Laws of partnerships

CPA-Business-Law-Section-1 BLOCK RELEASE

Introduction
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

Characteristics of partnership
1. Membership-The logical minimum number in partnership is 2 with a maximum of 20.
2. It is not an incorporated association
3. Each partner is an agent of the other in the firm
4. It can sue or it can be sued its registered name
5. It exists with an aim of making profit
6. A partner’s liability to debts and obligations of the firm is generally unlimited
7. Death, insanity or bankrupt of partners may lead to dissolution

In a partnership, partners may be classified as:-
1. Real and Quasi
2. Minor and Major
3. Active and dormant / sleeping
4. Limited and General

Advantages of partnership

Some of the advantages of partnership as a form of business include;
1. There are easy to form since they don’t require many legal formalities
2. Business resources are easy to acquire through contribution from the partners
3. In case of professional firms there is specialization of labour
4. Losses are shared among the partners
5. Management duties are shared among the partners

Disadvantages
1. Liabilities of partners for debts and obligations of the firm is unlimited i.e. partners are liable to use personal assets if the firm is insolvent.
2. Sharing of profits reduces the amount available to individual partners.
3. A single partner’s mistake affects all partners.
4. Disagreements between partners often delay decision-making.
5. Tends to rely on a single partners effort to manage.
6. Death, bankruptcy, or insanity of a partner may lead to dissolution.

FORMATION OF LIFE

The formation of a partnership is not subject to any legal formalities, the agreement between the parties may take any of the following forms;
1. Oral or word of mouth.
2. Written with or without seal
3. Implied from conduct of the parties.

However, the partners may on their own accord reduce the basis of their relationship into a formal document detailing the terms and the condition of the association. The document is the Partnership Deed or Agreement or Articles of Partnership. It is not however, a legal requirement for them to do so.

Contents of a partnership deed
If the partners decide to register the partnership they will be required to have a partnership deed. Such document will contain the following;

1. Nature of business
2. Contribution of the partners. (capital)
3. Profit sharing ratio
4. Rules for determining interest on capital
5. Method of calculating goodwill
6. Power of partners
7. Accounts and audit
8. Expulsion of Partners
9. Procedure for settlement of disputes

Consequences of Non Registration of a Partnership Form of Business Organization

If the firm is not registered then it will suffer the following limitations
1. It cannot enforce its claims against a third party in a court of law
2. It cannot file legal suits against any of its partners
3. Partners of an unregistered firm cannot file any suit to enforce a right against the firm
4. A partner of an unregistered firm cannot file a suit against other partners.

Non registration however does not affect the following rights of a firm;
a. The right of a partner to sue for the dissolution of the firm or for the accounts of a dissolved firm or to enforce any right or power to realize the property of a dissolved firm
b. The power of an official assignee or receiver to realise the property of an insolvent partner
c. The rights of the firm, or its partners, having no place of business
d. The right of a third party to sue the unregistered firm or its partners

Rules applicable in the absence of partnership deed

The rules applicable are contained in Section 28 and 29 of the Partnership Act.
1. Profit and loss are shared equally
2. If a partner incurs liability while discharging the firm’s obligations he is entitled to indemnity.
3. If a partner lends money to the firm, he is entitled to interest on the principal at the rate of 6% per annum
4. A partnership can only change its business with consent of all partners
5. A person can only be admitted as partner with consent of all existing partners.
6. A partner is not entitled to interest on capital before the ascertainment of profit.
7. Every partner is entitled to take part in the management of the firm’s business.
8. A partner is not entitled to remuneration for taking part in the management of the firm’s business.
9. The books of account of the firm must be accessible to all parties
10. Under section 29 of the Act, a partner can only be expelled from the firm if the power to do so is expressly vested another partners.

RELATIONS OF PARTNERS TO PERSONS DEALING WITH THEM

 Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

 An act or instrument relating to the business of the firm, and done or executed in the firm-name, or in any other manner showing an intention to bind the firm, any person thereto authorized, whether a partner or not, is binding on the firm and all the partners

 Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments

 Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless that partner is in fact specially authorized the other partners; but this section does not affect any personal liability incurred an individual partner

 If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.

RELATIONS OF PARTNERS TO ONE ANOTHER

Variation consent of terms of partnership

 The mutual rights and duties of partners, whether ascertained agreement or defined this Act, may be varied the consent of all the partners, and that consent may be either expressed or inferred from a course of dealing.

Partnership property
 All property and rights and interests in property originally brought into the partnership stock or acquired, whether purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement:
Provided that the legal estate or interest in any land which belongs to the partnership shall devolve according to the nature and tenure thereof and the general rules of law applicable thereto, but in trust, so far as necessary, for the persons beneficially interested in the land under this section.

 Where co-owners of an estate or interest in any land, not being itself partnership property, are partners as to profits made the use of that land or estate, and purchase other land or estate out of the profits to be used in the same manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners but as co-owners for the same respective estates and interests as are held them in the land or estate first mentioned at the date of the purchase.

Property bought with partnership money
Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm

Conversion into personal estate of land held as partnership property
Where land or any interest therein has become partnership property, it shall, unless the contrary intention appears, be treated as between the partners (including the representatives of a deceased partner) and also as between the heirs of a deceased partner and his executors or administrators as personal and not real estate.
Execution against partnership property
 Execution of a decree shall not issue against any partnership property except on a judgment against the firm

 The court may, on the application summons of any judgment creditor of a partner, make an order charging that partner’s interest in the partnership property and profits with payment of the amount of the judgment debt and interest thereon, and may the same or a subsequent order appoint a receiver of that partner’s share of profits (whether already declared or accruing), and of any other money which may be coming to him in respect of the partnership, and direct all accounts and inquiries, and give all other orders and directions which might have been directed or given if the charge had been made in favour of the judgment creditor the partner, or which the circumstances of the case may require.

