PARTNESHIP LAW

Definition:
The word Partnership is the relationship between parties (persons) carrying on business in
common with an aim of earning profit. This is under LCO S. 190 (i). The two parties
involved coming together for business as per the contract; hence their relationship is
based on the term of the contract.

Significant features of a Partnership

(i) Capital is contributed by partners and not allowed to subscribe or subscription
from the public
(ii) Each partner is an agent of the partnership with authority to enter into contract
or purchase or sale of goods and services.
(iii) Each Partner is personally responsible for all debts of the partnership and
therefore the liability of all ordinary partners is unlimited.
(iv) A partner has a limited life.

RELATION WHICH DO NOT CREATE A PARTNERSHIP

According to section 190 (I) LCO, defines the following to be not partnership
(a) Sharing a gross costumes lauder services interest while servant salary.
(b) Receipt by a person a share of profit contingent, or varying with the profit of the
business
(c) Joint tenancy, tenancy is common joint properly common property or ownership.

TEST OF A PARTNERSHIP
Before the relation is called a partnership the following element must be proven or
proved.
(a) The relation must have been created by the agreement between the partners
(b) The purpose should be to share the profit of the business
(c)That the business is being carried out by all partners or any one acting for all.

TYPES OF PARTNERS
(I) GENERAL PARTNERS
These are partners who are liable for the liabilities of the firm up to full extent of
his personal assets. Every partnership must contain at ceast one general partner.

(i) SLEEPING OR DOMANT PARTNERS

These are general partner who wishes to have no active role in the management of
the firm. However he has a right to a share of profit and is responsible for
liabilities of the firm.

(ii) LIMITED PARTNER

This is a partner who has a right of share of profit but he has no right to
participate in the management of the firm. Also his liability is limited to the
amount of capital originally agreed to contribute to the business of the firm.

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 (iii) QUASI PARTNER/PARTNER BY HOLDINGOUT
This is not a partner by agreement but the one precluded from denying that he is a
partner due to his previous conducts or statement. Eg a retired partner who does
not give public notice of his retirement is bound by all transactions made by his
fellow existing partners. He will be regarded to be a partner due to his failure to
give a public notice of retirement.

(iv) NOMINAL PARTNER

This is not a partner who contributes capital to the firm nor having share of profit.
He/she has just agreed his/her name to be used by a firm as a partner.

DIFFERENCES BETWEEN A PARTNERSHIP AND A COMPANY

A company is an artificial person created by law having separate legal entity perpetual
succession, Limited liability and a common seal.

BASIS PARTNERSHIP COMPANY

1 Legal entity A firm doesn’t enjoy separate legal It has a separate legal existence. A
(status) existence, or separate legal personality company is separate form its
from the partners. members
2 Liability The liability of partners is unlimited to Liability of its members is limited to
the extent of private property except for the extent of the value of shares held
limited partners by them.
3 Number of Minimum of two partners, minimum of A public company must have a
members 20 partners but for banking maximum is minimum of 7 members to start with
10 but there is no limit maximum for
private company maximum is 50
4 Management The entire management lies with all -Management of a company is run
partners unless otherwise agreed. of a separate body (board of
directors)
5 Formation It is formed by a simple agreement It is created or formed by the act of
either in writing or by implication parliament called companies
ordinance cap 212.
6 Agency Every partner is an agent of the firm - A share holder is not an agent of
and can bind the firm by his act in the the company
course of business even if they are not
aware (other partners)
7 Distribution Profits are distributable among partners No compulsion of the distribution of
of profits as per the partnership deed. profit, only when dividends are
declared.
8 Transfer of A partner cannot transfer his share A MEMBER MAY TRANSFER
Interest without the consent of other partners HIS SHARE AS AND WHEN HE
LIKES
9 Property Property of the firm is the joint property Property of the company is not the
of all its partners property of its members as the
company and members have

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 separate legal existence
10 Winding up Can be wound up at anytime by an No one member can require it to be
partner without legal formalities wound up at will, and winding up
involves legal formalities

PROPERTY IN RELATION TO A PARTNERSHIP

The term property in relation to the partnership business represents rights, interest or
ownership of anything valuable.

