Company law revision questions pt.1

Q1) Explain the duties owed by the partners of a firm to each other AND                                                                B) the factors which might be construed as indicative or otherwise of the existence of a partnership by implication. And how they exist!

Definition of partnership s1

It can consist of two or more parties. Previously there was an upper limit on membership under s. 716 Companies Act 1985. A partnership must be formed for “business” “every trade, occupation or profession” as per s.45 of the 1890 Act. Partnerships must have “a view to make profit”. Does not need to be an “actual” profit but merely an intention to make a profit. Does not apply to Limited Partnerships, at its root a “partnership” is a contract.

The fundamental problem here is that, in the eyes of the law and in particular s.1 of the 1890 Act, “A partnership is a relationship that is determined by the substance of the interactions between the parties, and not by their conscious wishes or the designation which they choose to apply to that relationship.”

Rules for determining existence of partnerships. Among the different rules in s2, s2(3) is the most important. Despite the confusing words used, s2(3) is believed to mean that the court has to find a partnership if the receipt of profits is the only evidence. In reality, the court has always found other relevant evidences to consider and if so, the assistance of s2(3) would be minimal. Thus, the usefulness of s2(3) is clearly in doubt as shown by case laws and the Law commission has even suggested that the whole s2 be repealed from the Act.

Guidelines to determine if a Partnership exists s2 of 1980 act

Sharpe v  Carswell 1910, Lord  Ardwall:

“In short, joint owners are not partners, but are separate individuals holding definite shares in a common subject, but this does not render them either partners or joint adventurers.”

A view to make a profit, this was illustrated in the case of M Young Legal Associates Ltd v Zahid [2006]. The courts found that a solicitor in a law firm who was paid a fixed amount and had no entitlement to share in the profits was a partner because of other elements of his working relationship. Another case with similar scenario was Rowlands v Hodson [2009] R was sole practitioner but determined to sell her practice because of ill health. Cloutman (C) purchased the practice – but was insufficiently qualified to practice on own account. R entered into partnership with C. R entitled to 1% of profits and C 99. R did no work after first year Held to be partner and liable for debts of firm for unsatisfied negligence claim.

Partners of a firm are governed by the Partnership Act 1890 and their duties are stated in section 28-30 of the 1890 act. The definition of a partnership is stated in section 1 of the act. When a partnership is formed, partners would tend to create a partnership agreement which sets down among other things, the nature of the business and their rights and responsibilities. If they don’t draw this up the 1980 act provides a set of rules as a fall back.

A Partner is subject to strict duties towards the additional parties in the firm. These duties are equal in terms of when they arise. It may be that a partner is subject to duties of the utmost good faith and if their duties arise due to the fiduciary nature of the relationship.

Under section 28 of the Act is the duty to account. If a partner doesn’t follow this procedure, it would require the partner to pay to the firm sums made in breach of that duty.

The duty not to make a secret profit is another fiduciary duty seen in section 29 of the 1890 act.  . This was illustrated in the case of M’Niven v Peffers 1868 where the Lord Justice Clerk held that due to one of the partners who before the expiring of a lease obtained a new lease in his name and carried on the same business said, a managing partner who goes behind the back of his partner is not entitled to keep the profits for himself. He was ordered to share the profits. This case is very important as it emphasise the pecuniary interests of the parties and the good will involved which was taken into consideration the making  the decision.

Another duty owed by the partners of a firm to each other is not to compete with the firm. This is set out section 30 of the act. As illustrated in the case of Pilans Bros v Pilars 1908 where 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. The court held that he had to share profits with the partnership.

These are the duties owed by the partners of a firm to each other where good faith…

  1. B) Dissolution other than the court

S32,33,34 41

  1. B) Implication is by the court only

Section 35 of the 1890 act provides numerous grounds where the court can decide to dissolve a partnership on the application of the partner. Permanent incapacity is one factor where a partner may petition for the dissolution. However, as seen in the case of Eadie v MacBeans Bonis 1885, the court refused the petition. Three partners wanted to dissolve when the fourth partner suffered paralysis and could no longer work. Held, he didn’t have to dedicate all of his time unlike the other three, he only had to provide money and he did that so court refused to dissolve.

Another factor is prejudicial conduct, which falls under section 35 of the Act (c). This was illustrated in the case of Carmichael v Evans 1904 where the court upheld the expulsion of a partner who travelled on a train without a ticket, classing his crime committed as dishonesty. Their partnership agreement stated not to act in a scandalous behaviour which emphasises how important the agreement can be.

Breach of conduct – a petition for dissolution can be made if partner “wilfully or persistently commits a breach of the p. agreement.

Once it is dissolved, a partnership it’s no longer a legal person.

The Act has governed the law of partnerships for over 100 years, and it applied to partnerships which were small in size at the time of its enactment. Partnerships nowadays usually have partners ranging from two to many hundreds and it is arguable that the Act cannot meet the expectation of these large partnerships. Yet, the need to reform is not simply based on modernization. Problems caused by the vagueness of the Act should value concern especially in the rising number and expectation of modern partnerships today. It is high time to balance flexibility and certainty of the Act. Although most of the problems posed by the Act can be solved by drafting a partnership agreement which allows each specific partnership to create its own provisions