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LAW OF PARTNERSHIPS IN KENYA

FLB 316

CO-OPERATIVES AND PATNERSHIPS LAW

COURSE DIRECTOR: MR. G.O.O O

The law of partnerships

1.     INTRODUCTION AND NATURE OF PATNERSHIPS

DEFINITION

Partnerships maybe defined as a business association that comes into existence when two or more persons come together in the form of a firm.

It has been defined under section 3 of the PARTNERSHIPS ACT to mean, the relation that/which subsists between persons carrying on a business in common with a view of profit.

s.4 & s.28

From that definition under s. 3, it may be said that partnerships comprises 5 components all of which must exist at the same time:

  1. There must be a relationship– that relationship must be brought into existence through a process that is not unlawful, most commonly through the process of contract.
  2. The relationship must involve two or more persons
  3. Those two or more persons must carry on a business i.e. there should be no other reason other than the carrying on of the business that makes those persons to enter into a relationship. Business is defined very broadly to include every profession, trade or occupation
  4. That business must be carried on in common. That it must be carried on by all the partners or the section for the benefit of all the others.
  5. The business must be carried on with a view to profit. The only reason why partners should carry on the business is so that they may make profit. The making of profit is so fundamental that if the partnership makes losses for a consecutive period of 12 months then it is liable to be dissolved even by an order of the court. The fundamental position that profit occupies is historically entrenched so that in the olden days any business whose profits were shared amongst or between two or more persons would be considered the partnership and all those who took a share of the profit could be considered partners. With time that position was found to be too strict because it could lead to an absurdity where a person could be considered a partner in business even without his knowledge or intention.

From the latter part of the 19th century there was witnessed change in the law. The change insisted that the determination of whether a person is a party in any business should depend not only on the sharing of the profits but mainly on the real intention of the parties.

That change was expressed in the case cox v Hickman where the court explained as follows “although a right to participate in profit is enough indication of partnerships and though they are mainly cases where from such participation alone, partnership could be inferred yet whether that relation does or does not exist must depend on real intention of the parties not upon that one term which provides for participation in profits.

The changed law is what is enacted in section 4 of Kenya’s partnership Act cap 29. That section has been judicially interpreted in the case of Davis v Davis.The court explained that the real meaning of section 4 is that if the sharing of profits is the only factor to be considered in determining whether or not partnerships exist or whether or not a person is a partner in business then it may still be possible that the sharing of profits may constitute of profit. But if there exist other factors which may also be taken into consideration, then those factors too must be keenly taken take into consideration and the real intention of the parties must be given supremacy

Paragraph (c) of section 4 then proceeds to set out a list of persons who will not constitute partners even though they may take a share of the partners. The list is as follows;

  1. Orphans or a widow of deceased persons who receives a share of the deceased person by way of annuity does not by that fact alone become partner.
  2. An employee or a servant who receives a share of the partnership profit by way of his remuneration or wages does not become a partner in the business. It’s more of a compensation even though from the good will of the business does not become partner in the new business because the price of the good will have been paid out of the profits of the new business.
  3. The person who is repaying his debt out of the profits of the business does not become a partner as long as the payment is done in installments.
  4. The person who has advanced a loan to a business and who is being repaid his loan out of the profits of the business does not become a partner provided the loan agreement was reduced into writing.Case of Re Forte ex parte Schofield held that if the loan agreement is not reduced into writing then whoever who advanced the loan may be considered.

End

COMPARISON BETWEEN COMPANIES AND PARTNERSHIPS.

  • The legal regimes that governs partnerships different from that that governs companies and partnerships vary in that….partners are governed by the partnerships act and the limited liabilities partnerships act of 2011

Those 3 regimes of law prescribe significantly different regulations to govern the different business associations.

As regards partnerships, the general outlook of the partnerships is that they are essentially contractual and they are to be governed by the terms of the contract the parties may have entered into. But the limited liability partnerships act has now introduced rather strict regulations to govern partnerships that are categorized as limited liability partnerships.

As regards companies, the companies act prescribes detailed rules which may lead to the dissolution of a non-compliant company.

  • THE MODE OF FORMATION

Mode of formation of companiesdefers from that of partnerships. With regard to companies as well as limited liability partnership, both the companies act and the limited liability partnerships act requires that they must be formed formally in writing and the company must have issued to it a certificate of registration. (The two coincide in that they must be formal in writing)

Ordinary partnerships on the other hand do not have strict rules of formation; the partners are totally free to decide on how to form their partnerships, they may form it in writing in which case the agreement that they enter into becomes known as the partnership deed.

Alternatively, they may form it informally through an oral agreement and it may even be inferred from their conduct. (May contain any terms that the partners may deem fit)

  • Number of members differs.

