Which form of business organisation?

Case of George, Kim and Martha:

Roles of parties: investor and skill bringer. Who wants to be actively involved in management.
What do they want from this partnership?
Martha & Kim: Shielding personal assets, saving her investment
Kim: No management involved, silent partner: simply an investor.
George: bartender licence (important), skill, less money.
Availability of the parties; impacts management responsibilities. Those who don’t have time, contribute
more money.

LLP structure Advantages: assets are shielded; management can be structured however they want.
Diadvantages: enough communication may not go out to their customers regarding the agency, principle
relationships. It could run the risk of Kim being approached and committing the entity.
An LP structure:
George would be the GP
Kim would be the LP
Martha can come in as either: GP would work with her desire to contribute her time and protect her
invested money. LP would protect her personal savings from liability.

Factors to consider in picking an Appropriate Form

1) No of investors- Previously, 20+ people could not be partners, new CA silent on this.
2) Nature of Business. E.g. Law in Kenya can only be practiced under a partnership form (not as an
incorporation) – same as other professional services. Business can also be divided b/w public and
private companies along with the partnership forms.
3) Expertise of investors: would influence whether the investor would help in managing or silent.
4) Formalities of formation: the more sophisticated the form you choose to use- the higher the cost of
regulatory compliance (monetary forms e.g. registration costs, tax, fines etc.)
5) Nature/amount of legal regulation (upfront & continuing)
6) Taxation issues: individual/ income vs. corporate tax
Taxation regime for partnerships/SP: is different from that of corporate entities.

Partnerships/SP: Single/ “pass through” taxation (partners pay income tax on their earnings; the
firm/SP is not a taxable entity). Kenyan income tax is 30%. THE FIRM IS NOT TAXABLE.
Can go around this by hiding the profit from appearing in their incomes by pushing them out in the
form of benefits e.g. memberships to clubs, etc, but beware- certain ones are taxable benefits.

Corporates: Double taxation (the profits are taxed twice): Companies are taxable entities
(Company pays corporate tax in its profits (15% tax)) and shareholders pay tax on their dividend
payment (income tax). Profits are also taxed in this form. If these profits are distributed to s/hlders
as dividends: they would receive that money less the taxed amount.
 THESE PERCENTAGES CHANGE EVERY YEAR BASED ON THE TAX CODE. ALSO INCLUDES WHAT
CLASSFIES AS TAXABLE AND NON-TAXABLE BENEFITS.
However, the profits can be distributed in different ways e.g. s/hlders can be classified as
employees, withdraw salaries and this prevents the taxation of dividends. HOWEVER, they still have
to pay 30% income tax, but this is not an important factor due to the ability to ‘tax plan’ etc.

