Situation of Partnership and Responsibilities of Members

This answer will consider the situation of the partnership and will comment on how the nature of the partnership affects the status and responsibilities of its members. It will consider the nature of the unlimited partnership as opposed to the limited partnership.

Section 1(1) of the Partnership Act 1890 [1] defines a partnership as the relation that subsists between two or more people to carry on business with a view of making profit. Partnership has no separate legal identity; they cannot make contracts, commit crimes or be sued and confers unlimited liability [2] . This makes it possible for each partner to be liable without limit for debts incurred by other partners in the course of partnership business [3] .

In relation to Imran, he might probably be liable for the debt [4] . This is because there is no written partnership agreement, and the firm is an unlimited company which means that he may be personally responsible, as one of the partners for the debt. Firstly it is for Imran to take steps to avoid future liability for partnership debts [5] . This is because the provisions of sections 36 and 37 of the Act [6] stated that “a departing partner must inform all existing clients of their departure and put notice to that effect in the London Gazette to inform any potential clients” [7] . Secondly Imran’s interest in the firm must be purchased [8] . Section 43 [9] states that an outgoing partner’s interest is a debt due to him from the remaining partners [10] . Where a creditor relates with a firm after a change in its constitution, they are entitled to be apparent leaving members as still being members of the firm until he has placed notice of the change s36 (1) [11] . The Law Commission proposed that an outgoing partner should be bound to transfer his interest to the remaining partners however it must be stated in the partnership agreement how the interest will be purchased [12] . Section 5 of the Act binds every member of a partnership firm as agent, hence, their business activity is associated without authority, and under s14 “everyone who by words, spoken or written, or by conduct, represents himself, or knowingly allows himself to be represented as a partner in a particular firm, is liable as a partner to anyone who has because of that given credit to the firm or advanced money to it”. The individual will then be liable in debt to a creditor current [13] .

In terms of the removal of Mike as a result of his conviction, section 25 made it difficult if not impossible for a majority of partners to expel any partner unless it is expressly stated in their partnership agreement. Unfortunately, the Peach Boys have not got one, this means they would reverse to the Act. Situation like this leaves the partners with no choice where the offence could severely affect the firm’s going concern activity. An under the influence conviction is very damaging and could definitely affect the business, Mike should also be given the opportunity to defend himself [14] . Option here is technical dissolution by asking court to grant Syers’s dissolution order [15] . If the expulsion clause covers the complaint under which the majority expels a partner and whether the partners have complied with the procedural requirements set out in the agreement. Therefore no expulsion can take place without an express clause to that effect. A court may decide whether an expulsion clause has not been abused by ascertaining if the clause covers the complaint under which the majority expels a partner and whether the partners have complied with the procedural requirements set out in the agreement. [16] In Carmichael v Evans [17] , it was decided that a junior partner who travelled without ticket had flagrantly breached his duty. All these cases will be relevant if the Peach Boys had a written agreement with this clause.

The major consequence of entering into a partnership is that the partners owe a fiduciary duty of good faith to one another. For example, in Floyd v Cheney [18] , an architect engaged an assistant with a view to partnership. The assistant removed certain documents and photographed others in the absence of the architect who then sued for the return of the documents and negatives and sought an injunction restraining the use of confidential information. There was a dispute as to whether this was a partnership or a master/servant relationship. However, Megarry J held that “even if this was a partnership, there existed a duty of good faith which prevented the assistant from acting as he did”. Section 28 provides that:

“Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.”

Partners are fiduciaries and must not make unauthorised personal profit. This principle is also embodied in s.29 of the Act which requires “a partner to account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or involving the use of partnership property”. Thus the rule in Keech v Sandford [19] (which provided that where a trustee of a trust which holds a lease obtained a renewal of the lease for his own benefit, he held the lease as a constructive trustee for the beneficiaries) applies to partners where they obtain such a benefit as a result of their position as a partner.

A partner must not put himself in a position of conflict of interest and duty toward his partners. This is expressed by s.30 of the Act which provides that “where a partner has carried on a business of the same nature and in competition with the partnership, he must account to the other partners for the profits of that business”. Because, as has been seen, partnership is a species of contract, the written terms of the partnership deed (if any) and indeed those imposed by the Act can be varied by express or implied agreement. Carl has therefore likely breached these provisions [20] and his other partners, hence, should return all the profits made back to the firm as decided in Bentley v Craven [21] where the undeclared profit were asked to be returned to the firm.

There are too many risks associated with carrying on a business as unlimited partnership, from most constraints identified above for example. By Section 10, “where one partner commits an act which is wrong in itself, as opposed to being outside his authority, the firm will be civilly liable for any harm caused, and criminally for any penalty incurred if either the act was done with the actual authority of his fellow partners or the act was within his usual authority, in the ordinary course of the firm’s business” [22] . Section 9 states the obvious and rules that every partner is liable, jointly with his co-partners, for all debts and obligations of his firm which are incurred while he is a partner. Lastly, the unlimited liability which states that, each partner is responsible for the business debts. However, my advice to Peach Boys would be to take advantage of the new LLP Act 2000 that was introduced which helped to deal with the problems of unlimited liability.

Finally, it should be noted that the Limited Liability Partnerships Act 2000 created an additional category of partnership rather than reforming the existing rules. Nonetheless, as has been seen by the need to develop LLPs, modern circumstances demand continual evolution. In November 2003, the Law Commission and the Scottish Law Commission published a report on such reform accompanied by a detailed draft Partnership Bill. Central to their proposals is a redefinition of partnership which moves away from the relationship between persons carrying on business together to “an association formed when two or more persons start to carry on business together under a partnership agreement [emphasis supplied]”. This gives primacy to the existence of an agreement. A written agreement has never been an essential prerequisite of a partnership (even under the 2000 Act) and the Commissions shied away from imposing a statutory model agreement but it is nonetheless proposed to abolish partnerships at will providing that there should at the very least be express agreement.