 The other partner or partners shall be at liberty at any time to redeem the interest charged, or, in case of a sale being directed, to purchase the same.

Rules as to interests and duties of partners

The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, the following rules

(a) all the 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 the firm;
(b) the firm must indemnify every partner in respect of payments made and personal liabilities incurred him
i. in the ordinary and proper conduct of the business of the firm; or
ii. in or about anything necessarily done for the preservation of the business or property of the firm;
(c) a partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe is entitled to interest at the rate of six per centum per annum from the date of the payment or advance;
(d) a partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed him;
(e) every partner may take part in the management of the partnership business;
(f) no partner shall be entitled to remuneration for acting in the partnership business;
(g) no person may be introduced as a partner without the consent of all existing partners;
(h) any difference arising as to ordinary matters connected with the partnership business may be decided 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;
(i) the partnership books are to be kept at the place of business the partnership (or the principal place, if there is more than one) and every partner may, at all reasonable times, have access to and inspect and copy any of them

Expulsion of partner
No majority of the partners can expel any partner unless a power to do so has been conferred express agreement between the partners

Retirement from partnership at will
Where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving reasonable notice of his intention so to do to all the other partners.
Where the partnership has originally been constituted deed, a notice in writing, signed the partner giving it, shall be sufficient for this purpose

Where partnership for a term is continued over, continuance on old terms presumed
Where a partnership entered into for a fixed term is continued after the term has expired, and without any express new agreement, the rights and duties of the partners remain the same as they were at the expiration of the term, so far as is consistent with the incidents of a partnership at will.
A continuance of the business the partners or such of them as habitually acted therein during the term without any settlement or liquidation of the partnership affairs is presumed to be a continuance of the partnership

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

Accountability of partners for private profits
Every partner must account to the firm for any benefit derived him without the consent of the other partners from any transaction concerning the partnership, or from any use him of the partnership property, name or business connexion

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

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 him in that business
Rights of assignee of share in partnership
An assignment any partner of his share in the partnership, either absolute or way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to the partners.

In the case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.

LIABILITY OF PARTNERS

Just like in the law of agency a partner exercises both real and ostensible authority, and the firm is generally liable for debts arising in the conduct of a partner.

However, for the firm or other partners to be held liable for the acts of a partner, it must be evident that:

1. The partner was acting in the business of the firm.
2. He was acting in the usual way.
3. He was acting in his capacity as a partner.
In other circumstances a partner would be held personally liable: E.g.

1. If he is prohibited from acting on behalf of the firm.
2. He signs a document without express authority

Liability of a Retiring Partner
Unless otherwise agreed, a retiring partner is only liable for debts and other liabilities upon the date of retirement.

Liability of an Incoming Partner
Unless otherwise agreed, such a party is only liable for debts and other liabilities arising from the date he became a partner.

Liability of a Minor Partner
Under Section 12 of the Partnership Act, a minor partner is not personally liable for debts and other liabilities of the firm. However, his share in the property is liable. Under sec. 13 if a minor partner does not repudiate the partnership during infancy or within a reasonable time after attaining the age of majority, he is personally liable for debts and other liabilities from the date he became a partner.
Liability Estoppel
A person, who is not a partner, may be held liable as a partner the equitable doctrine of estoppel. Under Section 18 of the Act, if a person who is not a partner knowingly permits himself to be held out a partner or represents himself as a partner with the firms knowledge and third parties rely upon the representation, he is estopped from denying the apparent partnership and he is liable.

DISSOLUTION OF PARTNERSHIPS

A partnership can be dissolved through courts intervention or not depending on the circumstances

Dissolution through the court

Under sec. 39 of the Partnership Act, a partnership may be wound up the court on application if it satisfied that:
1. A partner has become a lunatic or is permanently of unsound mind
2. A partner has become permanently incapable of discharging his functions as a partner.
3. A party is continuously guilt of willful breach of the partnership agreement.
4. A partner has conducted himself on manner unfairly prejudicial to the firm and his continued association is likely to bring the firm’s name into disrepute.
5. The firms businesses can only be carried on at a loss.
6. Circumstances are such that it is just and equitable that the firm be wound up e.g. Disagreement.

Dissolution without the courts intervention

1. Performance: A partnership dissolves on the accomplishment of the purpose for which it was formed.
2. Lapse of time: A partnership comes to an end on operational of the duration prescribed the parties.
3. Mutual agreement: This is a situation where the parties agree to dissolve the firm. All partners must be party to the agreement
4. Death: Unless the partnership deed otherwise provides, the death of a partner leads to dissolution.
5. Bankruptcy: Unless the partnership deed otherwise provides a partnership dissolves if a partner is declared bankruptcy a court of competent jurisdiction.
6. Termination at will or at notice: Where the duration of the partnership is not specified, it may be dissolved notice i.e. a partners notice to the others of his intention to have the firm dissolved
7. Illegality: If the business of the partnership becomes illegal reason of change of law or otherwise, the firm is dissolved.
8. Charging a partner’s interest: If a partner’s interest in the firm is charged a court order for a private debt, the firm is dissolved

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