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Chapter 2: Nature of Partnership Outline 2.1 Introduction 2.2 Definition of partnership 2.3 A business 2.4 Carried on in common 2.5 By two or more persons 2.6 Carried on with a view of profit 2.7 Summary
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Chapter 2: Nature of Partnership Outline 2.1 Introduction 2.2 Definition of partnership 2.3 A business 2.4 Carried on in common 2.5 By two or more persons 2.6 Carried on with a view of profit 2.7 Summary Aims of this Chapter This chapter will enable you to achieve the following learning outcome from the CILEx syllabus: 1 Understand the key practical, financial and fiscal implications in choice of business medium 2 Understand the practices and procedures relating to the formation and management of a partnership 2.1 Introduction A partnership is a relationship, which is created when certain conditions are satisfied. This chapter examines these conditions. 2.2 Definition of partnership Partnership is defined by s1(1) Partnership Act 1890 (PA 1890) as: the relation which subsists between persons carrying on a business in common with a view of profit. There are four characteristics that must be present before a partnership can exist. There must be: (1) a business; (2) carried on in common; (3) by two or more persons; (4) with a view of profit. 2.3 A business Business is defined by s45 PA 1890 as including every trade, occupation or profession. This statutory statement is problematic because not every occupation can be called a business. For example, a landowner who simply manages his estate and collects the rents does not carry on a business, but if he deals in land (rather than just selling it off) this would constitute a business. The receipt of income from property is an incident of ownership. For a business to exist, the enterprise must be one which is recognised as a commercial or professional calling, for example, solicitors or plumbers. HQ16 CLS 5 The term business connotes some continuing activity and generally involves a series of commercial transactions which, if successful, result in a profit for the participants. However, a single transaction or venture may constitute a business or trade, such as a one-off purchase of goods or services (Mann v D Arcy [1968]). The existence of a business is not an essential prerequisite for a partnership. In Khan and Another v Miah and Another [2000] it was held that a partnership may exist before trading is actually commenced. The partners had to prepare for business by acquiring premises, securing planning consent and putting their affairs in order, to enable them to carry on business as restaurateurs. The court held that the process of committing capital and the effort of preparing for business was a joint venture which is part and parcel of being in partnership. The fact was that, prior to starting to trade, the partners were involved in commercial activity with a view of profit. The Court of Appeal decided in Christie Owen & Davies plc v Raobgle Trust Corporation [2011] that a partnership was in existence when the partners purchased premises for future development as a restaurant, as at that time they had done enough to commence the joint enterprise in which they had agreed to engage. This decision is a useful example of the application of the House of Lords decision in Khan v Miah, showing how the court will not just take the narrow view that a partnership exists from the moment that the actual business opens its doors and starts to trade, but will look at the steps the parties have taken beforehand with a view of ultimate profit. 2.4 Carried on in common The concept of common activity raises difficulties. The requirement might be said to be that the business is carried on by or on behalf of the partners. A person might be said to carry on business if he participates in the management of the business, as an owner might participate, but s24 PA 1890 recognises that individual partners might agree to forgo their right to participate in management. Ultimately, it is necessary to look at all the facts to determine whether or not a business is carried on by or on behalf of the partners. Effectively, there is a requirement for participation in the business. One has to look at the conduct of the alleged partners and ascertain whether or not they comport themselves as partners. In circumstances in which individuals behave as though they are not partners, the crediting of a share of the profits of the business to the accounts of those individuals will not be sufficient to make them partners (Saywell v Pope [1979]). Accordingly, the receipt of a share of profits does not automatically make a person a partner. The fact that two or more persons participate jointly in a business and share net profits is not sufficient alone to make them partners. It is necessary to consider the ultimate beneficial entitlement to the profits generated. In Re Fisher & Sons [1912] a partnership did not exist when executors continued the business of the deceased, because the profits generated did not belong to the personal representatives. 6 HQ16 CLS 2.5 By two or more persons Individuals and artificial persons (companies and limited liability partnerships) may be partners. 