PARTNERSHIPS - GENERAL AND FORMATION
It could be said that partnerships have existed for as long as business has been conducted but until the Partnership Act 1890 most of the law relating to the operation and status of partnerships developed through case law precedent.
The key differences between a partnership and a limited company are that there is no limited liability in a partnership (see paragraph 53.22) (unless the partnership is a limited partnership – see Part 2), and the partnership does not have a separate legal identity (see paragraph 53.19)
The Partnership Act 1890 (‘Partnership Act’) provides a definition of what a partnership is, its relationship with external parties and, in the absence of a partnership agreement to the contrary (see Part 3), the rules by which the partnership will conduct its internal business.
The Partnership Act does not cover all aspects of partnership business, and some matters are dealt with by separate legislation (see paragraph 53.7) or by case law.
Many of the provisions of the Partnership Act are subject to the contrary agreement of the partners, - partners have a wide discretion to decide between themselves the terms of their relationship and may agree to adopt different rules than those specified in the Partnership Act (but not so far as their relations with the outside world are concerned).
Information and guidance relating to partners is contained in Part 4 of this chapter. The term ‘member’ is used in the legislation to refer to partners and is, in many ways, completely interchangeable with the term ‘partner’. This chapter will use the term partner in preference to member for the sake of consistency, except where the context dictates otherwise.
Where the provisions of the Partnership Act leave some ambiguity, or may lead to an absurd conclusion, the House of Lords has sanctioned reference to pre 1890 case law to provide authoritative guidance [note 1].
The Partnership Act (see paragraph 53.3) has no provisions relating to the insolvency of partnerships and, instead, the current provisions are found in the Insolvent Partnerships Order 1994 (IPO 1994). Information and guidance relating to the insolvency of partnerships can be found in Part 6 to this chapter.
A partnership is defined as the ‘relation which subsists between persons carrying on a business in common with a view to a profit’ [note 2].
The terms carrying on business, in common, and with a view to a profit, are discussed in the following paragraphs. Whilst the general principles are outlined below, some of them are subject to fine distinction and much legal debate and, whilst the general principles can be applied to most cases encountered by the official receiver, where there is doubt the advice of Technical Section should be sought.
A partnership cannot exist until trading begins. So, an agreement to carry on business at a future time does not constitute a partnership [note 3], though ‘trading’ is defined quite broadly and can, for example, include preparing a premises for trade [note 4].
For a partnership to exist, the partners must be carrying on a business in common. This is a concept perhaps best explained by reference to a type of business that would not be a partnership. Where a landowner and a farmer decide that the landowner will allow his land to be farmed by the farmer to their mutual benefit (a sharing of the profits) then they would not be carrying on a business in common as one would running a business as a landlord and the other as a farmer. If, on the other hand, one partner was the landowner but both were engaged in some way in the farming operation then that would be a partnership [note 6].
If the activity of a business is not being carried on with an intention to make profit (even if that profit is not actually realised) then that business cannot be a partnership. This would exclude, for example, clubs and societies which, by and large, are not formed with a view to making a profit – even if they may actually make one.
So long as a partnership is capable of making a profit, the fact that a partnership does not actually make a profit does not decide matters – it is the intention and ability to make a profit which would be relevant [note 7]. The intention to make a profit need not be the dominant purpose, it may be secondary or incidental, but that would still be sufficient to meet the definition of a partnership.
It is not always easy to establish if persons engaged in an activity are, in fact, in partnership. The key piece of evidence in assessing whether or not there is a partnership in existence is the partnership agreement (see Part 3), but there are other indicators of the existence (or otherwise) of a partnership:
Following the definition in paragraph 53.8, the joint ownership of property does not, of itself, create a partnership – even if the owners are sharing profits from the property [note 8]. The question as to whether the co-owners are partners is one of evidence in the books [note 9].
By contrast, the fact that property used by the partnership is not jointly-owned does not mean that there is not a partnership [note 10].
The sharing of profits is an indicator that there is a partnership, but is not, of itself, evidence [note 13] and the terms of the arrangement between the parties must also be considered (that is are they merely acting as principal and agent) [note 14]. Equally, a partnership could be created even if there is no sharing of profits if, for example, there was an agreement that a partner would be paid a fixed sum in lieu of a share of profits [note 15].
Although a limited company could reasonably meet the definition of a partnership set out in the Partnership Act (see paragraph 53.8), that Act provides that a limited company cannot be a partnership [note 17].
A limited company can, though, be a partner in a partnership (see paragraph 53.28).
A limited partnership is a type of partnership and can, largely, be dealt with as a ‘general’ partnership. See Part 2 for more information on limited partnerships. This should not be confused with a limited liability partnership (LLP) (see Chapter 53A)
Unlike a company, a partnership has no legal identity (corporate personality) separate from that of its partners [note 18]. The partnership is the partners and the partners are the partnership [note 19] and there is no legal distinction between the parties. The rights and liabilities of a partnership are also those of the partners and any liability is enforceable against each of the partners individually.
It has to be said that this general principle is at odds with the provisions that allow a partnership to be subject to formal insolvency provisions separate to any proceedings against the partners of the partnership (see Part 6)
The Partnership Act provides that the persons who have entered into business in partnership are collectively called a ‘firm’ and the name under which they carry on business is the ‘firm name’ [note 20] (see paragraph 53.24).