In partnerships the minimum number allowed is 2and the maximum number allowed is 20. In companies on the other hand, if it is private company the minimum is 2 and a maximum of 50. If it’s a public company, the minimum is 7 and the maximum is unlimited.

  • LEGAL PERSONALITY

Once a company is incorporated, it acquires its distinct legal personality.As per the case of salmon v salmon. Company has its own personality distinct from that of partners. The same applies to the limited liability partners. S. 6 of the limited liability partnerships act.

On the other hand ordinary partnerships do not acquire separate legal personality, they remain one and the same thing with the partners (remain one thing with the owners)

  • MANAGEMENT

In companies, the management is not placed in the hands of shareholders (in their capacity as shareholders). On the contrary management is placed on the hands of a distinct body known as board of directors who do not have to necessarily be shareholders.

On the other hand, ordinary partnerships; management is vested as a matter of rights in the hands of partners themselves. If it is an ordinary partnership then the partners are deemed to be two things in one i.e. they are owners and manager, both, at the same time.

But if it is an LLP, the LLP act requires that the partners must appoint a manager under s. 27of the act; that must be a minimum age of 18.

  • LIABILITY

In companies, liability of the shareholders (members) for 3rd party debts is always limited unless the company is registered with unlimited liability.

But in partnerships, it depends on whether the partnership is an LLP or an ordinary partnership. If it is an LLP then the liability of members is limited but if it is an ordinary then there is no liability to members, meaning that the partner to an ordinary partnership is liable up to the last cent.

7)    Agency

In partnerships which are not LLPs (ordinary partnerships), each partner is considered to be an agent of each of his co-partners in respect of any business relating to the partnership. And in that regard of that any transaction that he enters into will be binding to each of the partners and also binding on the partnership firm.

But if it is an LLP then the transactions of the partnersare binding on the partnership firm but not on the individual owners.

In companies on the other hand, no member or shareholder has the right to bind other shareholders or the company with other shareholders of the companies with his own transactions.

8)    Transferability of shares

in companies the share that the shareholder possesses or own is fairly easily transferable, if it is a private company then all that is required is the consent of the board of directors but if it is a public company then no consent is required for sale of shares and those shares can be freely transferable to the market e.g. the Nairobi stoke exchange

On the other hand shares are not easily transferable. If it is an ordinary partnership, the transfer of shares operates only to give the transferee financial benefits that the transferor would have been entitled to but does not give him the full rights of the partner. It is required that all the other partners must give their consent to the transfer.

A transfer in a partnership normally operates like an assignment.

9)    Winding up

Forcompanies, the life of a company must be brought to an end formally in accordance with the provisions of the companies act either through the process of voluntarily winding up or compulsorily winding up.

In partnerships however, only LLPs are required to dissolve or wind up in accordance to rules of the LLPs act. But if it is an ordinary partnership, the rules of winding up are usually not vigorous so that if the partnership was formed informally then it may even be wound up by the conduct of one partner or through the expression of the will of only one partner. (Case of Mohammed v. Hussein; from company law)

2.     PARTNERS

  1. Who is a partner?

The partnerships act does not define the word partner. But a partner may be defined as any person who is a member of a partnership. For one to become a member of a partnership, there are no detailed rules, the only requirements is that he must have the capacity to enter into contract.

There are two categories of persons in respect of whom extreme caution must be exercised in respect to who deserves to enter into a partnership contract and those are infants/minors or person of unsound mind.

As regards infants, the following must be born in mind:

  1. In the event of liability for 3rd party debts they cannot be held liable for business/trade debts. They may be liable only for debts arising out of supplies of necessaries of the infants.
  2. That when the infant reaches the age of majority, he has the option of bringing the partnership to an end by reprieving the partnership agreement. But if he does not reprieve the partnership agreement then he becomes liable the same way as an adult partner from then henceforth.

With regard to the same persons, the following should be noted:

  1. They may enter into partnership agreement only when they are introducing comments
  2. Once they enter into the partnerships agreement, then for as long as the partnerships exist, they will be considered to be partners of full capacity and the power to do everything that a company can do.
  3. Any person who is in partnership with the person of unsound mind will not escape liabilities for debts and liabilities incurred by the same person unless he can prove that at the time he entered into partnership by the same person he did not know that the person was so insane as not to possess the mental capacity to contract.
  4. In practice it is advisable that any person who enters into a partnership contract with a person of unsound mind should secure a provision that limits the contractual authority of that insane person.

b)    TYPES OF PARTNERS

There are various types of partners who may co-exist in the same partnership especially if the partnership is an ordinary one.

  1. active or ostensive partners

These are full-fledged partners in the sense that they are involved in everything that the partnership undertakes. They have the right to participate in management. They have a right to vote; the right to actively engage in other business and to share the profits of the business.

