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What can David do about his position in relation to the other partners?

Introduction

In considering what rights David has in respect of the other partners, it will first need to be determined whether a partnership has actually been created.For a partnership to be created two or more persons must conduct business with a view to profit.Partnerships are defined under s.

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1(1) Partnership Act (PA) 1890 as a “relation subsisting between persons carrying on business in common with a view of profit”. Since David, Clive and Jane have all started a business in advertising with a view to profit; it is evident that a partnership has been created. As a partnership agreement has not been created by the partners, the partnership will be governed by the PA 1890. David will thus be able to rely on the PA 1890 in order to establish his rights and duties. It is contained within s. 19 PA 1890 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 of the partners, and such consent may be either express or inferred from a course of dealing”.[1] Therefore, the rights and duties of David will have been capable of being varied with the mutual consent of all the partners. As the partners do not have a partnership agreement in place, it is clear that they have not varied the terms of their rights and duties that are contained under the Act. Given that a partnership is based upon the mutual trust of all the partners, they each owe a duty of good faith. This has been exemplified in the case of Const v Harris[2] when it was held by Lord Eldon that; “in all partnerships, whether it is expressed in the deed or not, the partners are bound to be true and faithful to each other”.

Therefore, each partner must be required to act in the interests of the partnership as a whole and not in the interests of themselves. As Jane is a director of a company that runs corporate events, called Eventbright Ltd, which has been regularly used by the partners, it is questionable whether Jane is acting in the interests of the partnership. This is because Jane may only be using Eventbright Ltd in order to increase profits in her own company. This can be seen in Trimble v Goldberg[3] where it was made clear that all partners must act in good faith for the benefit of the partnership. There are three requirements that must be fulfilled by the partners when acting in good faith of the partnership. These are; 1) the duty to disclose information, 2) the duty to account for benefits received, and 3) the duty in respect of competing business.[4] Whether the latter two duties are being fulfilled by Jane is debatable. This is because Jane may be benefiting from using her company to which she is a director in order to gain profits (s. 29 PA 1890) and her company may be considered a competing business (s. 30 PA 1890). If this is the case, Jane will be required to disclose this information to the other partners and must account for and pay over to the firm all profits made by her. In respect of the restrictions Jane and Clive want to impose upon David’s work, it is likely that David will be able to assert his rights contained under s. 24 PA 1890. Here, it provided that; every partner may take part in the business (24(5)) and that decisions are to be taken by a majority but unanimity is required to change the nature of the business (24(8)). David may therefore take part in the business, yet because Jane and Clive have suggested he take a more administrative role, it is arguable whether this will be sufficient. This is because Clive and Jane will be capable of making a majority decision as to how the business is being run, although they cannot change the nature of the business without David’s consent. In effect, David may not be able to oppose the decision that is being made by Clive and Jane as they will be able to take a majority vote as to how they think the business should be run. And, if they feel that it is in the best interests of the business, then David may not have any right to argue against this unless they acted in bad faith or attempted to change the nature of the business.

If David is not happy with the new arrangements, he may be capable of bringing the partnership to an end. This can be done by giving notice to the other partners (s. 26 and 32 PA 1890). If David decides to bring the partnership to an end, any partner will have the right to publicly notify the dissolution (s. 37 PA 1890). After the partnership has been dissolved, each partner will be entitled to have the partnership property applied so that the debts and liabilities can be discharged. Once this has been done, any surplus will be distributed equally between the partners. Because not all property is partnership property, a distinction will have to be made between personal and partnership property as personal property will not be able to help meet partnership debts (s. 20 PA 1890).

Overall, it seems as though David may not be able to oppose the decision of Clive and Jane to restrict his work to more clerical and administrative matters. If David is not happy with this decision he may be able to bring the partnership to an end by giving notice to the partners. Once this has been done, the partnership property will be distributed equally between all three partners.

What is the partnership propertyWhy does it matter?

The amount of money and property the partners have contributed to the partnership to use in the enterprise is known as partnership capital.[5] This represents the partner’s equity in the partnership and has noted in Reed v Young[6]; “The capital of a partnership is the aggregate of the contributions made by the partners.

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It is important to distinguish between the capital of a partnership, a fixed sum, on the one hand and its assets, which may vary from day to day and include everything belonging to the firm having any money value, on the other.” Partnership capital is thereby distinguished from partnership property which is the property that has been acquired by the partnership. This includes a transfer of property to; a) the partnership in its name, b) one of the partners in their capacity as partnership, or c) one of the partners indicating their capacity as a partner.[7] It is vital that partners indicate their intent as to whether the property is to be considered capital or property as this will determine who is entitled to the property once the partnership is dissolved. If the property is partnership capital, then the individuals will be entitled to take their share of the property.[8] If the property is partnership property, then the property will be distributed equally between the partners. As pointed out by Lord Andrews LCJ in McClelland v Hyde[9]; “the capital of a partnership is something different from its property or its assets”.

