The Law Commission

The Law Commission

and

The Scottish Law Commission

(LAW COM No 283)

(SCOT LAW COM No 192)

PARTNERSHIP LAW

Report on a Reference under Section 3(1)(e) of the Law

Commissions Act 1965

Presented to the Parliament of the United Kingdom by the Lord High Chancellor
by Command of Her Majesty

Laid before the Scottish Parliament by the Scottish Ministers

November 2003

Cm 6015

SE/2003/299 £    .    

The Law Commission and the Scottish Law Commission were set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Honourable Mr Justice Toulson, Chairman
Professor Hugh Beale QC
Mr Stuart Bridge
Professor Martin Partington CBE
Judge Alan Wilkie QC

The Chief Executive of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

The Scottish Law Commissioners are:

The Honourable Lord Eassie, Chairman
Professor Gerard Maher
Professor Kenneth G C Reid
Professor Joseph M Thomson
Mr Colin J Tyre QC

The Secretary of the Scottish Law Commission is Miss Jane L McLeod and its offices are at 140 Causewayside, Edinburgh EH9 1PR.

The terms of this report were agreed on 10 October 2003.

The text of this report is available on the Internet at:

http://www.lawcom.gov.uk

http://www.scotlawcom.gov.uk

CONTENTS

	PARAGRAPH
SECTION A: INTRODUCTORY (PARTS I – III)
PART I: INTRODUCTION
Partnership law reform in its context	1.1
The role of partnerships in the business world	1.1
The relationship of the general partnership to the limited partnership	1.5
The relationship of the general partnership to the limited liability partnership	1.8
Terms of reference	1.11
The relationship of partnership law reform to the Company Law Review	1.12
"Think small first"	1.13
The structure of the report	1.14
The consultation exercise	1.16
Acknowledgements	1.20
PART II: A SUMMARY OF THE CURRENT LAW
Introduction	2.1
A contractual relationship	2.2
Partnership and legal personality	2.5
Agency	2.10
Fiduciary duties	2.14
Management and financial rights	2.18
Partnership property	2.20
Duration of partnership	2.26
The effect of changes in membership of the firm on third parties	2.34
Partners' liability and a third party's access to information	2.40
Insolvency	2.42
PART III: OVERVIEW OF PROPOSED REFORMS
The principal aims of partnership law reform	3.1
Flexibility and informality	3.3
Continuity and independent personality	3.7
Encouraging continuity	3.7
Notice period and financial rights	3.10
Independent legal personality	3.12
Mutual trust and good faith	3.18
Clarity of concept	3.21
The 1890 Act as a "model"	3.21
Missing links	3.22
Partnership property	3.23
Contractual remedies	3.28
An accessible Code	3.30
Concepts in the draft Bill	3.32
Partnerships as a legal entity	3.32
The liability of partners	3.33
The partnership agreement	3.34
Default partnership rules	3.35
Other reforms	3.37
Solvent dissolution	3.37
Miscellaneous issues	3.39
Transitional provisions	3.40
Proposals which we are not taking forward	3.42
Limited partnerships	3.44
Special limited partnerships	3.46
Form and style of the draft Partnerships Bill	3.47
Matters not dealt with	3.49
Tax law	3.50
Insolvency	3.54
Consequential amendments	3.58
SECTION B: GENERAL PARTNERSHIPS (PARTS IV – XIV)
PART IV: THE DEFINITION OF PARTNERSHIP
Introduction	4.1
Issues arising out of the existing definition	4.3
The use of the expression "relation"	4.3
The need for agreement	4.4
Carrying on business with a view of profit	4.5
Who carries on the business?	4.7
Our provisional proposals and consultation	4.8
Partnership as an "association"	4.9
The need for agreement	4.10
When a partnership is formed	4.11
Who carries on the business?	4.12
The division of profits	4.13
The rationale for reform	4.14
The reform proposals	4.15
Who may be partners?	4.15
Definition of partnership	4.16
The need for agreement to constitute a partnership	4.18
The commencement of the partnership	4.21
Partners carrying on the business of the partnership	4.25
Partnership as a business vehicle	4.33
Division of profits	4.36
Who is a partner?	4.37
What are not partnerships?	4.40
A statement of a partnership's capacity	4.41
Criminal capacity (England and Wales)	4.43
Rules for determining the existence of a partnership	4.48
Concepts in the draft Bill	4.54
Partnership agreements	4.54
Default partnership rules	4.56
PART V: SEPARATE LEGAL PERSONALITY