Because of that crucial decision that they occupy the law requires they must give public notice whenever they retire.

  1. Dormant /sleeping partners

They merely invest their money into partnerships. They do not get involved actively in the business of the partners. They however have the right to vote in decision making and they have right to receive a share of the profits, but normally their nature of relationships to the other partner is not disclosed to the public.

  1. Silent partners

These are partners who invest their capital into the business. They then become entitled to the profits of the business, but they do not have the right to vote to the management decisions.

  1. Partners in profit only.

These are partners who invest their profits into the partnership and their after they play no role into the management and also they have no vote; they are entitled only to the profits only without being liable to 3rd parties.

c)     NUMBER OF PARTNERS

By virtue of section 386 of the Companies act, if more than 20 persons purport to engage in a business inform of a partnership then the law will consider them to be an illegal entity. That position was expressed in forthhall bakery v wangoe; in that case 45 individuals purported to have engaged in a business and in that capacity as a partnership, they sought to recover a debt owing to them by a defendant. It was held that they were an illegal entity who could not enjoy any orders from the court except the court pointed out that such illegal entities will be given recognition only for purposes of punishment.

Case of smith v Anderson; gives an explanation as to why the law imposes limitation on the maximum number that may form a partnership. That justification is given in the following words “the act was intended to prevent the mischief arising from large trading undertakings being carried on by large fluctuating bodies so that persons dealing with them did not know with whom they were contracting and so might be put to great difficulty and expense which was a public mischief to be redressed.”

3.     Formation of partnerships

Even though there are no strict rules regarding formation of partnerships particularly ordinary, every person seeking to form a partnership needs to bear in mind certain matters:

  1. To avoid future complicated conflict as regards the rights and obligation of partners it is always advisable that the partners should conclude their contract in writing in the form of a partnership deed
  2. Partners should ensure that all the essential elements of the contract are present.
  • Parties must exercise caution to ensure that the business they seek to engage in is not illegal and also that there is not prohibition in law for such contracts to be carried on by a partnership. In the event that the business was originally lawful at the commencement of the partnership, if it becomes unlawful during the subsistence of the partnership as a result of the change in the law then the partnership must compulsorily come to an end. The risk of engaging in an illegal business is that the partners will not acquire any rights as against each other and no rights against third parties but 3rd parties acquire rights against the partners in so far as those rights are not tainted in the parties.
  1. In selecting partners parties need to exercise caution and select partners with extreme care because partnerships are built on mutual trust and confidence.
  2. If the partnership is to be registered as an LLP then section 17 (2) entitles the registrar to refuse to register the partnership if he does not meet the requirements of s. 17

Under that same section as read together with s. 19 , once an LLP is registered and issued a certificate, that certificate of registration acts as conclusive evidence that the partnerships has complied with the requirements of the law.

4.     THE PARTNERSHIP AGREEMENT.

AIM: LOOK AT WHAT PARTNERSHIP AGREMENT IS SUPPPOSED TO LOOK LIKE

The partnership agreement may take the form of an oral agreement between the parties. It may also take the form of a written agreement in the form of a partnership deed or articles of partnership.

In the case of an LLP, it must take the form of an LLP agreement. In the absence of an LLP agreement then an LLP may adopt the standard agreement that is contained in schedule 1 of the LLP act.

There are no statutes as regards what should be the exact contents of a partnership deed. The parties are free to agree on any term as they may deem fit.

In the case of an LLP there are basic terms that must be agreed upon and set out. Those terms are provided for under s. 17 (1).

In the absence of an express provision, on any specific issue in the LLP act/agreement then those gaps shall be filled by the provisions of schedule 1.

In addition to the requirements of s. 17, and in the case of any other partnership agreement the basic terms that a partnership agreement should contain include the following:

  1. The firm name – is the name under which the partnership will carry on its business. S. 6 of the partnership act provides that once a partnership comes into existence it becomes known as a “firm” and the name under which it carries on the business is known as the ”firmname”. There are no strict rules regarding the choice of firm names. The only requirements are:
    1. That the name must not be as identical to that of an existing business as to cause confusion to the public as to the real identity of the firm.
    2. It must also not be crafted in such a way as to fraudulently/deliberately mislead the public. Partners may settle on a name that is a combination of their own individual names or a name that describes the nature of the business. In the case of an ordinary partnership, if they settle on a name which is not a combination of their name then they should have that name registered in the REGISTRATION OF BUSINESS NAMES, CAP 499.

CASES OF ILLUSTRATION HOW CHOICE OF FIRM NAMES CAN AFFECT

The mere fact that partners are carrying out a business under a firm name does not constitute a …separate legal perspective.