Apart from where the context requires otherwise, this chapter will avoid use of the term ‘firm’ and, instead, use partnership. Largely, this is to assist with accurate searching using the intranet search facility.
As a partnership has no separate legal identity (see paragraph 53.19) it cannot employ people. Often, the partnership name will be on an employee’s employment contract, but this is just as convenient shorthand for the names of the partners (see paragraph 53.136 for the effect of this principle so far as concerns insolvency).
Similarly, on the basis that a person cannot make a contract with him/herself, a partner cannot be employed by his/her own partnership (in the same way as a director is an employee of a limited company) [note 21].
Apart from the fact that a partnership does not have a separate legal identity to that of its partners (see paragraph 53.19), the other significant difference between a partnership and a company is that the members of a partnership have unlimited liability, unlike the members of a company whose liability is limited to any unpaid shares.
A partnership may be entered into for a fixed term, a single business venture, or an open-ended period of time (know as a ‘partnership at will) terminable by any partner on the giving of notice [note 22].
Subject to the usual restrictions regarding the ‘passing off’ (using a name over which some other party claims a proprietary interest) and the use of sensitive names [note 23], a partnership is free to choose its name. There are no special rules.
Unless the partnership (firm) name consists of the surnames (or corporate names, as the case may be) of the partners of the partnership, then all business documentation such as orders, receipts, letters and invoices must contain the names of the partners [note 24], unless the partnership has over 20 members – in which case the relevant documentation should contain a statement that a list of the partners is available for inspection, and the address that the list is kept [note 25].
In effect, using the partnership name in litigation is just shorthand for using the names of the partners, in whose name the litigation is more correctly brought (against) [note 27].
Since a partnership has no separate legal identity (see paragraph 53.19), a partnership cannot be partner in another partnership. Where it is suggested that a partnership is a partner in another partnership then, legally speaking, it will be the partners of the partnership who are the partners of the other partnership [note 30], although the partnership (firm) name may be used to describe the partners collectively within the documentation of the other partnership.
There used to be an upper limit of 20 on the number of partners that a partnership could have. This limit was removed in 2002 [note 31] and there is, therefore, no upper limit.
A corporate partnership is simply a partnership where one, or more of the partners are corporations (limited company, public limited company or limited liability partnership) [note 32]. There are no special rules applying to this type of partnership and the statutory provisions in relation to partnerships apply. The guidance given elsewhere in this chapter may be followed generally.
The effect on the partnership of the insolvency of a corporate member of a partnership is dealt with in paragraph 53.91.
A group partnership is simply a partnership where two or more of the partners are themselves partnerships (see paragraph 53.25 for ‘true’ position regarding a partnership as a partner). There are no special rules applying to this type of partnership and the guidance given elsewhere in this chapter may be followed generally.
Capital is the amount contributed by the partners of the partnership for the purpose of commencing or carrying on the partnership business and is usually expressed in cash terms even if the contribution was property or goodwill. A partner’s capital interest in the partnership relates to the amount contributed and is different to their interest in the assets of the partnership, which relates to their share in the partnership as set out in the partnership agreement (see paragraph 53.60) (assuming there is one – see paragraph 53.54).
The capital of a partnership cannot be increased or reduced without the consent of all the partners [note 33].
The Partnership Act provides no definition of partnership property and matters are largely decided by case law. Generally speaking, it is left up to the partners to agree what is (and what is not) partnership property [note 34]. In the absence of any partnership agreement (see Part 3), the following will taken into account [note 35]:
Advice on dealing with partnership property is in Part 8 of this chapter.
Assuming that all the partners are solvent, they may agree to remove property from or introduce property to the partnership. In the absence of any fraudulent intention, such an agreement is binding on the trustee in bankruptcy [note 37].
This does not affect the liquidator’s ability to seek to overturn the transaction as, for example, a transaction at an undervalue (see Chapter 31.4A, Part 3).
A partner is not permitted to pledge partnership property as security for his/her own debts without the agreement of the other partners [note 40]. If he/she does so, he/she would be liable to recompense the partnership for any property lost under the pledge.
Subject to any contrary agreement, losses are paid first out of partnership profits, next out of capital and then, if necessary, by the partners personally in the proportion in which they are entitled to share profits [note 41] or, otherwise, equally [note 42]. Accordingly, unless the partners make specific arrangements to the contrary, losses are shared equally between them, even if the amounts of the capital they contributed were unequal (see paragraph 53.30) or they are a salaried partner (see paragraph 53.70) with no entitlement to share in the profits of the partnership.
Unlike with a limited company [note 45], there is no statutory duty to produce accounts of a partnership, though invariably there will be an indirect requirement as a result of tax regulations and there may be a requirement in the partnership agreement to keep accounts. The partners do have a duty to provide each other with accounts [note 46].
The legislation makes a presumption that records will be kept and provides that they are to be kept at the principle place of business and made available to all partners to inspect [note 47] [note 48].
The failure to keep records may form the basis of any allegation of wrongdoing in respect of a Bankruptcy Restriction Order or a disqualification order (see paragraph 53.115) (see Chapters 42 and 64 of the Enforcement Investigation Guide).