Partnership governance - Procedures under the Partnership Ac...

Learning Outcomes

This article outlines the key procedures that govern the creation, operation, and termination of ordinary partnerships under the Partnership Act 1890, including:

• The statutory definition of partnership and the consequences of the firm not having separate legal personality
• Default internal management rules (participation in management, voting, profit and loss sharing, access to books, indemnities, and interest on partner loans)
• Actual and apparent authority of partners and circumstances in which a partner’s act binds the firm
• Partner liability for debts, wrongful acts, and misapplication of property
• Incoming and outgoing partner liability and holding out
• Retirement and dissolution procedures
• The differing effects of actual and constructive notice to third parties
• Order of application of assets on winding up
• Variation of statutory defaults by partnership agreement (admission, expulsion, decision‑making, remuneration, and dispute management)
• Clauses requiring express provision (e.g. expulsion)

SQE1 Syllabus

For SQE1, you are required to understand partnership governance under the Partnership Act 1890, with a focus on the following syllabus points:

• The statutory definition and formation of partnerships under the Act
• The default rules for partnership management and decision-making
• The authority of partners to bind the firm and each other
• The liability of partners for debts and wrongful acts
• Procedures for retirement, expulsion, and dissolution of partnerships
• The effect of partnership agreements on statutory procedures
• Holding out, incoming and outgoing partners, and notice
• Application of assets on dissolution and the concept of partnership property
• Partners’ fiduciary obligations (ss. 28–30 PA 1890) and the duty of good faith

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Under the Partnership Act 1890, what is required for a partnership to exist?
2. How can a partner bind the firm in contract with a third party?
3. What is the default rule for sharing profits and losses among partners?
4. What steps must a retiring partner take to avoid liability for future partnership debts?
5. Can a partner be expelled from a partnership without an express agreement?

Introduction

The Partnership Act 1890 (PA 1890) provides the framework for internal governance and external liability of ordinary partnerships in England and Wales. It sets out default internal rules between partners (notably in ss. 24–25) and external rules governing relations with third parties (ss. 5–18). These apply unless varied by express or implied agreement. Understanding which rules are mandatory in effect against third parties (e.g. agency and holding out) and which are internal defaults that can be changed (e.g. remuneration or profit splits) is critical in practice.

Partnership Formation and Status

A partnership arises when two or more persons carry on a business in common with a view of profit (s. 1(1) PA 1890). There is no registration requirement. Whether a partnership exists is a question of fact assessed holistically, with guidance from s. 2 PA 1890 (e.g. sharing gross returns is not conclusive; receipt of a share of profits is prima facie evidence of partnership but not conclusive).

Key Term: partnership
A relationship between persons carrying on a business in common with a view of profit, as defined in s. 1(1) PA 1890.

The partnership has no separate legal personality. The partners collectively comprise the "firm" and the firm acts through partners.

Key Term: firm
The collective name for the partners in a partnership under the PA 1890.

Partners may be individuals or companies. The previous statutory cap on partner numbers no longer applies. Partnerships may trade under a business name; if not limited to the partners’ names, the Companies Act 2006 business name rules and disclosure requirements apply.

Key Term: partnership agreement
A written or oral agreement between partners that can modify or override the default rules of the PA 1890.

Unless varied, the PA 1890 provides the following internal default rules (chiefly s. 24, applied subject to s. 25):

• All partners share profits and, absent agreement to the contrary, contribute equally to losses of capital and otherwise (s. 24(1)).
• The firm must indemnify every partner in respect of payments and liabilities incurred in the ordinary and proper conduct of the business (s. 24(2)).
• A partner is entitled to 5% interest per annum on amounts advanced beyond agreed capital for partnership purposes, but no interest on capital contributed before profits are ascertained (s. 24(3)).
• All partners are entitled to participate in management (s. 24(5)).
• No partner is entitled to remuneration for acting in the partnership (s. 24(6)).
• Admission of a new partner requires unanimous consent (s. 24(7)).
• Ordinary business decisions are determined by majority; changes to the nature of the business require unanimity (s. 24(8)).
• Partnership books are to be kept at the principal place of business and be open to inspection by all partners (s. 24(9)).

