PARTNERSHIP BUSINESS CASE STUDY
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Partnership Business Case Study
Partnership form of business involves two or more parties who have to sign a contract agreeing to share responsibilities and profits and losses. Generally, the real intention means that he or she should be no desire to deceive since the signed contract is legally binding (Lan 2016). The partners are known to lack what is called the limited liability, which means that when their entity plunges in debts and cannot pay back, the personal resources of the partners may be used to settle that (Pollock 1890) This essay entails discussing the partnership form of business, latent liabilities and partner’s legal rights.
Partnership Act 1890
People are considered partners because this contributed to cash, property expertise, intellectual property, and others. All the parties in their form of business have to share responsibilities, profits, and costs of the firm. All the parties sharing the duties in the business are normally liable for every firm’s engagement as general partners (Pollock 1890). There are liabilities of outgoing and incoming partners. In Floydd v Cheney, it was held that the partners owe each other a duty of good faith, which should prevent one from engaging in actions that jeopardize the smooth running of the business. In Keech v Sandford, it was held that a partner should be put himself or herself above the conflict of interest. In case other parties in the partnership business had admitted an individual, the person cannot withdraw himself or herself from liabilities that were accrued or the activities that occurred before they entered the firm.
In case a mutual consent exists on that issue, and it is allowed in the contact, the incoming person, therefore, will not incur liabilities to existing creditors that co-partners administered. A similar principle normally applies to outgoing partners. Liabilities may not be discharged even in situations where an individual has retired from the business (Cumberlege, 2018). However, in the case of mutual agreement exists, the situation would play out differently. As such, it will not have liabilities to debts that were accrued after the retirement of the person from the business.
In case of no contract or agreement, all accrued debts before retirement of a person from the business will be the partner’s responsibilities. The contract or agreement may be formal with signatures and also formally expressed orally by partners. It may also be inferred from the existing facts. The creditors are legally right to claim their money to such individuals, no matter whether they are part of the firm of not (Cumberlege, 2018). The prescription purpose exists to protect the interests of the creditors. It is nowadays common knowledge that all parties are supposed to be responsible for their deed: all incoming partners need to go after getting consent from the existing partners, outgoing partners do not need consent.
The mutual duties and rights of partners may be understood by mutual consent in case of no law violation. Actual consent needs to be inferred from the fact that should be done formally, and all partnership normally have exclusive rights to the property of the partnership (Cumberlege, 2018). The partners are known to co-own the properties of partnership business; the share of partners is the existing partnership assets proportion. All partners are legally right to convert the shares into cash as they prefer, and their debts and liabilities may be discharged from the business of the partnership (Pollock, 1890). Rules with regards to their profit distribution exist, all rights, duties, and interests of partners need to be determined based on the agreement of partnership and as the law prescribes.
All partners have to share losses and profits equally. They usually have shared interests and shared interests. The profits proportion a partner could get form the company is always determined in comparison with the losses a partner is going to suffer. Advanced costs that partners expand for partnership purposes and running of busies need to be regarded as personal payments and common costs (Pollock, 1890). Every partner has a right to participate in the management of the business and partners have a duty of diligence and care to the business every partner is supposed to devote faithfully to the business and use their intelligence and skills to generate more profits (Cumberlege, 2018). Moreover, the partners have a right to claim reimbursement of salaries and the intelligence community. In the case of different thinking opinions among the partners, the decision will be made from majorities point of view. However, all partners can express their opinions in the process of decision making. Again, all partners have a right to inspect financial reports on partnership books. No changes can take place in the business without signed consent from the present partners.
If someone wants to leave the partnership entity, several ways can be explored. They may retire based on a partnership agreement or retire by providing written notice to the remaining partners to reveal his or her intentions. It is legally wrong for partners to participate in similar business without consent from existing partners (Cumberlege, 2018). A partner may also be mentally ill or died, leading to exit from the partnership form of business; the remaining partners will terminate the partnership through expulsion notice.
In AIB plc v Martin, the duties of partners and mutual rights, whether defined by the act of ascertained by agreement, could be varied based on the partner’s consents, and the consent may either be inferred or express from dealing course. Partners also need faith and trust between each other since, as soon as they make bad decisions, they increase the risk that spills over to their personal accounts (Milman 2018). Partners should always consider circumstances and find out if the business is financially viable since the partnership is a small business, and it would be better if the partners consulted each other before making business decisions.