The case of patel v. natural contractors whereby the court heldthat a firm name is not a name of a legal person. Partners may use it to enter into a contract and they may use it to institute and defame legal proceedings but the contract and the dual proceedings will be construed as though they were individual names of each of the partners. That rule does not however affect LLPs which are recognized as legal entities of their own names. The court pointed out further in that case that a sole trader has no right to enter into a contract or institute or defend legal proceedings in his own name.

Cases:

Ewing v buttercup margarine co. ltd – in this case, the plaintiff by name Ewing had been carrying on business dealing with margarine under the firm name of buttercup margarine co. ltd. The defendant company got registered more than 50 years later after the firm had started carrying on the business. It was registered under the name buttercup margarine co. ltd. It was also carrying on the same business dealing with margarine. Plaintiff firm instituted an action in court arguing that the name of the defendant was so similar to the name of the firm and that it would mislead members of the public.

The court agreed and issued an injunction stopping the defendant from using that name.The court pointed out that the continued use of that name would mislead the public into believing that the defendant was a branch or extension of the plaintiff.

Case:

North chesire & Manchester brewery co. ltd v the Manchester brewery co. ltd. In that case, the defendant company had been carrying on business under that name for a period of 8 years then the applicant got registered to carry on the same business their original name was North Chesire Brewery co. ltd. Later they extended their geographical area of operation and to reflect their extension they changed their name to reflect North Chesire and Manchester brewery co. ltd.

The court ruled out that north chesire and Manchester brewery co. ltd had selected that name in good faith without any intention to deceive the company but none the less there were high chances that the public would be occasionally be misled as to the real identity of the two companies and so the court issued an injunction stopping them from using that name.

Case of Parke Davis v opa pharmacy ;td …had been carrying on business for 8 years….under the name capsolin. The respondent started carrying on a similar business of marketing the business…on that for the …but it marketed its ointment and name as capsopa. The court held that because of the similarity of the first 4 ..of the tills in which the ointments were marketed happened to get confused and so the respondents were denied the use of that name.

Case of turton v turton: the court ruled… in that case, the plaintiff was called Thomas turton and the defendant was called … turton. The defendant had carried on his business for 9 years under the name “john turton” and later “John turton and co.” later on he admitted two of his sons to become partners of the business and renamed his business as john turton and sons”. Thomas turton who had been carrying on a similar business under the name “Thomas and sons co” moved to court to stop john turton from using that name. The court held that although there was similarity in names and that some members of the public would… be misled, an injunction was…issued to stop john turton from using his own name in business because he is using his name honestly and without any fraudulent intention.

In the case of croft v day…there were two gentlemen, one was known as Charles Bay and the other one was known as Prof…they formed a partnership under the firm name…their physical address was known as 97,Holborn Hill. Later martin transferred his shares to Bay. They continued to run business under Day and….ltd. he carried on the business until he died then the executor of his estate who happened to …who happened to be known as Day assigned to carry on business under the same firm name. he then went out to look for another man by the name martin and incorporated him into the business and so they became partners. They carried on the business under the name Day and martins, gave their physical address as 90 ½ high Holborn. The court held that the be not allowed to use that name because even though it was combination of two individual names, the firm name was mischievously crafted to mislead the public

Content of the partnership agreement

  1. Nature of the business. It is important that there should be no ambiguity in the nature of the business that the partnership sets to undertake. The nature of the business is important for two reasons:
    1. It is important for that business that each partner has…to bind..with its act s or transactions
    2. It is only in respect of that business that a partner in an ordinary business is considered to be an agent of both the firm and his properties.

The nature of the business is so important that section 28 of the partnership act requires that it should not be changed except with the unanimous consent of the other partners.

  • The capital of the partnership. That term should specify the amount of capital that the business is setting up with including the exact proportions contributed by each partners and the manner in which those proportions have been contributed. In the absence of an indication in the contribution of each partner then by virtue of section 28 of the partnership act each partner is presumed to be liable to contribute equally. In the event that partners agree to contribute at different proportions it must be specified further whether partners are required to earn interest of their capital, otherwise the general rule remains that partners are not entitled to interest of thatbusiness.
  1. Division of profit. Under that term the partners should agree on the exact proportions of how they will share the profits of the business. If they will not agree then by virtue of s. 28 of the PA each partner is entitled to an equal share of the profits irrespective of the contribution.
  2. Place of carrying on business. That term should specify the physical address of the business. In the case of an LLP that physical address is known as the registered postal address in regard to s. 31 of the LLP act. It is important for 3 reasons:
    1. If any partner is under obligation to keep partnership books/records … then he will be deemed to have discharged the obligation if he keeps those books at that office.
    2. If any person desires to keep books or records of partnership, then he is entitled as a matter of right only to inspect them at that office.
    3. If any documents are required to be served against the partnership fund, then they are deemed properly served once they are served at that office.
  3. The duration commencement date and the duration of the business. That term should specify the exact date on which the business commences, the duration for which it will last and the date on which it will come to an end. Those are important because it is the date of commencement of the partnership that also marked the date of commencement of the agency relationship between the partners and the firm in an ordinary relationship and between the firm and the partner in an LLP. That relationship lasts only during the duration of the partnership. The date of end of the business or partnership, may be …by reference to a specific calendar date or by reference to the occurrence of an event or accomplishment of a task. In such cases a partnership will be deemed to have come to an end either on the specified date or upon the occurrence of the event or accomplishment of the task. In the event in any reason the partnership commences without having fixed the duration or date to which it will come to an end, it becomes known as a partnership at will. Meaning, it remains in existence only for as long as the partners will. Partnerships at will may be brought to an end through the unilateral conduct of one partner or any partner.as in the case of Mohammed v. Hussein (1950) EACA. In that case, the partnership was carrying out business from premises that had been rented out to it by one of the partners. Due to a misunderstanding between the partners, the partner who was the owner of the premises unilaterally decided to throw out the partnership from the premises and as a result of that conduct the partnership was deemed to have terminated (because it was a partnership at will.