A firm can get property in the following circumstances:-

(i) At the time when the firm is formally established
(ii) During the prices of business

Property Includes
(i) All property right and interest which have been brought into the common
stock for the purpose of the partnership by the individual partners, whether at
the commencement or subsequent added to the business.
(ii) The goodwill of the firm that will be acquired or obtain in the course of the
business
(iii) All property, right and interest acquired into the course of business with
money belonging to the firm including secret profit and personal benefit
delivered by a partner.

Relations of Partners to Persons dealing with them (THIRD PARTIES)

Every partner is the agent of the firm and his partners for the purpose of the business of
the firm. The acts of every partner who does any act for carrying on business of the kind
carried on by the firm bind the firm unless:-
(a) The partner so acting has no authority to act for the firm in that matter
(b) The person with whom he is dealing either knows that he has no authority or
doesn’t know or believe him to be a partner.

Thus, in the light of the limitations above every partner has implied authority to bind the
firm by:-
(a) Selling the goods of the firm
(b) Purchasing on the firms behalf, goods of the kind usually employed in the firm’s
business
(c) Receiving payment of the firm’s debts and giving receipts for them
(d) Accept, make and issue negotiable instruments in the firms name
(e) Borrow money on the firms credit and pledge the firms goods to effect that
purpose

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RELATIONS OF PARTNES TO ONE ANTOHER
The article of partnership governs the relationship of the partners to one another. If there
is no written partnership agreement their relations are governed by the provisions of the
partnership Act (LCO)

CONTENTS OF THE PARTNESHIP DEED

i) Name of the firm, nature and place of business
ii) Name, Address and occupation of each partner
iii) Status or type of each partner eg. Active dormant etc
iv) Capital to be contributed by each partner
v) How profit are to be shared (also loss)
vi) The date of commencement and termination of any
vii) The rate of interest on drawings and loans
viii) The Bank account and who are signatory
ix) The provision as to whether the partnership will continue in business in case
of retirement death or insolvency of partner
x) The system of maintaining accounts and provision of Audit
xi) The method of calculating goodwill at the time of retirement death, or
admission of a partner
xii) Arbitration these included in the agreement to determine the dispute

REGISTRATION OF A FIRM NAME

Generally a partnership is not subject to registration. However, Business names
(Registration) ordinance cap 213, makes it compulsory for:-
(v) Every firm having name which do not disclose the true surnames of all the
partners
(vi) Limited partnerships
- To register with the register of Business name.
BRELA – Business Registration licensing Authority.

EFFETS OF NON – REGISTRATION

The law makes failure to register the firm name will suffer the following consequences
(i) It is an offence
(ii) A partner cannot bring any action to enforce a right a rising out of a business
against his co-partners
(iii) The third party can enforce his contractual rights against the firm while the
firm cannot enforce any right against the third party.

RIGHTS AND DUTIES OF THE PARTNERS

The partnership deed gives or stipulates all the right and duties, in absence of any express
provision the following rights and duties are provided by the law (S. 194 LCO)

RIGHTS
(i) All partners are entitled to share equally in the profit and must contribute
equally toward the losses of the firm

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 (ii) A Partner in entitled to interest on loan made to the firm
(iii) Every partner is entitled to be indemnified by the partnership for the lost,
expenses incurred in the ordinary or proper course of the business of the firm
or anything done for the preservation of the business or property of the firm.
(iv) Every partner has the right to take part in the management of the partnership
business
(v) Every partner has the right to have access to and inspect or have copy any of
the book of the firm.

DUTIES
Every partner is under the following duties in the partnership
(i) To render true account and full information of all matters affecting the
partnership
(ii) To account to the firm for any benefit derived by him from transaction,
concerning the partnership without the consent of the partners
(iii) A partner has a duty not to compete with the firm ie he should not carry out a
business of the same nature and compete with that of the firm without the
consent of other partners. If he does that he must account the profit made to
the partnership
(iv) Majority partners cannot expel a partner unless the power to do so has been
conferred by the agreement between the partners
(v) No partner is entitled to remuneration for acting in the business of the firm.
Allowance such as fuel, lunch etc is accepted and the partner can claim them.
(vi) Not to introduce a new member in the partnership without the consent of
existing partners.

