Scottish Law Commission (Reports)

PART XIII

MISCELLANEOUS REFORMS, AND PROPOSALS WE HAVE NOT TAKEN FORWARD

Introduction

13.1     In this Part we discuss the proposals for the reform of partnership law which we have not considered elsewhere in this report, and also the proposals and questions which we made or raised in the Joint Consultation Paper but which, in the light of the response of consultees, we have decided not to convert into recommendations.^[1]
13.2     The miscellaneous reforms comprise our proposals in relation to various provisions of the 1890 Act, a provision in relation to notices, amendments to the Business Names Act 1985 and a proposal in relation to Scottish criminal procedure. The principal matter which we are not taking forward is the option of introducing a new registered partnership into the law of partnership in both jurisdictions.

Miscellaneous reform recommendations

The repeal of section 3 of the 1890 Act

13.3     Section 3 of the 1890 Act provides:

In the event of any person to whom money has been advanced by way of loan upon such a contract as is mentioned in the last foregoing section,^[2] or of any buyer of a goodwill in consideration of a share of the profits of the business, being adjudged a bankrupt, entering into an arrangement to pay his creditors less than one hundred pence in the pound, or dying in insolvent circumstances, the lender of the loan shall not be entitled to recover anything in respect of his loan, and the seller of the goodwill shall not be entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money's worth have been satisfied.

13.4     In the Joint Consultation Paper^[3] we said that the policy behind the section is a relic of old case law in which the recipient of a share of the profits of the business was held liable as a partner for its debts and obligations. We suggested that the postponement of the rights of the lender has an adverse impact today, particularly in start-up and rescue financing, by penalising loans with a variable rate of interest. We provisionally proposed that section 3 should be repealed. Consultees unanimously agreed, although the APP suggested that the repeal should relate only to new transactions.
13.5     We therefore recommend that section 3 of the 1890 Act (which postpones the rights of certain creditors of a partnership) should not be re-enacted in the draft Partnerships Bill.

Revocation of continuing guarantee by change in membership of partnership

13.6     Section 18 of the 1890 Act provides:

A continuing guaranty or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transactions of which, the guaranty or obligation was given.^[4]

13.7     In the Joint Consultation Paper we questioned whether there was a need to retain section 18 in relation to guarantees given to the partnership if many partnerships had continuity of partnership on a change in membership. We suggested that the provision made little sense where the partnership was the creditor in the primary obligation. We also asked whether there was a need for the provision where the guarantee is that the partnership (as the debtor in the primary obligation) will perform its obligation.^[5]
13.8     Consultees were not exercised by the proposal. While the principle that a guarantor should be released from liability where the creditor alters his risk without obtaining his consent is important, section 18 rarely results in the revocation of a guarantee. The parties to the guarantee can specify in the guarantee whether the obligation depends on the membership of the partnership remaining unchanged. Thus, where a person gives a guarantee to a partnership as a result of a personal connection with one of the partners, he can make it clear whether his obligation is to survive that partner's departure from the partnership. We have recommended continuity of partnership as a default rule. In this context a change in the membership of the partnership may not, in any event, be readily perceived as an alteration of risk. In the light of the consultation response we see no need to re-enact section 18.
13.9     We therefore recommend that section 18 of the 1890 Act is not re-enacted.

Order charging a partner's share (English law)

13.10     Section 23(2) and (3) of the 1890 Act set out the procedure by which a judgment creditor of a partner may obtain a court order charging the partner's share in the partnership with the amount of the judgment debt and interest thereon. The section empowers the court to appoint a receiver over the partner's share and to give directions for accounts and inquiries. It also provides that if the court directs a sale of the partner's share, the other partner or partners may purchase the share.^[6]
13.11     In the Joint Consultation Paper we suggested that there was no need to alter the rules to take account of the introduction of separate legal personality.^[7] Consultees did not dissent.^[8]
13.12     We therefore recommend that sections 23(2) and (3) of the 1890 Act should be re-enacted in modern language. (Draft Bill, cl 46)

