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October 1994
This part of the chapter sets out the legislative framework within which partnerships operate in England and Wales. The principal Act of Parliament governing partnerships is the Partnership Act 1890 (denoted in the margin as PA 1890) and references in this Part to the Act or sections of it are to that Act unless otherwise indicated. It is important to remember, however, that many of the provisions of the Act are subject to the contrary agreement of the partners, ie partners have a wide discretion to decide for themselves the terms of their relationship and may agree to adopt different rules than those specified in the Act (but not so far as their relations with the outside world are concerned).
A partnership is defined in section 1 of the Act as "the relation which subsists between persons carrying on a business in common with a view of profit", excluding all companies, although companies may be members of partnerships. A partnership is then a relationship between individuals and/or legal persons such as companies and under English law does not have a separate legal personality from its members. The partners can sue and be sued personally as well as in the name of the partnership, so creditors can choose to pursue one or more partners personally, rather than the partnership, for partnership debts. There is no system of registration of general partnerships.
Notes: [s1 PA 1890]
A key difference, then, between a partnership and a limited company is that a partnership does not provide the partners with any limited liability, ie each partner is liable without limit for debts incurred by the other partners in the course of the partnership business. This rule applies for all partnerships except those formed and registered as limited partnerships (see paragraph 53.4).
Under the Limited Partnerships Act 1907, (denoted in the margin as LPA 1907) it is possible for some members of a partnership to have limited liability, provided they do not interfere in the management of the partnership and provided also that there is at least one "general" partner who accepts unlimited liability. A limited partner is defined as a partner who contributes a stated amount of capital to a partnership and whose liability is limited to the amount contributed. He is expressly forbidden from taking any part in the management of the partnership firm and breach of that rule will expose him to unlimited liability as if he were a general partner. A limited partnership must be registered as such with the registrar of companies, otherwise it is deemed to be a general partnership. The Limited Partnerships Act provides special rules for certain situations that might occur in the life of a limited partnership, which include that the bankruptcy of a limited partner does not dissolve the partnership and that he may only realise his interest in the firm by assigning it with the consent of the general partners. As limited partnerships are rare in practice, the remainder of this chapter assumes that the partnerships encountered by official receivers will be general partnerships.
Notes: [s4 LPA 1907] [s6(1) LPA 1907] [ss 5, 8 and 15 LPA 1907] [s6 LPA 1907]
53.5 Establishing a partnership
A partnership can begin and cease trading quite informally, without any express intention of the partners and without any written agreement. Where there is no express agreement, or the agreement does not specify how a given circumstance is to be dealt with, the provisions of the Partnership Act 1890 apply. The maximum number of persons who can form a partnership is usually 20, but this limit is waived for various professional partnerships, including accountants and solicitors.
Notes: [s716(1) CA 1985][s716(2) CA 1985 and Various Partnership (Unrestricted Size) Regulations]
A partnership agreement or deed is no different in law from any other type of contract and the general rules concerning the formation of a contract apply. Where the agreement is written, it usually takes the form of a deed setting out the terms upon which the partnership is to be conducted. Partners can specify almost any terms they wish and section 19 of the Act confirms that "the mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing".
Notes: [s19 PA 1890]The Business Names Act 1985 (denoted in the margins as BNA 1985) seeks to control the use of certain words or expressions in business names and requires the disclosure of partners’ names to potential customers and suppliers. The Act applies to all partnerships which have a place of business in Great Britain and which carry on business in Great Britain whose names do not consist only of the surnames of all individual partners (and corporate names of corporate partners) and such "permitted additions" as their first names or initials. If a partnership name would imply a connection with national or local government, the written approval of the Secretary of State for Trade and Industry is required before it can be used. For certain other words and expressions, listed in the Company and Business Names Regulations 1981 (as amended in 1982), the approval of a "relevant body" must be sought before the Secretary of State is approached. A partnership subject to the Act must disclose the name of each partner, and an address at which service of a writ or similar document will be effective, on all business documents (letters, orders, receipts, invoices etc) and on a prominent notice at its business premises. If there are more than 20 partners, the keeping of a list of partners at the firm’s principal place of business and a statement in business documents of the existence and location of the list and its availability for public inspection is sufficient, but the display requirement still applies. Should a firm fail to comply with these requirements, as well as being subject to criminal penalties, it may not enforce an action based on any contract made whilst it was in breach of the requirements, if the defendant can show either that he could not pursue a claim against the partnership because of the breach or that he has suffered a financial loss as a result of it. This protection for the defendant lapses, however, if he brings a counter-claim.