20(1) PA 1890 states that partnership property includes “property originally brought into the partnership stock or acquired for the purposes and in the course of the partnership business”. It is important for partners to specify what property belongs to whom in order to avoid any undesirable consequences. The original owners of the property may not be entitled to recover the property in the event that the partnership comes to an end.[10] On the insolvency or bankruptcy of a partnership, there are two sets of creditors; joint and separate. The partnerships assets are referred to as the “joint estate” in the Insolvency Act 1986 (as amended by the Insolvent Partnerships Order 1994 (SI 1994 2421)) and are used in the first instance to pay the partnerships creditors. If an asset increases in value, the increase will belong to the firm if the asset is partnership property. If the asset is owned by the individual partner, then the increase will belong to the individual.[11] As a partnership does not have its own separate legal entity, partnerships cannot own property in its own name. Instead, partnership property will be held in the names of the individual partners who will be deemed to be holding the property in their names as agents for the purposes of, and as trustees for, the partnership as shown in Burdick v Garrick[12] where property held on trust for the partners was considered partnership property.

There is also a presumption, unless expressly stated otherwise, that partnership property is held by partners as tenants’ in common and not as joint tenants (except for land; s. 39(4) Law of Property Act 1925). This was evidenced in Bathhurst v Scarborough[14] when it was noted that the general rule is that property bought with partnership money belongs to the partnership and will be held by the partners as tenants in common. The accounts of the partnership will usually make it clear which assets are to be considered partnership property and which assets are merely individual property that is to be used by the partnership as in Barton v Morris[15] where it was clear from the partnership’s accounts which assets were to be treated as partnership and individual property. In the instant scenario it would appear as though the office equipment and stationary is partnership property, whilst the rest of the partner’s assets are personal property. However, because there is no partnership agreement in place that specifies which separates the assets between ‘partnership property’ and ‘partnership capital’ it seems as though s. 20(1) PA 1890 will apply. This means that all of the property that has been brought into the partnership stock will also be called partnership property. This has been recognised by Deards who stated that; “property brought into the partnership stock will cover property brought in as capital by a partner”.[16] Nevertheless, because s.21 of PA 1890 provides that property brought with the partnership’s money is presumed to have been brought for the partnership, any property that is itemised in the partnerships accounts will be deemed partnership property. This suggests that if the property is not itemised in the partnerships accounts and is merely being used by the partnership, then in the absence of any agreement by the partners, the use of any property by the partners will not be regarded as partnership property.[17] Consequently, if any of the assets are not itemised in the partnerships accounts it cannot be said that they will be classed as partnership property. In Waterer v Waterer[18], however, the use of land was considered partnership property because of the nature of the partnership.

In effect, unless David’s assets are itemised in the partnerships accounts, they will not be considered partnership property. The premises by which the company operates will most likely be considered partnership property in light of the Waterer v Waterer[19] case, whilst the use of Eventbright Ltd will not be. Any assets that are considered partnership property will be shared equally between the partners.

Bibliography

Books

E Deards., Practice Notes on Partnership Law, (Cavendish Publishing, Business & Economics, 1999).

E MacIntyre., Business Law, (Essex: Pearson, 6th Edition, 2012).

R Mann., Essentials of Business Law and the Legal Environment, (London: Cengage Learning, Business & Economics, 2009).

Journals

K Killington., ‘Partnerships – All Are Equal?’ (2008) Tax Journal, Issue 916, 14-16.

P Beasang., ‘Partnerships: Legal Issues’ (2008) Tax Journal, Issue 916, 13-14.

T M Lewin., ‘What is Partnership Property?’ (2011) < http://www.icaew.com/en/technical/farming-and-rural-business/general/what-is-partnership-property> [25 July, 2014].

Legislation

Partnership Act 1890

Case Law

Barton v Morris [1985] 1 WLR 1257

Bathhurst v Scarborough [2004] EWCA Civ 411

Brown v Inland Revenue Commissioners [1965] AC 244

Burdick v Garrick (1869-1870) LR 5 Ch App 233

Const v Harris (1924) Turn & R 496

McClelland v Hyde [1997] 3 All ER 800, CA

Reed v Young [1984] STC 38, 57-58

Trimble v Goldberg [1906] AC 494, PC

Waterer v Waterer (1872-73) 15 LR Eq 402

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What can David do about his position in relation to the other partners?. (2018, Nov 05). Retrieved April 1, 2020, from https://phdessay.com/what-can-david-do-about-his-position-in-relation-to-the-other-partners/.