2.6 Carried on with a view of profit A partnership can exist only if a business is carried on with the intention to make a profit. PA 1890 does not state that there must be an intention to share profits between partners. The sharing of profits is not essential to the existence of a partnership, but there may be sufficient other factors present to establish a partnership in the absence of an alleged partner sharing the profits. Stekel v Ellice [1973] established that a person receiving a salary could still be a partner if other factors made such a designation appropriate. On the other hand, the sharing of profits is prima facie (that is to say, on the face of it) evidence that a partnership subsists (s2(3) PA 1890). However, s2(3) PA 1890 goes on to list a number of instances whereby receipt of a share of profits does not, by itself, make a person a partner. The fact that the receipt of profits is only prima facie evidence means that this can be rebutted if there are other factors which tend to suggest there is no partnership (Cox v Hickman [1860]). In other words, the sharing of profits is only one of several factors to be taken into account in deciding whether a particular arrangement is a partnership. Whether a person may be held to be a partner clearly depends upon the facts of the case and the intention of the parties. In all but the most exceptional of cases it will be clear whether or not the intended or actual relationship is one of partnership. The question of whether or not a person is a partner usually arises in the context of a creditor seeking to fix liability for a debt on a person on the basis that he is a partner, and thus responsible for the debts of the firm, because those who are obviously partners cannot meet the debt. In the context of normal commercial lending to a partnership the risk of the lender being held to be a partner is minimal, but it increases when terms are agreed which entitle the lender to a share of profits or to participate in some way in the decision-making processes of the business. s2(3)(d) PA 1890 provides specifically that the advance of money by way of loan to a person engaged in business on terms that the lender receives a rate of interest which varies with profits, or a share of profits, does not, by itself, make the lender a partner. The provision goes on to state that the contract for the loan must be in writing signed by or on behalf of all parties before the lender may rely upon this provision. These rules, designed to determine the existence of a partnership, are of equal importance on the retirement of a partner who sells his share to the remaining partners. s2(3)(e) provides that a seller receiving a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not sufficient in itself to make the seller a partner. HQ16 CLS 7 It should also be noted that a lender who is entitled to a share of net profits, or a person who sells goodwill in consideration of a share of profits generated by a partnership, is a postponed creditor. If the partnership becomes insolvent, then the status of certain creditors is reduced to that of deferred creditor and they cannot recover anything in respect of their debt until all the other ordinary creditors have been paid in full (s3 PA 1890). 2.7 Summary (1) Partnership is a relationship which exists when the conditions set out in s1 PA 1890 are satisfied. s1 defines a partnership as the relation which subsists between persons carrying on a business in common with a view of profit. There must be: a business; carried on in common; by two or more persons; with a view of profit. (2) A business includes every trade, occupation or profession. The following points should be noted: not every occupation is a business and, if it is not, it cannot form the basis of a partnership; for an enterprise to be a business it must be a recognised commercial or professional calling; the term business connotes a continuing activity and generally involves a series of commercial transactions; a partnership may come into existence before trading has commenced. (3) Factors to be taken into account to ascertain whether a business is carried on in common, and therefore whether persons participate in a business, include: participation in management; sharing of and beneficial entitlement to profits; the conduct and intentions of the persons involved. (4) Those who may participate in a partnership include individuals and artificial persons such as companies and limited liability partnerships. (5) An intention to make profits is a prerequisite for the existence of a partnership. The following points should be noted: the sharing of profits is not essential to the existence of a partnership provided substantial other factors exist to support the existence of a partnership; sharing of profits is prima facie evidence of the existence of a partnership. 8 HQ16 CLS 2016 Copyright CILEx Law School Limited All materials included in this CLS publication are copyright protected. All rights reserved. Any unauthorised reproduction or transmission of any part of this publication, whether electronically or otherwise, will constitute an infringement of copyright. No part of this publication may be lent, resold or hired out for any purpose without the prior written permission of CILEx Law School Ltd. WARNING: Any person carrying out an unauthorised act in relation to this copyright work may be liable to both criminal prosecution and a civil claim for damages. This publication is intended only for the purpose of private study. Its contents were believed to be correct at the time of publication or any date stated in any preface, whichever is the earlier. This publication does not constitute any form of legal advice to any person or organisation. CILEx Law School Ltd will not be liable for any loss or damage of any description caused by the reliance of any person on any part of the contents of this publication. Published in 2016 by: CILEx Law School Ltd College House Manor Drive Kempston Bedford United Kingdom MK42 7AB British Library Cataloguing in Publication Data A catalogue record for this manual is available from the British Library. ISBN
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