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Business Law and Practice - Test and Feedback questions and answers
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Test and FeedbackUnit 1 – Partnership
Preparation -
Question 1 – Is there a Partnership
Jake and Michael decide to import motorcycles from Europe to undercut expensive official dealers
in the UK. Michael, who can speak French, goes to France and orders the bikes. Jake pays the
French seller directly. Jake gives Michael 10% of the difference between the 'official' UK price
and the price Jake actually pays. Jake then sells the bikes in his shop. Indicate whether the
following statement is true or false: Jake and Michael are in partnership together. FALSE
Michael and Jake's actions do not satisfy the definition of a partnership under s.1 Partnership Act
1890. Michael is acting as Jake's agent: he does not accept any financial risk and he does not
get a share of the profits.
Question 2 – Profits
Jamie and Malcolm went into partnership earlier this year. Jamie provided 25% and Malcolm 75%
of the capital needed to buy the partnership assets. Jamie works full-time in the business, but it
was agreed that Malcolm would not spend any particular number of hours working for the
business and simply provide consultancy advice as and when requested by Jamie.
There is no written partnership agreement and nothing else has been agreed. How will Jamie and
Malcolm share the profits?
Which one of the following is CORRECT?
A. Jamie will be entitled to 25% of the profits and Malcolm will be entitled to 75%.
B. Jamie and Malcolm will each be entitled to 50% of the profits.
C. Under the Partnership Act 1890, Jamie is entitled to a reasonable salary, and Jamie and
Malcolm will split the remainder of the profits between them equally.
D. Because Malcolm is under no obligation to work for the business, he will not be entitled to a
salary but James will be entitled to a reasonable sum for the work he carries out. Malcolm and
Jamie will then split the remainder of the profits between them, Malcolm receiving 75% and Jamie
25%.
Have a look at s.24(1) Partnership Act 1890: because there is no agreement to the contrary, both
partners are entitled to half of the income profits.
Question 3 – Partnership Act
Muriel, Molly and Marilyn have been in partnership since 1990. They all work full-time for the
business. They share profits equally and have no relevant express agreement between them.
Which one of the following is CORRECT?
A. If Molly leaves the business, she could be prevented from setting up a competing business.
B. Each partner is entitled to receive a salary in addition to her share of the profits.
C. Muriel and Molly together could expel Marilyn, even if Marilyn objects.
, D. Any of the 3 partners could dissolve the partnership at any time without giving a reason.
Have a look at ss.24(6), 25, 26 and 30 Partnership Act 1890:
- Section 24(6) Partnership Act 1890 provides that a partner is not entitled to a salary.
- Section 25 Partnership Act 1890 effectively provides that partners can only be expelled by
unanimous consent - including the consent of the partner to be expelled.
- Section 26 Partnership Act 1890 provides that a partnership "at will" may be dissolved by any
partner giving notice to the others.
- Section 30 Partnership Act 1890 only provides for restrictions on competition whilst Molly is
still a partner.
Question 4 – Dissolution
John, Andrew and Robert have been in partnership together for 3 years and they have no
partnership agreement. John has recently been declared bankrupt. Indicate whether the following
statement is true or false: Andrew and Robert can insist on continuing the business in partnership
without John, who will have to retire. FALSE
Bankruptcy automatically dissolves the partnership under s.33 Partnership Act 1890.
Question 5 - Profits
Two years ago Adam, Rebecca and Kamal set up a partnership. Their agreement provides for
income and capital profits to be shared in the same proportions as their capital contributions
which were: Adam - £10,000, Rebecca - £10,000 and Kamal - £20,000. The business has just
ceased to trade, having a total realisable value of £24,000 after allowing for payment of all claims
on the partnership including the partners' capital contribution. How much should Kamal receive
from this £24,000?
Which one of the following is CORRECT?
A. £12,000
B. £8,000
C. £20,000
D. £6,000
The partners have agreed to share profits in the same proportions as their capital contributions so
profits will be split £6,000 to Adam, £6,000 to Rebecca and £12,000 to Kamal.
Consolidation –
Question 1 – Partnership Act
Liam and Daniel have been partners since 1990 in a garage trading as L & D Vehicle Repairs.
They have no partnership agreement. They have always purchased their stock from Car Parts
(Garages) Co. Liam has just learnt that Daniel has been a sleeping partner in Car Parts
(Garages) Co for the last year. When challenged, Daniel replied that Car Parts (Garages) Co
wrote to L & D Vehicle Repairs suggesting a merger of the 2 businesses but, as Liam always said
it was good to keep their business small, Daniel thought that Liam would not agree to the merger;
instead, he negotiated his personal involvement with Car Parts (Garages) Co.
Which one of the following is CORRECT?
A. Liam is entitled to claim from Daniel an account for his share of the profits of Car Parts
(Garages) Co on the basis that Daniel is involved in a competing business without Liam's
knowledge and consent.
, B. Liam is entitled to expel Daniel from the partnership and to force Daniel to sell to him his
share of the business.
C. On the basis that the opportunity to invest in Car Parts (Garages) Co was initially offered to L
& D Vehicle Repairs, Liam may succeed in claiming that Daniel should now account to Liam
for any profit he has received from his involvement with the firm.
