Scottish Law Commission (Reports)

Partnerships Bill

Court's powers in relation to partnerships 46 Order charging partner's share (England and Wales) 47 Order removing partner or breaking up partnership 48 Section 47: interim orders

49 Order breaking up partnership on application of Secretary of State 50 Order appointing liquidator

51 Order appointing provisional liquidator

52 Order for repayment of premium on premature break up of partnership 53 Order for benefit of former partner

PART 3

LIMITED PARTNERSHIPS

Introduction 54 Limited and general partners

Limited partners and limited liability 55 Restricted role of limited partner

56 Limited liability of limited partner

57 Limited partner who has unlimited liability

Other modifications of Part 2 for limited partnerships 58 General application of Act to limited partnerships

59 Rights and duties of the partners etc.

60 Changes in partners

61 Break up and winding up of limited partnership

Registered office and names

62 Registered office

63 Name of limited partnership

64 Improper use of "limited partnership" etc.

65 Information to be provided on partnership documents

Registration 66 Application for registration

67 Registration and registration certificate

68 Registration of changes, deregistration and other matters 69 Offences of providing false information

Supplementary 70 Offences by bodies corporate

71 Evidence

72 Interpretation of Part 3

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iii

iv

Partnerships Bill

PART 4

SPECIAL LIMITED PARTNERSHIPS

73 Special limited partnerships (England and Wales) PART 5

SUPPLEMENTARY

Disclosure of information about partners etc. 74 Disclosure of names and addresses of partners

75 Business Names Act 1985

Interpretation

76 Interpretation

Final provisions 77 Regulations and orders etc.

78 Consequential amendments

79 Transitional provisions

80 Short title, commencement and extent

Schedule 1 - Whether persons are carrying on business together Schedule 2 - Partner's secondary liability: limitation and prescription Schedule 3 - Orders under section 47: supplementary provisions Schedule 4 - Winding up by liquidator

Part 1 - General

Part 2 - Powers of liquidator exercisable with approval or sanction Part 3 - Powers of liquidator exercisable without approval or sanction Part 4 - Liquidator's powers in relation to sequestration of estates of

partners and partnership (Scotland) Schedule 5 - Functions of provisional liquidator Schedule 6 - Permitted activities for limited partners Schedule 7 - Registration of changes and corrections Schedule 8 - Deregistration

Schedule 9 - Administration of the registration system Schedule 10 - Special limited partnerships

Schedule 11 - Amendments of the Business Names Act 1985

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Partnerships Bill

Part 1 - Introduction

1

DRAFT

OF A

BILL

TO

Make provision about partnerships; and for connected purposes.

BE IT ENACTED by the Queen's most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:-

PART 1

INTRODUCTION

(1) A partnership agreement is an agreement between two or more persons for

(2) For the purposes of this Act, a partnership is an association formed when two or more persons start to carry on a business together under a partnership agreement.

(3) A partnership is a legal person but not a body corporate.

not legal persons).

(5) A partnership is-

(a) a general partnership, or

(b) a limited partnership registered under section 67.

(7) Schedule 1 provides examples of circumstances which do not by themselves establish that persons are carrying on a business together.

