TOPIC: PARTNERSHIP

Partnerships are governed in Kenya by the Partnership Act (Cap. 29). This act defines a
partnership as "the relation which subsists between persons carrying on a business in common
with a view of profit

Corporations of whatever kind are excluded. It means any company or association registered
under the Companies Act or any other act are not considered as partnerships (S. 3(2)).

In order to prove the existence of partnership, the following three factors must be established:

(a) A business

(b) Carrying on business in common

(c) A profit motive

Section 2 of the Act defines business as "every trade, occupation or profession". There must,
therefore, be a commercial or professional enterprise where goods are sold or services
rendered. Mere joint ownership of property is not enough to constitute the owners into partners,
and it is immaterial whether or not they share profits.

Carrying on business in common means that it must be carried on by or on behalf of all those
involved in the undertaking. Thus, the mere sharing of gross returns does not in itself constitute
the persons so sharing into partners. Although, the sharing of profit is prima facie (in absence of
anything to the contrary) evidence of partnership, something more than this must be proved in
order to establish the existence of a partnership. This is because a person receiving payment
out of profits of a business, whether as a gift or legacy, or in return for services rendered e.g.
interest on a loan, debt repayment etc. cannot be said to be a partner. The existence of a
partnership can only be effectively ascertained from the intention of the partners.

PARTNERSHIPS DISTINGUISHED FROM COMPANIES:

Partnership

Has no legal existence

apart from its members. 2. Cannot generally sue or be sued in its own name, and may only do
so as a matter of convenience.

3. Cannot consist of more than 20 persons, authorised by written law. unless some

4. Is easy to form by written agreement or orally.

5. May engage in a variety of business, subject to the mutual consent of the partners.

6. It is easy to alter its capital.

7. It is sometimes difficult to distinguish between a partner's own property from that partnership.
of the

Every partner is an agent of the firm and of the other partners.

9. Shares may only be transferred with the consent of the other partners.

Company

1. It is a legal entity distinct from its members. 2. Has a right to sue or be sued in its own name.

3. A private company may have up to 50 members, while the membership of a public company
is

unlimited. 4. Difficult to form-must always have written documents.

5. The activities it can engage in are limited by its constitution and by the doctrine. of ultra vires.

6. A certain strict procedure must be followed before its capital can be altered. including holding
a meeting and passing a resolution.

7. Since a company may own property in its own name, its property can hardly be confused with
that of its members.

8. A shareholder is not an agent of the company (only directors are agents).

9. In public companies, shares are freely transferable; restrictions exist only in private
companies.

FORMATION OF PARTNERSHIP

A partnership may be formed by oral or by written agreement or an agreement of partnership

can be inferred from the conduct of parties. Although, it is not necessary to have a partnership
agreement in writing, where the partnership agreement is in writing, it is incorporated in a
document known as "Articles of Partnership'' or "Partnership Deed". A partnership deed must be
drafted with care and be

signed by all the partners The partnership deed includes the following clauses:

(1) The name of the firm and the names and addresses of the partners.
(ii) The nature of business and place where it will be carried on, The date of commencement
and the duration of partnership.

(iv) The amount of capital to be contributed by each partner and methods of raising finance in
future if so required

(*) The ratios of sharing profits and losses.

(1) Interest on partner's capital, partner's loans, and interest on

drawings (if any)..

(vi) Salaries, commissions etc. payable to partners (if any).

(vii) The method of preparing accounts and arrangement for audit. (ix) The duties, powers and
obligations of all

partners.

(x) The procedures to be followed in case of retirement, death and

admission of partners.

(x) Arbitration in case of disputes among the partners.

NAME OF PARTNERSHIP BUSINESS

Section 6 of the Act provides that the persons who form a partnership are called a firm and the
name under which they conduct their business is called the firm name. A firm has a right to
conduct its business under any name, but such a firm should not use the name of another firm
which is already in existence.
The Registration of Business Names Act (Cap. 499) states that when the name of the
partnership does not consist of the true surnames of all partners then there is for the registration
of the firm name under this Act. For the registration of the firm name, the following particulars
must be submitted to the Registrar:

(i) The business name

(1) The general nature of the business

(i) The principal place of the business (iv) The present Christian names and surnames of each
partner.
(v) The nationality and residential address of each partner.

(1) Any other business or occupation of each partner.

The Registrar of Business Names issues a certificate indicating

the firm name registered. This certificate must be displayed at the firm's

principal place of business.

