Lec 3 - Company Law

how does s.1 Partnership Act 1890 define a partnership?

"The relation which subsists between persons carrying on a business in common with a view of profit."

Is a partnership a company?

NO, it is an unincorporated business venture (a firm), not a separate company, but it is still regulated by the 1890 Act.

Does a partnership need to actually make a profit to exist?

No, what matters is the INTENTION to make profit

How is "business" defined for partnership purposes?

• s.45 PA 1890 defines it as including every trade, occupation or profession.

• It must be a recognised commercial or professional calling.

why does the definition of partnership matter in practice?

You must meet the definition to be a partnership, especially if you want the Act's protection.

Is registration or any particular form needed to create a partnership?

No

What underpins a partnership legally?

Contract/an implied agreement (not necessarily spoken) is presumed to create a binding agreement.

Can a partnership be created for a single venture?

Yes. It can be for a single transaction or venture, or for a continuing business.

Can a partnership exist before trading starts?

Yes. It can be inferred from a date before the business commences trade. A person can become an agent of the partners even before trading has started.

What did Khan and Another v Miah and Another [2000] decide?

A partnership existed when property for future development was purchased. The partners were involved in commercial activity with a view to profit, even though they hadn't started to trade.

what does companies and LLPs may be partners and liable only to the extent of its assets, thus protecting members mean?

Unlimited liability - no distinction as you (partner) and business

Llp still protects its liability, not liable to full extent as individual is not a partner

 

Does calling someone a "partner" automatically create a partnership?

No it doesn’t automatically infer partnership

Is every occupation a business that can form a partnership?

No, the enterprise must be a recognised commercial or professional calling.

Is there a limit on number of partners?

No not anymore, used to be 20

regulations for a partnership

• No particular form required

• A partnership is a contractual relationship.

• It may be created for a single transaction or venture, or as a continuing business.

• "Business" is defined by s.45 PA 1890 as including every trade, occupation or profession.

• Making a profit is not essential providing the intention to make a profit exists.

• A partnership can be inferred from a date prior to the business commencing trade.

• Companies and LLP's may be "partners" and liable only to the extent of its assets, thus protecting members.

What is the liability of partners?

Unlimited.

There is no distinction between the partner and the business, so all partners are responsible for the firm's debts and can act on behalf of the partnership.

Can companies and LLPs be partners?

Yes, but they are liable only to the extent of their assets, which protects their members. An LLP's members are not liable to the full extent as individuals, because the individual is not a partner.

Does the partnership deed matter to third parties?

No. A deed (a formally executed document, sealed and witnessed) sets out expectations and can alter the Act's default provisions, but it only governs the partners themselves.

When is the Act's default position most commonly used?

When things start to go wrong

Is there an age requirement to become a partner?

No

Can a minor (under 18) be a partner or agent, and can they be held liable?

A minor can be an agent of the partnership and bind it, but debts are not recoverable from the minor because they lack capacity, so the creditor has no redress against them.

What case illustrates a minor's lack of liability?

Mercantile Union Guarantee Corporation v Ball [1937]. An infant haulage contractor who took a lorry on hire-purchase was held not liable for arrears of instalments.

Can someone who is mentally impaired be held liable?

Capacity is assumed unless it is established that they lack it. A person deemed insane lacks capacity and cannot understand the basis of the intention to be contractually bound.

What counts as a trading or business name?

Any name that includes additions to the owner's own name creates a business name, which is subject to certain restrictions and regulations.

What must a partnership disclose, and why?

Transparency. Everyone dealing with the business should be aware of the partners' names. Names must be displayed on invoices, headed paper, emails and websites.

What is the risk of not following the naming rules (e.g. a Facebook or Instagram business with no website)?

You might get away with it, but if you sue on an unpaid invoice, the other side can argue the invoice is illegitimate, so they don't owe you the money.

What does s.5 PA 1890 say about agency?

Every partner is an agent of the firm and of the other partners for the purpose of the business. Their acts carrying on the business in the usual way bind the firm.

When will a partner's act NOT bind the firm under s.5?

When the partner has no authority for the particular matter AND the other person either knows they have no authority or does not know or believe them to be a partner.

How should judges treat the statutory provisions on partner authority in s.5 PA 1890?

Judges are bound to follow the statutory provisions. Statutory recognition means they have to follow it. With common law principles, judges have wide discretion and are not bound to follow them.