Notes: [ss 2 and 3 BNA 1985][s4 BNA 1985][s4 and 5 BNA 1985]53.8 Rights and duties of partners
The main rights and duties of partners are set out in the Partnership Act 1890 and common law principles, as interpreted by case law. However, many of these principles can be altered by consent between the partners, either stated expressly in a partnership agreement or implied from the partners’ conduct.
Notes: [ss5-24 and28-30PA 1890]
53.9 Access to books and information
Section 24(9) of the Act provides that the partnership’s books are to be kept at the place of business (or principal place of business, if there is more than one), and every partner can inspect and take copies of them. Partners are also bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representative. Should a partner assign his interest in the firm, the assignee does not have such rights while the firm continues, but he does have a right to an account if the firm is dissolved.
Notes: [ss24(9)28 PA 1890][s31(1)PA 1890][s.28 PA 1890]
53.10 Capital, profits and losses
Section 24(1) states that, subject to contrary agreement, all the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards losses. Accordingly, unless partners make specific arrangements to the contrary, losses are shared equally between them, even if the amounts of capital they contributed were unequal.
Note: [s24(1) PA 1890]
53.11 Payment of partnership debt
If one partner settles a partnership debt, either willingly or unwillingly (because he is the one being sued), he has a right to claim an indemnity from his fellow partners. Section 24(2) says that "the firm must indemnify every partner in respect of payments made and personal liabilities incurred by him (a) in the ordinary and proper conduct of the business of the firm, or (b) in or about anything necessarily done for the preservation of the business or property of the firm".
Notes: [s24(2)PA 1890]
The concepts of partnership and employment are mutually exclusive. As a partnership is simply the relationship between partners, no partner can be employed in the business since he cannot employ himself. It follows that partners, as self-employed individuals, are not entitled to the protection of employment law in relation to matters such as redundancy and unfair or wrongful dismissal.
In terms of duration, the Act divides partnerships into those entered into for a fixed term, and others, which are known as partnerships at will. A fixed term partnership can be ended only in accordance with the terms of the partnership agreement, the express provisions of the Act (eg death or bankruptcy of a partner), or by court order. A partnership at will, however, may according to the Act be ended simply by one partner giving notice to the other partners to that effect. The notice will end the partnership from the date given in it, or, if no date is mentioned, from the date of communication of the notice. If a fixed term partnership continues after the fixed term expires without any express new agreement, the Act considers the partnership to have been converted to a partnership at will.
Notes: [s26 PA 1890] [s32 PA 1890] [s27 PA 1890]
53.14 Liability for partnership debts after retirement
Under section 36 of the Act, where a partner retires and a person deals with the firm after the change in membership, that person is entitled to treat all apparent members of the old firm as still being members of the new firm until he is notified of the change. For this purpose an advertisement in the London Gazette is deemed to be notice to all persons who had not dealt with the firm before the change. An "old" partner is fully responsible for debts incurred whilst he was a partner. A partner who retires is liable for partnership debts incurred after he retires unless:
Of course, if the retired partner knowingly allowed himself to be represented as a continuing partner, he would not escape liability. However, the estate of a partner who dies, or is made bankrupt, or who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of death, bankruptcy or retirement respectively.