Advantages of corporate taxation: Lots of tax incentives which can reduce tax.
Opportunities for tax planning e.g. Shareholders can become employees and their pay/benefits
becomes deductible expense; this is not possible for partners.
7) Level of investor involvement
8) Liability issues (limited or unlimited? If ltd, by shares or guarantee?) LLP or Co? Unlimited- SP,
Unlimited Company and GP)
9) Ease of raising capital/financing options. Initial Public Offering (IPO) and offering shares (Equity
finance), Debt finance (loans). Equity owners are true owners of the business because they have
invested in the business. As an Equity owner- no salaries, just dividends- therefore their wellbeing rests
on the profitability and success of the company. (Salaried partners are not equity owners).
Ordinary shareholders = equity owners because their wellbeing rests on the profitability and success of the
company.
Preferred shareholders = not equity owners because their rate of return is pre-negotiated, and they will be
paid regardless of whether the company is doing well or not.
 Only companies can create debentures (floating charge): offering as collateral physical assets, and
intangible assets such as collectibles/receivables/ goodwill etc. Also takes into account when a
company goes into liquidity/ liquidises its assets.
Liquidity of Investments: ease of converting asset into cash.
Public listed companies have the highest liquidity- ease of selling.
Very difficult to sell a stake in a private/closed company.
GP can only sell his stake with consent of other partners; may not get a share of goodwill (reputation of the
business- which sometimes can be very valuable) if the others choose to continue with business. Need
unanimous consent to sell and to have a new partner coming in.
Ease of exit for founders is important when he is frustrated: ask the company to redeem their shares when
they are squeezed out and need to liquidate quickly.
When a business is new, but scales quickly- need for Venture Capitalists (VCs) to invest in the company.
VCs-> people who invest in the business early (may come in as LPs or LLPs), and institutional investors (will
always want shares)
LP: no consent required to sell; but market is illiquid.
Partnerships
What’s a partnership?
S2 Partnership Act (No 16 of 2012): means the relationship which exists between persons who carry on
business in common with a view to making a profit (excludes certain relationships which aren’t a part of
the Act).
S3: Bodies excluded from scope of this Act for the purpose of this Act, the following bodies shall not be
considered as a partnership— (a) a limited liability partnership (regulated by a different Act- Limited
Liability Partnership Act (No 42 of 2011)); (b) a corporate body; or (c) a foreign limited partnership.
Partnerships are unincorporated business forms and therefore do not enjoy all the attributes of a
corporate form.
James L.J definition in Smith v Anderson (pg 367 Principles of Commercial Law): use his definition as a
general conceptual definition (partnership composed of definite individuals, bound together by contract,
to continue for some joint objective either of pleasure or for a limited time), and use the statutory one is
more specific and pertains to Partnerships itself.
3 elements for a business to qualify as a partnership:
1) Business- includes any trade, profession or occupation (a broad list that’s not exhaustive)
2) Carried out in Common- mutuality: parties (numbers are implicated) must be willing to carry out the
business jointly. Previously the limit was 20+ and beyond this, persons must incorporate the entity.
s389 CA- not limited under new company law.
Cf. Fort Hall Bakery Suppy Co v Wangoe (1959)- an association comprising of 45 people held to be illegal
because it wasn’t incorporated.
S7(3) & 17(1): partners are the firm’s and each other’s agents for purposes of carrying out the p/ship
business. (More on this later)
This has implications on liability of partners. (More on this later)
S17(2): Partner’s authority can be withdrawn/limited.
3) Profit- it’s not necessary that profit be actually made; so long as the aim is to be profitable.
Provision is meant to exclude charitable associations.
Object must be lawful.
Cf. Foster v Driscoll: a p/ship is illegal if formed with a view to profiting from criminal activity or
making profits out of a business which is contrary to public policy, or which cannot be carried on
legally.
Means that the court will not recognise as a true partnership, any relationship formed for illegal
activity.
Firm Name: a p/ship can carry out its business under any firm name. Registration is regulated by the
Registration of Business Names Act (CAP 499) (RBNA)
Firm: means an unincorporated body of one/two + individuals, one/two + corporations, who have entered
into partnership with one another with a view to carrying on business for profits s.2(1) RBNA.
Business Name: means the name/style under which the business is carried on, whether in partnership or
otherwise (S2(1) RBNA)
Recall: Even a sole proprietor can register a business name (not a firm name) under RBNA.
Registerable name: s4 RBNA- firms, individuals and corporations can be registered.
S10 RBNA: Failure to register is a criminal offence
S25: Additional penalties
Questions whether a partnership exists: situations which appear to be p/ships but have been excluded
There are some activities which could be termed as partnership but for avoidance of doubt, have been
expressly excluded in Schedule 1 of PA: p372-374 Laibuta.
 Co-ownership of property, doesn’t, of itself, give rise to a p/ship.
But person may be partners w/o joint ownership of property used in p/ship business.
 Joint Venture: separate entities where they decide that sold/purchased goods are brought into
common stock.
 Share of gross returns, profits & losses
 Loans serviced by a share of profits
 Agreement to pay a lender a rate of interest that varies with profits
 Employees who share profits
 Annuity payment to beneficiary of dead partner
 Payment of annuity/profit as consideration for sale of goodwill by former partner.
 S/holders in a company are not partners, though they share profits.
15.06.2016
THE LAW OF PARTNERSHIPS
How do you create a partnership? There is no legally prescribed way for creating a partnership
relationship. That is why you can do it either through conduct, through express agreement/contract.
Agreement: written document, or oral.
(http://kenyalaw.org/caselaw/cases/view/73669) Ruth Winnie Okoth (Applicant/Plaintiff) v. Hellen
Adhiambo Oluoch (Defendant) [2010] eKLR: High Court: The applicant seeks from the court an injunction
restraining the Defendant whether by herself, her agents, associates, employees, representatives, assigns
or anybody acting on her behalf or otherwise from removing from the place of business of the partnership
known as Dirtless Services or transferring in any manner computers, equipment, resources records or
clients belonging to the said partnership to a different entity or otherwise pending the determination of
this suit.

Ruth & Hellen entered into a partnership agreement on 20 th February, 2008, by which they agreed to carry
on business as partners. They operated smoothly until July, 2010, when the Plaintiff discovered that the
Defendant was running the Partnership in breach of both the Agreement and her fiduciary duties.
Moreover, the Defendant had gone ahead to incorporate a company by the name of “Dirtless Enterprises
Ltd.” and to transfer the clientele of the Partnership to the newly registered Company.  Furthermore, she
had gone on to use the name of the firm to outsource for business the proceeds of which she claims to be
her own and not those of the partnership.
In her response Ms Otieno for the Respondent argued that the parties had agreed to carry out business as
Dirtless Services and not as Dirtless Enterprises. She submitted that the Defendant was not a party to
Dirtless Enterprises and that she denies signing the partnership Agreement which is not even dated. She
further submitted that there was nothing in the agreement pointing at Dirtless Enterprises and that the
Respondent was not a director in the company. She also submitted that the Partnership was not registered
and could not therefore be implemented.

Legal rule that the court took: a partnership agreement need not be in writing and can be orally made.
Holding out/Estoppel (conduct): contribution of money/resources (becomes a partner in fact),
representing to the world that he is a partner.
Where there is a partnership relationship or not is a question of mixed law and facts. Cf. Kinoti v Kibanga.
 (http://kenyalaw.org/caselaw/cases/view/93259) J K Kinoti v. G J Kibanga [2013] eKLR: they were
employees of a company, and decided to join hands to provide supplies to their employer. They were very
careful in creating their partnership because of the important matter of job security. Kinoti continued
working for the employer in Meru, while Kibanga left to register the business in Nairobi. The business was
to be set up in Meru. Kibanga registered it under the RBNA as a sole proprietorship instead of a
partnership. Kinoti was doing the leg work to set up the business: looked for a store, paid rent, set up
shelves, received the 1st consignment, used his company car to transport goods, and after he left he took
the company car in lieu of his termination dues, set up other stores.