The rights of an assignee of a share in a partnership

13.13     Section 31 of the 1890 Act sets out the rights of an assignee of a share in a partnership. While the partnership continues, the assignee is not allowed to interfere in the management of the partnership business or to require any accounts of partnership transactions or to inspect the partnership books. His rights are confined to receiving the share of profits to which the assigning partner would otherwise be entitled and he must accept the account of profits which the partners have agreed. On dissolution of the partnership or on the withdrawal of the assigning partner,^[9] the assignee is entitled to receive the assigning partner's share of the value of the partnership's net assets and to an account for the purpose of ascertaining that share.
13.14     In the Joint Consultation Paper we asked consultees whether the principle in section 31 should be extended to anyone acquiring a partner's share by operation of law while the partner remains a partner.^[10] Most consultees thought that the section should be so extended but one consultee was unaware of the issue arising in practice. Several consultees thought that there was no need to extend section 31 as it already covered assignments by operation of law. Two consultees suggested that it should be made clear that the section also applies on a partial assignment of a share.
13.15     We think that it should be made clear that the restriction on an assignee's involvement in management applies both in voluntary assignments (whether whole or partial) and also assignments arising by operation of law (as, for example, on the bankruptcy of a partner or the liquidation of a corporate partner).
13.16     We do not recommended the re-enactment of section 31 of the 1890 Act in so far as it (a) prevents an assignee during the continuance of the partnership from requiring accounts of the partnership transactions and (b) requires the assignee to accept the account of profits agreed by the partners. We envisage that there may be circumstances where an assignee could legitimately apply to the court for an account, where, for example, it was evident that the other partners were not disclosing the firm's true profits or the assignor's share of those profits. We do not recommend giving the assignee a right to the production of accounts by the partners on demand and think that he should not have a right to inspect the firm's records. But we do not wish to exclude the possibility that the court might in an appropriate case order an account.
13.17     We recommend that assignees of a partner's share (whether by voluntary assignment or by involuntary assignment on death, insolvency or otherwise) should not be allowed to take part in the management of the partnership business or affairs. Such assignees should not be entitled to inspect the partnership's records. (Draft Bill, cl 36)

Publicity for departure of a partner or break up of a partnership

13.18     Section 37 of the 1890 Act provides:

On dissolution of a partnership or retirement of a partner any partner may publicly notify the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence.

13.19     This is an important provision as it enables a partner to notify the public and the partnership's customers or clients of the termination of his secondary liability for debts incurred after the date of notification.^[11] In the Joint Consultation Paper we proposed no change to the substance of this section.^[12] Consultees did not comment on the issue.
13.20     We therefore recommend that section 37 of the 1890 Act (publicity for departure of a partner or break up of partnership) should be re-enacted in modern language. (Draft Bill, cl 41)

Repayment of premium on premature break up of partnership

13.21     In the Joint Consultation Paper we said that we saw no need to alter the substance of section 40 of the 1890 Act which provides for the repayment of all or part of a premium paid on entering a partnership for a fixed term,^[13] when that partnership is prematurely dissolved.^[14] Consultees did not comment on the issue but we have since received representations that the provision remains useful and should be re-enacted.
13.22     We therefore recommend that the substance of section 40 of the 1890 Act should be re-enacted: where a partner in a fixed term partnership has paid a premium to another partner in respect of the formation of the partnership and the partnership breaks up before the end of its term, the court should have power to order the repayment of the whole or part of the premium. (Draft Bill, cl 52)

Amendments to the Business Names Act 1985

13.23     It is appropriate to amend the Business Names Act 1985 (the 1985 Act) in consequence of our recommended reforms. The proposed amendments are principally to apply the 1985 Act to partnerships which are legal persons and to limited partnerships. In particular, we propose (a) to apply the 1985 Act to a limited partnership which carries on business in Great Britain under a name which does not consist of its registered name, without any addition other than one permitted under the 1985 Act, (b) to require a limited partnership to disclose its registered name and the name of each general partner, (c) to provide that if a partnership which is a legal person uses a prohibited name or does not comply with the disclosure requirements of the 1985 Act, each of its partners (or in the case of a limited partnership each of its general partners) may be guilty of an offence, and (d) to apply the 1985 Act to foreign limited partnerships which have a place of business in Great Britain and carry on business in Great Britain.
13.24     We therefore recommend that the Business Names Act 1985 should be amended in consequence of our recommended reforms of partnership law. (Draft Bill, cl 75 and Schedule 11)

