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Exam Ready Notes for First-Term Module Business Law and Practice. ...
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Always Apply to the Facts, make a Company Diagram, and Give Advice/Conclude
2020-2021
LPC Exam Ready Notes
[Business Law & Practice]
1
, Always Apply to the Facts, make a Company Diagram, and Give Advice/Conclude
Preliminary note: any reference to 'Cheatsheet' is a reference to the Company Procedure document also
available on the ERNotes Stuvia page.
Partnerships
Existence of a Partnership is the relationship (s1):
Partnership o Between persons (2+);
o Carrying on a business in common
‘Business’ includes every trade, occupation or profession (s45)
2+ persons are not carrying on business in common if one of
those persons is the agent of the other.
o With a view to profit
The receipt by a person of ‘a share of the profits of a business
is prima facie evidence that is a partner’ (s2(3))
No formalities required, a partnership comes into existence if the above
elements are satisfied, even if a formal agreement doesn’t exist.
Other ‘badges of partnership’
o Partners are involved in making decisions that affect the business
o Partners share in gross profits and losses
o Partners have a right to examine the accounts
o Fiduciary relationship with other partners
o Having a ‘specific purpose’
o Being made ‘for a pre-determined period’
Although these aren’t strictly necessary they are indicative of a partnership.
Advantages and Advantages Allows for commercial secrecy
disadvantages Informal in nature, easy to set up
Flexible – can make own arrangements/rules
Tax relief for start-up losses can be claimed
Disadvantages Can create fixed charges, but not floating
Each partner is fully liable for all debts of the partnership
Any partner may act in apparent authority and bind the firm
Partner’s duties The main duty is that of utmost good faith. This is codified in ss28-30 and is
and responsibilities characterised by partners having to:
Divulge all relevant information regarding their business or relationship
(s28)
Share all profits derived from the partnership
Share all profits they make from a competing business carried on without
partner’s consent (s30)
Bear their share of any losses made by the business (s24(1))
As a firm, indemnifying fellow partners against bearing more than their
proportion of liability (s24(2))
Partnership Note, this can be altered by way of an express agreement between the partners. All
decision making decisions are made on a simple majority basis. Except in the following three instances
(under the PA1890) where there must be unanimity:
Introducing a new partner (s24(7))
Changing the nature of the business (s24(8))
Varying the terms of the partnership agreement itself (s19)
o The consent here can be inferred by express agreement, or course
of dealing.
Default ‘Partnership Agreement’ Provisions under the PA1890
The existence of a partnership agreement can vary the default rights and duties of partners found in the Act
(s19).
2
, Always Apply to the Facts, make a Company Diagram, and Give Advice/Conclude
Definition of a s1 Partnership is a relationship:
partnership Between persons (2+);
Carrying on a business in common
o ‘Business’ includes every trade, occupation or
profession (s45)
With a view to profit
Existence of a s2 The receipt by a person of a share of the profits of a business is prima
partnership facie evidence that is a partner (s2(3))
Ownership of common property does not create a partnership
automatically
Power s5 Actions performed by a partner binds the firm unless that partner had no
authority (see diagram below)
Firm money s7 Partners cannot use partnership money for private purposes unless
authorised
Reducing the scope of s8 Partners may agree that certain acts will not bind the Partnership. Third
acts which bind the parties who are aware of this agreement cannot sue the partnership for
Partnership damages arising from these acts, only the contracting partner
Liability of partners s9 Partners share unlimited, joint and several liability
Tortious liability s10 The partnership is liable to tortious claims if a partner, whilst acting in
the ordinary course of business of the firm, commits an offense
Holding out s14 Partners who hold themselves, or knowingly suffer themselves to be held
as partners are liable for debts suffered in circumstances where someone
gave credit the partnership in the belief that Partner-X was a partner
Exception: if the partnership uses Partner-X’s name after their
death, Partner-X’s estate is not liable
Note: by requesting an announcement of your retirement in The Gazette
and requesting that your name be removed from the letterhead, you are
no longer holding yourself out to be a partner.
Test set out in Nationwide v Lewis says you are holding out if (even if
you’re never a Partner) you:
Orally represent; represent through conduct; or were knowingly
represented by another person; and
This representation is relied upon by a third party
Who consequently gives credit to the firm
Liability of incoming & s17 Incoming partners are not liable for issues which occurred prior to
outgoing partners their joining the partnership (s17(1))
Outgoing partners remain liable (to creditors) for debts incurred
before their retirement (s17(2)
Variation of the terms s19 The terms of the partnership can be varied at any time by either express
of the partnership agreement, or inferred agreement from a course of dealing.
Partnership property s20 Property bought exclusively for the Partnership is held on trust for the
Partners. In other words, equally.
