Defined in terms of the Partnership Act 1890, Partnership is “the relation which subsists between persons carrying on a business in common with a view of profit”. More often than not, those in partnership will have invested in a Partnership Agreement setting out the basis on which the Partnership assets are owned, how profit, and losses, will be shared as well as the relationship among the Partners for important matters such as holidays, retiral and succession.
Having been discussed at length at the time of entering into the Partnership Agreement, happily many agreements are then put away as the business forges ahead. Often it is only when things go wrong that they are dusted off and their terms consulted. But what happens if there is no Partnership Agreement?
If there is no formal Partnership Agreement, then the provisions of the Partnership Act 1890 will apply, save to the extent that it can be shown that there is agreement among the Partners to the contrary. For example, in terms of the Act, all of the Partners are entitled to share equally in the capital and profits of the business – importantly, they must contribute equally towards the losses sustained by the firm. It may be, however, that the Partners have customarily shared profits on a different basis and it can be demonstrated that there is agreement among the Partners that such an arrangement should continue.
The Act provides that no majority of the Partners can expel any Partner unless a power to do so has been conferred by express agreement between the partners. In a large firm this has the consequence that if issues arise in respect of one individual, little may be able to be done about it.
In that event, the Partners may turn to another provision of the Act to the effect that a partnership can be dissolved by any Partner giving notice to the others of his intention to dissolve the Partnership. This is a radical step to have to take but if there is no Partnership Agreement setting out how the Partners will manage issues of performance, it may be the only tool available.
There may also be unintended consequences of not having a Partnership Agreement. In terms of the Act, every partnership is dissolved as regards all the partners by the death of any partner. The partnership property is then applied in settlement of the debts of the business and the residue shared among the partners, including the deceased partner’s estate.
A Partnership Agreement would normally provide that the Partnership would continue notwithstanding the death of a partner and specify the procedure, and timescale, for accounting to the family of such partner, whilst importantly also protecting the future of the business.
For further information or to discuss any Partnership matters, contact bto.
Jeremy Glen
Partner, Glasgow
Posted: 30.08.10