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BBAM 2212: Business law Lesson Two Partnership Prepared by :- Mrs.(Dr).Sathana.Vaikunthavasan Senior Lecturer Department of Marketing University of Jaffna Business organizations A business organization consists of an individual or a group of individ...

BBAM 2212: Business law Lesson Two Partnership Prepared by :- Mrs.(Dr).Sathana.Vaikunthavasan Senior Lecturer Department of Marketing University of Jaffna Business organizations A business organization consists of an individual or a group of individuals working together to produce goods and services required to fulfill human needs and wants Risk by involving in business Business organizations can be classified based on different criteria Ownership Objective Scale Based on ownership: Private sector businesses Public sector businesses Based on their objectives Profit oriented businesses Not-for profit organizations Based on the scale: Small and medium scale businesses(SMEs) Large scale businesses Business organizations continue…………….. Based on the ownership, private sector can be further classified as: Sole proprietorships Partnerships Incorporated companies Sole proprietor A business started, owned and run solely by the owner is known as a sole proprietorship. Main characteristics of sole proprietorship: Capital is provided by the owner Ownership rests with a single person Profits or losses are borne alone No continued existence Unlimited liability of the owner Registration is not mandatory Legal personality Business can solely be led at owner’s discretion Starting Sole Proprietorships Steps which should be followed practically by an entrepreneur Get license form the Local authority. Obtaining the following applications from the Divisional Secretariat Handing over the certified report of the Grama Niladharee and the duly completed application form along with the registration fee to the Divisional Secretary Issue the Certificate of Registration of Business Name. Partnership Partnership Partnership is a relationship which subsists between persons to carry on a business in common with a view of profit. The following elements could be found in a partnership: 1. Unless the capital exceeds Rs. 1000, the agreement could commence verbally or by conduct. If the capital exceeds Rs. 1000/=, the partnership agreement must be in writing. 2. Minimum 2 persons, company act no. 7 of 2007 states –maximum number of persons 20 3. There must be a business which includes every trade, profession or other occupation 4. Partners must have an intensions to do their business together and to share profits and losses among them. 5. Non profit organization can’t be a partnership Characteristics of partnerships Number of partners Existence of an agreed (stipulated) relationship among partners No continued existence Unlimited liability of the partners No separate legal identity Not mandatory to register a partnership Every partner will be a representative (or an agent) of other partners Types of partners General partner takes active participation in the firm and the running of the business. Sleeping partner/ dormant partner does not participate in the daily functioning of the partnership firm. bound by the action of all the other partners. share the profit and losses. Salaried partner no right to participate in the profits and losses of the partnership. no voting rights in relation to the partnership. Rules regarding creation of Partnership A partnership must be created only for a legal purpose If capital of a partnership is more than Rs, 1000/-, then , the agreement of such partnership must be in writing. Sivakumar V. Rajasekaram: there was no written agreement for the partnership, a number of documents were shown to prove that the business was carried on in partnership. Bust the privy council hold that these documents are insufficient to fulfill the requirements. Partnership Name: If the partnership does not contain the true full name of partners, such names will have to be registered within 14days of the commencement of the business. It must not contain words : president, presidential, national, state, Sri Lanka, corporation, society, Municipal, incorporated, company or likely words Minor could be a partner Rights and duties of Partners Partnership agreement Partnership Act-Partnership Act of 1890 Contribute to the capital equally and share the profits equally Indemnify every partner in respect of payments made and personal liabilities incurred by him Partner gives a loan – entitled to an interest of 5% per annum. No partner is entitled to interests on capital Not entitled to receive a salary Ordinary matters are decided by majority of votes, an equal voting new changes can be made. No new partner shall be admitted without the consent of all partners The partnership book must be kept in the place of business All partners must agree to expel a partner. Duties of partners Every partner should submit true accounts and full information regarding his dealing to other partners. Bentley V. Craven(1853) was employed to buy sugar on behalf of firm. He bought sugar at a discount and sold it to the firm at the market price. Court held that partnership was entitled to recover the profits from him. Bentley V. Craven (1853) Year: 1853 Plaintiff: Bentley Defendant: Craven Issue: Craven bought huge stock of sugar on his own account and later sold it to the partnership at a profit, without declaring his interest to other partners. Rule of law: partner should be just, faithful and observe utmost good faith towards every other partner of the firm. Court’s reasoning: The profit obtained from a partnership business must be divided among the partners. It is not justice to make individual profits from a partnership. Conclusion: The partnership was entitled to recover the profit from the defendant. Duties of partners Disclose full information with regard to all benefits, all transaction or any use by him of the partnership property, name or business connection Pathirana V. Pathirana a disputes arose between two partners. One bought goods on credit using the name of the partnership but did not share the profits with the other. Court decided that he is liable to share the profits with the other. Pathirana V. Pathirana Year: 1966 Plaintiff: Ariya pathirana Defendant: Robert watte pathirana Issue: A partnership between the parties had held a contract for the exclusive supply of a foreign company’s goods in Ceylon. One of the partners cancelled the partnership’s contract and took a new contract in his name alone. This contract was said to be personal to that partner. Rule of law: Partnership law, after termination one partner carries on the partnership business using the capital of other, that partner is liable to account to the partnership. Court’s reasoning: This new contract was to be treated as partnership property. Since it arose out of the substantial goodwill which the partnership had generated. Conclusion: This new contract was to be treated as partnership property, that partner is liable to account to the partnership. Duties of partners Section 30 of the Act- a duty of every partner not to complete with partnership by carrying on a business of the same nature as and competing with that of the firm without the consent of other partners. Pillans Bros V Pillans there was a partnership between three brothers, one acquired a rival business of a similar nature, court held that the profit of the rival business should be shared between the other two partners. Pillans Bros V Pillans Year 1908 Plaintiff: Pillans Bros Defendant: Pillans Issue: One of the partners in a business that manufactured nuts and bolts bought another nut and bolt factory a few miles away and began operating as a sole trader. Rule of Law: Partnership Law, duty not to compete with the firm Court’s Reasoning: The court held that he had to share profits with the partnership. Conclusion: Breach of duties and was held in court that he had to account to the partnership for the profits made in the business. Liabilities of Partners Liability of Contract Partners enter in to a contract All partners will be jointly and severely liable to those contracts Liability on debts Every partner is responsible for the full amount of the firm’s debt. Liability for torts Tort is a wrongful act- in injury to another person, property, reputation or the like and for which the injured party is entitled to compensation. The partners are jointly liable Injured party can sue all the partners together or separately. Relationship between partners and third parties Third parties have no right to inspect the partnership agreement Dissolution of Partnership Under court order or without intervention court Section 35 of the Act, an application can be made by a partner when Partner is found lunatic Permanently incapable of performing his part Guilty of conduct which is prejudicial to the partnership business Breach the partnership agreement A partnership can only be carried on at a loss The court thinks it is just and equitable to dissolve Dissolution of Partnership continue………….. Dissolution without intervention of court: By agreement of all partners By the expiry of the agreed time On the death or bankruptcy When a partner sells his share to an outsider When a partner gives notice of the intension to dissolve the partnership When the business of the partnership has become illegal End