Alternatively the partnership at will may be terminated by any of the partners giving notice to the other of his intention to terminate the partnership. If the partnership was concluded orally then that notice may take any form (oral or written). But if the partnership was concluded in writing then the notice must also be in writing.

In the case of an LLP, S.12 OF THE LLP act requires that the notice must be in writing and for a period not less than 90 days.

  • The account bank account. That term should specify the how the accounting of the business shall be kept including the person who will be responsible and the manner in which it shall be kept. It is important that if the partnership is an ordinary partnership, then the partnership records should indicate how each partner stands in relation to each of his co-partners and also in relation to the firm.

In the case of an LLP the records should indicate how each partner stands in relation to the firm. As regards the bank accounts, it is important that the bank agreement specifies the bank where the partnership agreement will be obtained including the type of account and who the signatories to the account shall be. In the absence of a specified signatory the law presumes each partner has the right to be signatory to the accounts. It is also important that the partnership agreement should specify that all payments to the partnership shall be made to the account and all payments out of the partnership shall be made out of the account.

Equally important is the requirement of auditing of the books of account. For ordinary partnerships it is not mandatory to audit the accounts, but the partners may agree to have their account audited at specified intervals.

In the case of LLPs however, the books of accounts must be audited at least once every year and they must have been kept in such a way to make it possible to extract the balance sheet and to prepare profit and loss account.

  • The management. The partners should specify who will be responsible for the management of the partnership firm. In the case of an LLP failure to specify the manager renders the partners guilty of an offence. In the case of ordinary partnerships, failure to specify the manager allows the general rule to set in that each every partner sets in as a manager.
  1. The consequences of death and bankruptcy. That term should specify exactly what should happen to the life of the partnership in the event that any partner dies or becomes bankrupt. It is advisable that that term should provide that in the event that a partner dies or becomes bankrupt, the partnership will be deemed to have been constituted and will be continued by the remaining partners. Failure to make that provision will allow the general rule to sets into operation which is that upon the death or bankruptcy of any partner every ordinary partnership stands dissolved.

And in the case of an LLP the death of any partner dissolves the partnership but the bankruptcy of any partner operates only to prevent the bankrupt partner to become the manager. In case the partners agreed that the partnership should continue reconstituted after the death of any of them, then it is also necessary that upon the death of the partner, the interest of the deceased partner should be ascertained and be paid out to his estate before the reconstituted partnership continues. If that does not happen, then at the time of dissolution of the partnership the interest of the deceased partner will be entitled to an interest at the rate of 8%p.a.

  1. Settlement of disputes. That term should indicate how disputes arising in the future under the partnership should be dissolved and by reference to what system of law. Commonly partnership agreement do provide that any dispute arising should be referred to the arbitrators agreed upon by the partners.

5.     Partnerships relations

Relationship between partnerships & third parties.

a)    Generally

The nature of relationship that arises between partnerships and 3rd parties is governed by the law of the agency. The law of agency comes into play because once the partnerships come into existence every partner is considered to be an agent of their partnership firm.

In the case of an LLP every partner is considered to be also an agent and principal of each of the other partners at the same time.

b)    Legal status of partnerships

That nature of relationship is what defines the nature of third party liabilities in terms of section 7 of the partnerships act as well as section 11 of the limited liability partnerships act.

The two sections provide that if a partner in the ordinary course of business enters into a transaction with a third party then that transaction will bind the firm.