Things went south when they tried to open a Bank account & Kinoti realised his name wasn’t on the
registered certificate, Kibanga’s defence was he was trying to protect Kinoti and not threaten his job
security, and the employer may not have given the consignment to the business. However, Kibanga put
Kinoti’s name as a signatory, and the matter is forgotten. Kinoti then discovers that Kibanga has a separate
business account and proceeds of the business are going in that. Kinoti has not been withdrawing a salary.
The High Court characterised the relationship as an agency/principle relationship.
CoA agreed with the High Court decision, but they cited the Rule of Law clearly. The Courts gave undue
importance to the RBNA Certificate- when in reality it is simply a document for the creation of the business
and trademarking the name, and it has nothing to do with the company creators. I.E. A birth certificate that
only states one parent, doesn’t negate the presence/existence of the other parent.
1) Creation of Agreement
Written/Oral
Can be evidenced by:

 Deed (delivered and executed under seal) or Articles under Seal

 Agreement (executed under hand).
 Unsigned documents/memorandum drafted by one partner and acted on by others
 Informal heads of agreement initiated by the partners and intended to form instructions for a
formal document.
 Oral evidence
 Mode of dealing adopted by partners
In practice though, many partnership agreements are in written form. The relationship will be governed by
the Agreement and/or the Partnership Act (Default Rule)
Common terms in a Deed/Articles/Agreement pg. 376 Laibuta
Additions to those: termination clauses, exist strategy clause, duties and obligation clauses, management
clause, arbitration/mediation clause, penalties for failing to fulfil duties /obligations.
Default Rule: Partnership Act
Defn: s2(1): a rule that applies in relation to a p/ship, if the rule is not dealt with in the partnership
agreement.
S6: When the default rule applies
(1) Where a default rule applies in relation to a partnership, it shall be treated as a term of the p/ship
agreement.
(2) The application of a default rule in relation to a partnership may be modified or excluded:
(a) In accordance with the terms of the partnership agreement or;
(b) With the agreement of all the partners.
DR says 50/50 regardless of capital contribution of partners. Where partners want to distribute profits
differently, it needs to be in some form of agreement.
2) Doctrine of Holding Out/Estoppel
Happens when a person, in the absence of K, represents himself or knowingly allows himself to be
represented as a partner will be deemed to be a partner: Arthur Corrie v Dennis
The representation may be expressed (by word/writing) or by conduct.
The person will be estopped where: a representation has been made, that has been relied upon to the
party’s detriment.
Representation can be communicated by: (para 22 Halsbury’s)
The apparent partner: will be liable even if he doesn’t know that the representation has been
communicated to a 3rd party who has acted on it.
By a 3rd party: must’ve been made with apparent partner’s knowledge/assent.
The apparent partner will be liable (as if he were a partner) if a 3 rd party is induced to extend credit
to/enter into Ks with the firm.
Basis of liability is the doctrine of estoppel.
BUT liability doesn’t extend to Tort.
Persons often caught by doctrine: Employees (e.g. law firm clerks- Peacock v Peacock), Retired partners
who fail to give proper notice.
But: representation that a person is willing/intends to become a partner is not sufficient c.f. Bourne v
Freeth.
Capacity: governed by common law of contract.
Rule re: minors (HLB para 28) Yes, but they can get the benefits of the partnership, but cannot hold up
liabilities and obligations while in their infancy. Repudiate- once they reach the age of majority, they can
ratify or nullify their participation in such agreements. If a minor misrepresents himself as an adult, then he
is estopped and is liable regardless of his actual age.
Rule re: persons of unsound mind: knowledge of insanity must be present for one to avoid a contract. The
insane person must be adjudicated by a court stating that he is of unsound mind. Other rules same as
Contract: if a person knowingly enters into a contract with an insane person it’s valid.
Rule re: Companies & other Corporations (can be a partner if: (a) authorized by its MEMARTS, (b)
membership does not violate law re professional qualification).
Illegality of P/Ships: can occur by virtue of statute or common law e.g.

 P/ship in the profits of a crime

 P/s in a business which is contrary to public policy e.g. prostitution or which cannot be legally
carried out.
 If one partner is unlicensed/unqualified
 Formed to distort/restrict competition (null/void)
 If professional rules forbid P/ships e/g/ for barristers.
Consequences: a p/ship is automatically dissolved when it becomes illegal.
Partner’s knowledge of illegality is irrelevant.
Effect: no legal recognition of p/ships, contracts not enforceable; damages cannot be recovered for breach
but

 Court will enforce rights of innocent parties.