What are the two sets of responsibilities under s.5 PA 1890?

1) Every partner has an agent's authority.

2) This applies provided they are carrying out the usual business activity of the partnership.

What must the organisation contracting with a partner show for the firm to be bound under s.5?

The organisation must be acting in good faith.

What happens if the partners have made an express decision about a purchase, such as new equipment?

Once an express decision has been made, a partner cannot disagree with it.

A partner commissions equipment from a company in the partnership's name, and the company raises an invoice. Can the company recover the money?

Yes. The company had no reason to believe the partnership wouldn't pay, and the invoice was in the partnership's name, so it has the right to recover the money even though the partner exceeded their authority.

Why is a partner exceeding their authority a common area of dispute?

The partnership may argue the partner had no authority to make the purchase, but the third party can still recover if it acted in good faith and had no reason to doubt the partner's authority.

Two types of authority

Actual authority (for acts authorised by the partnership) and apparent authority (the partnership may be bound by transactions entered into without authority if the third party doesn't know the partner lacks authority).

What are the 2 sets of responsibilities under s.5?

• every partner has an agent's authority.

• this applies provided they are carrying out the usual business activity of the partnership.

  • Anyone contracting with them must be acting in good faith.

Why is authority a "common area of dispute"?

• Partners exceeding their authority.

  • For example, a partner commissions equipment in the partnership's name, the supplier has no reason to believe they wouldn't pay, and the partnership pays on the invoice.

  • The supplier has the right to recover the money.

How does the court approach s.5 compared with common law?

Judges are bound to follow statutory provisions, but they are not bound to follow common law principles and have wide discretion.

Common law can help identify express, implied or apparent authority.

s.24 Partnership Act 1890

(1) All partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.

(5) Every partner may take part in the management of the partnership business.

(6) No partner shall be entitled to remuneration for acting in the partnership business.

(7) No person may be introduced as a partner without the consent of all existing partners.

(8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.

s.24(1): How are capital and profits shared by default?

All partners share equally in the capital and profits and must contribute equally towards losses, whether of capital or otherwise.

s.24(5): Who can take part in management?

Every partner may take part in the management of the partnership business.

Unlike a company, investing doesn't mean you have to participate, but participation is a legitimate expectation recognised by the courts.

s.24(6): Are partners paid for working in the business?

No. No partner is entitled to remuneration for acting in the partnership business. They are not employed by the partnership. They receive profits and drawings.

s.24(7): Can a new partner be introduced?

No person may be introduced as a partner without the consent of all existing partners.

s.24(8): How are disagreements decided?

Ordinary matters are decided by a majority of the partners. No change to the nature of the partnership business can be made without the consent of all existing partners.

What happens if there is no partnership deed?

There is no opportunity to set your own terms, so you fall back on the default position of the Partnership Act: all money shared, all liable.

How do partnership accounts work in practice?

Profits are decided annually and divided equally among partners. In practice, monthly drawings are received.

Partners are individually responsible for their own self-assessment tax on the profit they receive.

What happens legally when a partner joins or leaves?

Technically a new partnership (a new entity the law recognises) is formed. All partners must be told, and a leaving partner must say in advance so people know there is a change.

How does a partnership end?

A partnership at will rolls on until something brings it to an end.

What happens if a partner dies?

The partnership ends and a new one is created with whoever is left. For example, if there were 3 partners and 1 dies, the 2 remaining create a new partnership.

What do you need in order to expel a partner legally?

A partnership deed with an express expulsion clause. Otherwise you can't get rid of a partner unless you dissolve the whole partnership.

Does having an expulsion clause guarantee a valid expulsion?

No. An express clause does not necessarily validate the expulsion. Three questions must be satisfied.

What are the three tests for a valid expulsion?

1. Was the expulsion covered by the clause? (Snow v Milford (1868)).

2. Was the expelled partner informed of the reason and given the opportunity to defend himself? (3) Did the partners carrying out the expulsion act in good faith? (Blissett v Daniel (1853)).

Snow v Milford (1868)

• A partner in a banking firm was expelled after committing adultery. The partnership deed contained an expulsion clause, and the other partners relied on it.

• Decision: The expulsion was invalid. The case is cited for the point that a banker's adultery was held not prejudicial to banking business. The conduct did not fall within the wording of the clause, so the power to expel had not been triggered.