NUMBER OF PARTNERS

A partnership cannot consist of more than twenty persons. In the case of banking business, the
number of partners is limited to ten. If the number of partners exceeds these limits then
partnership becomes an illegal association.

PARTNERSHIP PROPERTY

Property may be used for the purposes of the firm's business and yet may not be part of the
partnership property, eg, office furniture and/or equipment may be used by the firm and yet
remain the property of one of the partners. It is always necessary to distinguish between
partnership property as such, from property belonging to individual partners.

"Partnership property" is defined by section 2411) as 'All property and rights and interests in
property originally brought into the partnership stock or acquired, by purchase or otherwise, on
account of the firm, or for the purposes and in the course of the partnership business; and under
the provision partnership property"must be held and applied by the partners exclusively for the
purposes of the partnership and in accordance with the partnership agreement t further
provided: "Unless the contrary intention appears, property bought with money belonging to the
firm is deemed to have been bought on account of the firm": 5.25. It follows from this that
property bought using the firm's money is presumed to be partnership property.

RELATIONS OF PARTNERS TO ONE ANOTHER

Where there is a written agreement the rights and duties of the partners are governed by the
Partnership Deed. If there is no written partnership agreement then the rights and duties of the
partners are according to the provisions of the Partnership Act.

(A)

1.DUTIES OF PARTNERS:

To Render True Accounts:

Every partner is bound to render true accounts and full information of all things affecting the
partnership to any partner or his legal representatives: S. 32. Thus, where a partner is buying
another partner's interest in the firm, the buying partner is under a duty to disclose all
information relating to the partnership assets which is within his knowledge but not known by the
selling partner.

2.Secret Profit

Secondly, every partner "must account to the firm for any benefit derived by him without the
consent of the other partners from any transaction concerning the partnership, or from any use
by him of the partnership property, name, or business connection": S. 33. For instance no
partner can take an interest as a purchaser or part-purchaser in the partnership property: nor
can he make a profit from a sale of his property to the firm.

3. Not to Compete

Thirdly, every partner is under a duty not to compete with the firm. If a partner without the
consent of the other partners carrion on any business of the same nature as and competing with
that of the firm. must account for and pay over to the firm all profits made by him in the
business. S, 34,

4. Share Losses

Finally, every partner is liable to contribute to the firm's losses and other liabilities.

(B) RIGHTS OF PARTNERS:

Subject to the partnership agreement, the rights of partners are

as follows:

1. Every partner has a right to share equally in the capital and profits of the business.

2 Every partner has a right to be indemnified in respect of payments made and personal
liabilities incurred by him in the ordinary and proper conduct of the firm's business.

3. Every partner is entitled to interest on any advance made by him to the firm at the rate of 5%
pa.

4. Every partner is entitled to interest on the capital subscribed by him, after profits have been
ascertained.

5. Every partner has a right to participate in the management of the partnership business; and a
working partner may get a salary
(otherwise a partner is entitled to remuneration for his services

to the firm).

6. Every partner has a right to object to any person being introduced as a partner without
consent of the other partner(s).

7. Decisions are made in the firm on a majority basis, but the majority must act in good faith.
Thus, "No majority of the partners can expel any partner unless a power to do so has been
conferred by express agreement between the partners (5.29); nor may any change be made in
the nature of the partnership business without the consent of all existing partners.

8.Partnership books must be kept at the place of business and every partner has a right to
inspect them and get copies from them.

9. Any partner may, by notice to the other partner(s), dissolve the partnership. S. 36(C).

RELATIONS OF PARTNERS TO PERSONS DEALING WITH THEM

Every partner is an agent of the firm and his other partners for the purpose of the business of
the partnership; and 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 of which he is a member bind the firm and his
partners, unless the partner so acting has in fact no authority to act for the firm in the particular
matter, and the person with whom he is dealing either knows that he has no authority or does
not know of believe him to be a partner S.7. Thus, a third party wishing to make the firm and
other partners liable for the acts of one of the partners must prove three things

1 That the act was done in relation to the partnership business.

2. That the act was an act for carrying on business in the usual way

3. That the act was done by the partner in his capacity as a partner, not as an individual.

Persons having dealings with a partner are entitled to assume that he has authority to do acts
usually carried on in that kind of business. A person dealing with a partner is not affected by any
secret restriction on his power, unless he is aware of such a restriction, (S. 10)