Criminal proceedings against partnerships (Scots law)

13.25     In the Joint Consultation Paper we pointed out the anomaly that, while it is possible for the Crown to bring summary proceedings against partnerships in their own name, it is not possible so to bring solemn proceedings.^[15] There may be cases where the Crown would wish to use solemn procedure, for example where a partnership has caused many deaths by selling poisonous food, in order to impose heavier sentences than those available under summary procedure. We therefore provisionally proposed that it should be possible to prosecute partnerships not only by summary procedure but also by solemn procedure.^[16] The consultees who responded to this proposal unanimously agreed with it. As this recommendation involves the amendment of legislation on criminal procedure we have not included it in the draft Bill but will inform the Scottish Ministers of the recommendation.
13.26     We therefore recommend that section 70 of the Criminal Procedure (Scotland) Act 1995 should be amended to provide for the prosecution of partnerships as well as bodies corporate.

Proposals that we have not taken forward

The registered partnership

13.27     In Part XX of the Joint Consultation Paper we set out a possible scheme for conferring separate legal personality on partnerships by registering the partnership in a register of partnerships. We suggested that the registered partnership would provide greater certainty to partners and to outside parties than the present informal partnership. The register would disclose the identity of partners and the dates of their joining and leaving a continuing partnership. It would offer greater certainty as to the status of partners and the duration of a partner's liability for partnership debts. It might also assist in the ownership and transfer of property and in obtaining recognition of the partnership in foreign jurisdictions.
13.28     Most consultees opposed the introduction of the scheme either as the exclusive means of the introduction of separate legal personality or as an option where legal personality was available without registration. Arguments advanced against the scheme included the following. It would create unnecessary bureaucracy and administrative burdens. Operating the scheme would be costly. The scheme would be complex. Few partnerships would register as many of the benefits were for third parties and not the partners and there would be penalties for failure to keep the register up to date. If registration were necessary to confer legal personality there would be partnerships with and partnerships without legal personality. That would require complex rules. There was also the danger of public confusion between too many sorts of partnerships as there would be unregistered general partnerships and registered partnerships as well as limited partnerships and LLPs. Such support as there was for the option of the registered partnership was generally lukewarm but one consultee was in favour as a means of allowing a partnership to grant a floating charge.
13.29     As we have recommended both the introduction of separate legal personality without registration and a new default rule of continuity of partnership, we think that there would be few advantages to partners from the introduction of the registered partnership which would provide an incentive for them to register. We are also aware of the financial and administrative burden which the scheme could entail and the danger of public confusion by a proliferation of different forms of partnership. We have therefore concluded that we should not recommend the introduction of a registered partnership.

The power to grant floating charges

13.30     In Part XXII of the Joint Consultation Paper we discussed the power of partnerships to grant charges and rights in security over partnership assets. We provisionally proposed that unregistered partnerships with legal personality should be able to grant charges or rights in security in the same way as individuals.^[17]
13.31     The Law Commission is consulting on proposals that, in English law, partnerships, other non-corporate bodies and individuals should be empowered to grant floating charges.^[18] This consultation exercise has revealed wide-ranging support for the proposition that partnerships should be able to grant floating charges. The Law Commission will address this issue in the context of their wider review of charges. In Scotland, the floating charge is a statutory creation and was introduced in 1961.^[19] The Scottish Law Commission is consulting on a review of the registration of company charges in Scotland^[20] and recognises the need for a review of the law of securities, particularly over corporeal and incorporeal moveable property, in the future.
13.32     We do not propose to deal with the issue whether partnerships should be able to grant floating charges except in the context of a wider reform of the law relating to floating charges. Accordingly we have not taken the issue forward in this project.