Introduction	5.1
Consultation	5.3
The reasons for recommending separate personality	5.5
Clarity and commercial perception	5.5
A solution to practical problems	5.10
Existing pragmatic solutions	5.11
Practical problems	5.14
(A) The approach of leading textbooks	5.14
(B) The approach of the courts	5.18
Enforcement of partnership debts	5.20
Transfer of partnership property	5.21
Partnership insolvency	5.24
Conceptual clarity	5.25
Consistency with other developments in partnership law	5.28
Scotland	5.28
Europe	5.30
The United States' experience	5.31
Summary	5.37
Partnership – a sui generis entity	5.38
Certain consequences	5.41
The partnership as a partner	5.41
A statement of capacity	5.42
Transitional provisions	5.43
PART VI: THE AGENCY AND LIABILITY OF A PARTNER
Introduction	6.1
The agency of a partner	6.3
Existing law	6.3
Our provisional proposals	6.6
Consultation	6.7
Reform recommendations	6.10
The liability of the partnership for obligations incurred by a partner	6.23
Existing law	6.23
Our provisional proposals	6.25
Consultation	6.26
Reform recommendations	6.28
Vicarious liability of the partnership in tort or delict	6.29
Liability for loss to a partner	6.30
The provision of free or cut-price services	6.31
Liability for penalties	6.34
Vicarious liability of the partnership for misapplication of property by a partner	6.36
The liability of partners for the obligations of the partnership	6.47
Existing law	6.47
Our provisional proposals	6.49
Consultation	6.51
Reform recommendations	6.54
Partners' liability	6.58
A partner's right to indemnity from the partnership	6.60
A partner's right to contribution from the other partners	6.61
The liability of the incoming partner	6.66
Existing law	6.66
Our provisional proposals	6.68
Consultation	6.70
Reform recommendations	6.73
The incoming partner's capital	6.74
The date when an obligation is incurred	6.79
The liability of the outgoing partner	6.81
Existing law	6.81
Liability for pre-retirement debts	6.81
Liability for post-retirement debts	6.82
Liability through "holding out"	6.83
Our provisional proposals	6.84
Consultation	6.85
Reform recommendations	6.86
The liability of the apparent partner	6.89
Existing law	6.89
Our provisional proposals	6.93
Consultation	6.94
Reform recommendations	6.96
PART VII: LITIGATION AND ENFORCING JUDGMENTS
Introduction	7.1
Litigation	7.4
Existing law	7.4
English law	7.4
Scots law	7.7
Our provisional proposals	7.10
A partnership can sue and be sued	7.11
Litigation after dissolution of a partnership	7.12
Disclosure of the identity of partners	7.13
Whether an account is needed	7.14
Consultation	7.15
A partnership can sue and be sued	7.15
Litigation after dissolution of a partnership	7.16
Disclosure of the identity of partners	7.17
Scots law	7.18
Whether an account is needed	7.19
Reform recommendations	7.20
A partnership can sue and be sued	7.20
Method of service on a partnership	7.23
Establishing the liability of a partner for a partnership obligation	7.25
Disclosure of the identity of partners	7.27
Litigation after a partnership is dissolved	7.32
Whether an account is needed	7.35
Enforcement	7.36
Existing law	7.36
English law	7.36
Scots law	7.41
Our provisional proposals	7.44
The need for a judgment against the partnership	7.44
Enforcement against a partner's assets	7.45
No need to exhaust the partnership's assets	7.46
English law	7.47
Scots law	7.48
Consultation	7.49
The need for a judgment against the partnership	7.49
Informing partners of claims and enforcement against a partner's assets	7.50
Scots law: the effect of an arrestment	7.54
Reform recommendations	7.55
Limitation and prescription	7.65
England & Wales	7.67
Scotland	7.69
Scots law: the effect of arrestment in execution	7.73
PART VIII: CONTINUITY OF PARTNERSHIP AND THE OUTGOING PARTNER
Introduction	8.1
Terminology	8.5
Continuity of partnership	8.6
Existing law	8.6
The partnership at will	8.8
The Syers v Syers order	8.9
Problems of discontinuity: a summary	8.13
Our provisional proposals	8.14
Consultation	8.17
Reform recommendations	8.19
More detailed rules	8.20
The inadvertent partnership	8.21
The loss of vested contractual rights	8.26
The incoming partner's capital	8.27
Striking a balance: the rights of the outgoing partner	8.36
Our provisional proposals	8.36
Consultation	8.37
Reform recommendations	8.40
