHOLE indemnify other partners for any loss)

Exceptions
 Firm is not bound where Partners have agreed by agreement to restrictions as to the acts which
bind the firm (providing 3rd party has notice of this agreement) (s8)
 If there is an indemnity clause in the agreement, the Partner exceeding their authority will cover
the loss arising from the breach, though any partner can be sued (joint and several liability (s9))

 A Partner who left before the debt was incurred can be sued if:

I) ‘Holding Out’ (s14(1))
 Test set out in Nationwide v Lewis
 Where a creditor relied on a representation that a particular person was a Partner by oral
(conversation)/written (headed notepaper)/conduct (previous dealings) behaviour

II) Failure to give Notice of Departure (s36)
 If third party has not received appropriate notice of retirement (not death/bankruptcy) and
PARTNER WHO subsequently gives credit to the firm believing them to be Partner, 3rd party may hold Partner
LEFT BEFORE liable for the debts unless:
DEBT INCURRED  Actual notice was given (letter to all parties with whom the firm has contracted
previously; existing customers) s36(1)
 Notice was placed in the London Gazette (irrespective of whether the 3rd party knew the
publication existed or did not read it) s36(2) for future customers

III) Novation (s17(3))
 Tripartite (outgoing Partner, existing Partners and creditor) agreement whereby the creditor
releases the outgoing Partner
 The firm (as newly constituted to include the new Partner) becomes liable for the debt
incurred
 If there is no Partner to replace the outgoing, the agreement must be by deed and
consideration given by the firm to the 3rd party
 Different to indemnity which is bipartite (agreement between retiring partner and remaining
partners)

OUTGOING  Outgoing partner has continuing liability
PARTNER AFTER  However, likely to be covered by indemnity clause in express agreement
DEBT  Partners may reserve money to satisfy this liability when opting to buy the outgoing partner out




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