Partnership: General

Question 1

Why choose a partnership?

Answer 1

A partnership is one type of business organisation commonly chosen by those who want to carry on a business with a view to profit. Partnerships range from the very small organisation, consisting of just two partners running a local store, to large international firms of accountants.

Some regulatory bodies require that their members operate through a partnership. Others choose to operate as a partnership, rather than to incorporate as a limited liability company.

Question 2

What are the advantages of a partnership compared with a limited liability company?

Answer 2

(i) the lack of formalities required in setting up a partnership; (there are a number of requirements if you want to incorporate a company - this is not the case with a partnership).
(ii) the affairs of the partnership can remain private (you do not have to file anything e.g. With Company House - you may find out how much directors are being paid but not in partnership); and
(iii) the flexibility in running the partnership where partners may determine their own management and organisations

These are default rules that apply where the parties haven’t entered into an agreement to operate
otherwise.

Question 3

What are the advantages of the limited company compared to the partnership?

Answer 3

(i) companies may more easily grant securities than partnerships, in particular floating charges (because these are only available from companies);
(ii) ownership may be easily transferred in a company, through shares, and there is no limit on the number of potential shareholders;
(iii) the obvious advantage of a company is limited liability. Partners in a partnership have unlimited joint and several liability for the debts of the partnership - these means their assets are exposed where partnership debts need to be satisfied. The company alone is responsible for the debts of the company. This difference may be more illusory than real - it is common for directors of companies to be asked by banks to provide personal guarantees. This negates the benefits of limited liability.

The third option is a limited liability partnership which has been possible since 2000. This entity is explained later in the lectures.

Question 4

How are partnerships governed?

Answer 4

Partnerships are governed by the Partnership Act 1890. It is a codifying statute. The Act deals with Partnership in four broad categories:
⁃ a. ss 1-4 - the nature of partnership - what is a partnership and how is this identified?
⁃ b. ss 5-18 - the relations of partners to people dealing with the firm - how does the law regulate this body of partner against those interacting with the partnership?
⁃ c. ss 19-31 - the relations of partners to one another - those within the partnership what are their rights and responsibilities to each other?
⁃ d. ss 32-44 - the dissolution of the partnership and its consequences.

Question 5

What is the nature of a partnership?

Answer 5

The basic idea behind a partnership is that everyone has a right to participate in the business - both its profits and losses.

Question 6

What is the definition of partnership under the 1890 Act?

Answer 6

Section 1(1) of the 1890 Act defines partnership as:
⁃	"the relation which subsists between persons carrying on a business in common with a view of profit”. (So you do not have to be making a profit to be a partnership - mere intention is enough (clubs and associations could not be partnership).

Question 7

What business is included?

Answer 7

Section 45 of the Act defines business as “including every trade, occupation or profession.”

Question 8

What is not a partnership?

Answer 8

Section 1(2) sets out what is not a partnership - stopping those acting together in a company or LLP from being partners.

Question 9

How can a partnership be constituted?

Answer 9

A partnership can be constituted in writing and may set out the rules of operation. But partnerships can also be constituted orally or inferred from the actions of the parties. It is important to look at the nature of the relationship between the parties in order to determine partnership.

Question 10

Adam v Newbigging (1888) 13 App. Cas 308

Answer 10

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Question 11

When is a partnership created? / How can one determine if there is a partnership?

Answer 11

See Khan v Miah [2000]

Question 12

Khan v Miah [2000]

Answer 12

⁃ This case is useful in determining when a partnership has been created. In this case individuals agreed to form a partnership to run a restaurant. Mr Khan had provided most of the finance. The group of people carry out lots of preparatory work - they take a lease of premises and start fitting out the premises. Before trading begins, the relationship between the individuals breaks down. The restaurant eventually opens and starts trading but by this stage Mr Khan is no longer involved and is not given any of the profits.
⁃ The question for the HL was whether there was a partnership, and if so, when was it created? (There was no operating restaurant when the relationship broke down)
⁃ The judge at first instance said there was a partnership. The judge at appeal held that since they hadn’t started trading there was no partnership. The HL disagreed with the court of appeal.
- HL held that it is not necessarily the case that it is created when they start trading. There was no rule of law to this effect. Rather it is when they embark on the activity in question (to run a business activity to make a profit and had entered into transactions as a partnership e.g. Find premisses and to fit the premisses). The HL held that this includes things before trading actually begins (e.g. includes preparatory work etc) are part of the ultimate venture. Thus the HL held that there is a partnership in which Mr Khan has a 50% stake.)

Question 13

Christie Owen & Davies plc v Raobgle Trust Corp [2011] EWCA Civ 1151

Answer 13

Khan was followed in this case

COA held: the purchase of a property intended to run a restaurant in was enough to constitute a partnership between these individuals. The court said that while their plan was to operate a restaurant, the first step was to acquire this property to allow them to make progress towards the ultimate end.