• An expulsion is only valid if it falls within the terms of the clause. Courts read these clauses strictly, so if the partner's conduct isn't covered by the wording, the expulsion fails, however much the other partners disapprove of it.

• (s.25 PA 1890): This is the authority for your first expulsion test, "Was the expulsion covered by the clause?" The other two tests are notice and a chance to defend (second test) and good faith (Blisset v Daniel, third test).

• If a partner is expelled for something outside it (e.g. private conduct that doesn't affect the business), argue the expulsion fails the first test, citing Snow v Milford.

extramarital affair by partner, expelled by partnership as they didn’t want to be associated with scandal, but court deemed that expulsion clause was too general and is not bringing oaretnership into disrepute, it was bringing the partner into disrepute so wording must be correct

Blissett v Daniel (1853)

• A partner in a firm wanted his son to become joint managing partner. Blisset was removed after the managing partner went around the other partners and built up a "charge sheet" of reasons to get rid of him. The deed did contain an expulsion power. The question was whether it had been used properly.

• Decision: The court struck the expulsion down as being in bad faith, a fraud upon the power, malicious and vindictive. The clause existed, but the partners used it for a collateral purpose rather than for the genuine benefit of the firm.

  • Good faith is the basis on which all the stipulations in a partnership deed rest, so an express power of expulsion must be exercised in good faith and for the benefit of the partnership.

• (s.25 PA 1890): Blisset is the authority for your third expulsion test, good faith. Some sources also treat it as supporting the requirement that the partner is served with notice of the charges and given a reasonable opportunity to be heard, which matches your second test.

• If the partners have an expulsion clause but the facts suggest a personal motive (making room for a relative, taking the partner's share, a grudge), argue that the clause exists but the expulsion fails the good-faith test, as in Blisset.

genuine grounded reasons of good faith; partners voted to get rid of partner so they could acquire his shares as they didn’t like the way he was voting and courts said they were not acting in good faith so courts will monitor the way they use expulsion clause

What is the nature of partners' duties to each other?

Fiduciary: utmost good faith. Even though you are distinct from the partnership, you must do what is best for the partnership, not for yourself.

What if the partnership isn't working but a partner is "not pulling their weight"?

They still cannot be excluded without a clause. They remain liable for any debts the partnership incurs and are still entitled to their share of profits.

What does "powers exercised for the benefit of the firm as a whole" mean?

Any power the law gives a partner must be used for the good of the firm as a whole, not for personal gain.

s.25 PA 1890

No expulsion of a partner by a majority unless all partners have expressly agreed to such a power being conferred.

However, an express expulsion clause in a Partnership Deed does not necessarily validate the expulsion.

• expulsion covered by clause?

• has expelled partner been informed of reason for expulsion and had opportunity to defend themselves?

• did partners conducting expulsion act in good faith?

what are fiduciary duties?

requirement to act in good faith

s.28 - Fiduciary Duties of Partners

• s.28 Duty of partners to render accounts.

  • Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.

Termination of a partnership

• Under the Partnership Act 1890

  • By notice S.32

  • Any full partner may terminate a partnership by giving notice. This need only be oral unless the agreement specifically required written notice. The power must be exercised in good faith:

• Under contract law

• Under Court order

  • physical or mental incapacity

  • conduct prejudicial to the business

  • business can only continue at a loss

  • it is just and equitable to do so

s.29 - Fiduciary Duties of Partners

• Accountability of partners for private profits.

  • 1. 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 name or business connexion.

  • 2. This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner, and before the affairs thereof have been completely wound up, either by any surviving partner or by the representatives of the deceased partner.

S.29 - be accountable for interest, accounts, any side deals, other arrangements (s.30 overlap)

 

If u make any money from fiduciary duty breach and you are found to have breached, the money belongs to partnership

Any opportunities that could’ve been taken by partnership

 

Competing nature (SAME BUSINESS) - S.30

S.29 - ANY opportunity

s.30 - Fiduciary Duties of Partners

• Duty of partner not to compete with firm.

  • If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.

Daniel v Daniel (s.28)

2 brothers in partnership, one brother ran partnership and took core responsibilities in day to day, other once had his own life and wasn’t really involved, this brother wanted to leave partnership, brother gave him a figure of what his share was worth and gave his money, the leaving brother found out company was worth significantly more than he had been paid

Court said s.28 would apply, they were fiduciaries of the business, he should’ve given the correct amount