LIABILITIES OF:
A) MINOR
A minor may be admitted to the benefit of a partnership is not personally liable
and his property cannot be attached for firms debt but his share in the firm is
liable for the firm debts upon realizing a full age of majority the minor must
decide to continue with the firm or not. If he fails to exercise his option on
attaining majority age with in a reasonable time he become personally liable for
all debts and obligation of the firm since the date of his admission to the benefit of
partnership.

B) INCOMING PARTNERS
A person who is admitted to an existing firm does not there by become liable to
the creditors of the firms for anything done before he become a partner in the
firm. He becomes liable for debts incurred by the firm after he becomes partner
(S. 208. LCO)

C) RETIRING/OUTGOING PARTNER

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 A partner who retires from the firm does not cease to be liable for the partnership
debts incurred before his retirement but he may be excused from any liability by
agreement between himself and remaining members and the creditors (S. 208
LCO). It is the duty or retiring partner to inform all the creditors of the firm the
fact of his retirement unless he may still remain liable for the debt incurred after
his retirement.

LIMITED PARTNERSHIP
The limited partner is not common. In limited partnership at least one partner should be a
general partner and other is limited partner to the extent of their capital only.

A limited partnership is not a person at law and therefore the number of members should
not exceed 20 (10 for banking)

REGISTRATION
Every limited partnership must be registered with the joint stock companies. The
following are the terms:-
(a) The firm name
(b) The general nature of the business
(c) Principal place of business
(d) The full name of each partner
(e) The term if any for which the partnership is entered into and the date of its
commencement.
(f) A statement that the partnership is limited and the description of every limited
partner
(g) The sum contributed by every limited partner and whether paid in cash or
otherwise.

Any change in respect of the above particulars or the fact that a general partner becomes
a limited partner must be notified to he registrar within seven days. Failure to register
means that the limited partner continues to be fully liable as a general partner.

Right and Duties of a Limited Partner are:

i) Is not liable for the debt of the firm beyond his capital but we may not
withdraw any party of his capital and even if he were to do so he would still
be liable to the firms creditors for the account of capital we originally
subscribed.
ii) A limited partner has no power to bind the partnership and may not take part
in its management. If he manages the firm he becomes liable for all liabilities
of the firm during that period of management but he can give advice to
management on the managerial issues.
iii) Death bankruptcy or mental disorder of a limited partner doesn’t dissolve the
partnership nor. The limited partner can dissolve the partnership by notice.

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RIGHT AND POWER OF PARTNER ON DISSOLUTION
All right of the partner are always contained in the partnership deed however upon
dissolution the partner possess the following rights

(a) NOTIFICATION
On dissolution of a partnership or retirement of a partner, any partner may publicity
notify the same and may require the other partner or partners to concur in all necessary or
proper acts to achieve the purpose.

Case: Through V Hunter

(b) Authority after winding up

After the dissolution of the partnership the right and obligation of the partners continues
in accounting things necessary for the winding up the business of the partnership and
complete transaction begin but unfinished at the time of dissolution but not otherwise

(c) Partners Lien for proper Administration

A lien which is the nature of a personal right against co-partners and their representatives
assist a partner in getting proper administration of the winding up and prevent the assets
from being used to pay separate debts of the partners before the firm debts.

(d) Apportionment of Premium

Where one partner has paid premium to another on entering into a partnership for a fixed
term and the partnership is dissolved before the expiration of such term other than by
death of a partner, the court may order the repayment of the premium or part of it as it
thinks just.

