Company Law: Agency and Liability in Partnerships

Topic 13: Agency and Liability in Partnerships

• Partnerships can be complex entities with different types of partners, each bearing distinct rights and responsibilities.
• It is essential to differentiate between partners and employees within a partnership, as they have contrasting roles and legal statuses.
• Partners typically have a stake in the profits of the firm, whereas employees do not share in these profits.
• However, partners also bear liability for the firm's debts, which employees do not.
• Employees are entitled to specific statutory rights, such as protection against unfair dismissal, which do not apply to partners.
• Determining whether an individual is a partner or an employee can be intricate, and there is no one-size-fits-all test.
• Factors like profit-sharing rights may indicate partnership status.
• Each case must be evaluated based on its unique circumstances.

The Relationship between Partners

• Partnership agreements can set forth express duties and obligations for partners.
• The Partnership Act 1890 introduces implied rights and duties to regulate partner relationships.
• Notably, partnership agreements are contracts of the utmost good faith (uberrimae fidei), imposing fiduciary duties on partners.
• Three key fiduciary duties under the Partnership Act 1890 include:
  • Duty to render true accounts: Partners must provide accurate information about partnership matters to other partners or their legal representatives.
  • Duty to account for benefits derived: Partners must account for any benefits they gain without the consent of other partners from partnership transactions or property.
  • Duty to avoid competition: Partners are prohibited from competing with the partnership's business without consent and must account for profits made in competing ventures.

The Relationship between Partners and Third Parties

• The Partnership Act 1890 governs how partners can contractually bind the firm and their co-partners to third parties.
• Section 5 of the Act defines every partner as an agent of the firm and co-partners for the partnership's business.
• Partners can bind the firm and co-partners to third parties when acting within their authority and in the usual course of business.
• However, partners cannot bind the firm or co-partners when they lack authority, and the third party either knows of the lack of authority or does not believe the individual to be a partner.

Liability for Tortious and Wrongful Acts

• Section 10 of the Partnership Act 1890 addresses liability for wrongful acts or omissions of partners within the ordinary course of the firm's business or with their co-partners' authority.
• Partners and the firm can be vicariously liable for these acts.
• Notable cases, such as Dubai Aluminium Co Ltd v Salaam, emphasize that even if acts are undertaken unlawfully or without authorization, liability under Section 10 still applies if the act is within the firm's ordinary course of business.

Topic 12: Dissolution

• Dissolution is a crucial phase in the lifecycle of a partnership.
• It marks the end of the partnership's existence, whether due to mutual agreement or a fixed term expiration.
• There are two types of dissolution: general and technical.
• General dissolution is a comprehensive termination of the partnership, involving winding up the partnership's affairs and settling its accounts.
• Technical dissolution occurs whenever there is a change in the partnership's composition.

Methods of Dissolution

• Mutual agreement: Partners can agree to dissolve the partnership, either informally or as stipulated in the partnership agreement.
• Notice by a partner: A partner can serve notice for dissolution if allowed by the partnership agreement.
• Specific power in the agreement: The partnership agreement may grant a partner the power to initiate dissolution.
• Legislation: Partnerships can dissolve due to events outlined in legislation, such as the death or bankruptcy of a partner, unless otherwise agreed.
• Misconduct: Fraud, misrepresentation, rescission, or engagement in illegal activities can trigger dissolution.
• Court order: A court can order dissolution in cases of mental incapacity or other ill-health.
• Operational loss: If the business can only operate at a loss, dissolution may be necessary.

Effect of Dissolution

• The effect of dissolution on a partnership depends on whether there is a partnership agreement in place or not.
• Profits and losses: In the absence of a specific provision in the partnership agreement, the Partnership Act 1890 dictates that profits and losses should be divided equally among partners.
• Dissolution and retirement: According to section 26 of the Partnership Act 1890, any partner can dissolve the entire partnership by giving notice to the other partners, effective immediately.
• Death: The Partnership Act 1890 mandates that the death of any partner results in the dissolution of the entire partnership.
• Expulsion: In the absence of a provision to the contrary, section 24 of the Partnership Act 1890 prohibits the expulsion of a partner.

Topic 11: Formation of a Limited Liability Partnership

• A Limited Liability Partnership (LLP) is a distinctive form of business entity that combines elements of both partnerships and limited companies.
• Unlike a traditional partnership, an LLP offers its members limited liability, shielding their personal assets from business debts and liabilities.

