Illegal Partnerships

Partnership can be illegal because the business is intrinsically illegal, as in Foster v. Driscoll [1929], where the shipping of alcohol into the USA during prohibition was contrary to the laws of a friendly foreign state; or because the business is carred on illegally.

A partnership is an illegal association if the number of partners exceeds the legal maximum, which is 20 for trading partnerships. Solicitors, accountants and stockbrokers are not subject to any limitation and many professional firms have been exempt by statutory instrument including patent agents, surveyors, auctioneers, valuers, estate agents, land agents, actuaries, consulting enginrees, building designers and loss adjusters. 

The Relations of Partners to One Another

The terms of any partnership agreement will determine the relationship between the partners in priority over any contradictory provision in the Partnership Act 1890. However, where the agreement is incomplete, the Act applies.

The terms of the partnership can be changed expressly or by implication; so that where a firm operates for a number of years in contradiction to the express provisions of the agreement, the agreement will be varied by the practice. In Pilling v. Pilling (1865), a father entered into partnership with his two sons. The articles provided inter alia that the father’s capital, a mill and machinery, should not be brought into the partnership and that he should receive 4 per cent interest per annum on his capital before profits were calculated. During ten years each partner was credited with interest on capital. The court held that this was evidence of a new agreement and the mill and machinery were partnership property to be shared between the partners on dissolution.

 

Partnership Property

 Partnership property must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement and includes property original by brought in and property acquired on account of the firm or for the purposes and in the course of the partnership business.

Failing agreement, ownership is established by the Act which provides that there is no presumption that property was brought into the partnership, but all property bought with the firm’s money is deemed partnership property. In Miles v. Clarke [1953], the plaintiff, a freelance photographer, joined the defendant as a partner in an existing  photography business. The agreement merely related to sharing the profits equally and for payment of a salary to the plaintiff. On winding up the business, the plaintiff claimed a share of the assets, including premises leased by the defendant and other equipment which he had installed. The court held that the lease and other equipment belonged to Clarke, and  Miles retained the value of his personal goodwill. The stock-in-trade and other consumable items purchased by the firm constituted the partnership assets.

A writ of execution shall not issue against partnership property except on a judgement against the firm: Peake v. Carter [1916].

 

The rights of Partnership Inter Se

(1) All partners share equally in the capital and profits of the business and must contribute equally to the losses.

This does not mean where one partner only contributed capital while the other(s) contributed ‘know-how’, that on the dissolution of the partnership, this capital would then be divided among the partners. It does, however, mean that, even where the capital contribution is unequal, the partners will receive an equal share of the profits and be equally liable for any losses, including losses of capital. For example, A, B and C enter a partnership, with A contributing 10000 towards the capital, B 5000 and C ‘know-how’. If on dissolution the surplus assets after payment of debts is only 6000, in which case 9000 capital is lost, A, B and C will each be required to contribute 3000.

Where, however, one of the partners is insolvent and unable to contribute to lost capital, the other partners are not obliged to make up the deficiency, and the loss on capital will be divided between them in the ratio of their last agreed capital. Thus if C is insolvent, the capital loss of 3000 will be borne in the ratio of A and B’s capital contribution 2:1. Therefore A will lose 2000 and B will lose 1000. (A will lose a total of 5000 and B 4000.) This is the rule in Garner v. Murray [1904].

(2) The firm must indemnify partners in respect of payments made and personal liabilities incurred – in the ordinary and proper conduct of the business of the firm.

(3) A partner making an advance beyond the amount of capital which he has agreed to subscribe is entitled to interest at the rate of 5 per cent per annum.

(4) A partner is not entitled to interest on the capital subscribed by him.

(5) Every partner may take part in the management of the business.

(6) No partner is entitled to remuneration for acting in the partnership business.

It is normal for remuneration to be paid to partners who are actively involved in the running of the business, before the net profits are calculated. In this way working partners receive more than those who do not devote their whole time to the business.

(7) No person may be introduced as a partner without the consent of all existing partners.

(8) Differences as to ordinary matters of partnership business may be decided on by a majority of the partners, but no change made in the nature of the partnership business without the concent of all existing partners.

(9) the partnership books are to be kept at the place of business, and every partner may have access to and inspect and copy any of them.

The expulsion of a partner 

No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the parties.

Where there is a power of expulsion it must be used in good faith, but allows service of notice of expulsion without warning or opportunity to offer an explanation.

Duties of Partners

Rendering true accounts and full information

Partners are in a fiduciary relationship with other partners and contract between them require full disclosure. This duty is owed to other partners or their legal representatives. In Law v. Law [1905], the parties were brothers and partners. The plaintiff sold his share in the partnership but later discovered that certain assets had not been disclosed to him. He succeded in an action for misrepresentation against the defendant. 

Duty to account for secret profits 

Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership property name or business connection. In Bentley v. Craven (1853), the plaintiff was in partnership with the defendants as sugar refiners. Craven, the firm’s buyer, bought sugar cheaply and sold it to the firm at the market price. The court held the firm was entitled to the profit made by Craven.

The section also applies to transactions undertaken after the partnership has been dissolved by the death of a partner and before the affairs thereof have been wound up. In Thompson’s Trustee in Bankruptcy v. Heaton [1974], T and H were partners and as such held the lease of a farm. The firm was dissolved by mutual consent and the farm was occupied by H and later by a limited company controled by H and his wife. On H’s  death, T claimed a half-share of the lease, and in the same year, H’s executors acquired the freehold reversion and later sold the farm. T’s trustee in bankruptcy succesfully sought a declaration that the executors held the reversion as trustees for themselves and T.

In Boardman v. Phipps [1966] the appellants acted as agents for a trust which held shares in a private company. As a result of information gained as trustees, the agents purchased nearly all the other issued shares in the company without the prior consent of the trustees and, as a result of their management skills, the shares increased in value to the benefit of the trust and themselves. In an action brought by one of the beneficiaries of the trust, the House of Lords held that the agents were accountable to the trust for the profit made by them since their opportunity for making a profit arose because of their agency on behalf of the trustees of the trust. 

Duty not to compete with the firm

If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business. The partnership agreement would usually prohibit the carrying on of such a business. 

The relations of Partners to Persons dealing with Them

Powers of partners to bind the firm

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner bind the firm and his partners, unless the partner has in fact no authority for the firm in the particular matter. 

Liability for Debts and Contractual Obligations

Every partner in a firm is jointly liable with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable for such debts and obligations, so far as they remain unsatisfied.

Joint liability means liability interdependently with the other partners to the joint creditors of the firm but not independent (or several) liability.

It is still normal for persons dealing with a firm to provide that partners shall be jointly and severally liable, however, since this means that, in the event of the bankruptcy of the firm, they would have an equal claim with other separate creditors against the estate of the individual partner, as well as against the joint assets of the firm.  

Liability in Torts 

A firm can be liable for the general torts of partners, and for the misapplication of money and property of third persons. It can also be vicariously liable for the torts of its employees under the normal common law rules. Every partner is jointly and severally liable for torts committed while he was a partner.