The financial rights of the outgoing partner	8.49
Our provisional proposals	8.49
The notional sales measure	8.50
The accounts measure	8.51
An indemnity	8.52
Interest on the value of the unpaid share	8.53
Consultation	8.54
The appropriate measure of value	8.55
An indemnity to the outgoing partner	8.58
Restrictions on the indemnity	8.60
Interest on the value of the outgoing partner's share	8.61
Reform recommendations	8.62
The measure of value	8.62
The outgoing partner's indemnity	8.69
The right to a commercial rate of interest	8.74
Where the partnership does not honour the indemnity	8.79
The mechanisms for withdrawal from a partnership and the powers of the court	8.82
Introduction	8.82
(1)The mechanisms for voluntary withdrawal	8.85
The mischief	8.85
Reform recommendations	8.89
(2)Involuntary withdrawal from a partnership	8.101
Reform recommendations	8.101
Death or bankruptcy	8.101
Expulsion	8.107
(3)The intervention of the court: removal of a partner or winding up	8.111
The mischief	8.111
Our provisional proposals	8.113
Consultation	8.116
Reform recommendations	8.119
Supplementary measures	8.128
Fraud, misrepresentation and non-disclosure	8.133
(4)Illegality and continuity of partnership	8.137
Existing law	8.137
Our provisional proposals and consultation response	8.138
Reform recommendations	8.140
Other matters	8.147
Dispute resolution, self help and instalments	8.147
PART IX: PARTNERSHIP PROPERTY AND THE EXECUTION OF DEEDS
Introduction	9.1
Partnership property	9.3
Existing law	9.3
What is partnership property?	9.4
How partnerships hold partnership property	9.6
Identifying property as partnership property	9.10
Our provisional proposals	9.14
A partnership may own property	9.14
Property which is not held in the name of the partnership	9.15
Protection of purchasers of partnership property	9.16
A voluntary register of authority	9.17
Consultation	9.18
A partnership may own property	9.18
A voluntary register of authority	9.20
Identifying property as partnership property	9.21
Section 20(3) of the 1890 Act	9.22
Reform recommendations	9.23
Ownership of property generally	9.25
Ownership of land	9.26
Ownership of other types of property	9.35
UK patents	9.38
European patents	9.39
Copyright	9.40
UK registered trademarks	9.41
Community trademarks	9.42
Registered designs and design rights	9.43
Shares in UK registered companies	9.46
UK registered ships	9.47
Hovercraft	9.48
Aircraft	9.49
Joint Tenancy in English Law	9.50
Protection of bona fide acquirers of partnership property	9.52
The nature of a partner's interest	9.66
Identifying property as partnership property	9.73
The definition of partnership property	9.81
The execution of documents and deeds	9.84
Existing law	9.84
Our provisional proposals	9.87
Consultation	9.89
Reform recommendations	9.94
PART X: PARTNERS' FINANCIAL AND MANAGEMENT RIGHTS, EXPULSION AND RETIREMENT
Introduction	10.1
Financial and management rights	10.2
Existing law	10.2
Capital contributions	10.2
Partnership accounts	10.3
Profit shares	10.4
Indemnity against loss and expenses	10.5
Interest on advances	10.6
Participation in management	10.7
Decision making: majority or unanimity	10.9
Our provisional proposals	10.10
Partnership accounts	10.10
Capital and profit shares	10.11
Interest on advances	10.13
Management decisions	10.14
Consultation	10.15
Partnership accounts	10.15
Profit shares and return of capital contributions	10.16
Interest on advances	10.19
Management decisions	10.20
Reform recommendations	10.22
Partnership accounts	10.22
The return of capital contributions, profit shares and responsibility for losses	10.23
The return of capital contributions	10.23
Profit shares	10.24
Responsibility for losses	10.25
Interest on advances	10.26
Management decisions	10.27
Agreement on capital contributions	10.28
Other default rules in section 24 of the 1890 Act	10.29
Expulsion, suspension and compulsory retirement	10.31
Existing law	10.31
Our provisional proposals	10.34
Consultation	10.36
Reform recommendations	10.40
PART XI: PARTNERS' DUTIES
Introduction	11.1
Existing law	11.3
The duty of good faith	11.3
The duty of care and skill	11.6
Other fiduciary duties	11.11
No duty to devote full time and attention	11.12
No court power to relieve from liability	11.13
Our provisional proposals	11.14
Duty of good faith	11.14