However the court cannot order the return of any part of the premium of:-
(i) The dissolution is in the judgment of the court wholly or chiefly due to
misconduct of the partner who paid the premium.
(ii) The partnership has been dissolved by an agreement containing no
provision of the return of any part of the premium
(iii) The dissolution is due to the death of a partner

TREATMENT OF GOODWILL ON DISSOLUTION

Good-will is part of partnership asset i.e can customer sewered, which will continue to
request service even after change of ownership on dissolution of can be treated as
follows:-

i) If the firm is sold as a going concern

The firm can be sold to outsider or to another partner (among founder) who may
acquire or may agree (by agreement) the right to acquire the share of the other
partners. In this case goodwill forms part of the assets sold and must be paid for and

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 the purchaser of the business may then use the name of the firm and restrain the
outgoing partners from continuing to use it.

ii) If there is no going concern

In this case goodwill of the business disappears and the partners take the assets
forming their own particular share in accordance with their agreement, subject to cash
adjustments of the value of the assets taken do not correspond precisely with the
shares due to each partners.

Then after that, any partner can use the firm name so long he doesn’t involve his
former partner in liability for the new business.

APPLICATION OF ASSETTS ON DISSOLUTION

Unless there is an agreement between the partners the assets are applied as follows:_
(a) In paying the debt and liabilities of the firm to person who are not partners there
in
(b) In paying to each partner rateably when is due from the firm to him for advances
as distinguished from capital.
(c) In paying to each partner rateably what is due from the firm to him in respect of
capital
(d) The ultimate residue, if any shall be divided among the partners in the proportion
in which the
NB
If the asset is not to satisfy the creditors partners advances and repayment of
capital the deficiency is made:-
i) Out of profit (if any) brought forward from previous years
ii) Out of partners capital
iii) By the partner individually in the proportion of the profit sharing
ration.

PARTNERS INSOLVENCY ON DISSOLUTION

Where the partner is insolvent and the firms assets are not sufficient of pay the creditors
and partner’s advances this deficiency must be borne by the co-partner in the ration in
which they were entitled to share profit.

Where the assets of the firm are more than sufficient to pay the firms creditors and
partner’s advances, but are not sufficient to repay the partners, capitals, then each partner
must contribute to this deficiency in the proportion in which he shares profit and losses.
However where the partner is insolvent and cannot pay his share a deficiency, the other
partner need only to pay their own share.

i) If the firm is sold as a going concern

The firm can be sold to outsider or to another partner (among founder) who may
acquire or may agree (by agreement) the right to acquire the share of the other
partners. In this case goodwill forms part of the assets sold and must be paid for and

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 the purchaser of the business may then use the name of the firm and restrain the
outgoing partners from continuing to use it.

ii) If there is no going concern

In this case goodwill of the business disappears and the partners take the assets
forming their own particular share in accordance with their agreement, subject to cash
adjustments of the value of the assets taken do not correspond precisely with the
shares due to each partners.

Then after that any partner can use the firm name so long he doesn’t involve his
former partner in liability for the new business.

APPLICATION OF ASSETS ON DISSOLUTION

Unless there is an agreement between the partners the assets are applied as follows:-
i) In paying the debt and liabilities of the firm to person who are not partners
their in.
ii) In paying to each partner rateably when is due from the firm to him for
advances as distinguished from capital.
iii) In paying to each partner rateably what is due from the firm to him in respect
of capital.
iv) The ultimate residue if any shall be divided among the partners in the
proportion in which the profit are divisible
NB:
If the asset are not sufficient to satisfy the creditors, partners advances and repayment
of capital the deficiency is made:
i) Out of profit (if any) brought forward from previous years
ii) Out of partners capital
iii) By the partner individually in the proportion of the profit sharing ration

PARTNERS INSOLVENCY ON DISSOLUTION

Where the partner is insolvent and the firm assets are not sufficient or pay the creditors
and partner’s advances this deficiency must be born by the co-partner in the ratio in
which they were entitled to share profit.

Where the assets of the firm are more than sufficient to pay the firms creditors and
partner’s advances, but are not sufficient to repay the partners, capitals, then each partner
must contribute to this deficiency in the proportion in which he shares profit and losses.
However where the partner is insolvent and cannot pay his share a deficiency, the other
partner need only to pay their own share.

Case: Garner Garner V. Murray 1904

The effect of the rule in this case is that the insolvent partners portion of the deficiency
fall on the solvent partners not in proportion to their share of profits and losses but in the
ratio of their last agreed capitals.