IMPLIED AUTHORITY OF A PARTNER

A trading partnership is that which engages in the buying and selling of the goods. A sleeping
partnership is one in which there is a sleeping partner as well as an active partner. A sleeping
partner is one who is not disclosed and who is not actively engaged in running the business. A
sleeping partner is not liable (where the active partner has exceeded his powers) if the third
party in dealings with the active partner believed him to be a sole principal, A non-trading
partnership is that which engages in the sale and/or rendering of services eg, firms of advocates

In trading partnerships, a partner has implied authority to perform some functions on the behalf
of the firm. These acts which are committed in the course of the firm's business will be binding
on the En and other partners. A partner has implied authority to

1. buy and sell goods;

2. engage employees for the firm;

3. borrow money, contract debts and repay such debts on behalf the firm, of

4. negotiate instruments of credit debts; employ an advocate in an action against the firm;

Note: A firm is not liable for debts created by a partner for the

purposes not connected with the firm's ordinary course of

business. The sleeping partners and the partners of non-trading partnerships have no implied
authority.

Mercantile Credit Co. Ltd. V. Garrud (1962)

A firm of garage proprietors in which the defendant was a sleeping partner sold a car to the
plaintiff so that it could let it out of hire purchase to a customer. None of the partners in the firm
had title to the car. The car was sold without the defendant's authority, but the plaintiff sought to
recover the purchase price from him. The business of the firm was mainly concerned with
letting, look-up garages and repairing cars, and a clause in the Partnership Deed excluded the
buying and selling of cars. Held. The sale of the car to the company so that it could be let out on
hire purchase was an act for carrying on in the usual way business of the kind carried on by the
firm, and the firm was therefore bound

Higgins V. Beauchamp (1914)

Beauchamp was a sleeping partner in a business of cinema proprictors carried on by another

partner called Miller. The Partnership Deed provided that no partner should contract any debt on
account of the partnership without the consent of the other partners except in the usual and
regular course of business. Miller borrowed money from Higgins, stating that it was for his own
use. Higgins then sued Beauchamp to recover the sum lent. Held: Since the firm was not a
trading partnership, Miller had no implied authority to hind the firm in respect of the debt.

HOLDING OUT
"Any person who, by words spoken or written or by conduct, represents himself, or who
knowingly suffers himself to be represented, as a partner in a particular firm is liable as a partner
to anyone who has on the faith of any such representation, given credit to the firm, whether the
representation has or has not been made or communicated to the person so giving credit by or
with the knowledge of the apparent partner making the representation or suffering it to be
made." (S.18).

A person who so represents himself is said to hold himself out as a partner. This is what the
'Doctrine of Holding Out' is about. It is therefore advisable for a person not to make any false
claim that he is a partner in a firm which may not even know of his existence. It is equally
advisable for a retiring partner to take steps to ensure that he does not continue to be held out
as a partner.

LIABILITY OF PARTNERS

Section 11 of the Act states as under

"Every partner in a firm is liable jointly with the other partners for all debts and obligations
of the firm incurred while he is a partner, but a person who is admitted as a partner into an
existing firm does not thereby become liable to the creditors of the firm for anything done before
he became a partner; and after his death his estate is al severally liable in the due course of
administration for those debts and obligations, so far as they remain unsatisfied, but subject to
the price fragment of his separate debts.

ASSIGNMENT OF SHARES IN PARTNERSHIP

Section 35 of the Act provides that a partner can assign his

shares in partnership to an other person (assignee) by way of will, gift,sale or mortgage

The assignee is not entitled to:

(a) interfere in the management or administration of partnership business

(b) require any accounts of the partnership transactions

The assignee is entitled to

(a) Receive the share of profits in respect of assigned shares

(b) Accept the account of profits agreed to by the partners.

During the continuance of the partnership, the assignor still remains liable to the creditors of the
firm, but he can be indemnified by the assignee in respect of losses.
In the case of dissolution of the partnership, the assignee is entitled to receive the share of
assignor, and for the purpose of ascertaining that share, he is entitled to an account as from the
date of the dissolution (S,35(2)).

