va 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 (8. 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. 364Mapp Partnership Has no legal existence apart from its members. Cannot generally sue or be sued in its own name, and may only do so as a matter of convenience. Cannot consist of more than 20 persons, unless authorised by some written law. Is easy to form by written agreement or orally. May engage in a variety of business, subject to the mutual consent of the partners, It is easy to alter its capital. It is sometimes difficult to distinguish between a partner’s own property from that of the partnership. Every partner is an agent of the firm and of the other partners. Shares may only be transferred with the con- sent of the other partners. Company . It is a legal entity distinct from its members. Has a right to sue or be sued in its own name. A private company may have up to 50 members, while the membership of a public company is unlimited. . Difficult to form-must always have written documents. The activities it can engage in are limited by its consti- tution and by the doctrine of ultra vires. A certain strict procedure must be followed before its capital can be altered, including holding a meeting and passing a resolution. Since a company may own property in its own name, its property can hardly be confused with that of its members. A shareholder is not an agent of the company (only directors are agents). In public companies, shares are freely transferable; re- strictions exist only in private companies. Ching Key PARTNERSHIPS DISTINGUISHED FROM COMPANIES: "io Seg &, Vn 365 iS Z “ap sy py_ 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, but 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: (i) 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. (iii) | 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. (v) | The ratios of sharing profits and losses. (vi) Interest on partner’s capital, partner’s loans, and interest on drawings (if any). (vii) Salaries, commissions etc. payable to partners (if any). (viii) 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. (xi) 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 thcir 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. 366 \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: () The business name (ii) The general nature of the business (iit) _ 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. _ (i) 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. [BER OF PARTNERS A partnership cannot consist of more than twenty persons. In case of banking business, the number of partners is limited to ten. If e number of partners exceeds these limits then partnership becomes an gal association. PARTNERSHIP PROPERTY Property may be used for the purposes of the firm’s business nd yet may not be part of the partnership property; e.g. office furniture ind/or equipment may be used by the firm and yet remain the property one of the partners, It is always necessary to distinguish between "Partnership property” is defined by section 24(1) as "All property and rights and interests in property originally brought into the ‘Partnership stock or acquired, whether 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 367_ “must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement’. It is 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": $.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 determined according to the provisions of the Partnership Act. (A) DUTIES OF PARTNERS: 1. 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 a sale of 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 carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business. S, 34. 368Share Losses Finally, every partner is liable to contribute to the firm’s losses other liabilities. RIGHTS OF PARTNERS: Subject to the partnership agreement, the rights of partners are 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% p.a. 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 majority basis, but the majority must 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” (S.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). 369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 or believe him to be a partner." §.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 of 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 e.g. 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 firm’s business will be binding on the firm and other partners. A partner has implied authority to: 3701. buy and sell goods; 2. engage employees for the firm; 3. borrow money, contract debts and repay suchdebts on behalf of the firm; 4. negotiate instruments of credit debts; 5. employ an advocate in an action against the firm; ote: 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. Garrod (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 on ire 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 laintiff 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 nd selling of cars. Held: The sale of the car to the company so that it Id be let out on hire-purchase was an act for carrying on in the usual ay business of the kind carried on by the firm; and the firm was therefore bound. liggins V. Beauchamp (1914) Beauchamp was a sleeping partner in a business of cinema d provided that no partner should contract any debt on account of partnership without the consent of the other partners except in the sual and regular course of business. Miller borrowed money from ins, stating that it was for his own use. Higgins then sued feauchamp to recover the sum lent. Held: Since the firm was not a trading partnership, Miller had no implied authority to bind the firm in spect of the debt. 371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 represcntation 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 also severally liable in the due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment 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; (6) require any accounts of the partnership transactions. 