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).

BLP - Differentiate between employed and self-employed

Why employment status is important?

Many employment rights such as the right not to be unfairly dismissed, and the right to redundancy pay, rely on you being an employee.

Many employers take on self-employed workers in order to avoid employee rights and having to pay tax and national insurance for their employees.

It doesn’t matter how your employer refers to you as (employed or self-employed). What matters is what happens in practice, how you work? How much work you do? Do you use your own tools or the employer provides them?

The main differences:

Employee	Has a contract of service (expressly or implied). Existence of a maximum hours threshold and minimum wage.	including unfair dismissal, redundancy and maternity rights - includes all those rights enjoyed by workers
Self-Employed	A person in business on their own account. Have fewer rights except those they negotiated for themselves.	Certain rights in respect of trade unions and under the Human Rights Act only.

The courts have created a test to assess whether a worker is employed or self-employed:

• Control – the greater the control exercised by an employers over the manner in which its workers carry out their duties the more likely they are to be employees.
• Mutuality of obligation to provide and to do work – employers are obliged to offer their employees work and employees are obliged to do it, so the greater the obligation the more likely that they are employees.
• Substitution – employees are usually obligated to carry out their duties personally so If the worker can send along a “stand-in” then they are more likely to be self-employed.

BLP - Choosing a business name

A client needs to consider:

• Any regulatory regime (if any) that applies to the name chosen &
• Whether the name chosen be legally protected.

Regulatory regime

Different regimes for incorporated businesses (e.g. companies & LLP) and unincorporated business (partnerships and sole traders).

Incorporated businesses (Companies & LLP)

Neither limited companies nor LLP can be registered (i.e. cannot form) unless the name chosen by their founders is approved by Registrar of Companies. To get that approval the name must not be:

• An existing name on the index, maintained by the Registrar of Companies.
• A name whose use would be a criminal offence.
• A name which is offensive.
• A name which is misleading.
• A name which would suggest a link with HM Government.
• Nor contain any prescribed words without the consent of the relevant regulatory body (Company & business Names Regulations 1981 –SI 1981/1865).

See also CA 85 (ss25-29 & 348-351) & Limited Liability Partnership Act 2000.

Unincorporated businesses (Partnerships & Sole Traders)

As long as a sole trader or Partnership choose to trade under their own name(s) then no regulations apply. Because everyone transacting with such a business knows the identity of those who run the business (s1 Business Names Act 1985).

If however they wish to use a “business or trading name” would mean that ss2-11 of the Business Names Act 1985 would need to be complied with, i.e. so that the actual surnames of those running the business are disclosed on all correspondences (invoices) so that creditors and all third parties know who they are dealing with.

The use of any prescribed names in the business name requires permission of the relevant specified body (see Company and Business Names Regulations 1981 for a full list of words and the appropriate body).

A corporate body wishing to trade under a business name would be required to comply with Business Names Act s1(1)(c). Which would mean the corporate body’s registered name would have to be disclosed on all stationary etc. Again so that the creditor knows who they are dealing with.

HOWEVER AFTER 1^ST OCTOBER 2008 CORPORATE NAMES WILL BE DEALT WITH UNDER PART 5 OF CA 06 WHILST BUSINESS NAMES WILL BE DEALT WITH UNDER PART 41.

BLP- Removal of Director

Table A article 81 deals with this and provides that the office of director will be vacated in a number of circumstances:

1. He ceases to be a director by virtue of … the act or prohibited by law from being a director.
2. He becomes bankrupt.
3. He resigns his office by notice to the company.
4. He shall for more than six consecutive months have been absent without permission of the directors from meetings of directors held during that period and the directors resolve that his office be vacated (taking article 11+12 into account).

It is therefore quite common for companies to supplement these provisions by giving the directors/members powers to remove in a wider range for circumstances.

Removal of director by members

Companies shall also be bound by s168 CA 06.; giving members power to remove a director by ordinary resolution at a meeting subject to a directors right to protest under s169 CA 06 (not that it’ll make a difference). Special notice to the company will be required (s312 CA 06) of at least 28 days. Therefore you can’t use short notice.

As a director is also a member, he may also have the benefit of what is known as a “Bushell v Faith” clause in the company’s articles (article 10). This gives the members enhanced voting rights on a motion to remove a director where he/she has less than 50% of the shares in the company.

Removal from Executive office

If the director is an executive then under Table A article 84 removal from the board would also terminate this role and the directors employment with immediate effect. However this can have employment law consequences as termination of an employment contract without notice may result in having to pay compensation. Unless the director has been guilty of very serious misconduct.

BLP - Appointment of a Director

S154 CA 06 requires every private company to have at least one director, the first being appointed through the signing and submission of Form 10. There after appointment is governed by a company’s Articles (table A Articles 78-79).

78 …a company may by ordinary resolution appoint a person who is willing to act as a director either to fill a vacancy or as an additional director…

79 The directors may appoint a person willing to act as a director, provided that the appointment does not exceed the maximum number of directors in accordance with the articles…

Once a new director has been appointed then the Registrar of Companies must also be informed using the appropriate Form (288(a)). However a director may also wish to be appointed to an executive role within the company (Table A article 84).

Executive directors should be issued with an employment contract (sometimes referred to as a “service agreement” and defined as a “Service contract” in s277 CA 06) with the company. If they do then it’s important to ensure that s188-189 and 228 CA 06 are complied with:

• S188 CA 06 provides where the term of a directors employment is or longer than two years then the company may not agree to such a provision unless it has been approved by a resolution of members of the company.
• S189 CA 06 states where s188 is contravened then the provision in the contract as to duration will be void and the contract will instead be terminable on “reasonable notice”.
• S228 states that a copy of all current directors service contracts (or a memoranda of their main terms) must be kept at the company’s registered office (or another authorised place) and must be retained for at least one year after termination.