Andrew, Bob, Charlie and Davids Partnership - Assignment Example

Andrew, Bob, Charlie and David’s Partnership The Legal Nature of the Partnership The fact that the Bob, Charlie, Andrew and David did not prepare an official agreement will not prevent the operation of a legal partnership.1 A partnership can be formed either expressly or impliedly. In the absence of an express agreement, the partnership between David, Bob, Charlie and Andrew is a traditional partnership and is therefore governed by the Partnership Act 1890. The 1890 Act codifies and amends preexisting equitable principles of partnership.2 The definition of a partnership as contained in Section 1(1) of the 1890 Act has legal consequences for the firm’s status as well as the distribution of assets and liabilities. Section 1(1) defines a partnership as: …the relation which subsists between persons carrying on a business in common with a view of profit.3 Essentially Section 1(1) of the 1890 Act makes it clear that the legal status of the partnership is found in the fact that it is an organization which is founded by individuals for the purpose of pursuing some form of business activity/activities.4 What this means for Bob, Charlie, Andrew and David is that their partnership is a relationship between them and it has no existence separated and apart from that specific business relationship. Put another way, the partnership does not have a legal persona which is distinct from the members.5 Consequently, the construction firm as a business partnership is nothing more than a “group of individuals collectively involved in a business activity”.6 Section 4 of the 1890 Act permits a modicum of unity in that it facilitates the use of a firm or business name for the conduct of business.7 Even so, the partners remain liable both jointly and severally.8 In fact Order 81 of the Rules of the Supreme Court as provided for in the Civil Procedure Rules 1998, provides that an action may be taken against the members of a partnership in its organization’s name but any order in favour of the plaintiff can be enforced against any member of the partnership.9 This can have far reaching consequences for the individual partners since some of them funded the partnership by virtue of loans held against their personal properties. What this means is that, in the event the partnership is held liable for damages they may each face the possibility of having to surrender personal assets to satisfy the debt if the partnership is unable to do so. While this is generally what would happen under a partnership, the chances of this occurring is increased since they each have personal assets directly tied to the partnership by virtue of their respective loans. There are two ways that property attached to a partnership is owned. It can be owned collectively or it can be owned individually. Partnership property is all that property which was brought into the partnership or acquired for the firm’s purposes.10 It is a matter fact whether or not property is partnership property and much will depend on the specific circumstances of the case.11 On the facts, the partners put equal funds into the partnership for the purpose of setting up the partnership and for purchasing plant and other equipment. Presumably, each of these purchases were bought for partnership’s business and can be presumed to be partnership property. Distinguishing between personal and partnership property is entirely important because it will determine whether or not the property can be used to satisfy the debts or claims by partnership or personal creditors. Obviously partnership creditors can pursue the partnership property but personal creditors may not pursue partnership property.12 2. The Consequences for the Partnership should David Leave If David leaves the partnership, he will remain liable for any debts or pending obligations, either jointly or severally, if those debts and/or obligations were incurred prior to his leaving the partnership.13 The date of a contract or transaction will ultimately determine whether or not an outgoing partner is liable for any outstanding debts or obligations. This is so regardless of when the contract is performed. The fact is, outsiders dealing with a partnership are at liberty to regard the members of the firm as the continuing members of the firm until such time as they have received notice of the member’s departure.14 In many cases proper notice requires publication in the London Gazette.15 It therefore follows that in preparation of David’s departure, notice should be given by virtue of a notice published in the London Gazette and to all of the relevant business contacts. If this is not done, David’s personal creditors may come after the partnership or David may be pursued by creditors of the partnership who entered into business transactions with the partnership after his departure. 3. What can be done to Avoid the Problems that can Arise under a Partnership In order to avoid some of the problems that can arise in the future, upon the formation of the partnership, an express partnership agreement should be drafted setting forth the terms of property ownership and the distribution of assets and liabilities. The agreement can also set forth the procedure for retirement or withdrawal of one’s partnership. The specific procedure for severance and the grounds for severance can also be set out in an express partnership agreement. Another option would be to set up a Limited Liability Partnership under the Limited Liability Partnership Act 2000.16 Despite its designation as a partnership, the LLP is characterized by a corporate personality since the LLP has a distinct legal personality that is different from that of the individual members.17 The LLP effectively permits the members to avoid personal liability for the partnership’s debts and obligations because it can hold property, create charges attached to its property, implement contracts in the LLP’s name and it can initiate and be the subject of legal actions in the LLP’s name. Moreover, the LLP will have perpetual life and will be unaffected by modifications in membership. Partners also benefit from the concept of limited liability in that they will only be liable for that which they “agreed to contribute to its capital”.18 4. Possible Solutions before David Leaves In order to avoid the problems associated with joint and several liability under a partnership, there are two options open to Andrew, Bob, Charlie and David. These options are in addition to the requirement of notice which must be done regardless of any other course of action. The first option is for bringing the partnership to an end and dividing the liabilities and assets equally between the partners. Since there is no agreement it will be assumed by law that the partners intended to share the firm’s profits and liabilities equally, particularly since they each contributed the same start-up amount.19 If Bob, Andrew and Charlie wish to carry on the old business they may start a new partnership to carry on the old business. However, this time they may want to consider either an express partnership agreement or an LLP. Another option may be for Bob, Andrew and Charlie to take on a new partner to replace David by virtue of novation. By virtue of novation, the new partner will simply assume David’s existing obligations and liabilities. The novation device typically requires a contract between the outgoing partner, the remaining partners in the new firm and the creditors.20 5. Legal Issues to Consider if the Partners decide to Expand in European Markets Should the partners agree to go along with David’s idea of expanding into the European markets they ought to be aware that for the most part, European jurisdictions treat the partnership as a contract.21 In the absence of a written partnership agreement this can be problematic for the partnership as much of the transactions abroad will be subject to the laws of a different jurisdiction in circumstances where European Community (EC) law does not apply. It would therefore make sense to first ensure that the laws of the intended European Market are such that it applies EC law to the commercial transactions and where it does not, the laws are at least consistent with the principles of English and/or EC laws where relevant. An LLP may not be an option should the partners decide to expand to European markets. This is because the interests attached to a LLP in Europe are treated as “tradeable securities that are subject to securities legislation” under community law.22 Moreover, there are other issues that can arise as a result of maintaining and regulating building contracts outside of the UK. Invariably this can involve liabilities for torts in jurisdictions where tort laws may apply that could result in expensive legislation in the event the forum and the applicable law are outside of the UK. Be that as it may, many of the difficulties associated with the conflict of laws and the nature and legal status of a partnership can be overcome by an express partnership agreement with a choice of law clause in which the UK is the governing law. The same approach should be taken to all building and other contracts made with parties outside of the UK. Bibliography Civil Procedure Rules 1998 Kelly, D.; Holmes, A. and Hayward, R. (2008) Business Law. Routledge Cavendish. Keenan, D. (2007) Smith and Keenan’s English Law: Text and Cases. Longman. Limited Liability Partnership Act 2000. McCahery, J.; Raaijimakers, M. and Vermeulen, E. (2006) The Governance of close Corporations and Partnerships. Oxford University Press. MacIntyre, E. (2008) Business Law. Pearson/Longman. Miles v Clarke [1953] 1 All ER 779. Partnership Act 1890. Rush, J. and Ottley, M. (2006) Business Law. Cengage Learning EMEA. Thompson v Percival [1834] 5 B and Ad. 925. Tower Cabinet Co. Ltd. v Ingram [1949] 1 KBD 1032. Yaden, R. (2008) Business Organizations: Principles, Policies and Practice. Emond Montgomery Publication. Read More