Personal creditor’s s23 Creditors may, with consent of the court, seize partnership assets to
rights to partnership satisfy an individual partner’s personal debts
assets
Financial interests of s24 Partners share equally in capital and profits/losses (s24(1))
partners Creditors may pursue any one partner (usually the wealthiest)
personally, therefore the partners must all indemnify each other
such that they have a contractual obligation to bear the burden of
losses equally (s24(2))
Additional capital given to the partnership (beyond the initial capital
agreed) is given at a rate of 5% interest per year (s24(3))
Participation s24(5) Every partner may take part in the management of the partnership
3
, Always Apply to the Facts, make a Company Diagram, and Give Advice/Conclude
Salary s24(6) No partner is automatically entitled to remuneration (s24(6))
New partners s24(7) All existing partners must consent to a new appointment
Decision making s24(8) Most day-to-day decisions are made by simple majority
Expulsion s25 Partners cannot expel partners except if there is an express agreement
(unanimous consent, including the consent of the partner being expelled)
allowing such an expulsion
Retirement s26 Where no fixed duration has been decided, partners must give notice to
all other partners to retire
They needn’t give a reason why
This notice needn’t be in writing unless the partnership was
made by deed (s26(2))
This retirement determines the partnership
If a partner wants to retire without the partnership dissolving,
all the partners must agree to vary the partnership agreement
to allow this.
Duration of s26(1) Partnerships can have no fixed duration
partnership
Renewal s27 Fixed term partnerships which continue beyond the fixed term are
assumed to continue on the same terms
Good faith s28 Partners must provide ‘true accounts’ and ‘full information’ of all
s29 things affecting the partnership (s28)
s30 Partners must account for benefits gained by them from partnership
transactions (s29)
Partners must not compete with the partnership whilst they are a
partner (s30), if they do they must account for all profits made by
them through their competing work
The above sections imply a duty for partners to act in good faith when
dealing with each other and the partnership (Const v Harris)
Dissolution s26 The partnership will dissolve if:
s32 A partner gives notice of his retirement (s26(1))
s33 o This notice needn’t be in writing unless the partnership
s34 was made by deed (s26(2))
s35 The fixed duration of the partnership expires (s32(a))
A partner gives notice that he wants the partnership to dissolve
(s32(c))
o This notice needn’t be in writing unless the partnership
was made by deed (s26(2))
o Note: Partnerships of undefined duration only
A partner dies or is made bankrupt (s33)
An event happens which renders the partnership’s actions illegal
(s34)
The court orders it (s35)
The partnership has the option to dissolve if any partner suffers his share
of the partnership property to be charged for a separate debt (s33(2))
See ‘What Causes a Partnership to an End’ below.
Notification to clients s36 Clients who have not been notified that a partner has left the firm can
of retiring partners hold that retired partner liable as if they were a current partner
Whether or not this means actual notice, or Gazette notice depends on
the scale of the firm.
Actual notice for existing clients/suppliers
Gazette notice for everyone else
Winding up s38 Partners have continuing authority during the winding up process
4
, Always Apply to the Facts, make a Company Diagram, and Give Advice/Conclude
Fraud and s41 Partnership is rescinded if a prospective partner relies on a fraud or
misrepresentation misrepresentation to entice another individual into partnership
Distribution of assets s44 In order, debts are paid from profits, then capital, then the capital
(after dissolution) investment contributed by each partner (s44(a))
Remaining assets are distributed proportionately in accordance
with each partner’s initial capital investment (s44(b)(4))
‘Can [X-Person] do [Y-Action] in the context of this Partnership’ Question Structure
When answering a ‘Can X do Y’ or ‘Can Z happen in the context of this partnership’ question, follow this
structure:
Is there a Partnership? (discuss the possibility of an unintentional partnership)
o Don’t discuss this if it has been stated that a Partnership exists.
Does the Partnership Act 1890 address the issues in the problem?
If so, has what the Partnership Act says on the problem been varied by way of a Partnership
Agreement?
Interpret the relevant provisions of the Partnership Act or Partnership Agreement, and advise on
the outcome
Provisions in a Typical Partnership Agreement & Possible Inclusions
General The Partnership Agreement acts as a contract between partners
o The Partnership Agreement disapplies default provisions from the
Partnership Act, and can be altered at any time (s19)
Things to include Commencement date, name, financial input, profit-sharing, drawings, shares in revised
in agreement asset values, nature of business, ownership of assets, participation, roles, decision-
making, duration, retirement, expulsion, payment for outgoing partner’s share,
restraint of trade following departure, dispute resolution.
Default Position (under PA1890) Possible Inclusions in the Agreement
Profit-Sharing All partners share equally in the Profit-share proportionately to capital
profits and losses (s24(1)). investment, or another parameter?
What happens in the event of a loss?
Monthly limit on drawings?
o Consequences for overdrawing?
Provision whereby salary is taken before
profits are split?
Interest be paid on capital contributions?
Should the profit-sharing ratio reflect
seniority?
If a fixed asset is sold, how will the capital
be shared?
Participation Partners may take part in the Minimum amount of time to be spent on
management of the partnership partnership matters?
(s24(5)) Should salary reflect participation?
PA1890 is silent about Holiday/maternity leave?
minimum hours worked Are partners allowed to carry on other
businesses?
Salary No partner is automatically entitled Provision for a salary to be given
to remuneration (s24(6)) regardless of profits or losses?
Decision Making Most decisions require a simple Requisite majority for decisions?
majority (s24(8)) except the Provision for dispute resolution?
following decisions which require
unanimity:
Introducing a new partner
(s24(7))
5
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