ACC205 LAW OF ASSOCIATION

LECTURE NOTES
WEEKS 3 AND 4

Partnership Business
Structure and Partnership
Laws
Lecture Objectives:
 Recap of Partnership Business (Features, Adv and
Disadvantages)
 Know what is a partnership business as per PL
 Legal rules relating to partnership formation,
registration, operations and dissolution (winding
up)
 Reference will be made to Partnership Act and
Cases
 Accounting for partnership business from
formation, operations till dissolution (Next Topic)
PARTNERSHIP DEFINED -
RECAP
 Partnership Act:
 The relationship that ‘subsists between persons
carrying on a business in common with a view to profit’
 Partnerships are governed by the Partnership Act,
common law and equity
 Restrictions on number (20 in AU – Fiji?)
 Necessary attributes
1. Must be an agreement (written or verbal)
2. View to earning a profit
3. Co-ownership of the business

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ADVANTAGES OF A
PARTNERSHIP
 Pooling of capital resources and multiple
skills of individual partners
 Low cost
 Formed at little or no cost
 Subject to little regulation
 Partners may be able to operate with
more flexibility because not subject to
control of a board of directors
 May be tax advantages

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CHARACTERISTICS OF A
PARTNERSHIP
 Mutual Agency
 Each partner acts as agent for the partnership
 Each partner has authority to act on behalf of the partnership
 Unlimited liability
 Each partner personally responsible for all the debts of the
business
 No limit to liability
 Personal assets are exposed
 Unattractive to wealthy individuals

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CHARACTERISTICS OF A
PARTNERSHIP
 Limited life
 Ended if member dies, withdraws or retires, or
becomes incapacitated
 Ended on the admission of a new member
 Ended via bankruptcy
 Ended if formation purpose is over
 Transfer of partnership interest
 Capital interest is personal asset

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PARTNERSHIP AGREEMENT
 Agreement covers:
 Name, location and nature
 Name, investment and duties of each partner
 Sharing of profits and losses
 Administrative details
 Withdrawals (drawings)
 Dispute resolution
 Admission/withdrawal of partners
 Partnership liquidation
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Matters covered in the partnership
agreement
 Date of commencement for the business
 Duration of the partnership business
 Nature of the business
 Partners entitlement including profit /loss sharing /assets/ liabilities
 Partner rights/duties and obligations
 Capital contribution Partnership Act only
 Partnership business management (sleeping/active) supplements the
agreement
 Admission/exit of partners
 What happens when dissolution
 Remunerations of partners running the business
 Business loans /advances /interests
 Termination of partnership
 Conflicts/misconduct by partners
 Auditing/accounts/employment issues
Definition of Partnership
The Partnership Act in Fiji is largely based on the UK Partnership
Act, 1890, the common law principles and the rules of equity
arising out of common law.

Common law is set by case precedents based on principles of

equity. Some of these may also have been codified.

Definition: Section 2 of the Fiji Partnership Act defines

Partnership as:

“Partnership is the relation which subsists between persons

carrying on a business in common with a view to profit, but the
relation between members of any company or association
which is –
 Outside the Definition of Partnership

a) registered as a company under any Act for

the time being in force and relating to the
registration of joint stock companies; or

b) formed or incorporated by or in pursuance

of any other Act of Parliament, Letters
Patent or Royal Charter,

is not a partnership within the meaning of this

Act.
Case of Helmore vs Smith 1886
 Parties are deemed to be fiduciaries of one another.
“relationship which subsists between persons” as per the
partnership definition.

 Each member of a partnership owes fiduciary obligations to act in

the joint interests of the partners in relation to the conduct of the
business of the partnership and in respect of its assets.
 It is well established that the duty of good faith in a traditional
partnership is one of a fiduciary relationship. As Bacon VC noted
in Helmore v Smith (1886) 35 ChD 436 :
 “If fiduciary relation means anything I cannot conceive a stronger
case of fiduciary relation than that which exists between the
partners. Their mutual confidence is the life blood of the concern.
It is because they trust one another that they are partners in the
first instance; it is because they continue to trust each other that
the business goes on.”
3 Criteria for Partnership Existence

Three criteria that conforms whether a partnership business

exist or not.
These are:

1. Association of persons carrying on a business

2. The business must necessarily be carried on in common
3. The business must be carried on with the sole motive to
make profits
When does a Partnership
exist?
• Any business arrangement that satisfies the
following three elements in the statutory definition
of a partnership is a partnership
1. ‘Carrying on a Business’: A number of repetitive acts rather than an
isolated one

