THE PARTNERSHIP ACT 1890
This note provides general guidance on the Act. Please note that partners are advised to enter into a written partnership agreement and to seek legal and accountancy advice when doing so. Further, partners are advised to seek legal advice if partnership problems arise.
For practical advice on constructing a written agreement and tips for new partners see my Articles page here.
The principal piece of legislation that governs partnerships, including those in general practice is the Partnership Act 1890. The act contains a number of default provisions, i.e. provisions which apply unless the partners agree otherwise. This allows certain provisions - concerning partners’ relations to one another - to be varied by agreement between the partners. The act is divided into four main parts as follows.
· Definition of partnership
· Relations with non-partners (the outside world)
· Relations of partners between themselves
· Dissolution and its consequences
Definition of partnership. The first clause in the act sets down that
“Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”
The meaning of business in common is important because partners can only be held liable for debts in relation to this “business”, for GPs this is usually the provision of general medical services to a list of patients.
Obligations to the outside world. The act imposes a joint and several liability on each partner for partnership debts incurred while he or she is a partner. This liability cannot be waived by agreement. For business purposes every partner is an agent of the partnership and anything done in the ordinary course of the business binds the partnership and the other partners. Such a liability may extend to a debt incurred by a person acting, or apparently acting, on behalf of the partnership, if the creditor is unaware that the person does not have the authority of the partners.
The joint liability principle includes the possibility that any partner may be sued individually, for example by a patient, and thereby be forced to settle a claim in full. (He or she may then have grounds to sue the other partners for redress). In some cases a court may require that all the partners be joined in an action. It is also possible that a patient dissatisfied by one partner can sue the whole partnership, hence the vital necessity of all partners having defence body cover. Innocent partners cannot be held liable for crimes committed by a partner, but they may be held liable for any civil damages subsequently incurred.
Relation of partners between themselves. The rights and obligations of partners to one another are subject to agreement between themselves. In the absence of any agreement the following will apply.
· All assets acquired by the partnership become partnership property.
· Partners have a right to an equal share of the capital and profits.
· All partners have the right to take part in the management of the partnership
· No partner may receive “remuneration” for acting in the partnership business.
· The admission of a new partner requires unanimous consent.
· Only a majority of partners is required to decide on “ordinary matters”.
· No partner may be expelled unless a power to do so is expressly agreed
· A partner may dissolve the partnership at any time without notice.
Dissolution and its consequences. Dissolution – the breaking up of a partnership – occurs when the partnership relation terminates, even though the partners may continue to be associated together, either in a new partnership or simply to oversee the winding-up of the business. Legally, dissolution will be held to occur because of one of the following.
· By any partner giving notice to the others (subject to agreement, i.e. this can be prevented)
· By mutual agreement of the partners
· By fraud or misrepresentation
· By a repudiatory breach of the partnership agreement by a partner
· By the death or bankruptcy of any partner (subject to agreement, i.e. this need not dissolve the partnership as between the other partners)
· By illegality
· By the order of a court
Among the grounds on which a court may order dissolution are: when a partner becomes permanently incapable of performing his or her part of the partnership contract (including because of “unsound mind”); when a partner is in breach of an express or implied term of the partnership agreement; or when the business can only be carried on at a loss.
New partners. It should be noted that the admission of a new partner will as a matter of law constitute a new partnership, therefore his or her liabilities do not extend to those debts incurred before he or she became a partner (and possibly to those after he or she left). However, a new partner may be bound by a pre-existing partnership agreement if he or she is aware of it and behaves as though it was agreed.
Outgoing partners. Generally a partner leaving (for whatever reason) will terminate the partnership unless the agreement stipulates that the others will carry on as before.
Future legislation? The Law Commission and the Scottish Law Commission published a review in 2003 of partnership law. This ran to some 500 pages with many detailed recommendations including a draft Partnership bill. However, the current coalition government has stated that they have no plans to introduce amendments to the Partnership Act of 1890.
The text of the Commissions’ review (Report 283) is at www.lawcom.gov.uk/docs/lc283-2.pdf.
This site was last updated 03/01/11