Approved Name

• The chosen name must adhere to specific regulations, such as not being identical to the name of an existing LLP.
• The name must conclude with either ‘Limited Liability Partnership’ or its abbreviation ‘LLP’, or an alternative ending in Wales.

Documentation

• The formation of an LLP hinges on the submission of specific documents to the Registrar of Companies, accompanied by the requisite fee, all under an approved name.
• Section 2(1) of the LLP Act 2000 outlines the key requirements, including the incorporation document and a statement affirming compliance.

Method of Incorporation

• An LLP can be incorporated either electronically or through paper filing.
• The application form to be used is the ‘Form LL IN01 Application for the incorporation of a Limited Liability Partnership (LLP)’.

Ongoing Filing Requirements

• Changes to LLP details: LLPs must notify Companies House of any changes in membership using various forms.
• People with Significant Control (PSC): Initial PSC details must be provided on registration, and any subsequent changes must be reported within 14 days.
• Charges: When creating a charge, an LLP must submit a statement of particulars, a copy of the charge, and the necessary fee to Companies House within 21 days.
• Confirmation statement: An annual confirmation statement is required to affirm the accuracy and currency of information held by Companies House.
• Annual accounts: LLPs are obligated to file annual accounts with Companies House every year, ensuring financial transparency and accountability.

Topic 10: Formation of a Partnership

• Partnerships can be complex entities with different types of partners, each bearing distinct rights and responsibilities.
• It is essential to differentiate between partners and employees within a partnership, as they have contrasting roles and legal statuses.
• Determining whether an individual is a partner or an employee can be intricate, and there is no one-size-fits-all test.### Formation of a Partnership
• The formation of a partnership in the UK is relatively simple, often beginning through informal agreements or common business activities.
• It is advisable to draft a comprehensive partnership agreement to ensure clarity and avoid future disputes.
• The Partnership Act 1890 provides default terms that apply to the partnership in the absence of a written agreement.

Implied Terms in the Absence of a Partnership Agreement

• Equal profit and loss sharing: all partners are entitled to share profits and losses equally, regardless of their capital contribution.
• Indemnification: the partnership must indemnify each partner for payments made and personal liabilities incurred in the ordinary course of business.
• Interest on capital: a partner who contributes more capital than agreed upon is entitled to interest at a rate of five percent per annum.
• Capital interest: partners are not entitled to interest on their capital until profits are ascertained.
• Management participation: each partner may participate in the management of the partnership.
• Remuneration prohibition: partners cannot receive remuneration for their role in the partnership.
• New partner consent: introducing a new partner requires the unanimous consent of all existing partners.
• Nature of business change: altering the nature of the partnership's business requires the consent of all existing partners.
• Access to partnership books: every partner has the right to access, inspect, and copy partnership books.

Contents of a Partnership Agreement

• Name of the partnership: if the partnership's name includes the surnames of all partners, no restrictions apply.
• Partnership commencement date: partnerships can begin through common business activities.
• Place of business: specify the business address and geographic coverage.
• Nature of business: describe the primary business activities and any provisions for future expansion or change in direction.
• Names and roles of each partner: define each partner's role, such as general partner, fixed equity partner, silent partner, or salaried partner, along with their respective responsibilities and profit-sharing arrangements.

Financial Provisions in the Partnership Agreement

• Capital contribution: detail the amount of capital each partner will contribute to the partnership.
• Profit sharing: specify the ratio or percentage of profits each partner is entitled to.
• Salary: outline the salaries paid to partners, deducted from profits before profit-sharing calculations.
• Interest on capital: define the interest rate paid on capital contributions exceeding the agreed-upon amount.
• Drawings: set limits on the amount partners can withdraw from the business account.
• Asset ownership: allocate ownership percentages for partnership assets.

Compliance with the Companies Act 2006 (CA 2006)

• Disclosure requirements: partnership names must be included on business letters, invoices, orders for goods or services, receipts, and written demands for payment of debt.
• Prominent notice: display partner names and UK service addresses in a prominent location at the business premises.
• Restrictions on business names: business names should not suggest a government or local authority connection, use sensitive words without permission, or include terms like 'limited,' 'Ltd,' 'limited liability partnership,' 'LLP,' 'public limited company,' or 'plc.'