 A partially legal p/ship will be enforced in part (“Blue pencil” test).
Nature of a P/ship firm:
GP + LP not a distinct legal person, but under s7(2) A p/ship shall be capable of suing and being sued in its
own name, entering into contracts and owning/holding property in its own name, and subject to the p/ship
being changed- providing continuity for the p/ship business despite a change in the partners.
LLP is however a body corporate with separate legal personality.
S8(1) a p/ship firm has unlimited capacity. I.e. no restrictions are placed on its operations. It can do
anything any other legal person (natural/incorporated) can do. Doctrine of ultra-vires doesn’t apply to it.
S9 but is incapable of committing a criminal offence unless expressly provided for under the law. (See
Halsbury’s para 2 for UK’s example of a p/ship’s criminal liability).
Carrying out the p/ships business
S7(1): each partner under a p/ship shall be responsible for carrying out the business of the p/ships.
S7(3): each partner is an agent of the p/ship for the purpose of the business of the p/ships.
This means that every partner, if acting within the ordinary course of the p/ship business has power to
bind the firm and his fellow partners unless:
S17: the partner has no authority and the 3rd parties with whom he is dealing either: (1) know that he has
no authority or (2) doesn’t know or believe him to be a partner. C.f. Lal v Bush Mills: the test for the
ordinary course of business is whether the act or omission done was necessary to carry on the partnership
business in the ordinary course or the usual way.
22.06.2016
General Partnerships: Relations between Partners & 3rd Parties
Unincorporated entity = Partnership firm
Not a distinct legal person, but under s7(2) it is capable of suing and being sued, entering into contracts
and holding/owning property, and continuity (perpetual succession) is provided despite change in partners
based on the p/ship agreement. The default rule applies if express provision is not made in the P/ship
agreement. The default rules is the Partnership Act + other relevant succession laws which mean that the
firm is automatically dissolved on the death of a partner. Continuity ends when there is winding up of the
firm.
S8(1)- p/ship has unlimited capacity (no restriction placed on its operations, and it can do anything any
other legal person can do). Doctrine of ultra vires doesn’t apply.
S9- p/ship is incapable of committing a criminal offence unless expressly provided for by law.
LLP (exception) = incorporated entity
Under s7 each partner is responsible for the business of the p/ships (7(1)), and each partner is an agent of
the p/ship for the purpose of the business of the p/ship s7(3): Central Motors v PA it was held that by
reason of the agency which exists between partners, a cheque signed by one partner, below the printed
name of the firm, was sufficient to bind the firm, notwithstanding that the firm's bank mandate required
both partners to sign each cheque; (obiter) but that, where such agency does not exist, the bank must
honour the mandate that it has with its customer.
S17 - This means that every partner, if acting within the ordinary course of the p/ship business, has power
to bind the firm and his fellow partners, unless; the partner has no authority and the 3rd parties with whom
he is dealing know: (1) know that he has no authority; (2) doesn’t know or believe him to be a partner. Cf
Lal v Bush Mills (FN 633)- managing partner pledged firm’s credit for provision of supplies to the firm’s
employees; held to be in the usual course of business of the firm (a saw mill business).
Upshot of s7 & s17
All partners are collectively bound by the act/omissions of each other so long as the acts/omissions are
within the scope of their actual/apparent authority. Cf Marcy Munjiru Waiguru v. National Bank of Kenya
Limited [2011]: The issue is whether or not one is liable for the liabilities incurred by one’s partner which
one is unaware of. Because it is an unincorporated company the law views a partnership as being one and
the same as its owners. One of the major characteristics of a partnership is each partner’s personal liability
for any legal actions and debts of the partnership.
Applicable conditions (Laibuta pg 370, Halsbury para 39):
i. Act must be in relations to the p/ship bz; not the partner’s personal business.
ii. Must be in the usual course of business in the usual way. “Usual” determined by nature of
business.
iii. Act must’ve been done by a partner in his capacity as a partner.
Limitations on authority must be communicated to 3rd parties, this cannot be a private affair.
1) Notice to any partner = notice to the firm.
2) LP is bound by acts of (any) GP (even apparent GP).
S20(1): partner needs express authority to execute/sign deeds. (Read para 40 onwards of Halsbury)
If it has been agreed between the partners that any restriction is to be placed on the power of any one or
more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with
respect to persons having notice of the agreement, but 3rd party must have notice about restriction.

An agreement by one partner to transact business in an unusual way does not bind his partners who have
not authorised and have no notice of that agreement.

A partner cannot delegate his authority without the consent, whether express or implied, of his partners.
Acts prima facie within his implied authority do not bind him or his firm if the person he deals with knows
he has no such authority.

“Covenant not to sue”- a legit way of avoiding litigation and perhaps either settling or using other methods
of alternate dispute resolution to sort out the matter. You can also go to court and ask the court to render
that clause void and use contract law doctrines to try and get your remedies.
Implied Authority re money matters
In a trading firm, partners have implied authority to draw all negotiable instruments
Mercy v NBK: Isabella and Mercy started a day care business. Point- Any Act which is performed by a
partner who is duly authorised- those transactions can be binding on the firm + the other actors/partners.
If actions are not authorised- they have no capacity to bind the firm. If the partner is acting in his
individual, personal capacity- co-partners + firm are not bound.
Ratification & Acquiescence
Ratification: can be done if 1 partner acts in excess of/without authority. The general principles regarding
ratification apply.
Acquiescence: if the innocent partner learns of the unauthorised transactions but does nothing about it,
can also be bound cf. doctrine of laches/lapse of time. The firm can be estopped to deny the transaction
because they’ve done nothing after a reasonable time, and are therefore bound by the transaction.
Liability for wrongful acts
Contract: Joint liability
Tort: Joint and Several liability (except in fraud cases)