In the ordinary partnerships, the transactions will also bind his co-partners. That binding gives rise to liability that operates exactly the same way the liability of the principle operates in the ordinary law of agency. Accordingly the transaction of a partner will only be binding upon his co-partners and the firmif he acted within the scope of his authority. The firm and co-partners will not be bound if he acted either in excess or outside his authority. Also it will not be binding if the third party with whom he transacted had knowledge of the fact that he did not have authority to act. The authority of the partner may take the form of either actual or express authority or apparent or ostensible authority.

It is common to find partnership agreements where the actual authority of a partner has been restricted by for example prohibiting him from entering into certain transactions.

In such cases, the determination of whether the partnerships firm or his co-partners are bound will depend on whether his transactions was within his ostensible authority. That means that ostensible authority is normally wider than actual authority and it may extend to cover situations where the actual authority has been restricted.

Case Watteau v. Fenwick (1893) 1 QB 346

In that case the defendants had been a partnership in which they appointed one of them to be a manager. The manager had been given authority to do everything else but he was prohibited from purchasing certain items without involvement of other partners. In contravention of that obligation, he purchased those items from the plaintiff but the price was not paid. The plaintiff brought an action to recover the price.

The courtheld that even though the prohibition had restricted actual authority, the items that he purchased were labored by his ostensible authority and so the firm was nonetheless bound to pay the price.

Under s.11 of the partnerships act, the nature of liability that arises in respect of ordinary debts and obligation owing from the partnerships to 3rd parties is categorized as joint liability.

Under s.14 of the partnerships act, if a partner commits or omits a tort then the liability for the tort also binds the partnership firm.

In the case of ordinary partnerships it also binds co-partners. The liability under that section is joint and several liability.

Under s.15 there is also liability categorized as joint and several which arises in the following instances:

  1. If a partner in the ordinary course of the business receives property or funds from a 3rd party and then misappropriates it.
  2. If the firm receives property or funds or property are misappropriated by either of the partners.

c)      NOVATION

S.21 as read together with s.11 of the partnership act is to the effect that the liability of a partner to 3rd party debts and obligations arises from the moment he joins as a partner and ends either on the day he retires from the partnership or the day the partnership is finally wound up. There’s only one exception to that rule and it takes the form of novation.

Novation is understood to be a tripartite agreement between either the retiring partner on the one hand and the remaining partners and the creditors of the firm on the other hand or between a newly incoming partner on the one hand and the existing partners and creditors of the firm on the other hand to the following effect:

  1. That the retiring partner will not be held liable for the debts and obligations incurred while he was still a partner OR
  2. That the incoming partner will be held liable for debts and obligations incurred even before he joined the partnership.

Novation may take the form of either an express or implied form.

By virtue of s.40 of the partnerships act where there is no novation, a retiring partner is required to give notice of his retirement from the firm. Otherwise 3rd parties may be entitled to hold him liable for debts incurred after retirement.

In case of an LLP section 11(3) of the LLP act requires the retiring partner to give notice to the registrar unless the public already has notice of his retirement.

d)    Holding out

Refers to a situation where the person either makes himself to believe or allows others to cause him to believe to be a partner.

It is provided for under s. 18 of the partnerships act. to the effect that any person who represents himself either by written word or spoken word or allows himself or suffers himself knowingly to be represented as partner in a firm is guilty of holding out and if on the strength of such representation a third party gives credit to the firm then he will be held liable for that third party debt and will be held liable in the same way in which a partner will be held liable.

In determining whether a person has suffered/rendered himself to be partner it is mandatory that he must have had actual knowledge that he was being represented. Negligence and recklessness do not suffice.

It is immaterial that the person who was not given actual notice at the particular time he was being represented to a particular third party.

On the basis of holding out it is advisable that whenever one retires from partnership he should ensure that he does not leave behind evidence that may be used to represent him as a partner.

Case:Tower cabinet ltd v. Ingram

There were two partners carrying on the business of dealing with furniture under the business name “Merry’s”. The gentlemen were known asChristmas and Ingram. After some time Ingram retired from the business. Christmas continued to carry on the business under the same name “Merry’s”. About one year after Ingram’s retirement, Christmas wrote a letter to the plaintiffs requesting to be supplied with certain furniture. The furniture was supplied but the price was not paid. The plaintiff brought an action to recover the price and they joined only Ingram as the defendant. The reason they did that was because on the letterhead that Christmas used to request for the supplies the names of two partners had been….namely Christmas and Ingram. It turned out that that was one of the old letterheads that Ingram had forgotten to destroy before he retired. It was held that in the circumstances there was no evidence that Ingram had actual knowledge of the existence of those letterheads and so he had not suffered himself to be held out as a partner with Christmas.

e)    Partnerships relations in respect of partners themselves.