Notes: [s36 PA 1890] [s36(3)PA 1890]
The dissolution, or termination, of a partnership may take place because of the retirement, death or bankruptcy of a partner or because of a disagreement between partners. If one or more partners leave, retire, die or are made bankrupt and other partners continue the business, nevertheless under English law this is a "partial" dissolution: the old partnership is dissolved and a new one is created by the continuing partners. There are three broad grounds upon which a partnership will be dissolved: contractual (see below), illegality and court order.
Notes: [ss 32-35 PA 1890]
53.16 Contractual grounds for dissolution
Partnership has a contractual basis and a partnership agreement may provide express circumstances under which the partnership will end. Sections 32 and 33 of the Act also specify five situations in which a partnership will terminate, which are subject to contrary agreement between the partners. These are:
Partial dissolution of a partnership occurs when a partner leaves the firm and the other partners continue the business. The departing partner’s interest in the assets of the firm and any undrawn profits must be valued and then purchased by the continuing partners. Where the business is continued without any final financial settlement, then subject to any contrary agreement, the departing partner is entitled to such share of the profits as the court might find to be attributable to his share of the partnership assets, or alternatively to interest at 5% per annum on the amount of his share. Case law has established that if the departing partner opts for a share of the profits, the other partners can deduct an allowance for managing the assets between the date of his departure and the date of the settlement, and if he opts for the 5% interest, he is also entitled to a share of any increased value in capital profits between the two dates. However, where the partnership agreement gives the continuing partners an option to buy the departing partner’s interest, and they exercise that choice, the departing partner is not entitled to any further share of profits, providing that the other partners follow the terms of the agreement in all material respects.
Notes: [s42(1)PA 1890] [s42(2)PA 1890]
53.18 Rescission of the partnership agreement
If a partnership agreement was induced by a misrepresentation by one partner to another, be it fraudulent, negligent or innocent, the partner so induced can rescind the contract, effectively dissolving the partnership. He can also sue for damages and the Act provides that in addition he can claim:
The right to rescind is lost under general law principles if there has been undue delay in claiming the remedy, if the affected partner has continued in the partnership after discovering the misrepresentation or if a third party becomes involved.
Notes: [s41 PA 1890]
The effect of a full dissolution of a partnership is to end it as a going concern. The next step is to wind up the business, ie collect in and value the assets, pay the partnership debts and distribute any surplus to the former partners. This may be done outside the scope of the Insolvency Act 1986 and the Insolvent Partnerships Order 1994, if either the former partners wind up the firm themselves, or the winding up is carried out by a receiver appointed by the court.
53.20 Winding up by the former partners
If the partners wind up their firm themselves, they continue to act as agents for their fellow partners in doing so. The Act qualifies this by stating that the authority of each partner continues despite the dissolution of the partnership as far as is necessary to wind up its affairs, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. However, where a partner has become bankrupt the firm is not bound by his acts, although this does not affect the liability of any person who after the bankruptcy represented himself or knowingly suffered himself to be represented as a partner of the bankrupt.
Notes: [s38 PA 1890][s38 PA 1890]
A receiver may be appointed by the court even if the partnership is a going concern, in which case the receiver will be a receiver and manager. Where the partnership is a going concern, the court would need to be presented with evidence of fraud or unfair conduct before it would appoint a receiver. The application to the court would usually be by an aggrieved partner, although a creditor may make such an application. It is more common, however, for the court to appoint a receiver on the dissolution of a partnership, to oversee the winding up. It is not necessary for the receiver to be an insolvency practitioner and the court will often appoint one of the partners as receiver, providing there is no evidence against him. A receiver is an officer of the court whose supervision of the winding up must not be interfered with. He has a duty to act in the best interests of all the partners and can claim remuneration and costs from the assets of the firm. He may not pursue the partners personally should the firm’s assets prove insufficient to meet his costs and remuneration.
The general rules governing the distribution of partnership assets after a dissolution are given in section 44 of the Act, which provides that, subject to contrary agreement:
Notes: [s44 PA 1890]
[Back to Introduction] [On to Part 2 - The Insolvent Partnerships Order 1994]