Application
From the facts of the case, it was legal for the Gary, dan, and Karen to form a partnership form of business Food’R’Dral that orders seas food from a company called Seawishh Foods Limited. Gary unlawfully retired from the partnership form of business. While he has a right to withdraw from the business, he was supposed to stick to the laid down plans of retiring from the general partnership business. He can only retire from the business after meeting the fixed terms based on the agreement or retire from the business at will after providing written notice to the remaining partners to reveal his intentions. After being considered retired from the business, a partner ceases their labilities for all deed done and debts accrued before he retired (Milman 2018). The partner may negotiate the terms based on the partnership agreement. The legal duties and rights of every partner may be varied by agreement even in a situation where there is mutual consent, and no law has been violated.
Dan should acknowledge the kind of contract he agreed to. It must be established if the contract says that it is a single continuing contract where he is found liable for debts incurred when he was a partner. Again, a series of contracts deal with creditors of the business being made before his retirement date (Milman 2018). He will not be found liable for incurred debts. Still, the coming partners will cater to that instead. Dan was supposed to provide the creditor his retirement notice and write an official letter showing his intent to leave the partnership form of business. Dan would suffer if he had some assets in the partnership business, or he individually contributes towards the payment to creditors.
Dan will most likely get a contribution from the business to pay the creditors since one cannot leave the business without having informed the existing partners. It would be a good move even if he leaves the business without having to notify the members of the public. The court would most probably find all partners, including Dan and Gary, liable for the amount owed to the creditor. A retired partner will always continue being liable for existing partners’ actions on behalf of the business until he or the remaining partner provide a retirement’s public notice (Cumberlege, 2018). In case a third party without knowing that he once was a partner in the business, then he is not going to be personally liable to the third party.
In this case, Dan has not provided a public retirement notice nor has his fellow partners. Such means that he is still fully liable for the debts of the firm since the firm cannot sustain itself financially at the moment. Dan should understand that even after retirement, he has to continue being liable for the firm’s activities, which were done before his retirement. It is only an agreement between him, the partners, and a third party. In this case, the creditor who supplied fresh seafoods for the company. Also, such an agreement could be implied by the course of the dealing between the reconstituted firm and third party post his retirement announcement (Lan 2016). If Dan retired at will, then he needed to have provided a public notice and a written notice to the other partners, Karen and Dary, about his intention to retire from the firm.
The partnership act provides a real understanding of the partnership form of business, according to the partnership act. The partnership is a form of business existing between two or more parties who want to generate profits from the business (Milman 2018. Disputes in the partnership are rare, and when they occur, they are simple to solve. The partners are always supposed to sign a contract understanding that they are for all firm’s engagements as partners. Such is entirely different from what the registered company holds under the corporation act.
However, a mistake made by one partner will affect all other partners. Dan should not assume that he will not be liable for the actions of Karen and Gary. If Food’R’Deals is found to be struggling financially and thus unable to pay its debts, the personal properties of Karen, Gary, and Dan will be taken to settle the firm’s debts. Section 9 holds that partners are jointly liable for the obligations and debts of the partnership business. Therefore, innocent partners will lose the investment, and his personal property if one of the partners misbehaves or makes wrong decisions (Milman 2018). Partnership usually acts as a safeguard of making sure that all members are liable, and such is usually the cases when corporate veil protection is lifted under the company law.
Limited Liability Company
In business terms, liability is, in simple terms, the debt that a company or individual has to pay. Such could be in the form of asset finance loan accumulated tax, unpaid invoices rent falling, and others, for a limited company that may not meet its liabilities. The limited liability protects the company directors, such generally means that one will not be held responsible personally for limited company debts unless they signed as personal guarantors. Solomon v. Solomon entails separate corporate personality principles. It holds that shareholders in a limited company are never liable for debts of the company beyond their nominal share value. The case established principles that limited liability companies are different from its members.
