What is a partnership?
The definition of a business partnership is contained with the Partnership Act 1890 (Section one) and remains good law today:
“the relationship which subsists between persons carrying on business in common with a view to profit”
A partnership exists therefore where two or more people (or Companies) combine together in business. There is a statutory maximum of 20 partners but there are many permitted exceptions to this including solicitors, Accountants, Estate Agents etc.
Partners and the Outside World
Section 5 of the Partnership Act deals with the liability of partners to third parties:-
- An act done by a partner on behalf of a firm – and within the parameters of the actual authority given by the firm to that partner will generally bind the firm –
- An act done by a Partner (within the ordinary course of partnership business) will bind the firm – even if the partner is acting outside the authority granted by the firm – unless the third party concerned actually know of this lack of authority.
It follows that partnership carries onerous legal responsibility – including just by way of an example, liability for the negligent acts of other parties or liabilities to third parties with and whom other partners have entered into contracts with, for example business loans or overdrafts.
Management of a Partnership
Partnership law provides that each partner must act in utmost “good faith” towards his fellow partners. This includes a duty to act honestly, not to make “secret” profits, not compete against the business and so on.
Partnership decisions are to be taken by a majority of partners, - where the descision relates to the “ordinary” business of the firm. If the discretion is “extraordinary” for example, to fundamentally change the kind of business to be carried on or to admit a new partner or expel an existing one unanimity will be required.
Each business has a “capital account” – comprising the amounts of capital contributed by the partners to establishing the business and which is usually tied up in stock, assets, work in progress and so on.
Partners can contribute either capital or sometimes assets to a business – for example, a piece of machinery, or a building and so on. Once an asset has been contributed to a partnership – then it ceases to belong to the individual – and belongs instead to the partnership. The asset should be included within the partnership capital account at a defined monetary value.
The Partnership Act provides that partners will share capital and profits equally unless there is an express or implied agreement to the contrary.
Dis-Agreements between Partners
Dis-agreements between partners can prove expensive and protracted to resolve – when in order to preserve a continuing business or goodwill and speed is very much of the essence. Lawson Lewis Blakers are able to bring experience and pragmatism to the resolution of commercial disputes. We will use mediation or round table meetings where appropriate.
The remedy of last resort is an application to the Court. The range of remedies available includes:-
- An order to dissolve the partnership
- An order that an account be drawn to determine parties entitlement or liability
- A court will rarely make an order for the continuation of a partnership against the wish of any partner (known as an order for specific performance). Such Orders are occasionally made in exceptional circumstances to enforce clear cut obligations for example, directing that the particular individuals to collect partnership debts.
- The Court may grant injunctive relief to prevent individuals from breaking obligations imposed by the Deed of Partnership or the law.
- The court has a discretion to make a miscellany or other orders including that one partner make records available to other partners to inspect
- We strongly recommend that those trading in partnership enter into a formal deed of partnership
Lawson Lewis Blakers are able to provide specialist advice as to all aspects of the formation and dissolution of partnerships.