PARTNERSHIP AND BUSINESS MATTERS

Westbury Solicitors provide legal advice to small and medium sized businesses, sole traders, limited liability companies and limited liability partnerships. Our solicitors advise partners in professional partnerships and in respect of disputes between business owners. Our Solicitors and Barristers are available to provide advice and support in a range of business, company and commercial matters including company and partnership formation, personal insolvency, company insolvency, partner expulsions and compulsory retirements, breach of fiduciary duty, shareholder agreements, shareholder disputes and disputes relating to valuation and partnership accounts. A partnership under the PA 1890 is described as the relationship that subsists between persons (which includes individuals or corporate entities) carrying on a business (which includes every trade, occupation and profession) in common with a view of profit.

Partnership Formation Forming a new business partnerships without an formal partnership agreement may seem okay when it is formed between friends and family. However disagreements of profit share, financial mismanagement or personality conflicts can result in one partner unilaterally dissolving the partnership. It is therefore important that an agreement between business partners is set out in a formal partnership agreement and this requires a careful thought process of creating an agreement that will deal with partnership responsibilities, decision making, finances and how partners leave the partnership. A partnership agreement is a private document, and will usually contain provisions relating to:

• profit sharing
• duration
• termination
• the exit and expulsion of partners, and
• how losses are to be divided between the partners

What is a Business Partnership? Determining who is a partner. The partners in a partnership are the persons who are ‘carrying on a business in common with a view of profit’. In principle any individuals over the age of majority and with full mental capacity can be partners (as indeed can corporations). This is subject to some particular cases, such as some professions where a partner is required to have a particular qualification and in times of war there is a prohibition on being in partnership with an alien enemy. Minors may be partners but will in the normal course incur no liability to their partners or third parties until they attain their majority. When a minor reaches 18 (or even before), they may repudiate the partnership agreement and their co-partners may either seek restitution in respect of any property the minor may have received under the partnership agreement or proceed to apply the whole of the partnership property in payment of the firm’s debts and liabilities. It will often seem clear who are the partners in a partnership. The partnership agreement may indicate who are to be the partners and a list of partners’ names may appear on the partnership’s notepaper. However, the titles or labels given by a partnership (such as ‘partner’, ‘salaried partner’ or ‘fixed share partner’) are not conclusive in determining a person’s status and the question of whether someone is a partner or an employee of a partnership is one of substance rather than form. Where an individual receives a salary that is not dependent on profits, it may indicate that the person is an employee rather than a partner. An obligation to contribute to the capital of the partnership and a right of involvement to some extent in the management of the partnership are common indications that a person is a partner. The PA 1890 also sets out certain rules to apply in determining whether a person is a partner in a business (mostly phrased in the negative) including, among other things:

• receipt by a person of a share of the profits of a business is prima facie evidence that he or she is a partner in the business, but does not of itself make him or her a partner in the business
• receipt by a person of a payment contingent on or varying with the profits of a business does not of itself make him or her a partner in the business
• receipt of a debt or other liquidated amount out of the profits of a business does not of itself make him or her a partner in the business or liable as such
• receipt by an employee of remuneration by a share of the profits of a business or remuneration linked to the profits of a business does not of itself make him or her a partner in the business or liable as such
• a loan to a person engaged or about to engage in a business on the basis that the lender will receive interest varying with the profits of the business or shall receive a share of the profits of the business, does not of itself make the lender a partner in the business or liable as such, provided that the contract is in writing and signed by or on behalf of all the parties to it

Liabilities of Partnership A partner in a partnership is jointly liable with the other partners for all the debts and obligations that the partnership incurs while they are a partner. A partner in a partnership is also jointly and severally liable with the other partners for any liability of the partnership, while they are a partner:

• for loss or injury that is caused to any person who is not a partner in the partnership, or for any penalty incurred, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of the other partners
• to make good any loss resulting from one partner, who is acting within the scope of their apparent authority, receiving the money or property of a third person and misapplying it, or
• to make good any loss resulting from one or more partners misapplying money or property of a third person received by the partnership in the course of its business, while such money or property is in the custody of the partnership

Such personal liabilities of a partner in a partnership are potentially unlimited and this is an important factor to be considered when a decision is being made about whether a partnership should be used as a business vehicle. A new partner in a partnership does not become liable to creditors of that partnership for anything done before they became a partner. Nor does a partner retiring from a partnership cease to be liable to creditors of that partnership for debts or obligations of that partnership incurred before their retirement. However, a retiring partner may be discharged from any existing liabilities if that is agreed with the other partners of the partnership as newly constituted and the creditors of the partnership (such agreement either being expressed or inferred as a fact from the course of dealing between the creditors and the partnership as newly constituted).The estate of a partner who:

• dies
• becomes bankrupt, or
• retires from a partnership

is not liable for the debts of that partnership contracted after the date of the partner’s death, bankruptcy or retirement (but only, in the case of retirement, if the debts are contracted by the partnership with a person who has not known the relevant partner to be one of the partners in the partnership).A partner retiring from a partnership may be liable for debts incurred by the partnership after their retirement if the retiring partner appears to still be a partner to the relevant creditors, because they have not had notice of their retirement. Notice in the London Gazette of the retirement of a partner is sufficient notice to those who have not previously dealt with the relevant partnership before such partner’s retirement, but actual notice is required for those who have previously dealt with it. Westbury Solicitors’ team of specialist Partnership Solicitors adopt a pragmatic approach to resolving partnership disputes. We can provide advice on all aspects of partnership disputes and formation of partnership agreements that protects you and your business.