Question 14

Pine Energy Consultants Ltd v Talisman Energy (UK) Ltd [2008], per Lord Glennie at para. [28]

Answer 14

“There are certain features which are usually to be found in a partnership. None are present here. There was no firm name, no partnership premises, no partnership employees and no partnership bank account. Nor is there any averment that steps were being taken to establish any of these. There were no partnership accounts or tax returns. None of these is fatal to the contention that there was a partnership, but the lack of any of such things points strongly against the likelihood of there being one.”

Question 15

What does the Act say is a partnership or not?

Answer 15

Despite these cases, since it can be unclear whether there is a partnership or not, s 2 of the 1890 Act sets out 3 guidelines to determine if there is a partnership or not. Note that these are guidelines only (not determinative):

1) Joint/ common property / part ownership
⁃ Not enough to create partnership: Owning or leasing property together doesn’t in itself created a partnership (whether or not owners share profits from the use of the property).
⁃ Sharpe v Carswell 1910

2) Sharing gross returns does not of itself create a partnership
Clark v Jamieson 1909

3) A share of profits is prima facie evidence that you are a partner, but it does not of itself make you a partner.
Certain circumstances that when you share in the profits of a business but you will not be a partner:
Receipt by person of a debt out of the profits of the business does not in itself make you a partner
- Employees or agents who are paid out of the profits of the business is not a partner
- Where a loan is made to a partnership and a lender receives a rate of interest that does not in itself make the lender a partner.
Alna v Trends 1969

Question 16

Sharpe v Carswell 1910

Answer 16

⁃ People coming together to run a fishing boat. The case was brought by a widow (Mrs Sharpe) who’s husband had died on board the boat. In order to bring herself within compensation legislation her husband had to be employed by the defender. She tried to argue that her husband was employed by Carswell, because if she could prove that he was an employee he (and thus his widow) would be entitled to compensation under the employment compensation statute. Carswell argued that because he owned shares in the fishing boat he was a partner and not an employee.
⁃ However guideline 1 means that mere ownership of the shares does not (without more) mean that you are a partner. Thus the court held that he was an employee and thus the wife received the compensation.

Question 17

Clark v Jamieson 1909

Answer 17

⁃ Compensation for husband who had worked on fishing vessel - Parties running a boat were renumerated by the gross earnings of the vessel. Clark drowned. The wife was claiming compensation under an employment statute. The court held that although Clark was paid a share of gross earnings, he didn’t contribute to the running capital of the boat nor would he be liable if the boat made a loss. Therefore it was held that he was not a partner - rather he was an employee.

Question 18

Alna v Trends 1969

Answer 18

Argument about whether individuals are partners of Trends. It turned out two of the individuals had been partners and had made a loan to Trends, but had thereafter stopped being partners. They stayed involved in the partnership - they argued this was to ensure that their loans were paid back. Thus the money they were receiving may have looked like a share of the profit when in fact it was actually their loans being repaid. Thus it was held that they were simply creditors, not partners.

Question 19

Dollar Land (Cumbernauld) Ltd v C I N Properties Ltd 1996 SLT 186.

Answer 19

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Question 20

What is the major difference between partnerships in Scotland and England?

Answer 20

In Scotland a partnership has a separate legal personality (Partnership Act 1890 s 4(2) this applies to Scotland only). This provides in Scotland that a partnership is a legal person distinct from the partners. In Scots law a partnership is a legal entity made up of, but separate from the partners. This means that a (Scottish) partnership can enter contracts, raise court actions etc. in the firms name.

However in England partnerships have no separate legal personality - this means that the partners as individuals must enter into contracts etc on behalf of partnerships.

The difference can be seen in a comparison between the two quotes below:

Forsyth v Hare & Co (1834) 13 S 2.
‘It is a quasi corporation, possessing many, but not all the privileges which the law confers upon a duly constituted corporation’.

Sadler v Whiteman [1910] KB 868, 889 per Farwell J: -
“In English law a firm as such has no existence; partners carry on business both as principals and as agents for each other within the scope of the partnership business; the firm name is a mere expression, not a legal entity,… It is not correct to say that a firm carries on business; the members of a firm carry on business in partnership under the name or style of the firm.”

Question 21

What is the consequences of separate legal personality?

Answer 21

If someone is suing the partnership and the partnership accounts are not substantial enough then they have the right to sue the partners - this is an example of joint and several liability. This means that the creditor can sue any partner for the whole 100% of the debt. That partner can then sue the other partners to recover debts off them.

Question 22

What regulates what partners can call themselves?

Answer 22

There is a regulation of what partnerships may call themselves under the Companies Act 2006 [Look up section number.] (s1192 onwards s1198)
⁃ In brief you cannot suggest a government or local government connection. For example, partnerships cannot name themselves things like “UK Government Bonds” etc.
- Partnerships can use surnames or permitted divergences.
- There are restrictions on using deviations from the surnames or the partnerships
- They cannot carry on the partnership under a name that is likely to give the impression of working with the government or local authority.
- And the secretary of state’s approval is required for the use of “sensitive words or expressions” (there is a list of these set out in SI under the CA 2006- they include words such as “bank” and “group”.)
- Partnerships also have to disclose the partners names on all documents so those dealing with partnership know who they are dealing with/can serve papers on.