If Dan or other partners were directors, they could not be held responsible personally since the liabilities of the company are its wone and do not attack to directors. The only circumstances that could make the directors be held personally liable for the debts of the company are he engaged in personal guarantee. The company is unable to meet the said obligations if a director also allows the company to continue trading when it is insolvent or fails duties as director, he will lose limited liability protection and even held liable for all the incurred debts. Secondly, Dan and other partners could be held personally liable after narrowing money and has a director account, which is overdrawn, a liquidator may pursue him for amount recovery.
Again, directors who engaged in criminal or deceiving activities may compel the court to break the veil and make them responsible for any debts of the company. A director who cannot repay such liabilities will be compelled to sell or refinance assets. A director may be forced into bankruptcy by such actions. In Gilford Motor Co v Horne, the defendant was former company’s director who agreed that he would never steal customers from his employer, it breached the agreement, the court found him liable as he engaged in sham activities. Also, if a director cannot fulfill his duties, he may be barred or disqualified from acting as a director for 15 years. If Gary, Karen, and Dan were directors of a company, they would not be held personally responsible for that.
If Dan were a director in a limited company, he would have to follow a unique process to resign. He would, first of all, put his intention of resigning in writing and provide it to the directors who are remaining. He would have no obligation to give reasons for his resignation. Even though it is not legally mandatory, the director may be compelled to notify the users/ customers of the decision and let them understand that the person they should contact after this departure (Jelsma and Nollkamper, 2018). After fellow directors accept the resignation, a specific form TM01 is to be completed and take into the company’s house so that his names can be removed from company records.
At this departure point, liabilities will be over, and he would only help responsible for activities that took place during his director’s time. If he never acted outside the company law while he was serving as the director, he will be free to leave the company. If the company at the point of departure is found to be in a debtor plunges into debt after his resignation, nothing would happen because of limited liability. Such means that the company’s debts belong to the company, and they are not the personal responsibility of the director. In case the company fails to meet the debts, it may enter insolvency procedure as a way to close and clear its outstanding debts (Jelsma and Nollkamper, 2018). Only current directors will initiate that process. After a director resigns, they lose control over the company and cannot initiate, prevent, or liquidate a specific procedure.
If this case involved a Limited company, only personal guarantees could affect the directors. All the personality guaranteed debts will be the individual’s responsibility, and the money has to be paid back. While Gary had asked Karen not to place orders of fresh foods from Seawish, but buy from local supermarkets, Karen ordered from Seawish who do not understand anything to do with Gary’s request. The partners, in this case, have to pay Seawish the owed money since the limited liability never protects the partners. Gary cannot hold claim that requesting Karen to buy produce from the local market, but not from a creditor Seawish, is a justification for Karen to incur the said debt. In partnership, all the partners are liable for business expenses and costs, unlike in a company.
In sum, partnership entails two or more people coming together to run a business to generate profits. The form of business is regulated by the Partnership Act of 1890, which states the relationship between people who agree to run a partnership form business. While it is rare for partnership business to have a serious misunderstanding, there are factors like sharing of duties and responsibilities, loss and profits, and costs that mostly bring legal problems to the partners. For instance, a partner who wants to retire must understand that he or she has legal duties that cannot be absconded. In the case study, it is clear that the decisions made by Karen might plunge the business into financial uncertainty and affect the retired party—Dan. He will be forced to be legally liable for the debts of the company because he did not write a notice of retirement. Also, theirs is a partnership and not a limited liability company. The business people may avoid such challenges by forming a limited liability company that does not allow creditors to take personal resources to cater for the debts of the company.
Reference List
Cumberlege, J., 2018. Why companies and not partnerships? Practice Management, 28(4), pp.36-37.
AIB plc v Martin
Floyd v Cheney [1970] Ch 602
Gilford Motor Co Ltd v Horne [1933] Ch 935
Jelsma, P.L. and Nollkamper, P.E., 2018. The limited liability company. LexisNexis.
Keech v Sandford [1726] EWHC J76
Lan, L.L., 2016. Corporate law [Book Review]. Singapore Journal of Legal Studies, (Mar 2016), p.214.
Milman, D., 2018. Legal problems associated with the identification of partnerships. Nottingham Insolvency and Business Law Ejournal, 2018(6), pp.13-29.
Partnership Act 1890
Pollock, F., 1890. A Digest of the Law of Partnership: Incorporating the Partnership Act, 1890. Stevens.
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
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