Provisions Relating to a Partner Leaving the Partnership

• Rights, responsibilities, and liability: the partnership agreement should address key elements such as partner roles, capital contributions, profit sharing, salaries, and the use of partnership assets.
• Retirement of a partner: unless the partnership agreement specifies a different procedure, the retirement process involves the departing partner giving notice of their intention to dissolve the partnership.
• Expulsion of a partner: the grounds and procedure for expelling a partner should be clearly defined in the partnership agreement.
• Payment for departing partner: the partnership agreement should specify the basis for calculating the departing partner's share of the partnership's assets and profits.
• Restraint of trade: restrain of trade clauses can prevent an exiting partner from engaging in specific activities that might compete with the partnership or harm its interests.
• Arbitration: partnership agreements can include provisions specifying the circumstances in which disputes must be resolved through arbitration rather than civil court actions.

Liability in Partnership

• Holding out: Section 14(1) of the Partnership Act 1890 addresses the concept of 'holding out' in partnerships, where a person who represents themselves or allows themselves to be represented as a partner is liable as if they were a partner to any third party who has relied on this representation.
• Liability of new partners: a person admitted as a partner into an existing firm is not liable for anything done before they became a partner.
• Liabilities of Partners Upon Retirement: when a partner retires from a partnership, their liability for partnership debts and obligations incurred before their retirement persists.
• Liabilities following retirement: from the perspective of third parties, Section 36(1) of the PA 1890 holds relevance, stating that if a person deals with a firm after a change in its composition, they can consider all apparent members of the old firm as still being members until they receive notice of the change.### Introduction to Partnerships
• A partnership is created when at least two people start a business together with a view of making a profit.
• There is no formal process or system of registration.
• Individual partners must register with the HMRC as being self-employed.
• A partnership will invariably choose to have a partnership agreement in place which does not require any set formality.

Termination of Companies

• Company Voluntary Arrangement (CVA): a mechanism to help a struggling company manage its financial problems.
  • Involves a compromise between the company and its creditors, supervised by an insolvency practitioner.
  • A CVA is approved if the majority of creditors and shareholders vote in favour, binding unsecured creditors.
• Administration: aims to rescue a company by placing it under the control of an administrator.
  • Creditors cannot initiate winding-up proceedings during administration without court permission.
  • The administrator's role includes reorganising the company, negotiating with creditors, selling the business or assets, and repaying secured or preferential creditors.
• Fixed asset receivership: a receiver, appointed by a creditor holding a charge over a debtor's assets, takes custody of these assets, manages them, and collects income.
• Liquidation: aims to dissolve a company as a separate legal entity.
  • Occurs through voluntary winding-up by members or creditors or in the public interest.
  • Liquidation settles the company's affairs, pays off debts, and distributes remaining assets to shareholders.
• Clawback of assets for creditors: mechanisms recover improperly distributed assets before liquidation or administration.
  • Transactions subject to clawback include preference payments, transactions at an undervalue, and those resulting from fraudulent or wrongful trading.
• The order of priority for distribution to creditors:
  1. Fixed charge creditors
  2. Expenses of the insolvency process
  3. Preferential creditors
  4. Floating charge creditors
  5. Unsecured creditors
  6. Shareholders

Shares and Debentures

• Funding options for companies: debt finance and equity finance.
• Debt finance:
  • Advantages: ownership is retained, and control remains with the company.
  • Disadvantages: repayment obligations, including interest charges, and failure to repay can lead to insolvency.
• Equity finance:
  • Advantages: no obligation to repay received funds, and no additional financial liabilities.
  • Disadvantages: dilution of ownership and decision-making power.
• Debentures:
  • Represent a company's debt and serve as the loan agreement.
  • Must be registered with Companies House within 21 days.
  • Outline how business assets secure the loan and specify the interest rate.
• Shares:
  • Defined in Section 540 of the CA 2006 as a share in the company's share capital.
  • Types of shares: ordinary, preference, deferred, non-voting, and redeemable.
• Distribution of profits and gains:
  • Shareholders benefit from their investments when companies distribute profits and gains.
  • Distributions are subject to certain exceptions, ensuring that net assets stay above share capital.

Rights of Minority Shareholders

• Shareholders play a crucial role in the governance of a company.
• The role of a shareholder: participate in decision-making, hold significant decision-making power, and bear the responsibility of making significant decisions.
• Shareholder rights:
  • Receive a share certificate within two months of allotment or transfer.
  • Access important documents related to the company's incorporation and management.
  • Participate in general meetings and respond to written resolutions.
• Shareholder powers:
  • Removal of Directors and Auditors.
  • Winding up the company.
  • Applying to the court for remedies if the company's management is unfairly prejudicial.