2. ‘In Common’: Each participant benefits from and is bound by the

actions of the other

3. ‘With a View to Profit’: Excludes non-profit organisations

 Partnerships are called ‘firms’ not individuals, unincorporated

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 Business deems to include ‘every trade, occupation or
profession’. (UK Partnership Act).
The business should be of a commercial or professional nature. It
need not be of a continuing nature. It can be a one off event for a
particular period of time. (Legal interpretations)
Example: An agreement between 2 friends to share the prize
money out of fishing context in which they participated
– cannot be construed as carrying on of a business.
 Welch v Jess 1976:Jess and his friend Welch entered a fishing contest on Ninety Mile
Beach. They agreed to pool money for a kitty, agreeing to share any prize money later won.
Jess subsequently won $6,000 but later refused to share the prize money, claiming that it
was merely a social agreement not intended to be enforced the parties.
 The court ruled that there was a legally binding contract, and Jess was ordered to share the
prize money. The court declared that although social agreements are generally not legally
enforceable, they can be legally enforceable under certain circumstances. [2] In this case, the
objective bystander would have thought that, having pooled the entrance fee, it was obvious
that any winnings were intended to be shared.
 Commonality element /
mutual agency
-Business must be carried on in common
The commonality element brings about the agency principle
amongst the partners and the rights and obligations arising
there from, viz. between a principal and an agent.

In Duke Investments v Pilmer (1999) the above concept was

further explained thus ‐
In order to meet with the commonality factor, it was not
necessary for all the partners to be actively involved in the
business of the firm. The firm’s business could be managed by
say ‘x’. But in order for the firm to qualify as a partnership ‘x’
should carry on the business on behalf of the other partners of
the firm and thereby in his capacity as an agent for all the
partners.
Sharing of Profits – Prima facie
evidence
Sometimes even when the net profits are shared, there can
be a confusion whether a partnership exists or not. A classic
example of this is in a well known case ‐
Cox & Another v Hickman 1860 – need for agency relationship
Due to financial difficulties, partners in a firm transferred
their business + assets to ‘trustees (like receivers in case of
companies) who were entrusted with the responsibility to
carry on the business and make payments to creditors out of
profits which they could make. If all the debts were paid
then the business would then be vested with the partners
again. This was the agreement. – Principle of partnership
liability hence partnership business exists.
Further Case Discussion
In this case, one of the trustees (x) was also a
creditor.
Therefore he received payment of his debt, out of the
profits of the business which was then being managed
by the ‘trustee group’.
A suit was filed by another third party (A) who was a
creditor. Why? Because a partner (x) had received
share of profits, albeit it was in satisfaction of his
debt.
The question before the court was whether X was
merely a creditor OR a partner of the firm and hence
liable for the partnership debts and owed an
obligation to A.
Further Case Discussion
It was held that although ‘right to profits’ was a
strong test to decide if a partnership existed or
not; however other facts and circumstances (as
cited in this case) were also to be given due
regard to along with the intention and mutual
agreement between the parties and not merely on
that one term ‘profit share’, alone. It may be
observed that this was a very complicated
scenario where X is a principal ( as a partner) and
also an agent ( as a trustee) ‐ dual capacity where
the court recognized that X was a creditor first
and a partner next.
Cases highlighted where participation in
profit cannot be construed as partnership

 Section 3 (c) (ii) A contract for the remuneration of

a servant or agent of a person engaged in a business
by a share of the profits of the business does not of
itself make the servant or agent a partner in the
business or liable as such.
 Example: In Walker v Hirsch [1884], Walker had
been a clerk to the defendant’s firm when he and
the firm’s proprietors entered into an agreement for
Walker to be paid a fixed salary in addition to the
right to participate in one eighth of profits and
losses.
Cont…
 Section 3 (c) (iii) A person being the widow or child of a
deceased partner, and receiving by way of annuity a portion
of the profits made in the business in which the deceased
person was a partner, is not by reason only of such receipt a
partner in the business or liable as such.

