Partnership: Summary notes

Definition

Section 3 of the Kenya Partnership Act (cap 29) 1962 defines partnership as ‘ the relation which subsists between persons carrying on a business in common with a view of profit.’

Registered, statutory companies are not partnerships.

Section 4 specifies certain rules which determine whether or not a partnership exists. The most important of these are:

1. Co-ownership of Property does not of itself create a partnership whether or not the co-owners share any profits made by the use of the property.
2. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property
3. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. But does not of itself make the recipient a partner in the business.
4. Payments by way of interest on a loan advanced for use in the business.

Creation

A partnership may be formed by express agreement between the parties, either orally or in writing, or it may be implied from the circumstances. Frequently a formal deed of partnership is executed which lays down the terms and conditions of the partnership, but this is not necessary in law, and many partner¬ships are formed by unsealed written agreements.

The firm and the firm name

.Persons who have entered into a partnership with one another are called collectively a firm. The name under which the business is carried on is firm-name.

A firm is not a distinct legal entity and must be clearly distinguished from a corporation. Where partners contract in the firm-name, the contract will take effect as if the names of each and every partner were substituted in the contract for the firm-name. Similarly, partners may sue or be sued in the firm-name.

Choice of firm-name.

The general rule is that partners may carry on their business under any firm-name they choose. But this rule is subject to the following

provisos:

1. The firm-name must not be such as to raise the implication that the business is connected with another with which it is. in competition.
2. The requirements of the Registration of Business Names Act(Cap 499) 1962, must be satisfied. This Act provides that where firm-name does not consist of the true names of all the partners, the following particulars must be registered:

• The business name of the firm.
•  The general nature of the business.
• The principal place of business.
• The present Christian name and surname and any former Christian name and surname of each partner.
• The usual residence of each partner.
• The nationality of each partner.
•  Any other business occupation of each partner.

Number of partners

The general rule is that a partnership cannot consist of more than twenty persons and in case of banking partnership, ten persons. If these numbers are exceeded, section 389 of the Kenya Companies Act, requires the firm to be registered under the Companies Act. Failure to do so renders the firm to be an illegal association.

Partners’ rights and duties

The mutual rights and duties of the partners among themselves are usually ascertained by the agreement. In the absence of an agreement to the contrary, the Partnership Act contains the following:

1. All partners are entitled to share equally in the capital and profits of the business and must contribute equally to losses, whether of capital or otherwise.
2. Each partner may take part in the management of the firm’s business.
3. No partner is entitled to remuneration for acting in the partnership business.
4. No person may be introduced as a partner without the consent of all existing partners.
5. No change may be made in the nature of the partnership business without the consent of all existing partners.
6.  Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners.
7.        A partner is not entitled to interest on capital before the ascertainment of profits.
8.  A partner is entitled to interest at six per cent per annum on any money he lends to the firm other than the capital he originally agreed to subscribe.
9.         Each partner is entitled to have access to the partnership books.

A partner also has specific duties:

1. To act in good faith.
2. To render true accounts and full information of all things affecting the partnership,
3. To account to the firm for any benefit derived by him without the consent of the other partners, from any transaction concerning the partnership.
4. To disclose any secret profit made in dealing with the partnership.
5. To refrain from competing with the firm.

Liability of partners to third

Every partner is an agent of the firm and his other partners for the  purpose of the business of the partnership. The,acts of every partner, who does any act for carrying on in the usual way business of the kind carried on by the firm, bind the firm and his partners, unless:

1.  the partner so acting has no authority to act for the firm in that matter,
2.  the person with whom he is dealing knows that he has no authority, or
3.  does not know or believe him to be a partner.

 

The implied authority of a partner extends only to what is necessary for the conduct of the partnership business, including:

1. Selling the goods of the firm.
2.  Purchasing on the firm’s behalf goods of the kind usually employed in the business.
3. Receiving payment of the firm’s debts and giving receipts for them.
4. Engaging employees for the partnership business.In trading partnerships a partner may also:
5. Accept, make, and indorse negotiable instruments in the name of the firm
6. Borrow money on the firm’s credit.
7. Pledge the firm’s goods.
8. Instruct an advocate in an action against the firm for trade debt, or bring an action in the firm’s name.

Exceptions to implied authority

There is no implied authority

(i) to execute a deed,

(ii) to submit a dispute relating to the business of the firm to arbitration, and

(iii) to give a guarantee in the firm’s name unless the giving of guarantees is within the usual business of the firm.

Assignment of shares

Provided the Partnership Agreement contains nothing to the contrary, a partner may assign his share in the partnership, and this may be done either absolutely or by way of redeemable charge or mortgage to a third party. The assignee, however, is not entitled to take part in the management of the partnership business, or to inspect the books or the accounts of the partner¬ship. He is entitled only to receive that share of the profits which would other¬wise have gone to the assigning partner.

Liability of new and retiring partner

When a person is admitted into an existing firm, unless he makes a special agreement to the effect that he will take over the liability in respect of the firm’s debts at the time of his joining the firm, he will not be liable for these debts.

Likewise, unless there is a special agreement to the contrary, a retiring partner will be liable only for debts incurred before his retirement. But, if the partner¬ship business is being continued by the remaining partners, with or without the introduction of a new partner, the retiring partner will be liable for certain debts Incurred after his retirement unless he gave notice of retirement.

Partnership property

All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise on account of the firm, or for the purchases and in the course of partnership business, are partnership property, and must be held and applied by the partners exclusively for the purpose of the partnership and in accordance with the partnership agreement

Dissolution. A partnership may be dissolved in the following ways: A. Without a Court Order

1.  By mutual agreement at any time.
2. By the expiration of the fixed term, if any, stated in the partnership agreement
3. If the partnership was entered into for one adventure, or undertaking, by the termination of that venture or undertaking.
4. If the partnership is entered into for an undefined time, by one partner giving notice of dissolution to the others
5. By the bankruptcy or death of any partner.
6. If one partner allows his share to be charged for his separate debt.If an event happens which makes business of the partnership illegal

B. By Decree of the Court

1. When a partner becomes of unsound mind.
2. When a partner other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract.
3. When a partner, other than the partner suing, has been guilty of con-duct calculated to affect pre- judicially the carrying on of the business.
4.   When a partner, other than the partner suing, wilfully commits a breach of partnership agreement, or otherwise so conducts himself that it is not reasonably practicable for other partners to carry on the business in partnership with him.
5. When the business of the partnership can be carried on only at a loss.
6. Whenever circumstances arise which, in the opinion of the court, render it fair and equitable that the partnership be dissolved,

Limited Partnerships.

Limited partnerships may be formed under the Limited Partnerships Act (Cap 30) 1962. These are seldom formed as a private limited company has many more advantages. The Act lays down certain rules for limited partnerships:

1. Apart from limited partners, there must be one or more general partners who will be liable for all the debts of the firm.
2. The limited partner may not take part in the management of the firm.
3.  A limited partner cannot bind the firm.
4.  He cannot dissolve the partnership by notice.
5.   The death, mental illness or bankruptcy of a limited partner do not cause the dissolution of the partnership.
6. With the consent of the general partners, he can assign his share.