372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 ains liable to the creditors of the firm, but he can be indemnified by assignee in respect of losses. In the case of dissolution of the partnership, the assignee is itled to receive the share of assignor, and for the purpose of taining of that share, he is entitled to an account as from the date of dissolution (S,35(2)). ABILITIES OF INCOMING AND OUTGOING PARTNERS ming Partners "A person who is admitted as a partner into an existing firm not thereby become liable to the creditors of the firm for anything me before he became a partner": S. 21(1). An in-coming partner can nly be made liable where he is proved to have assumed the liabilities of existing firm through the process of novation (ic. an agreement tween him, the existing partners and the creditors concerned). itgoing Partners A partner who retires from a firm does not thereby cease to be ible for partnership debts or obligations incurred before his retirement .21(2)). However, a retiring partner may be discharged from any existing bilities by an agreement to that effect between himself and the bers of the firm as newly constituted and the creditors, and this ‘cement may be either express or inferred as a fact from the course of aling between the creditors and the firm as newly constituted. .21(3)). This shows that a retiring partner may be discharged by the ‘ocess of novation, express or implied. A retiring partner must therefore (ake steps to ensure that he is held out as a partner after his retirement; otherwise he will continue be liable for the firm’s debts. In the case of persons who had never It with the firm before the retirement, an advertisement in the 373Gazette is sufficient to discharge the retired partner: S. 40 (2); moreover, atetired person is not liable to any person subsequently dealing with the firm if that person did not know him to be a partner: $.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 all 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 it is 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 moncy 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. A continuing guaranty or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of 374agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of th> 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 _aseries of transactions e.g. 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", _ $.36(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 trom the _ date of communication of the notice". And if the partnership was entered into for a single adventure or undertaking, it is dissolved by the termination of that adventure or undertaking: $. 36(b). Alll 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(s). 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 v. Dowling (1927). Besides, "A partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged for his separate debt": S. 37(2). 315(c) By Illegality "A partnership is in every case dissolved by the happening of any 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: 1. 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. Evens (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 o: 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. 3766. Whenever in the opinion of the court it is just and equitable that the partnership should be dissolved. (©) By Rescission Where one of the partners is guilty of fraud or misrepresentation as regards the partnership contract, the partnership contract may be rescinded on this ground, in which case the partnership dissolved (S. 45). pplication of Property on Dissolution On the dissolution of a partnership, its property must be applied in payment of the firm’s debts and liabilities, after which the surplus must be applied in payment of what may be due to the partners spectively after deducting what may be due from them as partners to c firm; and for this purpose any partner or his representatives may, on ¢ termination of the partnership, apply to the court to wind up the usiness and affairs of the firm, S. 43. In case of insolvency or bankruptcy, the provisions of the Bankruptcy Act apply. Where the partnership property is not sufficient to meet the firm’s debts and liabilities, the deficiency is borne by the partners in the proportion in which they are entitled to share 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 losses or deficiencies of capital, must 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 paying to each partner rateably what is due from the firm to him for advances as distinguished from capital; 3. _ in paying to each partner rateably 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. 377LIMITED PARTNERSHIP Limited 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 liable for the debts or obligations of the firm beyond the amount so contributed.” 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; 378DSP oa a the general nature of business; the principal place of business; the full name of each of the partners; the term, if any for which the partnership is entered into, and the date of its commencement; a statement that the partnership is limited, and the description of every limited partner as such; 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 in the above particulars, a statement signed by the firm specifying nature of the change must be delivered to the Registrar of panies within seven days of such change. its And Duties of a Limited Partner He cannot participate in the management of the firm. He cannot bind the firm. He is not entitled to dissolve the partnership by notice. He can inspect the firm’s books. His death does not dissolve the partnership, unless specifically provided in the agreement. 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. EXERCISES Define partnership. What are the main distinctions between partnership and a limited company under Kenya law.? (C.P.S.) Enumerate six rights and duties of partners among themselves. (CPS) Discuss the formation of partnership. Explain the relations of partners to one another. 379Wire a short note on partnership property. Describe the relations of partners to persons dealing with them, Briefly explain the concept of "Holding Out". Describe the assignment of shares in partnership. Discuss the liabilities of incoming and outgoing partners. State and discuss the ways in which a partnership can be dissolved. Define limited partnership. Discuss the duties and rights of a limited partner. What is a partnership? Discuss the provisions of the Partnership Act (Cap..29) Laws of Kenya as they relate to dissolution of partnerships. (C.P.A.) (a) Examine the extent to which a partner has implied authority to act on behalf of the firm. (b) A and B are partners in a small bakery business. Without consulting B.A berrows Sh. 10,000 from a registered moneylender ostensibly for the business and spends it on his pleasure. State with reasons whether or not the firm is labile for the debt. vient (CP.A.) Ian