Preserving the rules of equity and common law

13.33     The law of partnership was, until 1890, judge-made law. In England it was the creation of common law and equity; in Scotland the creation of the common law. The 1890 Act was only a partial codification. As Prime and Scanlan^[21] state, "the codification was substantial rather than complete". Section 46 of the 1890 Act provides:

The rules of equity and common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act.

13.34     In the Joint Consultation Paper we proposed that the rules of equity and common law should be expressly preserved in the new Partnership Act.^[22] There was almost unanimous support among consultees who addressed this issue, although one consultee argued for a more comprehensive codification of the law instead.
13.35     Notwithstanding that support, we have revised our view on the appropriateness of such a clause in the light of advice which we have received on current practice in Parliamentary drafting. We recognise that such a statutory statement merely confirms the effect of a new Partnerships Act which, like the 1890 Act, would be an incomplete statement of partnership law. Rules of common law and equity (or in Scotland rules of common law) would continue to be relevant whether or not the statement was included in the draft Bill. The repeal of the 1890 Act would not revive anything which is not in force at the time the repeal takes effect. Thus the pre–1890 Act rules which were inconsistent with the 1890 Act would not revive.^[23] But those rules which were consistent with the 1890 Act and which have developed since 1890 would be preserved except so far as they are inconsistent with the provisions of the new Partnerships Act.
13.36     While a provision like section 46 of the 1890 Act has assisted a court in one reported case to determine how far another provision in a Partnership Act has affected the developing common law,^[24] we doubt whether it is actually needed.
13.37     We therefore recommend that there should not be an express provision in the new Partnerships Act preserving the rules of equity and common law in England and Wales, and in Scotland the rules of the common law, except so far as they are inconsistent with the express provisions of that Act.

A model partnership agreement

13.38     In the Joint Consultation Paper^[25] we discussed the benefits and limitations of a model agreement. We expressed the provisional view that if the default rules of the 1890 Act were modernised there would be less need for any officially approved model agreement. We doubted if we could overcome the problems of formulating a model agreement that addressed fully the needs of all types of partnership: there is no such thing as a standard form partnership. We pointed out that there was nothing to prevent commercial organisations from producing model agreements if they thought there was a market for them.^[26]
13.39     Most consultees supported our provisional views, emphasising the impracticality of a detailed model agreement which could readily be adapted to suit different partnerships. While there was no substitute for a carefully drawn up partnership agreement which addressed the needs of the particular venture, it was sufficient for the statute to provide a simple and robust default code. The minority who favoured an official model agreement stressed that it could operate as a starting point for drawing up an agreement to suit the particular partnership. One consultee suggested that it would draw the attention of less experienced individuals to the issues which they needed to consider when entering into partnership.
13.40     In view of the consultation response we confirm our provisional view and have not prepared a model partnership agreement.

Employment of partner by a partnership

13.41     In the Joint Consultation Paper we pointed out that there was doubt in Scots law (which accords separate personality to a partnership) whether a partnership can enter into a contract of employment with one of its partners.^[27] We provisionally proposed that if a partnership was to have separate legal personality it should be able to enter into a contract of employment with one of its partners.^[28]
13.42     In both jurisdictions consultees were divided in their response to this proposal. On reflection we are persuaded by the arguments of consultees who stressed that the status, rights and obligations of a partner were wholly different from those of an employee. In addition, a dual role as a partner and an employee could call into question the tax status of the partner and even the existence of the partnership.
13.43     We therefore recommend that a partnership should not be capable of engaging a partner as an employee. (Draft Bill, cl 7(4))

Abolition of the twenty-partner limit

13.44     Except for certain professional firms, partnerships were illegal if they had more than twenty partners.^[29] In the Joint Consultation Paper we proposed that the size restriction affecting partnerships should be abolished.^[30] Consultees agreed. The Department of Trade and Industry have consulted separately on the issue and the Government has removed the twenty partner limit for all partnerships with effect from 21 December 2002.^[31]

Note 1    We have also discussed such proposals in the individual Parts where they have been intimately connected to the topics in relation to which we are recommending reforms.    [Back]

Note 2    The reference is to s 2(3)(d) of the 1890 Act which refers to a contract of loan to a person engaging in business which gives the lender either a right to receive a rate of interest varying with the profits or a right to a share of the profits of the business.    [Back]