Duty of skill and care	11.16
Duty to devote full-time attention	11.19
Court power to relieve from liability	11.20
Persons to whom duties are owed	11.21
Consultation	11.23
Duty of good faith	11.23
Duty of skill and care	11.24
Persons to whom duties are owed	11.25
Court power to grant relief	11.27
Duty to devote a specified amount of time	11.28
Reform recommendations	11.29
Duty of good faith	11.29
Partners' duties in relation to accounting and partnership records	11.33
A duty of disclosure to and by an incoming partner	11.35
Duty of skill and care	11.41
The options	11.44
Arguments in favour of a restricted duty	11.46
Arguments against a statutory restriction of the duty of skill and care	11.48
Arguments in favour of a statutory statement of an objective standard of reasonable care	11.53
Arguments against a statutory statement of an objective standard of care	11.55
Our conclusions	11.56
A restrictive definition of duty	11.57
An objective standard of care	11.62
Persons to whom the partners owe duties	11.67
No court power to grant relief	11.71
No duty to devote a specified time to the partnership	11.72
PART XII: WINDING UP PARTNERSHIPS AND SETTLING PARTNERS' ACCOUNTS
Introduction	12.1
The termination of a partnership and its winding up	12.3
Existing law	12.3
Our provisional proposals	12.6
Consultation	12.10
Reform recommendations	12.13
Where there is only one remaining partner	12.18
Where no partners remain	12.22
The entitlement of partners on the break up of a partnership	12.24
A new system of winding up solvent partnerships	12.26
Existing law	12.26
Our provisional proposals	12.31
Consultation	12.35
Reform recommendations	12.45
Who appoints the partnership liquidator?	12.50
The court's power to appoint a provisional liquidator	12.54
Who may be appointed liquidator	12.57
Liquidator to give security	12.58
The effect of the appointment of a partnership liquidator	12.61
The functions of the partnership liquidator	12.67
Contracts entered into by liquidator or provisional liquidator	12.69
The powers of the partnership liquidator: (a) generally	12.71
The powers of the partnership liquidator: (b) powers requiring approval or sanction	12.75
Disclaimer of onerous property or termination of long leases	12.79
The partnership liquidator's accounts	12.84
Reference of questions to the court	12.87
The partnership liquidator and an insolvent partnership	12.89
Appointment of a replacement liquidator or removal of a liquidator	12.95
The release and discharge of a partnership liquidator	12.97
The expenses of winding up	12.100
The resignation, removal and release of a provisional liquidator	12.102
Rule-making power	12.105
The liability and common law duties of a partnership liquidator or provisional liquidator	12.107
Settling partners' accounts	12.109
Existing law	12.109
Our provisional proposals	12.116
Consultation	12.117
Reform recommendations	12.119
PART XIII: MISCELLANEOUS REFORMS, AND PROPOSALS WE HAVE NOT TAKEN FORWARD
Introduction	13.1
Miscellaneous reform recommendations	13.3
The repeal of section 3 of the 1890 Act	13.3
Revocation of continuing guarantee by change in membership of partnership	13.6
Order charging a partner's share (English law)	13.10
The rights of an assignee of a share in a partnership	13.13
Publicity for departure of a partner or break up of a partnership	13.18
Repayment of premium on premature break up of partnership	13.21
Amendments to the Business Names Act 1985	13.23
Criminal proceedings against partnerships (Scots law)	13.25
Proposals that we have not taken forward	13.27
The registered partnership	13.27
The power to grant floating charges	13.30
Preserving the rules of equity and common law	13.33
A model partnership agreement	13.38
Employment of partner by a partnership	13.41
Abolition of the twenty-partner limit	13.44
PART XIV: TRANSITIONAL PROVISIONS
Introduction	14.1
Our provisional proposals	14.2
Consultation	14.7
Reform recommendations	14.13
Partnership property: transitional provisions	14.22
Limited partnerships and special limited partnerships: transitional provisions	14.25
SECTION C: LIMITED PARTNERSHIPS (PARTS XV – XIX)
PART XV: ESTABLISHING AND OPERATING A LIMITED PARTNERSHIP 1): REGISTRATION AND DE-REGISTRATION
Introduction to Parts XV to XIX	15.1
The registration of a limited partnership: an overview	15.8
