LAW RELATING TO ASSOCIATIONS

If one wants to do business, he has three basic options to him/her.

a) He can operate the business own his own as a sole trader/sole proprietorship;
b) He can go into a partnership as partners;
c) He can register a company under the Companies Act 1984

Legal Personality
A person in law means any entity which is accepted by the law as having certain defined rights and
obligations. Such persons may be natural (human beings), artificial (corporate sole)-one office which is
held by one person any point at a time and third one is LTD Companies/public corporation.

The Concept of Corporations

The basic legal distinction between types of business enterprise is their status as corporate and non-
corporate organisations.

 Non-corporate organisations are those which do not have a separate legal identity distinct from their
owners. The main forms of non-corporate organisations are sole traders and partnerships. For
example the sole trader and partnership. There are not registered under the companies Act.

 Corporate organisations are those where the legal status of the organisation is separate from that of
the owners. The main categories of corporate organisations are private limited companies, public
limited companies –plc and statutory corporations such as Escom, Blantyre Water Board, Northern
Region Water Board, Malawi Revenue Authority etc.

A further important distinction to consider between business enterprises is that of limited and unlimited
liability. (Liabilities)

 Unlimited liability means that the individual owner or owners of an organisation have unlimited
liability for debts or actions taken by the business, if, say, the organisation fails, the owner(s) would
be liable for the extent of any debts of the organisation and would have to use all their personal
resources to meet those debts.

 Limited liability means that the responsibility of the owners of a business for its debts or actions is
limited in some way. This means that the shareholders who are the legal owners are not liable for any
debts of the organisation beyond the amount they have paid or agreed to pay for their shares. They
may lose all the money they have invested in the company, but cannot be called upon to pay more.
(Thus the term ‘limited’ in public or private limited companies means that the owners/shareholders
enjoy limited liability.)

Non-corporate Organisations
1) Sole trader
This type of business is owned and managed by one person who provides the financial resources and
makes all the business decisions.

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The key features of the sole trader are:

i. If he chooses not to trade under his own name he must register the name under the BUSINESS
NAMES ACT.
ii. The proprietor of the business is liable for all the debts of the business – has unlimited personal
liability. If the business fails the owner may lose all his personal property.
iii. He usually makes all the decisions and takes all the profits or stands all losses.
iv. There are no formalities for ending the business; he may cease trading at any time.
v. Upon the death of the sole trader the business ceases.

2) A Partnership
A partnership is an unincorporated association, where two or more persons associate for the purposes of
business.No other separate personality is brought into existence on the formation of the partnership, and
the business and all its assets remain the property of the partners.

The Partnership Act 1890defines a partnership as ‘the relation which subsists between persons carrying
on a business in common with a view of profit’.

However, while companies can never be considered as partnerships, companies themselves can be
partners in a partnership, for example, as part of a joint venture with other companies.

The maximum number of partners in a partnership is 20, except for certain professional partnerships, for
example solicitors and accountants, where there is no maximum.

Creation of Partnership
Partnerships can be formed simply in writing, orally or even by conduct. It is normal however, to have a
partnership agreement which sets out the terms on which the partners are associated. In the absence of
any agreement to the contrary, when a partner wishes to leave or retire, the partnership has to be dissolved
and then perhaps re-formed among the remaining partners.

Furthermore, when a new partner wishes to join, there has to be a unanimous consent of the existing
partners.

All partners are jointly and severally liable for the debts and/or actions of the partnership

a) No formalities are necessary, although for practical reasons writing is usually used.
b) The partners may trade under any name they please, except that the word ‘limited’ must not be the
last word of the name.
c) Any partnership agreement will usually deal with the following matters:
i. The firm’s name
ii. The place and nature of business
iii. The date on which the partnership is to commence and its duration. If there is no fixed period
then it is a partnership at will.