 The firm is liable to the same extent as the partner tortfeasor acting within the scope of his
authority.
 S21: Liability for torts: the firm is liable where:
Partner was acting in the ordinary course of business, or was duly authorised.
Trusteeship: if an individual partner is a trustee, his liability and obligations will not be borne by the firm,
but if the firm is a trustee, then liability is joint & several.
Trespass: a partner will not be liable for the trespass of another unless committed with the innocent
partner’s knowledge or if subsequently ratified.
Fraud: only the fraudulent partner will be liable. Firm cannot acquire property in goods fraudulently
acquired by 1 partner.
Right of contribution (s13(4))
Enjoyed by a partner who has paid more than his share of the firm’s debt/obligation.
Usually available in J&S form of liability.
Can pursue co-partners.
Rights of assignment of debt/securities: facilitates pursuit of co-partners.
Firm liability
They’re liable for acts/omissions of partners which injure 3 rd parties, if the partner was- acting in the
ordinary course of business, or was duly authorised (s21).
General partners are personally liable (J&S) for the firm’s debts & liability where (s22):

 There is a judgment decree against the firm made in the same/ earlier proceedings or there is a
court order ordering the firm to pay up.
But the partner is not personally liable for a firm debt owed to a co-partner/retired partner if the p/ship
agreement says so (s22(3)).
Non-partners can also be liable by “holding out” (s25). (only for contractual liability, not tort)
Secondary nature of a Partner’s liability
The firm is primarily liable for its debts/obligations s21
The partner’s liability is contingent and thus matures only if the firm is unable to pay.
A partner cannot be held personally liable for firm’s debt/obligation in the absence of court
order/jt/decree s23
Default rules: S10-S55 PA 2012
06.07.2016
Duration of Liability
Partner is only liable for obligations occurred when he was partner; not before he was a partner, retired
partner liable for debts accrued while he was a partner, and after he retires (unless doctrine of
estoppel/holding out applies) Halsbury para 73.
UNLESS DECIDED OTHERWISE.
Actual notice of retirement must be given to 3rd parties or by third parties who have dealt with that
partner.
Constructive notice to everyone else.
No notice required if partner dies cf. Vulliamy v Nobel
Retired partner can however, be discharged from old debt/obligations by a tri-partite agreement
(Novation) between himself, remaining partners and all creditors.
An agreement made between the partners inter se, or with some creditors is not sufficient.
Legal Proceedings- Halsb para 78
Suing:
All the partners can sue on a contract made in the firm’s name.
All partners suing on a K made by one of them on behalf of the firm.
One partner suing on a K made by him alone but for the benefit of the firm.
Firm can sue in its own name cf. s 7(2)(a) PA.
Suits against the firm:
Partners can be sued individually (all must be joined to the suit) or;
Sue the firm.
S24 (defence by partners)
Execution:
Judgement against a firm is in effect a judgement against all the partners (Since GP liability is unlimited).
Jt obtained against a partner in respect of a personal debt cannot be executed against p/ship property.
BUT: the judgment debtor’s interest (share) in the p/ship can be charged/attached with interest, but
partnership property cannot be interfered with for a separate partnership debt cf. Halsb para 94-97. This
means that any profit/income coming from the share will go to the relevant creditor(s), done by court
order.
The partners or partner of a member of a firm whose interest has been charged are at liberty at any time
to redeem it, or, in the case of a sale being directed by the court, to purchase it, or they may dissolve the
partnership.

Relationship between Partners Inter Se (to mean matters between themselves)

Governed by the p/ship agreement and or PA (Default rule)
The agreement does not have to be in writing unless a statute says it must be in writing….otherwise a
contract does not have a set requirement of form unless it is a contract affected by statutes of fraud.
Even if the agreement is in writing it doesn’t have to take any particular form.
Agreement or contract can be made under many forms including a deed, among other things.
Reqs of a deed:
Must be sealed
Agreement’s on the other hand are executed under hand
The agreement addresses many issues including:

 Nature of business
 Capital and property of the firm and the contributions made by each partner
 Rights & Remedies available to the partners against each other, and against others.
 Etc.
Rights & Duties of partners in the absence of P/ship agreement. PA:

 S12- equal sharing of capital & profit, to contribute equally towards losses.
 S13(1)- No remuneration as partner but can be remunerated under a K of service. E.g. a salaried
partner or managing partner. Because Partners are not employees under the general rule. They are
instead investors….meaning they aren’t allowed to take money under salaries but instead by equal
sharing of profit.
It is not illegal to remunerate them though as long as it is provided in the partnership agreement
 S13(4)…. Right to contribution. Why? Equity, fairness, warding off of unjust enrichment
 S13(1) capital contribution
 S13(2)- right of indemnity re expenses/liability incurred in the ord. course of business.
(reimbursement from the firm- which is different from the right of contribution owed by a partner
to his co-partners when he’s paid out more than his fair share- asking the co-partner to pay as well).
 S13(3) sheds light on the previous sub section. The one who contributes more somehow loans the
money to the other partners vis a vis the excess and the contributor will be allowed to gain interest
of 3 per cent from that loan.
 S14(2)- No interest on capital contributions.
 S14(3)- But where a partner’s contribution exceeds the agreed amount, he is entitled to interest
(3% Per Annum).
 The additional amount is treated as a loan to the firm.
 S15(1)- right to participate in management of the firm (only GPs). Even if a GP is not categorised as
a Managing partner- GP still has capacity to bind the firm (GP is an agent of the firm whether
they’re a managing partner or not!) unless the firm has withdrawn authority from one or more GPs
AND 3rd parties also need to be notified that the GP has limited or no authority.
 S26(1) all partners must consent to introduction of a new partner.
 S15(2)- dispute resolution re ordinary matters- majority decision.
  S15(3)- dispute resolution re extra-ordinary matters- unanimous decision
Issues dealing with suing/being sued = ordinary (s15(4)), s15(2), (3) & (4)) cannot be varied by
agreement.
 S16- Duty to keep & right to inspect p/ship books of accounts.
 S10(1) Duty of good faith owed by each partner to the firm and to their core/fellow partners.
(vertical duty of good faith ie the firm and the partners) Duty of good faith is a legal/ equitable/
common law doctrine. Encompasses the duty to inform on all matters (all material information)
 S10(2)- the duty requires:
 Information re firm matters.
 No secret profits cf. Halsb para 106
 No conflict of interest cf. Halsb para 107
 BASED ON DISCLOSURE! IF DISCLOSURE HAS HAPPENED- THEN THE PARTIES WILL NOT BE HELD
LIABLE.
 Remedy for someone who was successfully sued for secret profit(includes and also veres off to
catch profits made or benefits derived without the consent of the other parties using the name of
the partnership etc)/conflict of interest = remedy is to return the accounts/profits back to the firm.
 S10(3)- this duty cannot be waived(duty of good faith can not be renegotiated). COMING IN
THE TEST *Cannot be tinkered with like all the other default rules*
 S10(4)- duty continues, even after break-up, during winding up, and terminates only upon
dissolution.
 S11(1)- applies even before formation of p/ship- to prospective partners
 S11(2)- owed by existing partners to prospective partners.
 S11(3)- owed by prospective partners to existing ones.
 S11(4)- duty may be waived wholly or in part.
Other statutory provisions
1) Partnership Property
Defn s2 “Property to which the partnership is beneficially entitled” whether or not the property is held in
the partnership name.
S18- Rules for determining p/ship property.
S18(1)- All rights and interest in the property acquired on behalf of the partnership or for the purpose and
in the course of business of the partnership, and acquired on behalf of the partnership, is partnership
property.
S18(2) Property which is held in the name of the partners and which is— (a) acquired on behalf of the
partnership; or (b) contributed to the partnership as capital, is held in trust for the partnership by the
partner who acquired the property or contributed the capital.
S19- land acquired out of p/ship profits.
2) Partner’s share in a partnership
Cf Halsb Para 121 for definition and attendant rules.
A partner's share is his proportion of the joint assets after their liquidation and after payment and
discharge of the joint debts and liabilities, however this figure is constantly changing.

3) Death & Bankruptcy

IN THE ABSENCE OF A CONTRARY AGREEMENT, death of a partner in a GP automatically dissolve the
p/ship.
Bankruptcy- doesn’t automatically dissolve the p/ship firm, but it gives the other p/ships a ground to
petition the court for a dissolution order cf. Official Receiver v Aggarwal (pg 377; FN 657 Laibuta)
A p/ship agreement providing for continuation of business in spite of death is thus advisable.
The agreement will also provide for treatment of the dead partner’s interest in the firm.
Rule- dead partner’s beneficiaries have no right to claim upon interest in partnership.
Whole p/ship interest accrues to the surviving partner (joint ownership(?))
The beneficiary’s interest is limited to:
An account of the deceased partner’s interest/property, its collection & application
The deceased’s share of profit, if any.