The pre-existing partnership	15.14
The new partnership	15.15
Formation of a limited partnership	15.21
The content of the certificate of registration	15.22
Status of certificate of registration	15.24
Information to appear on the register	15.26
The principal place of business	15.30
The contents of the register	15.35
Registration of changes in limited partnerships	15.39
Change of partnership name	15.40
New limited partners	15.42
A person becoming a general partner	15.44
A person ceasing to be a general partner or a limited partner	15.46
Other changes in the limited partnership	15.50
Registration of corrections	15.54
Administration of the registration system	15.56
Delivery of documents	15.56
Registration of information	15.58
Inspection of register	15.60
Power to make regulations	15.62
The name of a partnership and disclosure of limited liability status	15.64
Name of limited partnership	15.64
Disclosure of limited liability status	15.67
Limited partnerships and the Business Names Act 1985	15.72
Improper use of "limited partnership" as a name	15.76
De-registration of a limited partnership	15.79
PART XVI: ESTABLISHING AND OPERATING A LIMITED PARTNERSHIP (2): THE GENERAL PARTNER AND OTHER MATTERS
Introduction	16.1
The general partner	16.3
Who may be a general partner?	16.5
Dual functioning of a general partner as a limited partner	16.7
Responsibility for registration formalities	16.8
Other responsibilities of the general partner	16.15
Limited partner excluded from management	16.20
Limited partner not an agent	16.22
A special definition of carrying on "business"?	16.24
Other alterations to the general law of partnership	16.27
Offences	16.31
Offences by bodies corporate	16.33
PART XVII: THE LIABILITY OF A LIMITED PARTNER
Introduction	17.1
What constitutes "management"?	17.3
The need for further guidance	17.3
The list of permitted activities	17.8
Scope of protection of a limited partner	17.18
Clarifying section 4(2) of the 1907 Act	17.18
Capital withdrawal and the liability of a limited partner after leaving the firm	17.24
Restoration of lost capital	17.26
When may capital be withdrawn?	17.37
Duration of liability	17.38
PART XVIII: THE RIGHTS AND OBLIGATIONS OF PARTNERS IN A LIMITED PARTNERSHIP
Introduction	18.1
Matters requiring the consent of the limited partners	18.3
Fiduciary duties and other duties	18.8
Profits and losses	18.13
Assignment/assignation by, and retirement of, limited partners	18.16
Miscellaneous proposals	18.19
PART XIX: SPECIAL LIMITED PARTNERSHIPS
Introduction	19.1
Background	19.2
Reform recommendations	19.12
The aggregate approach to partnership	19.14
Mutual agency	19.15
Liability of partners	19.16
Liability through holding out	19.17
Changes in partners	19.18
The break up of the special limited partnership	19.19
Registration of a special limited partnership	19.21
SECTION D: SUMMARY OF RECOMMENDATIONS
PART XX: SUMMARY OF RECOMMENDATIONS
The definition of partnership	20.1
Separate legal personality	20.12
The agency and liability of a partner	20.13
Litigation and enforcing judgments	20.20
Continuity of partnership and the outgoing partner	20.28
Partnership property and the execution of deeds	20.41
Partners' financial and management rights, expulsion and retirement	20.46
Partners' duties	20.47
Winding up partnerships and settling partners' accounts	20.52
Miscellaneous reforms, and proposals we have not taken forward	20.73
Transitional provisions	20.82
Establishing and operating a limited partnership (1): registration and de-registration	20.84
Establishing and operating a limited partnership (2): the general partner and other matters	20.103
The liability of the limited partner	20.111
The rights and obligations of partners in a limited partnership	20.118
Special limited partnerships	20.124
SECTION E: APPENDICES
APPENDIX A: DRAFT PARTNERSHIPS BILL	Appendix A
APPENDIX B: PARTNERSHIP ACT 1890	Appendix B
APPENDIX C: LIMITED PARTNERSHIPS ACT 1907	Appendix C
APPENDIX D: EXTRACTS FROM CP ON REFORM OF INSOLVENT PARTNERSHIPS ORDER 1994 (ENGLAND AND WALES)	Appendix D
APPENDIX E: PERSONS AND ORGANISATIONS WHO COMMENTED ON CONSULTATION PAPER NO 159 – PARTNERSHIP LAW	Appendix E
APPENDIX F: PERSONS AND ORGANISATIONS WHO COMMENTED ON CONSULTATION PAPER NO 161 – LIMITED PARTNERSHIPS ACT 1907	Appendix F