D. If Daniel now retires as a partner in L&D Vehicle Repairs, Liam will nevertheless continue as
a partner in the firm.
Have a look at ss.29-30 PA 1890.
In the absence of consent from Liam, Daniel is likely to be liable to account to Liam under s.29 PA
1890 for the benefit he has received.
On the bare facts, there is no clear evidence that Car Parts (Garages) Co is a competing
business. If it is, then Daniel has been engaged in a competing business without Liam's consent
under s.30 PA 1890 and he will be liable to account for all profits made by him in that business.
Further information is needed.
Liam has no power to expel Daniel (s.25 PA). If Daniel retires from the firm, Liam acting alone
cannot continue as a partner because the definition of partnership will no longer be fulfilled (s.1
PA 1890).
Question 2 – Liable for Debt
Nicola has helped her daughters Antonia and Chelsea establish a beauty therapist business by
providing the necessary finance and by visiting the salon regularly to provide business advice.
Antonia and Chelsea had a formal partnership agreement drawn up between them. Nicola does
not want to be a partner in the firm as she runs her own driving school business. However, as
Nicola is often seen at the salon, Antonia has occasionally told product suppliers that Nicola is a
partner in the firm.
Nicola wants to know if she could be liable for a debt of the firm to a supplier to whom Antonia
had represented that Nicola was a partner.
Which one of the following is INCORRECT?
A. Nicola could possibly be liable, if Nicola knew of and allowed the representations made by
Antonia
B. Nicola could possibly be liable, if the contract with the supplier was made after the
representation
C. Nicola could possibly be liable, if the supplier thought Nicola was a partner
D. Nicola could not be liable in any circumstances
Have a look at s.14(1) PA 1890: "Every one who represents himself, or who knowingly suffers
himself to be represented, as a partner, is liable as a partner.....". Nicola could therefore be liable
for the debt under s.14(1) if she knew of the representations being made, on the basis that she
"knowingly suffers" herself to be represented as a partner in the firm ("holding out").
Question 3 – Liable and Breach of Contract
Oliver, Henry and Michelle are in partnership supplying office furniture. On 26 February the firm
enters into a contract to supply desks to a customer. On 4 March Henry retires from the
partnership and the other two agree to indemnify him against any liability on the contract. On 25
March the partnership defaults on the contract. On 28 March Isobel joins the firm as a partner.
Who is liable for breach of contract?
, A. Only Oliver, Michelle and Isobel are liable for the breach of contract
B. Oliver, Henry, Michelle and Isobel are liable for the breach of contract
C. Only Oliver and Michelle are liable for the breach of contract
D. Only Oliver, Henry and Michelle are liable for the breach of contract
Think about who was a partner at the time the contract was entered into: the three partners in the
partnership at the time the contract was entered into are liable (ss.9 and 17(1) and (2) PA 1890).
The indemnity does not affect the third party's rights.
Question 4 – Partnership Act
Helen, Judy and Len run a bakery as a partnership. They have no written agreement and the only
relevant term they have agreed orally is that they share profits in the ratio 1 (Helen) : 1 (Judy) : 2
(Len).
Which one or more of the following is INCORRECT?
A. Profits of £9,000 from the sale of a recipe book which the bakery has been selling will be split
£1,500 to Helen, £1,500 to Judy and £6,000 to Len.
B. Any partner can dissolve the partnership immediately but only if they give notice in writing.
C. Each partner is liable without limit for the debts of the firm.
D. Len can retire from the partnership if Helen and Judy agree.
Bearing in mind that the question asked "Which one or more of the following is INCORRECT?",
look at ss.9, 19 and 26 Partnership Act 1890. Profits will be split £2,250 to Helen, £2,250 to Judy
and £4,500 to Len (1:1:2). As the partnership agreement is oral, a notice of dissolution does not
have to be in writing (s.26 Partnership Act 1890). Each partner is liable without limit for the debts
of the firm (s.9 Partnership Act 1890). Even though there is no retirement clause, if all of them
agree they can vary the agreement (s.19 Partnership Act 1890).
Question 5 – Notice of leaving a Partnership
Therese, Tim and Scarlet were partners until Therese left the business amicably, leaving Tim and
Scarlet to carry on in partnership. There was no partnership agreement and the three partners
shared profits equally. After Therese left the firm, the remaining partners ordered goods from
Bramhope Limited but the invoice for those goods has not yet been paid. Bramhope had dealt
with the firm on several occasions before Therese left the firm.
Which one of the following is CORRECT?
A. Therese cannot be liable because the debt was incurred after she left the firm.
B. Therese is not liable for the debt if at the time of her leaving she gave notice in the London
Gazette.
C. Bramhope Limited can sue Therese for a maximum of 1/3 of the sum outstanding.
D. Assume that at the time of her leaving Therese gave notice in the London Gazette. She later
wrote to Bramhope Limited to give notice that she had left but the company did not receive
her letter until after the debt was incurred. Therese could become liable for the full debt.
Have a look at s.36 PA 1890: notice of leaving a partnership must be given to existing customers.
Does this mean actual or constructive notice?
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