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iv. The proportions in which capital is to be provided, and whether interest is to be paid on
capital before profits are divided
v. Details of bank account, including who is allowed to sign cheques.
vi. Whether all or only some of the partners shall manage the business and whether all partners
shall give their whole time to the business.
vii. How profits are to be shared, and provisions for drawings
viii. Provisions for keeping regular accounts and the preparation of an annual profit and loss
account and balance sheet.
ix. What shall happen on the death or retirement of a partner. In the absence of an agreement to
the contrary the death of a partner automatically dissolves the partnership.
x. Whether a retired partner is allowed (within limits) to compete with the firm.
xi. A list or description of what is agreed to be partnership property.
xii. Insurance against death or sickness of a partner and for the business generally.
xiii. Any limits on the business interests of the partners outside the firm

xiv. An arbitration clause.

a) Authority of Partners
1) Every partner is an agent for the others and, hence, can affect the legal rights and obligations on
matters connected with the business. Thus he has implied authority to bind the firm by transactions
entered into by him in the ordinary course of business. An outsider who contracts with a partner
within the scope of that implied authority may treat the firm as bound, despite any restriction on the
authority of that partner to which the partners have agreed, unless the outsider knew of the restriction.

In MERCHANTILE CREDIT v GARROD (1962),(judicial precedent)

A and B were partners in a firm which let garages and repaired cars. The partnership agreement
expressly excluded buying and selling cars. Without B’s knowledge, A, acting without the owner’s
consent, sold a car to a finance company for 700 Pounds, paying the proceeds into the partnership
account. It was held that B was liable to repay the 700 Pounds to the finance company. The
prohibition on buying and selling in the partnership did not entitle B (or the firm) to avoid liability
since A’s conduct was of a kind normally undertaken by persons trading as a garage, i.e. A apparently
had authority to sell cars.

2) In a trading partnership the following acts are within the implied authority of a partner.
i. Borrowing money in the name of the firm and giving security by pledging its goods or by
depositing title deeds to create an equitable mortgage.
ii. Signing cheques, and drawing, accepting or indorsing bills of exchange.

iii. Employing a solicitor to defend an action against the firm. However, it is doubtful if a partner
would have authority to commence any proceedings other than routine actions to recover trade
debts.

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iv. Receiving payment of debts and giving valid receipts.

v. Buying and selling on account of the firm.

vi. Engaging employees to work for the firm. A partner probably does not have implied authority to
dismiss employees

3) The following acts are outside a partner’s implied(assumed) authority

i. Consenting to a judgement against the firm
ii. Executing a deed
iii. Giving a guarantee in the absence of trade custom to do so.
iv. Referring a dispute to arbitration.
v. Accepting property other than money in payment of a debt.

b) Liability of Partners
a. Liability for torts. On the usual principle of vicarious liability (since each partner is an agent of
the others) all partners are liable for a tort committed by a partner in the ordinary course of the
firm’s business, or with the authority of his co-partners.

In HAMLYN v HOUSTON (1903) a partner bribed a competitor’s clerk to disclose confidential

information relating to it. The partner used the information and the rival firm consequently
suffered loss. It was HELD that the partner’s firm was liable for his wrongful act since he was
acting in the ordinary course of business when he obtained information about the rival.

Partners’ liability in torts is joint and several. This means that a partners is liable jointly with the
other partners and also individually liable. Thus a plaintiff may issue separate writs against each
partner either at the same time or successively and judgement against one partner does no prevent
an action being brought against the others.

b. Liability for misapplication of money or property. Where either:

i. One partner acting within the scope of his apparent authority, receives money or property
of a third person and misapplies it, or
ii. A firm, in the course of its business, receives money or property of a third person and the
money or property is misapplied by one or more of the partners while in the custody of
the firm, then the firm is liable to make good the loss.
c. Liability in contracts
i. Every partner is liable jointly with his co-partners for all debts and obligations of the firm
incurred while he was a partner.
ii. Where liability is joint it used to be the case that once a third party had sued one of the
partners he could not sue the others. However, the CIVIL LIABILITY
(CONTRIBUTION) ACT 1978 removed this limit on the number of actions.It is
provided that a partner who has paid a debt of the firm can claim contribution from his
partners.

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d. Liability of a retired partner

i. A partner who retires does not cease to be liable for partnership debts incurred before his
retirement. These may include debts arising after his retirement from transactions during
the period when he was a partner.
ii. A retired partner may be discharged from liability for debts incurred while he was a
partner if the debts are later discharged by the new firm, or if the creditors agree to
release him by novation.

iii. A retired partner may be liable on contracts made after his retirement if he continues to
be an ‘apparent partner’, by for example allowing his name to remain on the firm’s
notepaper.

e. Liability of a new partner

i. A person admitted as a partner does not thereby incur liability for debts incurred before
he became a partner.
ii. There may be a contract of novationbetween a retired partner, the form as reconstituted
by the entry of a new partner and the creditors. Under such a three party agreement, the
creditors and the firm agree that the reconstituted firm will be liable for unpaid debts of
the old form and that the retired partner be discharged from liability.