 Commissioners of Inland Revenue v Lebus [1946] – in this case

the wife of deceased partner was entitled to share of profits
under a provision in her husband’s will. The commissioners’
intended to recover income tax on the amounts due under the
will however the court held that the beneficiary will have to
pay tax on amounts paid to her from the profits earned by the
business. She did not have interest in partnership assets.
Partnership or Not?
 Profit means a monetary gain – sharing of net
profits and not gross returns.
 Section 3 of the Fiji Partnership Act specifies
certain guidelines to be considered to interpret
whether a particular business is a partnership or not.
 Sharing of gross returns does not itself create a
partnership business (Section 3 (b))

• Common ownership of property and sharing of gross

returns does not by itself create a partnership

• Sharing of profits is prima facie evidence of a

partnership, but is not conclusive
Partnership Agreement/Deed
 It is of central importance – partners rights/
obligations and how the business will be operated
including profit sharing ratio.
 The partnership agreement can be expressed either
in written or verbal or both. No legal requirement.
 Partnership business can be created through
express agreement /implication / statute
 Precedes over Partnership Act.
 Provisions of these two documents are slightly
different.
 The deed is specific to each partnership entity.
Relationship between the firm and third parties:
Partnership and Agency

There is a fiduciary relationship that exists

between 2 or more partners and between the
partners and the firm. In other words, it is a
relationship between the principal and an
agent where the agent acts on behalf of the
principal, thereby binding the principal in their
obligations towards third parties. Each partner
is an agent of the other and hence they are
also principals of each other.
Agency and Fiduciary Relationship

“Agency is the fiduciary relationship which

exists between two persons, one of whom
expressly or impliedly consents that the
other should act on his behalf so as to
affect his relations with third parties, and
the other of whom similarly consents so to
act or so acts”. (Bowstead & Reynolds,
2016)
 In Re Garnac Grain Co Inc
it was held that “the
relationship of principal
and agent can only be
established by the consent
of the principal and the
agent”.
The parties would be
deemed to have to have
given such a consent, if by
law their relationship
tantamount to a
partnership.

Sections 6 to 11 of the Fiji

Partnership Act, deals with
the relationship between
Partners themselves and
the firm to third parties.
Interest, Rights and Duties of
Partners
 Duties of Partners: {Sections 25 to 32 of the Fiji
Partnership Act provides for the rights and duties
of the partners}
 The rights and duties of partners are primarily
governed by a mutual agreement between them in
the Partnership Deed, within the ambit of Law. In
the absence of any specific agreement the
provisions in the Fiji Partnership Act will be
Applicable.
Liability of Partners s10-13
 Joint liability:
 The partners must be sued jointly and not individually.
 Joint and several liability:
 Every partner is liable jointly and individually.
Creation of Agency

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Type of Authorities:
Ostensible/apparent authority
 Refers to the situation where a reasonable person would
understand that an agent (a partner) had authority to
act.
 This means a principal is legally bound by the agent's
actions, even if the agent had no actual authority,
whether express or implied.
Actual and apparent authority
 Actual (Agreement):
Authority to do acts specified in Partnership Act or partnership
agreement. Expressed, implied
 Apparent (implied):
Authority that the partner appears to have to third parties, e.g.
◦ selling goods and chattels of the firm
◦ purchasing on behalf of the firm.

Estoppel (‘Apparent’ or ‘Ostensible’ Authority)

− Actual authority is real authority

− Apparent authority is only the appearance of authority

− See Panorama Developments v Fidelis (p. 157) - an executive in a senior

financial position had apparent authority to make his employer liable for
the hire of expensive motor vehicles
Relationship Between Partnerships
and Outsiders
• Apparent authority is the authority a partner appears to have
from the viewpoint of a third party. Where a partner acts without
authority, the partners will be bound if:
− The partner is carrying on, in the usual way, business of a kind usually carried on by
the firm; and

− The outsider knows or believes the partner to be a partner, and the outsider is not
aware that the partner lacks authority
Apparent Authority Case laws

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 PARTNERSHIP
Relationship, Dissolution
and Winding Up
Relationship between partners
Fiduciary relationship:
 Partners must render true accounts.
 Partners must advise full information on all
matters affecting the partnership.
 Partners must account for private profits made
without consent of other parties.
 Partners cannot carry on a business of the same
nature in competition with the partnership,
without the consent of the other partners.
 Partners may assign their interest in the
partnership to another person (Rights of
Assignee).
Liability of partners [s10 to 18]
 Section 10 to 13
 Contracts—each partner is jointly liable.
 In tort—each partner is liable jointly and severally.
 Criminal wrongs—each partner is liable jointly and severally where
there has been a breach of a statute that does not require intent as
an element.
 In bankruptcy / insanity / incapacity / conflict —if a partner is
bankrupt, the partnership may be dissolved.
 As trustees—no liability for the actions of other partners acting
as trustees independent of the partnership. [s 14]
 Holding out as partner—liable as if partner of partnership.
[s 15]
 Incoming/Outgoing partner—continues to be liable for debts of
partnership incurred before retirement. [s18(1/2)]
 Novation – S18(3) retiring partner is discharged from existing
liabilities – agreement made with firm and creditor
Liability by Holding Out

