Lecture notes
Partnership
- Module
- Company Law
- Institution
- University Of Law (ULaw)
Lecture notes of 17 pages for the course Company Law at ULaw (Partnership notes)
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Unit 1 – PartnershipDefinition
Section 1 Partnership Act – partnership is the relation which subsists between persons
carrying on a business in common with a view of profit. Therefore, a partnership is a
relationship which exists when two or more persons carry on business together to make a
profit.
Partnerships are usually entered into in a formal and carefully considered manner
evidenced by a sophisticated partnership deed or agreement. However, partnerships can
arise informally by association, accident, or carelessness. The agreement can be oral or in
writing or even implied by conduct.
In Khan v Khan, the House of Lords held that the partnership had commenced even though
the restaurant in question had not opened before the partnership between the parties had
broken down.
There must be more than mere agreement or setting up a partnership to form a
partnership. There must be carrying on a business in common. This means that two or more
persons share responsibility for the business and for decisions which affect the business.
A partnership does not have a separate legal existence. A partnership may be created for a
specific purpose or for a pre-determined period of time or so as to continue without
reference to duration – a partnership at ‘will’.
Fundamental characteristics
Typical rights and responsibilities of partners which are fundamental to the relationship
include:
The right to be involved in making decisions which affect the business;
The right to share the profits of the business;
The right to examine the accounts of the business;
The right to insist on openness and honesty from fellow partners;
The right to veto the introduction of a new partner; and
The responsibility for sharing any losses made by the business.
Types of partnerships
Individuals: a business relationship between individuals.
Group partnership: between two or more partnerships.
Sub-partnership: partnership within a partnership.
Corporate partnership: when a company is a partner.
Setting up a partnership
There are no necessary formalities. However, a written agreement is invaluable as evidence
of the relationship and its terms. It is also useful for the partners to have a written
,constitution which will provide various things including possible solutions to disputes or
disagreements and thus perhaps avoiding future litigation.
Partnership Agreement
The Act regulates the rights and obligations of partners as between themselves unless the
partners choose to displace its application through an agreement. A written partnership
agreement usually takes the form of a deed.
Date and location - It is desirable to specify a date from which the parties regard their
mutual rights and responsibilities as taking effect. The name of the partnership should be
stated since that means it is fixed and any partner can insist as a matter of contract on there
being no change to it. The agreement may contain clauses which describes the premises at
which the business will be carried on, the geographical area of its operation and the nature
of the business which will be carried on. Once agreed, any change would need the
unanimous consent of the partners.
Capital - Each partner is likely to be putting capital into the business. The agreement should
state how much capital each partner is contributing and possibly del with the question of
future increases in contributions. Further, salaries of differing fixed amounts might be
appropriate before any surplus profit is divided between the partners. Interest may be
allowed on partners’ capital contributions. A suitable ratio in which the profits remaining
after salaries and interest on capital are to be shared should be stated. Often a partnership
agreement will set a monthly limit on how much each partner can withdraw.
Assets - If a fixed asset of the partnership is sold, realising an increase or decrease in its
value, how is this to be shared? If the assets are revalued, without the disposal, to show
their current value in the accounts, partners may be content to share these
increases/decreases equally under the PA. However, the terms need to be set out if
otherwise. A partnership asset is an asset where beneficial ownership rests with all the
partners, although not necessarily in equal shares.
Work Input - The PA will imply a term into a partnership agreement in the absence of a
contrary agreement that all partners are entitled to take part in the management of the
business. There is no implication that a partner must devote his full time and attention to
the business. Wilful neglect of the business may mean that the other partners are entitled
to be compensated for the extra work undertaken. The agreement should set out the
degree of commitment expected of each partner. The term might require the partner to
work in the business full-time or part-time or not even work at all. There must be
qualifications to the main statement as to the amount of work required of a partner. There
must be provisions dealing with holiday entitlement, sickness and other absence.
Roles – partners may have differing functions. For example, a sleeping partners role may be
defined as being limited to attending meetings.
Decision-making – unless the agreement provides to the contrary, all partnership decisions
will be made on the basis of a simple majority (each partner has one vote), except the
, decisions on changing the nature of the business or on the introduction of a new partner
which require unanimity.
Duration - if there is no provision in the agreement, the partnership can be dissolved at any
time by any partner giving notice to the others.
Except when constrained for illegality and public policy reasons, partners may agree
whatever terms they wish. Section 19 of the Partnership Act encourages partners to agree
and negotiate terms.
An express term will be required if partners are to be prevented from competing with their
firm after they leave. When in partnership partners must account for profit’s they make
from a competing business but the Act does not place any restraint on a partner who has
left.
An express restraint of trade clause might seek to prevent the partner who leaves from
setting up a business in competition. The courts treat such clauses as being against the
public interest on the basis that everyone should be free to carry on their trade or
profession. Accordingly, they cannot be enforced unless they are reasonable as between the
parties and in the public interest.
In Bridge and Deacons, it was held that restraint of trade clauses must only protect a
legitimate interest, such as a business and its goodwill, a share of which has been acquired
from the partner being restrained. They must also do no more than is necessary to protect
that interest.
The Partnership Act 1890
Section 19 – the mutual rights and duties of partners, whether ascertained by agreement or
defined by the Act, may be varied by the consent of all the partners, and such consent may
be either express or inferred from a course of dealing.
Management – every partner can participate in the management of the partnership
business.
Decisions to change the nature of the partnership – the Act requires a decision to be
unanimous. A simple majority is required to decide any ordinary matter connected with the
partnership business.
Section 24(1) – partners share equally in the capital of the business.
Partners share equally in the profits of the business and contribute to capital losses in
unequal shares, based on the size of their capital contributions.
All profits and losses are divided equally between partners.
Section 29 and 30 – give statutory effect to particular aspects of the duty of good faith.
Partners cannot benefit themselves at the expense of their partners. These sections require
partners to account for personal benefits they receive through partnership connections, the
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