LIABILITIES OF INCOMING AND OUTGOING PARTNERS

Incoming Partners

A person who is admitted as a partner into an existing firm does not thereby become liable to
the creditors of the firm for anything done before he became a partner: S. 21(1). An in-coming
partner can only be made liable where he is proved to have assumed the liabilities of the
existing firm through the process of novation (i.e. an agreement between him, the existing
partners and the creditors concerned)

Outgoing Partners

A partner who retires from a firm does not thereby cease to be liable for partnership debts or
obligations incurred before his retirement (5.21(2))

However, a retiring partner may be discharged from any existing Capabilities by an agreement
to that effect between himself and the members of the firm as newly constituted and the
creditors, and this agreement may be either express or inferred as a fact from the course of
dealing between the creditors and the firm as newly constituted (5.213)). This shows that a
retiring partner may be discharged by the process of novation, express or implied.

A retiring partner must therefore take steps to ensure that he is held out as a partner, after his
retirement, otherwise he will continue to be liable for the firm's debts. In the case of persons who
had never dealt with the firm before the retirement, in advertisement in the Gazette is sufficient
to discharge the retired partner: S. 40 (2): moreover, a retired person is not liable to any person
subsequently dealing with the firm if that person did not know him to be a partner: S.40(3). But
in the Case of the existing customers of the firm, who may know him to be a partner, actual
notices of his retirement must be served on them.

Minor Partner

Section 12 of the Act provides that a person who is under the age of 18 years may be admitted
to the benefits of partnership. But he cannot be made personally liable for any obligation of the
firm. However, the share of the minor in the property of the firm is liable for the obligations of the
firm..

Under section 13 of the Act, a minor becomes liable for obligations incurred by the partnership,
on attaining the age of majority. He becomes liable for the obligations of the partnership since
the date he was admitted to the benefits of partnership, unless he gives public notice within a
reasonable time of his repudiation of the partnership..

MISAPPLICATION OF MONEY RECEIVED

Under section 15 of the Act, a firm is liable for the misapplication of money received in the
following cases

(a) where one partner, acting within the scope of his apparent authority, receives the money or
property of a third person, and misapplies it; and

(b) where a firm in the course of its business receives money or property of a third person, and
the money or property so received is misapplied by one or more of the partners while in the
custody of the firm.

The firm is liable to repay this money to a third person (payer). But if the receipt of this money by
one partner is not within the scope of his authority then the other partners are not liable.

CONTINUING GUARANTEE

Section 22 of the Act deals with the continuing guarantee

continuing guaranty or cautionary obligation given either to a firm o

third person in respect of the transactions of a firm is, in the absence of agreement to the
contrary, revoked as in future transactions by any change in the constitution of the firm to which,
or the firm in respect of the transactions of which, the guaranty or obligation was given. It means
the firm's liability is revoked to the future transactions but remains liable on previous
transactions. The continuing guarantee covers a series of transactions eg. guarantee of a bank
overdraft.

DISSOLUTION OF PARTNERSHIP

A partnership can be dissolved in accordance with the provisions of sections 36, 37, 38 and 39
of the Act. A dissolution occurs in the following ways:

(a) By Expiration or Notice

Where the partnership was entered into for a fixed term, it is dissolved by the expiration of that
term: S. 36(a). But if it was entered into for an undefined time, it may be dissolved by any
partner giving notice to the other or others of his intention to dissolve the partnership", 536(c);
"the partnership is dissolved as from the date mentioned in the notice as the date of dissolution,
or if no date is mentioned, as from the date of communication of the notice". And if the
partnership was entered to for a single adventure or undertaking, it is dissolved by the
termination of that adventure or undertaking: S. 36(b). All this is subject to any agreement
between the partners.

(b) By Bankruptcy, Death or Charge

"Subject to any agreement between the partners, every partnership is dissolved as regards all
the partners by the death or bankruptcy of any partner: S. 37(1). The partners may, of course,
agree that on the death or bankruptcy of any one of them, his share is to be bought by the other
partners

Note: Where one partner sends notice of dissolution to the other partner, and dies before the
other partner has received the notice, the partnership is dissolved by death and not by notice;
McLeod vs Dowling (1927).

Besides, "A partnership may, at the option of the other partners, be disolved if any partner
suffers his share of the partnership property to be charged for his separate debt: S. 37(2).

(c) By Illegality

A partnership is in every case dissolved by the happening of event which makes it unlawful for
the business of the firm to be carried on or for the members of the firm to carry it on in
partnership": S.38

R. V. Kupfer (1915)

The outbreak of war rendered a firm's customer an enemy and it was therefore illegal to deal
with the customer. But the firm subsequently paid a debt owing to the customer, for which it was
charged with the offence of trading with the enemy. Held: The outbreak of war had dissolved the
partnership.