 A person who obtains credit for a partnership by falsely

‘holding out’ as (claiming to be) a partner of the firm
may be treated as a partner and sued by the creditor
the creditors and the firm as newly constituted.
Partnership property defined [s 21-24]
Includes all property brought into the partnership, or which is afterwards
acquired on account of the partnership (Section 21).
-property bought with partnership money (Section 22)
-personal estates converted deemed partnership property (Section 23).
Sec21 (2) – co-ownership of land to derive profits not itself partnership
business.
Dissolution of partnership
[s33 -45]
 By action of the partners:
 At expiry of term / fixed term / partner in writing to dissolve (S33)
 By giving notice / stated in the agreement
 By death of a partner
 By insolvency of a partner / bankruptcy (34)
 Where partnership property is charged for separate debt (sec 34)
 By illegality of the partnership business – unlawful to carry on the partnership
business (35)
 Mutual agreement
 Unsoundness of mind (S36a) /incapacity (36 b) / misconduct 36 c – guilty of
conduct / breach of partnership agreement /d business at loss (court see fit
for it to be dissolved
 Sec 38 Notification of dissolution - notify to the public
 Sec 39 continuing authority – winding up
 Sec 40 partnership property after winding
 Dissolution of partnership
Dissolution By court action when:
 Partner found to be of unsound mind (for unsoundness of
mind)
 Partner becomes permanently incapable of performing his
or her part of the contract (for incapacity)
 Partner is found guilty of conduct calculated to
prejudicially affect the carrying on of the business
(misconduct)
 Partner persistently breaches partnership agreement
 Partnership business can only be carried on at loss (losses)
 Disputes / conflicts
 There are other just and equitable grounds for dissolving
the partnership.
 Notice of dissolution of partnership

 Section 38
 Personal notice to persons who have had dealings with the firm
 Notification in government / tax office
 Registered business names to be cancelled – write to the
registrar of companies in an appropriate form
 Show:
 https://www.justice.gov.fj/companies/
 https://roc.digital.gov.fj/RocEServices/BusinessMenu
Distribution of Assets on
Dissolution
• Partnership debts are paid from profits or, if they
are insufficient, from capital, and finally from the
partners’ personal assets

• Assets are distributed in the following order:

1. Debts and liabilities to outsiders / creditors

2. Repayment of loans by partners

3. Repayment of capital contributed by partners

4. Profit distribution in equal shares or as agreed / surplus assets as per P

Agreement
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Joint ventures
 Anassociation of persons for the purposes of a
particular trading, commercial, mining or other
financial undertaking or endeavour, with a view
to mutual profit, e.g.:
◦ Mining ventures
◦ Property development
◦ Entertainment agreements
◦ Share-farming agreements
Comparison of joint ventures
and partnerships
Joint venture Partnership
 One-off enterprise  Continual business activity
 Profits paid separately  Profits paid to partnership
 Share physical output  Share profits of partnership
 Liable severally for debts  As discussed
 Manager not used to oversee  Manager may be used
Advantages of a joint venture

 Participants:
 Not liable for actions of other joint
venturers
 Receive income separately
 Able to compete with each other
Summary Notes
GENERAL DISCUSSIONS_PARTNERSHIPS
Brief recap
 Partnerships are considered as vehicles for small business enterprise.
 Formation of partnership does not bring in separate legal identity;
partnerships usually are not incorporated.
 Relations between partners are governed by rules or law of agency.
 The firm name of partnerships are sometimes known by the names of
partners themselves.
 Liability between the partners are usually joint (s.10)
 The Partnership Act in South Pacific Countries are taken from UK
Partnership Act [1890]
 The fiduciary duty does not cease on dissolution.
Limited liability partnerships

 A form of partnerships that acquire features of limited

liability companies or benefits of incorporation.

 A general partnership registered as a limited liability

partnership and thereby protects partners from
vicarious liability for the negligence or wrongful acts of
the other partners.

 General v limited partners: general partners are liable

for debts and obligations in the event where assets of
firm are inadequate.
Corporations v Partnerships

 Corporations offer continuity of life, free transferability

of interests, limited personal liability, and
centralization of management.

 Partnerships generally terminate on the death or

withdrawal of a partner, impose restrictions on
ownership, offer all partners management rights, and
subject partners to personal liability for the debts and
obligations of their partnerships.
Lecture Discussion Questions
 Explain how the business profits and losses of partnerships are
taxed?

 ‘Upon dissolution of a partnership, the authority of a partner to

bind the firm and other rights continue…’. Explain this statement
with reference to legislative provisions and case law.

 Explain the difference between implied authority and ostensible

authority and express authority under agency rule.

 THE END