Law of Companies and Partnerships: Agency and Liability

Topic 13: Agency and Liability in Partnerships

• Partnerships have different types of partners with distinct rights and responsibilities.
• It is essential to differentiate between partners and employees within a partnership.
• Partners have a stake in the profits of the firm, but also bear liability for the firm's debts, whereas employees do not.
• Employees are entitled to specific statutory rights, such as protection against unfair dismissal, which do not apply to partners.

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.
• Partnership agreements are contracts of 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.
• 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.
• The extent of liability can depend on the closeness of the connection between the wrongful act and the partner's authorized actions.

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Topic 12: Dissolution

• Dissolution marks the end of the partnership's existence, whether due to mutual agreement or a fixed term expiration.
• There are various causes of general dissolution, including:
  • Mutual agreement
  • Notice by a partner
  • Specific power in the agreement
  • Legislation
  • Misconduct
  • Court order
  • Operational loss
• Technical dissolution occurs whenever there is a change in the partnership's composition.
• The effect of dissolution on a partnership depends on whether there is a partnership agreement in place or not.

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Topic 11: Formation of a Limited Liability Partnership (LLP)

• An LLP is a distinctive form of business entity that combines elements of both partnerships and limited companies.
• The naming of an LLP is a crucial step in its formation, with specific regulations to adhere to.
• 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.
• The incorporation document must provide essential details, including the LLP's name, the registered office's location, the office's address, particulars of the initial members, designation of designated members, and a statement of initial significant control.
• An LLP can be incorporated either electronically or through paper filing.
• Ongoing filing requirements include changes to LLP details, People with Significant Control (PSC), charges, confirmation statement, and annual accounts.

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Topic 10: Formation of a Partnership

• Partnerships have different types of partners with distinct rights and responsibilities.

• It is essential to differentiate between partners and employees within a partnership.

• Partners have a stake in the profits of the firm, but also bear liability for the firm's debts, whereas employees do not.

• Employees are entitled to specific statutory rights, such as protection against unfair dismissal, which do not apply to partners.### Formation of a Partnership

• A partnership can be formed through oral agreements or implied through the actions of individuals carrying on a business together with the intent to make a profit.

• It is advisable to formalize the terms and conditions of the partnership in a written partnership agreement to avoid potential disputes and clarify the rights and responsibilities of each partner.

Key Provisions of Partnership Formation

• In the absence of a written partnership agreement, the Partnership Act 1890 provides default terms that apply to the partnership.
• Default terms include:
  • Equal profit and loss sharing
  • Indemnification of each partner for payments made and personal liabilities incurred
  • Interest on capital at a rate of 5% per annum
  • Capital interest
  • Management participation
  • Remuneration prohibition
  • New partner consent
  • Nature of business change
  • Access to partnership books

Contents of a Partnership Agreement

• A comprehensive partnership agreement should address:
  • Name of the partnership
  • Partnership commencement date
  • Place of business
  • Nature of business
  • Names and roles of each partner
  • Profit-sharing arrangements

Financial Provisions in the Partnership Agreement

• Capital contribution: detailing the amount of capital each partner will contribute to the partnership
• Profit sharing: specifying the ratio or percentage of profits each partner is entitled to
• Salary: outlining salaries paid to partners
• Interest on capital: defining the interest rate paid on capital contributions exceeding the agreed-upon amount
• Drawings: setting limits on the amount partners can withdraw from the business account
• Asset ownership: allocating ownership percentages for partnership assets

Compliance with the Companies Act 2006

• Partnership names must comply with the Companies Act 2006 disclosure requirements
• Disclosure requirements include:
  • Including partnership names on business letters, invoices, orders, and receipts
  • Displaying partner names and UK service addresses in a prominent location at the business premises
• Restrictions on business names include:
  • Not suggesting a government or local authority connection
  • Not using sensitive words without permission
  • Not including terms like 'limited', 'Ltd', 'limited liability partnership', 'LLP', 'public limited company', or 'plc'

Provisions Relating to a Partner Leaving the Partnership

• Introduction:
  • The departure of a partner can significantly impact the dynamics and operations of the business
  • Provisions in the partnership agreement address partner exits, including retirement, expulsion, and restraint of trade
• Retirement of a partner:
  • Retirement is a common way for a partner to exit a partnership
  • The partnership agreement should outline the procedure for partner retirement, including financial requirements and restraint of trade provisions
• Expulsion of a partner:
  • The grounds and procedure for expelling a partner should be clearly defined in the partnership agreement
  • Financial obligations and restraint of trade clauses should be specified
• 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:
  • Restraint of trade clauses 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
• Duration of the partnership:
  • By default, a partnership can continue indefinitely unless a specific duration is specified
  • The partnership agreement can include provisions that dictate the conditions under which the partnership continues

Liability in Partnership

• Holding out:

  • Section 14(1) of the Partnership Act 1890 addresses the concept of 'holding out' in partnerships
  • A person who represents themselves or allows themselves to be represented as a partner in a partnership 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
  • However, complexities arise when examining the timing and nature of the acts in question

• Liabilities of partners upon retirement:

  • A retiring partner's liability for partnership debts and obligations incurred before their retirement persists
  • However, this is a general rule subject to exceptions

• Liabilities following retirement: third-party perspective:

  • A third party can consider all apparent members of the old firm as still being members until they receive notice of the change
  • A retired partner remains liable to a third party who is unaware of their retirement### 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 for a partnership.

• Individual partners must register with the HMRC as being self-employed.

• A partnership will often have a partnership agreement in place, which does not require any set formality.

• Limited Liability Partnerships (LLPs) have extensive requirements, unlike partnerships.

Key Topics in Partnerships

• Formation of a partnership
• Formation of an LLP
• Relationship between partners, including partners as agents
• Dissolution of a partnership