To participate in the distribution of surplus assets (if any) after winding up.
Dead/B of a partner relieves him/his estate from liability for subsequent debt/obligations.
Rationale: death/B terminates all forms of agency- surviving p/ner can no longer bind the dead partner in
agency.
A bankrupt partner ceases to be a partner. The court’s declaration of bankruptcy serves as a constructive
notice to 3rd parties.
Liability is for contemporary debts/obligations.
Dead/B partner’s estate will remain liable for debts incurred before death.
A new firm is borne- a successor firm.
4) Ceasing to be a partner
S27- by death, expulsion, dissolution, removal by court order, bankruptcy or resignation.
i) Resignation- S28- 3 months’ notice by retiring partner to others.
If there are 3 + partners, any other partners can also resign, within the 3 months’ notice period,
with effect from the date the 3 months’ notice takes effect, but must give a 2 weeks’ notice.
ii) Expulsion- s29 (without a court order):
By majority partners where:
There’s a court order s44 or;
The expelled partner’s stake is attached in execution of a debt which is not a partnership debt.
“For cause” & with utmost good faith.
3 months’ notice required (s29(2))
Expulsion notice shall not take effect if court order is revoked or attachment order is withdrawn
(s29(3)).
NB- An expelled/retired partner is entitled to his share of the p/ship assets/value (s30)
Expelled partner continues to be liable for debt/obligation incurred while he was partner but
can be released by novation (S31).
Limitations of liability: 1 year after retirement; notice of retirement given- firm continues to use
retired partner’s name- (S33)
iii) Assignment: s34 (cf. Halsb para 124)
 Not included in list under s27.
Existing partner can assign his share, but assignee will not be entitled to:
Take part in management and inspect records.
Assignee is however entitled to share of assignor’s profits.
An assignee can become partner/replace assignor with consent
iv) Removal by court order (s44)- court has the power to make an order to remove a partner
(applicant or another) or breaking up p/ships (s44(1))
S44(2)- factors to consider
S45- effective date can be back-tracked.
S47- court will make appropriate orders to restore partner’s position esp where date has been
back-dated.
S48- where removal is made on the grounds of fraud, misrepresentation or disclosure, the
innocent parties are entitled to indemnity by guilty party for any loss suffered as a result
thereof.
S50- court may give interim orders prohibiting/limiting participation in p/ship business.
S35 PA: dissolution/break up/termination/winding up of a partnership relationship.
Take the “break up” as a factual term rather than a legal term- a factual termination of the partnership
may not be sufficient to end the partnership and the partners may have to go to court to go through the
legal process in order to terminate/dissolve the partnership.
Provided for under s35-39 and ss44(1)(c)
If there’s no fixed term in the partnership- it becomes a partnership at will. Lapse of the term intended to
end the partnership, but if the partners continue trading regardless- the partnership becomes a successor
firm (a new firm). The successor firm is basically the same as an old one.
Winding up- is a process of slowing down operations of the partnership firm and bringing them to an end.
Partner authority to bind the firm continues until legal dissolution. Can be terminated by death (s37(3))
S37- authority of a person who ceases to be a partner involuntarily does not continue (until dissolution);
but the partner is to be treated as partner for other purposes (s37(1))
S 38- notice be given re departure of partner/break up to be given.
S39- successor partnership: formed on/after break-up partner from old firm- can pass good title to buyers
for value without notice.
Difference b/w dissolution and winding up?
The terms are used differently in partnership compared to company law.
Partnership law- either de facto or de jure dissolution comes first either as a matter of fact (sufficient break
up) or a matter of law (a court order dissolving the partnership due to a sufficient break-up).
Company law- first put in a winding-up process through a court order, and then dissolution occurs when
the winding up process comes to an end (when the name of the company is struck off the Register).
Forms of dissolution not defined/ provided for by law- but by fact
Dissolution can either be technical (based on what the law says) i.e. event of death of a partner- and the
partnership agreement doesn’t have a succession clause- the death of a partner will automatically dissolve
the firm. However, if the remaining partner continues trading- the new firm becomes a successor firm and
continues. (s42- if these elements are present in a particular set of circumstances then they MAY lead to a
dissolution).
Alex Stewart Ndambo v. Elijah Mogere Ombworo [2008] Eklr
(http://kenyalaw.org/caselaw/cases/view/53263)- A partnership sought a dissolution order for partnership
b/w him and E. Court held it should be dissolved because there was a lack of trust (E had hidden some
accounts) & formed another business that was similar to his partnership (conflict of interest & secret
profit).