The manner in which partners will relate to each other including the rights they acquire as against each other and the duties that they incur towards each other is governed principally by the law of contract. That is because partnerships are essentially considered to be products of contracts. Like every other contract, partnerships contracts are subject to the fundamental doctrine of freedom of contract. Accordingly partners are free to enter into their partnerships agreement on any terms that they may deem fit.

In the event that their agreement omits certain necessary matters the provisions of the partnerships are revoked to fill those gaps.

In the case of LLPs the first schedule may be involved.

  1. 23 of the partnerships act reinforces the doctrine of freedom of contracts in so far as the partnerships contract are concerned by abiding that partners are free to modify whatever rights and obligations they have over the partnership agreement and even those that are being derived from the partnership act.

There’s however one term that the law insists on and the law will read into every partnership agreement. As for that one term, if partners omit to provide on it the law will improve on it. If the partnerspurport to exclude it the law will consider the partnership agreement to be null and void to that extent. That term is the principle of utmost good faith.

Out of that principle, flows the following 5 duties that the law imposes on every partner:

  1. It is the duty to resist from using or abusing the name or its association with the partnership for his own selfish-gain and to the detriment of the firm.
  2. In the event that the partnership agreement recognizes that a partner may be expelled from the partnership for breaching their partnership agreement, thatpower must be used only in good faith but not to oppress the partner who is being sought of be expelled. It is for that REASON THAT section 29 of the partnerships act provides that a majority of the partners may expel another only if the power to do so is expressly provided for in their partnership agreement.

Refer to the case of Clifford v. Timms(1907) 2 Ch 236.

The parties had been partners in a firm engaged in the practice of dentistry but the plaintiff also a director of another company which was also engaged in the practice of dentistry. In their partnership agreement, partners had agreed that should any one of them engage in an act that amounts to professional misconduct then the other partners would be free to expel him and to eliminate his partnership from him that company from which the plaintiff was a director published an advertisement in the magazine in which among other they made the following two allegations;

  1. That they were the only dentists who always sterilized the equipment before using them on the equipment.
  2. That they were the only dentists who had employed a female nurse to be always present and a male nurse to be operating on female patients.

The partners were aggrieved because of those advertisements and they issued a notice expelling the plaintiff from the partnerships. The court agreed and held that those had painted other dentists in negative manner…and amounted to professional misconduct to whichthe plaintiff was …by virtue of him having been the director of that company. The court concluded that the partners had properly exercised their power to expel the other.

  1. duty to account

The partner is required to disclose any information that comes to his knowledge and which may affect the partnership

Such information must be disclosed fully and truthfully.

  1. Duty not to make secret profit at the expense of the firm.

That duty requires that if a partner earns any commission or receives any benefit by reason of association with the partnership and if such commission of benefit is not known to the other partners then he must disclose it to the other partners and where necessary he must surrender it. That duty operates even where apartner sells his own property to the firm.

  1. Although as a general partners are not prohibited from engaging in separate private business, they are under duty not to engage in any business that may compete the business of the firm or any business that may inaccurately suggest that it has a link with the firm.

f)      Partnershipsrelations in respect of partnerships property

Partnership property occupies a critical place in the life of a partnership. If not properly handled it may lead to the breakup of the …

It is therefore important that all the partners clearly understand what their partnership property is.

Partnership property is defined under s. 24 as comprising in three categories of property;

  1. Property that was acquired into the original stock of the partnership
  2. Property that has been acquired during the lifetime of the partnership and for the purposes of the partnership.
  3. Property that has been acquired on account of the partnership.

Under s.25 any property purchased under partnership funds is pursued to be partnership property.

The partnership act at s. 24 implies that partnership property should be used or applied only for the purposes of partnership.

In the same way, s. 27 of the partnership acts provides that no decree may be executed against partnership property unless the decree arises out of the liability of the partnership. The section however also recognizes that if an individual partner incurs his separate liability which has nothing to do with the firm then if a decree accrues out of that liability, then that decree may nonetheless be executed against that individual partner’s share of interest in the partnership share property. But if that happens then under s. 37 of the partnerships act, the other partners have a right to give a notice terminating their partnership with that individual partner.

THE RELATIONSHIP BETWEEN PARTNERS THEMSELVES.

Under s. 28 of the partnership act partners acquire the following rights in their relationships to each other:

  1. The right to access, inspect and to take copies in the partnerships book of accounts
  2. Right to participate in resolving partnerships dispute.(right to vote)
  • Every partner has the right to be consulted and right of their consent be obtained. And in respect of those matters that require unanimity.

6) DISSOLUTION OF PARTNERSHIPS

The dissolution of partnerships varies depending on whether it is an ordinary or LLP.

In the case of ordinary partnerships there are two forms of dissolutions:

  1. Dissolution without an order of court
  2. Dissolution through an order of court

Dissolution outside court

Under that procedure a partnership may stand dissolved upon the occurrence of any of the events that are specified under s. 36, 37 and 38 of the partnership act.