Note 3    Joint Consultation Paper, paras 5.44 – 5.50.    [Back]

Note 4    This provision was a re-enactment of the Mercantile Law Amendment Act 1856, s 7 and the Mercantile Law Amendment (Scotland) Act 1856, s 4, which were repealed by the 1890 Act, s 48.    [Back]

Note 5    Joint Consultation Paper, paras 23.2 – 23.6.    [Back]

Note 6    In para 8.110 above we recommend that a partner may be expelled if he allows his share to be so charged. See the draft Bill, cl 31.     [Back]

Note 7    Joint Consultation Paper, paras 18.5 – 18.7.    [Back]

Note 8    Professor Webb suggested that it should be made clear that a charging order should be a remedy of last resort.    [Back]

Note 9    The withdrawal of the partner is described in the 1890 Act, s 31(2) as the dissolution of the partnership “as respects the assigning partner”. This is consistent with the idea of “technical dissolution” by which a partner is dissolved in law on a change in membership but the partners who remain in the business treat the partnership as continuing.    [Back]

Note 10    Joint Consultation Paper, paras 23.11 – 23.16.    [Back]

Note 11    See the 1890 Act s 36(1) and (2).    [Back]

Note 12    Joint Consultation Paper, para 23.22.    [Back]

Note 13    In our recommended reforms and in the draft Bill we draw a distinction between a partnership of defined duration and a fixed term partnership. The former is a partnership in which the partnership agreement provides that the partnership is to end on the expiry of a specified period or on the accomplishment of a venture that the partnership was formed to undertake (cl 76(1)). A fixed term partnership is one where the partnership agreement provides that the partnership is to end on the expiry of a specified period (cl 52(6)).    [Back]

Note 14    Joint Consultation Paper, para 23.22.    [Back]

Note 15    Joint Consultation Paper, para 23.19. The Criminal Procedure (Scotland) Act 1995, s 143 provides for the prosecution on summary procedure of a “partnership, association, body corporate or body of trustees”. Section 70 of that Act, on solemn proceedings, refers only to bodies corporate.    [Back]

Note 16    Joint Consultation Paper, para 23.20.    [Back]

Note 17    Joint Consultation Paper, para 22.30.    [Back]

Note 18    Registration of Security Interests: Company Charges and Property other than Land, Consultation Paper No 164.    [Back]

Note 19    The Companies (Floating Charges) (Scotland) Act 1961.    [Back]

Note 20    Registration of Rights in Security by Companies, Discussion Paper No 121.    [Back]

Note 21    Prime & Scanlan, The Law of Partnership (1st ed 1995) p 1.    [Back]

Note 22    Joint Consultation Paper, paras 23.17 – 23.18.    [Back]

Note 23    The Interpretation Act 1978, s 16(1) provides that “where an Act repeals an enactment, the repeal does not, unless the contrary intention appears, - (a) revive anything not in force or existing at the time at which the repeal takes effect…”.    [Back]

Note 24    See Geisel v Geisel (1990) 72 DLR 245, where Ferg J held that the equivalent of s 10 of the 1890 Act did not exclude a claim by the family of a deceased partner against his partner for negligently causing his death.    [Back]

Note 25    Joint Consultation Paper, Part XVI.    [Back]

Note 26    See, eg, T Sacker, Practical Partnership Agreements (1995) and Roderick Banks, Encyclopaedia of Professional Partnerships (1987) (looseleaf: latest update 2003).    [Back]

Note 27    See Allison v Allison’s Trustees (1904) 6 F 496; Fife County Council v Minister of National Insurance 1947 SC 629.    [Back]

Note 28    Joint Consultation Paper, para 23.21.    [Back]

Note 29    See Companies Act 1985, ss 716 and 717 and the 1907 Act, s 4(2) for limited partnerships.    [Back]

Note 30    Joint Consultation Paper, paras 5.51 – 5.61.    [Back]

Note 31    See Regulatory Reform (Removal of 20 Member Limit in Partnerships etc) Order 2002 (SI 2002/3203).    [Back]