Who winds up a company? Liquidator, receiver, manager. Liquidation (converting non-cash assets into
cash) happens during the process of winding up, if necessary.

Dissolution of a Partnership firm (GP & LP)

Summary of ways of dissolving a partnership- Laibuta pg 386-387

Rules under s41- order of distributing partnership money/assets upon dissolution. (rules + order of priority)

41(c)- 3% interest on the capital contributed during the course of business (not including the initial capital
contribution towards the partnership) which is owed back to the partner.

Recovery from co-partners in case of fraud/misrep- s 48

Rules for settling accounts b/w the partners p.389 Laibuta (expresses rules under s41)

Refund of joining premium (Halsbury)

Definition s54(3)

S54 (substantive provisions)

“Goodwill” partnership reputation in the market which will be taken into consideration when winding up
(can be exchanged for cash/money).

Limited Partnerships

Origin in Italy (not UK) during the middle ages.

Developed by the nobility- it was disgraceful/unlawful for them to engage directly in trade.
The inhibition was circumvented by investing in commercial enterprises indirectly, through trusted
merchants.
The understanding was that the nobility, though not named owners, would receive a share of profits w/o
accepting any liability for losses beyond the amount of their investment.
1907: first LP Act passed in England.
In Kenya, formerly regulated by the LP Act (Cap 30), now repealed, currently provided for under the PA. LP
= sleeping/dormant partner and are simply there as the investors.
Nature of LP
S56: limited partnership has to have GP(s) AND LP(s) (s56(1)(a)). LPS can expose themselves to unlimited
liability/deprive themselves of the privileges of a ltd partner. (s56(1)(b))
Cf. Definitions are in Halsb para 218.
LP doesn’t display the normal characteristics of a GP:
  The unltd nature of every partner’s liability.
 Implied authority of every partner to bind the firm & co partners.
 The right, subject to the p/ship agreement to take part in management.
**** The firm always needs to be sued first. Once a court judgement is granted stating that the firm is
unable to pay and then the partners themselves can be sued****
Formation
Unlike GPs, LPs must be registered. So formation is by registration.
Registration is at 2 levels:
i. Registration of the LP firm s66(2), 68, 69 (upfront); and s70 & 5th Schedule (changes).
ii. Registration of individual LPs- s57(1)
Application & statement: to be lodged with Registrar S68(1) S2
Particulars of the statement- s68(1)
Signing of statement s68(2)
Registrar to only register if s65 has been complied with
S65 requirements?
Registration certificate & contents- s69(1)(b); 69(2)
Failure to register is an offence. S66(3)
S73 The Registration certificate is conclusive evidence of fact of registration and other entries made
therein.
Changes must be notified to registrar and also LP related one’s advertised in the Kenya Gazette- s70 & 5th
Schedule.
Can defects in formality be cured by internal contracts? No. between the firm and the 3 rd party the relevant
penalties apply. However, internally- contract law works (p/ship agreement) i.e. if the LP is not registered,
the court will hold it as a GP, however the internal agreement stating one partner is an LP and the other is
a GP- they can sue each other under Contract Law.
S57 one becomes an LP when he is registered as such.
S57(2) one ceases to be a limited partner if…
Limited Partnership
Must be registered: 2 mandatory registration requirements: Register the entity as an LP and register each
of the limited partners. If both/either these things are not done- the partnership will be treated as a GP in
the eyes of the law. Attempt/instructions to register- but until the registration certificate is issued- the
entity doesn’t come into existence at law as an LP.
S58 PA: GP’s have the task of managing the LP firm- LPs are not allowed in management even if there’s an
internal agreement (exceptions in Schedule 4). If LPs do- they’re exposed to liability (S58(2)).
Macro- big picture management (which LPs are allowed to do), Micro- finer details e.g. daily running (LPs
are not allowed to enter this realm of management). Documentation regarding anything to do with the
firm is also to be signed by GPs.
LPs are liable- limited to the amount they contributed to the business at the time of joining the partnership
(like shareholders). S56(3)
Limited Liability is lost if:
LP takes part in Management
S59- if LP withdraws his capital contribution (wholly or in part)- because he is a financier, and the business
would probably suffer if that capital is taken away. So to protect the commitments already made- LP will be
held fully liable for losses incurred by anyone. *exception being if LP assigns his capital/loan to another
party to replace him as LP*
Capital contribution can be cash or property. (S59(5)).
Distinguishing b/w GP & LP: formation formalities, liability and management.
Application of PA to LPs
S60: The whole Act applies to LPs, save as modified by s62, 63, & 64.
S62:
(1) Admission of new partners to LP firm- only GP consent required.
(2) LP may not be expelled under s29.
(3) LP’s assignee can become partner if GPs agree or if P/Agreement says so
S63: GPs to oversee winding up.
S64: LP to maintain a registered office (not required for GPs).
S61: Dispute resolution.
Ordinary matters: to be decided by GP or majority of GPs.
Extra-ordinary matters: GP (if only 1) or unanimously
Authorising LP to act on behalf of the firm is an extra-ordinary matter.
Note: Death/bankruptcy of an LP doesn’t automatically dissolve the firm.
Note: LP has no right to issue notice to dissolve the firm.
LIMITED LIABILITY PARTNERSHIP
2011 LLP ACT
Definition: "limited liability partnership" means a limited liability partnership registered under section 11 or
a foreign limited liability partnership registered under section 45. (s2 LLPA)
Halsb para 233: a body corporate with legal personality separate from that of its members which is formed
by being incorporated under the LLPA.
Formation process (registration for Kenyan P/ships) vs incorporation (UK, corporation) cf. s6(1) & (2) LLPA.
LPA law was first passed in Texas (USA) in 1991.

 In the aftermath of the collapse of real estate/energy prices in the 1980s (phenomena culminated
in the late 90s/early 2000s with the Enron Scandal).
 Collapse led to massive bank failure followed by attempts to recover from the lawyers &
accountants (e.g. Arthur Andersen) who had advised banks.
  LLP lawyers were passed to shield innocent members of the partnership from liability.
LLPs were first introduced in the UK in 2000 (Jersey 1996).
Introduced in Kenya in 2012 (cap 30A/ Act No 42/2011).
Applicable law in Kenya: LLPA & PA where LLPA is silent (s8 LLPA).
LLPs v GPs (Salient Differences)
Separate legal entities from members: corporate personality/body.
Limitation of liability akin to companies.
Agency: GP is an agent of the firm & fellow partners, LLP is agent of the firm alone. LLP can only bind firm,
not fellow partners.
LLP has more formalities than GP.
LLP v Companies
LLP: no distinction b/w owners (shareholders) and managers (directors); distinction for companies.
No publicly available LLP Agreement; for companies MEMARTS are public documents.
LLP: taxed as a GP (single); company (double taxation).
Formation
Required formality: s16
Process: s17
Prepare and file a statement giving particulars under s17(2)
Statement to be signed by all partners (s17(2))
Registrar to prescribe/approve form- s17(3)
17(4) is not a mandatory requirement: verifying affidavit.
…
Firm Name:
S20: mandatory requirements re the firm name.
Must include LLP/ Limited Liability Partnership attached to the name.
Firm can’t use name that’s not registered (s20(2)).
RBNA must also be complied with.
Contravening this requirement = an offence = penalty- fine not exceeding 100,000/-
Restriction re names S21(1)
Reservation of names s21(2-3)
Registrar can require change of name s21(4)
Application to Registrar to require name change within 12 months of registration s22(7)
Failure to change name as required
Nature of LLPs
Provided for under s6- corporate body. Change in partners doesn’t affect its existence, rights, obligations
etc.
Capacity: s7- has capacity to be sued and to sue, own property & do anything else that any other corporate
body can do.
Membership: s9
Both natural and corporate persons (except trade unions) can be partners in an LLP.
Limitation of Liability: s10(1)- s10(6)
S26(1) - (2) – LLP must have at least 2 partners. 2-year grace period where membership falls to one- and a
second partner must be found within those two years, or else the lone LLP partner will be held liable
together with the LLP firm. And the LLP converts into a SP.
S11(1) - (2) - Power of Partner to Bind the Firm. Agency is vertical (binding only the firm), not horizontal
(can’t expose his co-partners to liability). But the firm is not liable where the Partner has no authority & the
3rd party knew this. A former partner is also treated as a partner in the absence of notice.