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Formation and Expansion

Document Cited authorities 50 Cited in Related
AuthorElspeth Berry
Pages11-42

Chapter 2


Formation and Expansion

2.1 GENERAL PARTNERSHIPS
2.1.1 The definition in s 1 of the Partnership Act

A general partnership is formed when the definition of what constitutes a partnership in s 1(1) of the Partnership Act is satisfied. This defines a partnership as:

the relation which subsists between persons carrying on a business in common with a view of profit.

Therefore, even if persons have agreed to form a partnership, they will acquire that legal status only if they comply with the requirements of s 1(1). If the arrangement is informal, and the parties have not actually thought about forming a partnership, or indeed thought about it and rejected the idea, it is still possible that the law will regard them as partners because any arrangement that satisfies the definition in s 1(1) will automatically be a partnership, whether this is intended or not. Section 1(2) confirms that a company or corporation is not a partnership.

Although a general partnership need not, and indeed cannot, be registered, certain Scottish partnerships (all Scottish limited partnerships, and those Scottish general partnerships which are qualifying partnerships for the purposes of the Partnerships (Accounts) Regulations 2008;1see 8.1.3) are required to maintain a register of people with significant control over the business (Pt 8A of the LLP Regulations 2009; see further 2.3.3).

1SI 2008/569.

12 Partnership and LLP Law

Relation


As this word implies, a partnership is not an entity in its own right like an LLP, but a relationship based on a contract between two or more persons, albeit a special type of contract.2A partnership does not have a legal personality separate to that of the partners (see Chapter 3). The relation between members of a company is expressly excluded from the definition by s 1(2)(a) of the Partnership Act, and therefore a company cannot be a partnership, although it can be a partner (see below).

Between persons


Natural or legal persons may be partners. Legal persons include LLPs, companies, and Scottish partnerships (s 4(2) of the Partnership Act), but not English or Welsh partnerships. A partnership in which all partners are companies is often referred to as a corporate partnership.

Two or more English or Welsh partnerships may seek to form a partnership between themselves (known as a group partnership), but in fact each of the partners in the constituent firms will be a partner in the group partnership.

Carrying on business


Section 45 of the Partnership Act defines a business as including ‘every trade, occupation or profession’. The more difficult question is whether the business is being carried on. The leading case is Khan v Miah3(see also 2.1.3), in which four individuals agreed to go into partnership together to run a restaurant. They entered into various contracts with third parties, and one of them leased premises. Three of them took out a bank loan, and two of them opened a joint bank account and informed the bank that they were partners for the purposes of the account. There was a breakdown in the relationship before the restaurant was opened, and the question arose as to whether a partnership existed. The House of Lords held that it was not necessary for actual trading to have commenced, but the parties must have done enough to have commenced the joint enterprise in which they had agreed to engage. On the facts, this was so since assets had been acquired, liabilities incurred and expenditure laid out in the course of the joint venture and with the authority of parties. In Christie Owen & Davies plc v RAOBGLE Trust Corporation,4the court held that a partnership

2E.g. Mullins v Laughton [2002] EWHC 2761 (Ch), [2003] Ch 250 (see further 9.1.4 and 11.1.2).

3Khan v Miah [1998] 1 WLR 477.

4Christie Owen & Davies plc v RAOBGLE Trust Corporation [2011] EWHC 1151 (Ch), [2011]

NPC 104.

Formation and Expansion 13 to buy and develop a property had come into existence because the first step, the acquisition of the property, had been taken, and this was sufficient. The court noted that although the facts of Khan were that the parties had not just acquired the premises but had already fitted them out, it was clear from the rationale of Lord Millett’s speech in Khan that the purchase or lease of the business premises without more would have been sufficient.

