BLP - Partnership Liabilities

A partner who acting within the authority granted to him (s5 PA1890):

• Will bind his fellow partners and
• Make any debts so incurred by him partnership rather than personal debts (thus also binding the other partners).

In contract if a partner acts outside his authority then any debts will be his alone.

Liability of partners for partnership debts

Each partner is both jointly and severally liable to outsiders for any act or omission committed by any of the partners/employees in carrying on the partnership (s9-12 PA 1890). A third party has the option to sue:

1. The partnership (meaning each partner is liable).
2. All the partners in their own names.
3. Any one or more of the partners in their own name.

For the full amount of his loss, depending on which the 3^rd party believes to be the most successful course of action. Allowing the 3^rd party to cherry pick the most affluent or easily accessible partner and pursue him.

Liability of new and retiring partners

Under s17(1) of PA 1890: “A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.” Unless the new partner enters into an agreement to that effect.

Under s17(2) “A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement.”

Unless

17 (3) “A retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm and the creditors”.

A retiring partner could also request his fellow partners (and creditor if possible) indemnify him against any historic debts unsettled at the date of his retirement. However whether or not such an indemnity is granted and the terms it sets out will depend on the strength of the outgoing partners bargaining position.

ALTHOUGH a partner has no liability for debts incurred after he ceases to be a partner (s17(2) PA 1890) this can be overturned. And thus he must be careful that they do not:

• Allow themselves to be held out (s14 PA) as still being a partner or
• Permit 3^rd parties to continue in the belief they are still partners (s36 PA).

This can be done by ensuring his name is removed from all partnerships documents. As well as under s36 PA give notice both generally to the world at large through an advertisement in the Gazette. Allowing a retiring partner to escape liability for future debts. And if possible under s36 (1) write to the firms actual clients notifying them of his retirement.

BLP - Partnership

Intro

Partnerships are created by two or more people “carrying on business in common with a view to profit” (s1 PA 1890). They do not necessarily need written agreement between partners for it to exist. In the absence of an agreement they are governed by PA 1890.

No registration is required. Altho do have to inform HMRC within 3 months of commencing business. Lack of registration and limited regulation mean Partnerships can keep internal affairs private and in theory is cheaper to run.

They are however taxed as self-employed people therefore have to pay income tax.

Legal Status of Partnership

All partners share in responsibility for debts and obligation of the partnership. Their liability is joint and several (any partner of the business can be called upon by a creditor to settle a debt. Which can ultimately leading to partner becoming bankrupt).

It is the partners themselves who are the business and it is they who are and who will be responsible personally for what is done in the name of the Partnership. Thus no protection is offered to partners from 3^rd parties. Therefore no need for a 3^rd party to request a personal guarantee when lending/ offering credit to a partnership. The partners are already personally liable for all partnership liabilities.

Partnership Agreement

Is whatever the partners agree between themselves therefore can be oral or in writing express or implied. A Partnership exists as long as:

• Existence of a contractual intention and
• A relationship capable of satisfying required of s1 PA based on intent.

Partners are also free to agree any restrictions they like between themselves within their agreement and thereby bind themselves contractually even if such agreement curtails the rights given to them under PA 1890. However what they can’t do is restrict the protection given to third parties under PA 1890.

Under s19 PA 1890 partners are free to vary the terms of the agreement if they so choose. But only if all the partners unanimously agree to its amendments.

No matter what form the Partnership Agreement takes it’s always a private document and may be kept confidential between partners. It does not appear on any public register unlike those of a limited company and no third party has the right to demand to see it.

BLP - Entering into contracts, agreements and arrangements

It is common for directors to have the authority to enter a wide range of contracts. Such authority comes from Table A art 70:

70 … the business of the company shall be managed by the directors who may exercise all of the powers of the company.

Therefore subject to CA 06, the companies own Memorandum & Articles directors can make a decision without requiring member approval.

HOWEVER under s190 CA 06, a director or a person connected with a director buying or selling an asset for/from the company and that asset is “a substantial non-cash asset” will require approval by the members by ordinary resolution. Either before the contract is entered into or entered into subject to members consent.

Test for a substantial non-cash asset (s191)

• An asset worth less than £5,000 is never substantial.
• An asset worth in excess of £100,000 always will be substantial.
• An asset worth between £5000 - £100,000 will be substantial, if it exceeds 10% of the company’s asset value (or net asset value).

A connected person with a director of a company is (s252-253 CA 06):

• A member of the directors family.
• A corporate body he’s connected to.
• Child of director
• Parents

Therefore before directors can purchase an asset under art 70, which is a substantial non-cash asset, they must first obtain the consent of the members consent by ordinary resolution or at least make it a condition of the contract that approval being obtained from members.

OTHERWISE the transaction is generally voidable at the Company’s request whilst those “liable” must account for any gain and indemnify the Company in respect of any related loss (s195 CA 06).