f. The salaried partner

It is common in professional partnerships, such as solicitors and accountants, to offer salaried

partnerships. These partners take a salary and often do not introduce any new capital into the
partnership or have any involvement in any dissolution of the firm. However, under the
PARTNERSHIP ACT 1890, in the first instance they are fully liable as partners.

c) The Relationship of Partners to Each Other

a. Good faith. There is a duty of utmost good faith once the partnership is established. This means:
i. Partners are bound to render true accounts and full information on all matters affecting the
partnership.
ii. A partner must account for any profit made by him without the consent of the others from
using the firm’s property, name or trade connections.

iii. A partner may have a separate account unless he had agreed to the contrary, but a partner
must account for any profit made in a business of the same kind as, and competing with, the
firm.

b. Management
i. Subject to the contrary agreement every partner is entitled to access to partnership books and
may take part in the management of the business.
ii. Decisions on ordinary matters connected with the partnership business are majority of the
general partners. If there is a deadlock the views of those opposing any change will prevail,
but unanimity is required on matters relating to the constitution of the firm, for example to
change the nature of the partnership business or to admit a new partner.

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c. Capital, profits and losses

i. Profits and losses are shared equally in the absence of any contrary agreement. However, if
the partnership agreement states that profits are to be shared in certain proportions then,
prima facie losses are to be shared in the same proportions.
ii. No interest is paid on capital except by agreement. However, a partner is entitled to 5%
interest on advances beyond his original capital.
d. Indemnity
The firm must indemnify any partner against liabilities incurred in the ordinary and proper
conduct of the partnership business, or in doing anything necessarily done for the preservation of
the partnership property or business.

e. Partnership property
i. The initial property of the partnership is that which the partners, expressly or impliedly agree
shall be partnership property. It is quite possible that property used in the business should not
be partnership property, but should, for example, be the sole property of one of the partners, it
depends entirely on the intention of the partners.
ii. Property afterwards acquired is governed by the same principle, but clearly it will be
partnership property if it is bought with partnership money.

d) Dissolution
a. Dissolution occurs:
i. By expiry of time, if the partnership was entered into for a fixed term.
ii. By termination of the adventure, if entered into for a single adventure.

iii. By death or bankruptcy of a partner, unless the partnership agreement other provides.

iv. By subsequent illegality, i.e. an event which makes it unlawful to continue the business

v. By notice of a partner

vi. By order of the court, for one of several reasons, for example the permanent incapacity of a
partner, or because is just and equitable to order dissolution.

b. Misrepresentation

When a partner is induced to enter into a partnership by misrepresentation he remains liable to

creditors for obligations incurred while a partner, but he has several remedies against the maker
of the statement including, for example, rescission and/or damages.

c. After dissolution the authority of the partners continues so far as is necessary to wind up the
partnership affairs and complete transactions already begun.

d. On dissolution any partner can insist on realization of the firm’s assets, (including goodwill),
payment of the firm’s debts, and distribution of the surplus, subject to any contrary agreement.

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Limited Partnerships
a) Limited partnership was established by the LIMITED PARTNERSHIP ACT 1907. The use of this
form of partnership has not been extensive due to the ease of incorporating a private company.
b) Under such a partnership there must be at least one general and one limited partner. The limitation
on the number of partners applicable to ordinary partnerships applies to limited partnerships.
c) The general partner is liable to all the firm’s debts and liabilities and is responsible for the
management of the partnershipbut a limited partner is only liable to the extent of his capital
contribution and the Limited Partnership Act prohibits limited partners from managing the
partnership.
d) A limited partnership must be registered with the Registrar of Companies. Until this is done all
partners are deemed to be general partners. The registered particulars include, for example, the firm’s
name, the place and nature of business, and the full name of each partner.

The Limited Liability Partnership (LLP)

A partnership formed under this LIMITED LIABILITY PARTNERSHIP ACT 2000, will enjoy limited
liability similar to that of the private limited company. Partners will not incur personal liability for the
debts of the partnership. It is registered with the Registrar of Companies, once formed owns the assets of
the business separate from the members and directors.

The LLP was brought about largely through pressure from large firms of accountants and solicitors
worried at the size of personal liability of individual partners for negligence.

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