ABBREVIATIONS

1890 Act	Partnership Act 1890
1907 Act	Limited Partnerships Act 1907
ACCA	Association of Chartered Certified Accountants
ADR	Alternative Dispute Resolution
APP	Association of Partnership Practitioners
Blackett-Ord, Partnership	Mark Blackett-Ord, Partnership: the modern law of partnership, limited partnership and limited liability partnership (2nd ed 2002)
Bowstead & Reynolds	F M B Reynolds with the assistance of M Graziadei, Bowstead & Reynolds on Agency (16th ed 1996)
BMA	British Medical Association
BVCA	British Venture Capital Association
DTI	Department of Trade and Industry
ECHR	European Convention on Human Rights and Fundamental Freedoms
EEA	European Economic Area
FSMA	Financial Services and Markets Act 2000
ICTA 1998	Income and Corporation Taxes Act 1998
Joint Consultation Paper	Partnership Law: A Joint Consultation Paper (2000) Consultation Paper No 159; Discussion Paper No 111
Joint Consultation Paper (LP)	Limited Partnerships Act 1907: A Joint Consultation Paper (2001) Consultation Paper No 161; Discussion Paper No 118
LLP	Limited Liability Partnership
Lindley & Banks	R C I'Anson Banks (editor), Lindley & Banks on Partnership (18th ed 2002)
LIBOR	London Interbank Offered Rate
Megarry & Wade	Megarry & Wade, The Law of Real Property (6th ed 2000)
NILRAC	Law Reform Advisory Committee for Northern Ireland
RUPA	Revised Uniform Partnership Act (1994) (USA)
Twome	M Twomey, Partnership Law (1st ed 2000)
UPA	Uniform Partnership Act (1914) (USA)
VATA 1994	Value Added Tax Act 1994