In practice, well-drafted agreements commonly vary profit shares, remuneration, decision thresholds, retirement/expulsion, and dispute resolution. Variations can also arise by course of dealing. However, some external effects (e.g. s. 5 agency with third parties) cannot be contracted out as against third parties who act in good faith without notice of internal limitations.

Key Term: partnership property
Property originally brought into the firm or acquired on account of the firm or for the purposes and in the course of the partnership business (PA 1890, s. 20). Although the firm lacks separate legal personality, such property is treated as partnership assets to be applied in accordance with s. 44 on dissolution.

Worked Example 1.1

Three partners run a design business. Two want to expand into a new area. The third disagrees. Can the majority proceed?

Answer:
No. Changing the nature of the business requires unanimous consent under s. 24(8) PA 1890.

Authority of Partners

Each partner is an agent of the firm and the other partners for the purposes of the partnership business (s. 5 PA 1890). A partner can bind the firm in contract with third parties when acting within actual or apparent authority.

Key Term: actual authority
Authority expressly conferred by the partnership agreement or implied from the partners’ consent, delegation, or established course of dealing.

Key Term: apparent authority
Authority where a partner represents to a third party, by words or conduct, that they have authority, and the third party relies on that representation acting in good faith within the usual course of the firm’s business.

Apparent authority is assessed from the standpoint of a reasonable third party dealing with the partner. A helpful approach is to ask:

• Is the transaction of a kind related to the partnership business?
• Would a partner in that type of firm usually have authority to enter into such a transaction?
• Did the third party know the partner lacked actual authority or that the person was not a partner?
• Is the third party’s reliance in good faith?

If internal limitations exist (e.g. “no contracts over £10,000 without unanimous consent”), the firm will still be bound if the partner had apparent authority and the third party had no notice of the limitation. The partner may, however, be liable to co‑partners for breach of the internal mandate (breach of warranty of authority).

Key Term: holding out
Where a person represents, or knowingly allows themselves to be represented, as a partner, leading a third party to give credit to the firm on that basis (s. 14 PA 1890). The person may become liable as a partner to that third party.

Worked Example 1.2

A partner in a retail partnership signs a supply contract. The other partners object, claiming they did not authorise it. Is the firm bound?

Answer:
Yes, if the contract is within the usual business of the firm, the partner has apparent authority and the firm is bound.

Worked Example 1.3

A partner in a boutique architecture firm signs a five‑year lease for a large warehouse used for manufacturing furniture. The partnership agreement requires unanimous consent for leases. The landlord knew the firm designed buildings but did not know about the internal consent clause. Is the firm bound?

Answer:
Likely no. Taking a long‑term warehouse lease for manufacturing is not within the usual course of an architecture practice. Without actual authority and lacking apparent authority for this kind of transaction, the firm is not bound. The partner remains personally liable to the landlord if they purported to act with authority.

Liability of Partners

Partners are jointly liable for all debts and obligations of the firm incurred while they are partners (s. 9 PA 1890). For torts or wrongful application of money or property committed by a partner acting in the ordinary course of the firm’s business or with authority, partners are jointly and severally liable (ss. 10–12 PA 1890). A claimant may sue any or all partners; contribution may then be sought between partners.

Key Term: joint liability
Liability where partners are responsible together for the firm’s contractual debts incurred while partners.

Key Term: several liability
Liability where each defendant can be pursued for the full amount (notably for torts under ss. 10–12 PA 1890).

The firm is liable for a partner’s wrongful acts committed in the ordinary course of the firm’s business (s. 10), and for misapplication of money or property received in the course of business or under the firm’s authority (ss. 11–12).

Incoming and outgoing liability: an incoming partner is not liable for pre‑admission debts (s. 17(1)). A retiring partner remains liable for debts incurred while they were a partner (s. 17(2)) but can seek a release via novation with the creditor.