In contrast, in Ilott v Williams and others,5the court held that there was no partnership because the putative partners had not acquired any significant property for the purposes of their new business, had no means of creating any profit and had made no financial commitment apart from buying a domain name, which was not a significant cost. There was no agreement as to the business model to be adopted, no evidence that any of the individuals sought to bind the others and no assurance of external funding or the regulatory approval which was required because the intended business involved the provision of financial services. Further, the parties clearly contemplated that the nature of their relationship should depend on the nature of the vehicle chosen, and all wanted limited liability.

In Dutia v Geldof and others,6the court accepted that a partnership could come into being during a ‘twilight period’ during which the legal relationships to be entered into in the future were being determined. Thus if the parties intended to operate their business through a corporate entity but commenced trading before incorporation, a partnership might be inferred. However, where they had already incorporated the principal trading vehicle, it was less likely that a partnership could be inferred pending the date on which the full structure was set up. Partnership was grounded in contract and therefore, in order for there to be a partnership, there had to be a concluded contract, but the legal threshold for a partnership agreement by inference was not easy to surmount. The use of the words ‘partner’ and ‘partnership’ by the parties did not signify that the requirements of the Partnership Act had been complied with. The court held that it was necessary for the putative partners to carry on business themselves; an agreement that they should have an economic interest in a business to be carried on by some other entity was insufficient, as acknowledged by s 1(2) of the Partnership Act which provided that companies were not partnerships.

In common


This means that the partners have the right to participate in the management of the business. Section 24(5) of the Partnership Act provides that every

5Ilott v Williams and others [2013] EWCA Civ 645, [2013] All ER (D) 55 (Jun).

6Dutia v Geldof and others [2016] EWHC 547 (Ch), [2016] 2 BCLC 252.

14 Partnership and LLP Law
partner may take part in management (see Chapter 6). This can be altered by agreement. In Hodson v Hodson and others7(see also below), the court held that it was not essential that a partner be involved in management in order to be a partner. However, since all partners are liable for debts and obligations of the partnership (see 7.1.5), it is understandable that they will, at least in smaller firms, normally want to be involved in management.

In Roger Marsh v Simon Cameron Marsh and Time Critical International Limited,8the court held that the claimant had helped his son, the first defendant, set up in business, as opposed to having set up in business in partnership with him. There was no evidence that the first defendant ever accepted him as a partner having the power to bind him to business transactions. None of the documentation referred to the existence of a partnership or to the claimant, or to any interest in the business at all apart from that of the first defendant, and all of it, expressly or by clear implication, referred to the business as a ‘sole trader’ or words to that effect. The fact that the claimant had intervened in the business, to protest at the pressure being applied to the first defendant by parties to an agreement with the business in order to obtain accounts and financial information, did not point to the existence of a partnership but to those parties being unaware of such a partnership, since had they known of it they would have sought the information from the claimant.

With a view of profit


The key to this element of the definition is intention.9It is not necessary that a profit is actually made; a business which ceases before profits are made could still be a partnership during its brief life. Furthermore, a person can be a partner in a partnership even if he does not share in the profits. In Stekel v Ellice,10it was held that a salaried partner who was not entitled to a share of profits but only a salary, and had contributed no capital, was a partner. Both the agreement, which entitled either party to dissolve the partnership and provided that on the death of the equity partner the salaried partner would inherit the business, and the subsequent behaviour of the parties, was in accordance with s 1 of the Partnership Act. In M Young Legal Associates Ltd

7Hodson v Hodson and others [2009] EWHC 430 (Ch), [2009] PNLR 23.

8Roger Marsh v Simon Cameron Marsh and Time Critical International Limited [2010] EWHC

1563 (Ch), [2010] All ER (D) 235 (Jun).

9See e.g. Newstead v Frost [1980] 1 WLR 135.

10Stekel v Ellice [1973] 1 WLR 191.

Formation and Expansion 15 v Zahid (a firm) and others,11the Court of Appeal held that there was a partnership between the fourth and fifth defendants even though the fifth defendant had no entitlement to share in the profits and had made no capital contribution. It reached this conclusion because the only reason for their business arrangement was to comply with the supervision requirements in the...

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