In all those instances with the exception of s. 38 the occurrence of any of those events will lead to the dissolution of the partnership for as long as the partners do not have a contrary agreement

As regards s. 38, a partnership must stand dissolved without any option for the partners to extend its life.

What are these events or occurrences?

Under s. 36 the partnership will be dissolved in the following circumstances:

  1. If it was formed for a particular adventure, it stands dissolution upon completion of that adventure.
  2. If it was formed for a specified period of time, it stands dissolution upon expiry of that period of time.

N/B-*examinable* -It is noted however that wherea partnership is formed without a specified term and it is deemed to be a partnership at will, it may be dissolved by the notice of any of the partners on the others, unless in their partnership agreement the partners have indicated that their partnership will not be dissolved except by mutual agreement.

Under s. 37 the partnership will dissolve upon the death or bankruptcy of the partners.

Also under the same section a partnership may be dissolved by the notice of many partners to any partner who has suffered his share of interest in the partnership property to be attached for his separate debt in terms of s. 27 (2) of the act.

N/b -Basis is s. 37(2)

Under s. 38 every partnership automatically must dissolve upon the occurrence of any event that renders its business unlawful. Essentially that will arise if there is a change in law.

Dissolution by an order of court

Under this procedure the law recognizes that a partner may file a petition in court seeking for an order dissolving their partnership. Such an order may be granted if the partner satisfies any of the grounds set out under s. 39 of the partnerships act.

These grounds are:

  1. Any partner has become permanently of unsound mind. Under that ground an application may be made by any partner including the one who is of unsound mind in which case the application may only be made on his behalf by his next friend.
  2. Where the partner has become permanently incapable of performing his obligations under the partnership agreement. Depending on the circumstances of partnership e.g. running low of reason for being a partner e.g. losing a land that kept him in the partnership.
  3. On the ground that it is established that any of the partners has conducted himself in such a manner that is calculated to prejudicially affect the conduct of the business of the partnership. E.g. Stiff competition of partnership business in breach of utmost good faith
  4. Where anypartnerpersistently has breached the terms of partnership agreement and thereby rendered it impracticable for other partners to carry on the business. refer to case of Clifford v. Timmins
  5. If the business of the partnership can only be carried on at a loss. If the loss continues consistently for 12 months then it has no effect.
  6. Partnership may be dissolved if any matter arises that in the opinion of the court makes it just unequitable that the partnership should be dissolved.

DISSSOLUTION OF LLPs

The LLP act recognizes three ways in which an LLP may be dissolved;

  1. By unanimous resolution by the partners themselves.
  2. Dissolution by a resolution of the creditors. Under that procedure the creditors must work together with the partners and jointly reach the decision to dissolve their partnership. (There would be only one ground that the partnership cannot repay its debts.)
  3. Through an order court under that,, or by a liquidator or by the minister or by a creditor and the court may order dissolution if any of the following grounds is proved:
    1. If the partners themselves have resolved to dissolve the partnership.
    2. If the partnership becomes unable to repay its debts.
  • If the court forms the opinion that it is impracticable for the partnership to be effected in accordance with the partnership agreement.
  1. If the number of partners has reduced to less than two and that situation persists for more than two years.
  2. A partnership may be dissolved wherever circumstances renders it just unequitable to do so.
  3. It may be ordered dissolved if it is established that it is being carried out for an unlawful purpose or risk to national security, national interest, public peace or public welfare.

Consequences of dissolution

Once a partnership has been dissolved if it is an LLP, then it must have a liquidator appointed to wind up its affairs.

If it is an ordinary partnership then the law does not require a liquidator but the partners are free to dissolve the partnership

At the time of winding up the affairs of the partnerships, the following rules apply:

  1. Every partners will have a right as against each other to have the assets of funds of the partnerships apply in the following manner:
    1. To pay off any liabilities and debts owing to third parties.
    2. To pay to any partner what owes from the partnership to that particular partner.
    3. If any surplus is to remain then it is to be shared out between the partners

In settling the accounts between the partners, the following two rules are to be observed:

  1. If there are any losses then the losses must be taken care of first. The losses must first be paid out of the profits of the business. If the profits are not enough then they are paid out of the capital. If the capital is also not enough then every partner is liable to contribute towards the settlement if the losses in the proportions in which they were entitled to share the profits.
  2. That the assets or funds of the partnership will be distributed in the following manner and order:
    1. To pay off third party debts and liabilities.
    2. To pay off any advances that a partner may have made in the partnership.
  • If any assets or surplus will remain then they will be paid to any partner in respect of what a partnership fund is owing that partner.
  1. If any surplus remained then it is to be divided among the remaining partners in the proportions in which they were to share their profits.

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