Key Term: novation
A new contract by which a creditor releases an original partner and accepts the reconstituted firm (or a new partner) as debtor for an existing obligation.

Key Term: indemnity
A contractual promise (usually in the retirement deed) by continuing partners to reimburse the retiring partner if they are called upon to meet an existing firm liability. It does not bind third‑party creditors.

Key Term: wrongful acts
Torts or other civil wrongs committed by a partner in the ordinary course of the firm’s business, for which the firm is liable under s. 10 PA 1890.

Worked Example 1.4

A partner negligently gives advice to a client, causing loss. Who is liable?

Answer:
The firm is liable for the partner's wrongful act if it was done in the ordinary course of business.

Worked Example 1.5

The firm’s website lists Erin as a partner for six months after she resigns. A new supplier, relying on the website, supplies goods on credit. Erin had asked the firm to remove her name, but no Gazette notice was placed. Is Erin liable to the supplier?

Answer:
Probably yes under holding out (s. 14). Erin knowingly allowed herself to be represented as a partner, and the supplier relied on that representation. Erin may have a claim against the firm for failing to update materials.

Procedures for Retirement and Expulsion

A partner may retire in accordance with the partnership agreement, or, if the partnership is at will, by giving notice to all other partners (s. 26 PA 1890). Notice can be effective immediately or from a specified date. There is no statutory right to expel a partner; expulsion is only possible if expressly agreed (s. 25 PA 1890) and must be exercised in good faith and in accordance with the express clause.

Key Term: partnership at will
A partnership with no fixed term and no agreement as to duration, which can be dissolved by any partner giving notice (s. 26).

Key Term: expulsion
Removal of a partner from the partnership, only permitted where the partnership agreement confers an express power and sets any required process or grounds.

On retirement, a partner remains liable for existing debts (s. 17(2)). To avoid liability for future debts, give:

• Actual notice to those who have previously dealt with the firm (s. 36(1)); and
• Constructive notice to others by advertisement in the Gazette (s. 36(2)).

Key Term: actual notice
Direct notification to those who have dealt with the firm, informing them that a partner has retired.

Key Term: constructive notice
Public notice (commonly in the London Gazette) of a partner’s retirement, deemed to notify persons who have not previously dealt with the firm.

The agreement should address settlement of the outgoing partner’s capital and current account, release of personal guarantees, and indemnities for legacy liabilities. A novation signed by the creditor is needed to fully release existing obligations; an indemnity alone does not bind creditors.

Partners owe fiduciary duties to each other, including to render accounts and full information (s. 28), to account for private profits derived without consent (s. 29), and not to compete without consent (s. 30). A breach may justify expulsion under an express clause or support dissolution by the court.

Worked Example 1.6

Priya retires from a café partnership on 30 June. She emails actual notice to all regular suppliers and places a Gazette notice on 5 July. On 10 July a new florist (who never dealt with the firm before) supplies flowers on credit. Is Priya liable?

Answer:
No. The florist had not previously dealt with the firm and the Gazette notice gave constructive notice. Priya remains liable only for debts incurred up to 30 June.

Dissolution and Winding Up

A partnership may be dissolved:

• By expiry of a fixed term or completion of a single venture (s. 32(a)–(b));
• By any partner giving notice in a partnership at will (s. 32(c) and s. 26);
• By death or bankruptcy of a partner (s. 33);
• By subsequent illegality of the business (s. 34);
• By court order on the grounds in s. 35, including permanent incapacity, prejudicial conduct, persistent breach of agreement, the business can only be carried on at a loss, or on the just and equitable ground.

On dissolution, partners’ authority is limited to acts necessary to wind up affairs and complete ongoing transactions (s. 38). The firm’s assets are applied in the following order (s. 44):

• Debts and liabilities owed to external creditors;
• Advances by partners (distinguished from capital) rateably;
• Return of capital to partners rateably;
• Any surplus divided in the profit‑sharing proportions.

