Law of partnerships – law notes for accounting and law students

Jan 27, 2015

  • It’s a very common type of business organisation/structure used – small businesses
  • Definition = the relationship that subsists between persons ( = minimum of 2 people) carrying on a business (= trade/profession) in common (= together) with a view to profit (intend to make profit).
  • Governed = by The Partnership Act, 1890; Limited Partnership Act, 1907; Agency Law; Contract Law (and see below)

Numbers = (2 → 20 (maybe 50 max)).

  •  Classes/Types of Partners =
  • General Partner: – active partner; day to day; Partnership Act = unlimited liability for debts; shares in profit.
  • Sleeping Partner/Silent Partner: – not active but has invested capital; not defined in Partnership Act = unlimited liability; profit share.
  • Limited Partner: – usually not involved but invested capital; shares in profit; liability for debts is limited only if he registers with Company Registration Office (CRO). This partner is limited as to what he can/can’t do.

[NOTE: CRO mainly deals with companies but it does deal with other business issues.  Don’t confuse with Company law]

All partners cannot be limited. The acxt requires at least one to be a general partner. 

Legal Relationship = • as regards third parties and the business, relationship based on the law of agency ( = acts of one partner binds the others) and as regards the relationship between the partners, it’s based on partnership agreement between the partners (i.e. contract law).  So it can be express, implied, written, verbal or inferred by conduct.

  • No legal requirement for contract in writing,
  • If no contract (or particular matters not in the partnership agreement), then terms of Partnership Act apply.
  • If written contract, known as partnership agreement/deed then it prevails.

 

Partnership Deed: – written agreement and contains info like

  • Name of firm (= group of partners) • address • type of business • commencement date • duration • bank details • auditors name • number of partners • meetings, voting, chairperson • profit & loss division • capital contribution • assets • death • bankruptcy • retiring sickness • dispute • non-compete • admission of new partners • rights of veto • arbitration

 

Duties of Partners: – found in Partnership Act and/or Deed.  Act says: –

~ Fiduciary duty: act in good faith for benefit of firm;

~ Duty to disclose: any matter that impacts on the partnership e.g. tell all financial info (Law v Law);

~ Duty to account: all benefits made in the business to go to partnership e.g. no secret profits (Bentley v Craven)

~ Duty not to compete: except with express consent of other partners

 

Rights of Partners: – found in Partnership Act and/or Deed. The Act says: –

~ Right to be treated with good faith and mutual confidence as partnership is based on a fiduciary relationship = trust;

~ Right to be involved in managing business;

~ Right to share in profit or contribute to losses.   Profits and losses do not necessarily have to be shared equally;

~ Right not to be expelled;

~ Right to veto admission of new partner(s);

~ Right to examine the books of accounts;

~ Right to be indemnified by other partners for liabilities properly incurred (i.e. in the course of business).

 

Authority & Liability of a Partner:

Authority to enter into Contracts comes from Law of Agency.  Actual or implied/apparent/ostensible authority. As the meaning of the latter suggests;

If third party believes the partner that they were dealing with had the authority, then, partnership bound e.g. assumption that a garage sells cars Mercantile Credit v Garrod

Liability of Partners =

  • In Contract: all the partners are jointly and severally responsible for the contract →one single action against all of them ( = jointly) or just sue one (= several from verb to sever); ). That one partner can seek indemnity from remaining partners;
  • In Tort: the partners are jointly and severally responsible → one single action against all the partners (joint) OR just sue one of them (severalDebts: “joint and several”
  • Debts: the partners have joint and several liability

                    New partner: only liable for debts and obligations from date of joining.

                    Retiring Partner: – liable for all debts and obligations to date of retirement; Will be liable for debts thereafter unless creditors are on Notice of Retirement.

 

Dissolution of Partnership: – i.e. termination of

  • By Court = Act allows Court to dissolve partnership where partner is incapable; partner guilty of misconduct or breach of the partnership deed; firm is making losses or where its “just and equitable” to do so (similar to Contract Law);
  • By Law = expiry of agreement; objective of partnership achieved; notice of death or bankruptcy; business becomes illegal;
  • By Agreement = partners agree to end it;

 

On dissolution what happens assets/liabilities?

First debts paid in priority as set out 1890 ( check out list of preferential debts).  If surplus then divided between partners.  If deficiency partners personal assets at stake!

 

Compare Companies to Partnerships:

 

– law notes from Kilkenny Solicitor firm Holland Condon

 

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