(d) By an Order of Court (S.39)

The court may decree a dissolution of the partnership:

I. When a partner is adjudged a lunatic or has a permanently 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 is guilty of conduct calculated prejudicially to
affect the carrying on of the business.

Carmichaeal V. Even (1904)

One of the partners was convicted of travelling on the railway without a ticket and with intent to
defraud. Held: As the conviction was for dishonesty, it was calculated to be detrimental to the
partnership business; and accordingly the firm would be dissolved

4. When a partner, other than the partner suing, wilfully or persistently commits a breach of the
partnership agreement or where it is not reasonably practicable for the other partner(s) to carry
on the business in partnership with him.

5. When the business of the partnership can only be carried on at a loss.

6. Whenever in the opinion of the count it is just and equitable that the partnership should be
dissolved.

(d) By Rescission

Where one of the partners is guilty of fraud o misrepresentation as regards the partnership
contract, the partnership conract may be rescinded on this ground, in which case the
partnership is dissolved (S. 45).

Application of Property on Dissolution

On the dissolution of a partnership, its property must be applied in payment the firm's debts and
liabilities, after which the surplus must be applied in payment of what may be due to the
partners respectively after deducting what may be due from them as partners to the firm; and for
this purpose any partner or his repesentatives may, on the termination of the partnership, apply
to the court to wind up the business and affairs of the firm, S. 43. In case of insolvency of
bankruptcy, the provision of the Bankruptcy Act apply. Where the partnership property is not
sufficent to meet the firm's debts and labilities, the deficiency is borne by the partners in the
proportion in which they are entitled to share the profit.
Losses, including losses and deficiencies of capital, are payable first out of profits, next out of
capital, and lastly, if necessary, by the partners individually in the proportion in which they were
entitled to share profits, (S.48(a)).

The assets of the firm, including the sums, if any, contributed by the partners to make up loses
or deficiencies of capital, mus be applied in the following manner and order. (S.48(b)).

1. in paying the debts and liabilities of the firm to persons who are not partners therein;

2. in paving to each partner rateably what is due from the firm to him for advances as
distinguished from capital;

3. in paying to each partner riteably what is due from the firm to him in respect of capital;
 4. the ultimate residue, if any, must be divided among the partners in the proportion in
which profits are divisible.

LIMITED PARTNERSHIP

Limted partnership can be formed in Kenya according to the provisions of the Limited
Partnerships Act (Cap. 30). The limited partnership enables to limit the liabilities of some
partners to the capital contributed by them whereas other partners are liable for all the debts of
the firm.

The limited partnerships are not popular in Kenya because the same benefits can be obtained
by establishing private limited companies.

Definition

Section 3(2) of the Act defines the limited partnership in the words:

"A limited partnership shall not consist in any case of more than twenty persons, and must
consist of one or more persons called general partners, who shall be liable for all debts and
obligations of the firm, and one or more persons to be called limited partners, who shall at the
time of entering into the partnership contribute there to a sum or sums as capital or property
valued at a stated amount and who shall not be liabi for the debts or obligations of the firm
beyond the amounts so contributod"

A general partner means any partner who is not a limited partner. A limited partner must not
draw his share as long as the partnership continues

Registration:

Section 4 of the Act states that:

"Every limited partnership must be registered as such in accordance with the provisions of this
Act and of any rules thereunder, or in default thereof it shall be deemed to be a general
partnership and every limited partner shall be deemed to be a general partner."

Under section 7 of the Act, the registration of a limited partnership shall be effected by sending
by registered post or delivering to the registrar of companies a statement signed by the partners
containing the following particulars

(a) the firm name;

(b) the general nature of business;

 (c) the principal place of business

(d) the full name of each of the partners

(e) the term, if any for which the partnership is entered into and the date of its
commencement;

(f) a statement that the partnership is limited, and the description of every limited partner as
such;

(g) the sum contributed by each limited partner, and whether paid in cash or how otherwise.

If during the continuance of a limited partnership any change occurs in the above particulars, a
statement signed by the firm specifying the nature of the change must be delivered to the
Registrar of Companies within seven days of such change.

Rights And Duties of a Limited Partner

1. He cannot participate in the management of the firm

2. He cannot bind the firm.

3. He is not entitled to dissolve the partnership by notice.

4. He can inspect the firm's books.

5. His death does not dissolve the partnership, unless specifically provided in the agreement.

6. He can assign his shares to another person with the consent of the general partners. In this
case, the assignee shall become a limited partner.