Key Term: dissolution
The process by which a partnership is brought to an end and its affairs are wound up (including application of assets under s. 44 PA 1890).

Goodwill is a partnership asset, and the agreement should specify whether it is to be sold and the distribution of proceeds. Post‑dissolution restraints on trade are enforceable if reasonable and supported by the agreement. Partners continue to owe duties of good faith during winding up, including the duty to render accounts.

Worked Example 1.7

A three‑partner firm dissolves. External creditors are owed £60,000. Partner loans total £30,000 (£10,000 each). Capital accounts are A £20,000, B £20,000, C £10,000. Available assets total £110,000. How are assets applied?

Answer:
Pay £60,000 to external creditors; then £30,000 to partner loans (£10,000 each); remaining £20,000 is applied to return capital: A £20,000, B £20,000, C £10,000 are due, but only £20,000 remains, so capital is returned rateably (£8,000 A, £8,000 B, £4,000 C). No surplus remains.

Modifying Statutory Procedures by Agreement

Most internal default rules in the PA 1890 can be varied by agreement (s. 19). A comprehensive partnership agreement should address:

• Profit and loss sharing and drawings;
• Capital contributions, interest on capital and on advances, and current accounts;
• Management roles, decision‑making thresholds (majority vs unanimity), and dispute resolution;
• Admission of new partners and retirement (including notice, valuation, and payment terms);
• Expulsion (grounds and procedure) and suspension;
• Duties (including confidentiality, non‑compete, and conflict management);
• Remuneration for managing partners;
• Banking and borrowing authority limits;
• Valuation and sale of goodwill on retirement/dissolution;
• Insurance, accounts, and access to books;
• Variation mechanics and mediation/arbitration clauses.

External agency consequences cannot generally be overridden as against third parties dealing in good faith without notice. Limitations on a partner’s authority will only protect the firm externally if the third party knew the partner lacked authority.

Key Term: fiduciary duties
Core partner obligations to act in good faith between themselves, to render true accounts (s. 28), to account for secret profits (s. 29), and not to compete without consent (s. 30).

Exam Warning

The PA 1890 does not provide for expulsion of a partner unless expressly agreed. Attempting to expel a partner without such a provision is invalid.

Revision Tip

Always check for a written partnership agreement and any variations by course of dealing. Most internal statutory procedures can be modified by agreement; external liability to third parties turns on agency principles, not internal mandates. For outgoing partners, verify both actual notice to known counterparties and a Gazette advertisement.

Key Point Checklist

This article has covered the following key knowledge points:

• A partnership exists where persons carry on a business in common with a view of profit; the firm has no separate legal personality.
• Default internal rules (s. 24) govern profits/losses, indemnities, interest on advances, participation in management, decision‑making thresholds, remuneration, and access to books.
• Each partner is an agent of the firm; the firm is bound by acts within actual or apparent authority.
• Partners are jointly liable for contractual debts incurred while partners and jointly and severally liable for wrongful acts and misapplication of property committed in the ordinary course of business.
• Incoming partners are not liable for pre‑admission debts; outgoing partners remain liable for past debts and must give actual notice to prior counterparties and constructive notice (Gazette) to avoid liability for future debts.
• Holding out can impose liability on persons represented as partners to third parties who rely on that representation.
• Retirement in a partnership at will is by notice under s. 26; expulsion requires an express power.
• Dissolution arises by expiry, notice, death/bankruptcy, illegality, or court order; s. 44 sets the order for applying assets on winding up.
• Most internal statutory defaults can be modified by agreement (s. 19). External consequences (e.g. agency) cannot be excluded as against third parties without notice.
• Partners owe fiduciary duties to each other, including duties to account (s. 28–30) and to act in good faith.

Key Terms and Concepts

• partnership
• firm
• partnership agreement
• partnership property
• actual authority
• apparent authority
• holding out
• joint liability
• several liability
• wrongful acts
• novation
• indemnity
• partnership at will
• expulsion
• actual notice
• constructive notice
• dissolution
• fiduciary duties