None of the following is a partnership for the purposes of this Act-

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EXPLANATORY NOTES

INTRODUCTION

Clause 1

1. Subsection (1) introduces the concept of the partnership agreement. This subsection and subsection (2) make it clear that without this agreement between the partners, a business venture is not a partnership to which the law of partnerships applies. This agreement may be explicit or implicit (see clause 76(2)). This reflects the existing law.
2. Subsection (2) governs the moment that a partnership comes into being. It is intended to reflect the existing law on this point under the Partnership Act 1890 (the "1890 Act"), as settled by the House of Lords in Khan v Miah [2000] 1 WLR 2123. See the report, paragraphs 4.16 - 4.24.
3. Subsection (3) provides that a partnership is a separate legal person. This is an innovation in the law of England and Wales. It is already the case under the 1890 Act in Scotland. For the background to and reasons for this change to the law in England and Wales, see the report, paragraphs 5.5 - 5.40. A partnership is not governed by the common law of corporations. It is a sui generis legal person and its characteristics will be determined by (a) the draft Bill, (b) the partnership agreement (which may in certain respects vary and supplement provisions of the draft Bill) and (c) the rules of common law and equity so far as consistent with the draft Bill. See the report, paragraphs 5.38 - 5.39 and 5.40 (2).
4. Subsection (5) introduces the concept of the limited partnership. Under the current law, limited partnerships are dealt with in a separate piece of legislation modifying and supplementing the 1890 Act (the Limited Partnerships Act 1907 (the "1907 Act")). In the draft Bill, the statutory provisions on limited partnerships are integrated with those on general partnerships. See the report, Parts XV - XVIII.
5. Subsection (6) provides that a partnership may be created whatever the nature of the business. This reproduces the existing law. See the report, paragraphs 4.33 - 4.35.
6. Subsection (7) introduces Schedule 1 which provides guidance on whether, on a given set of facts, people are in business together. It does this by setting out examples of arrangements that do not, by themselves, establish that people are in business together. It is broadly intended to reproduce the existing law under section 2 of the 1890 Act in a clear and unambiguous form. See the report, paragraphs 4.48 - 4.53.
7. All new general partnerships (and all existing general partnerships after the transitional period) will have separate legal personality under the draft Bill. It will, however, be possible for a new (or existing) limited partnership to elect to remain without separate legal personality. This option, and the law which applies if it is exercised, is governed by Part 4 of the draft Bill and referred to in subsection (4). It is expected that this option will be exercised only by sophisticated financial vehicles. For the background to this recommendation on limited partnerships, see the report, Part XIX.

Clause 2

8. This clause ensures that business vehicles other than a partnership constituted under Scots law or English law are not governed by the draft Bill. This reproduces and clarifies the law under the 1890 Act (section 1(2)). See the report, paragraph 4.40.

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EXPLANATORY NOTES

Clause 3

9. A central feature of the law of partnerships is that the partners are personally liable in full for liabilities of the partnership. Subsection (1) introduces this important concept, which is fleshed out in clause 23. Subsection (2) sets out the different position of limited partners in a limited partnership. See the report, paragraphs 6.57 and 6.59(1).

Clause 4

10. This clause provides how the partnership agreement (as defined by clause 1(1)) may be altered. See the report, paragraphs 4.54 - 4.55, 18.3 - 18.4 and 18.7.

Clause 5

11. The partnership agreement may contain detailed rules governing the relationship between the partners. But it may not. Indeed, a partnership agreement may not be express at all: it may be inferred from the fact that a business is being carried on (see note on clause 1 above). If a partnership agreement is silent on a matter (for example, how profits are to be shared) and the partners do not agree, how is this to be resolved? The answer may be provided by a "default rule" contained in the draft Bill. The draft Bill contains a number of these rules. This clause introduces the concept and explains how they work. A "default rule" applies unless the partners have agreed to deal with the subject matter of the rule in some other way.

12. The purpose of subsection (2) is to ensure that the breach by a partner of a default rule gives the partnership and other partners the same remedies as the breach of an identically worded term of the partnership agreement. Subsection (3) sets out the way in which partners may modify or exclude a default rule. See the report, paragraphs 4.56 - 4.58.

GENERAL PARTNERSHIPS

Carrying on of partnership business and capacity

Clause 6

13. The introduction of separate legal personality for partnerships does not alter the fact that the partners own and manage the business and remain fully liable for its debts.

14. The separate legal personality of a partnership under the draft Bill is designed to clarify and simplify the legal analysis of its activities. In particular, separate legal personality provides a simple structure for a partnership's contractual relationships, and for its ownership of property. It also gives legal reality to the economic fact that the partnership which exists after a change in membership is (unless otherwise agreed) the same partnership which existed before. These features of separate legal personality are the subject of subsection (2). See the report, paragraphs 4.25 - 4.32.

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Part 2 - General partnerships

3

(b) subject to the partnership agreement, to provide continuity for the partnership business despite a change in the partners.

(3) The partners are agents of the partnership (but not of each other).

(4) It is a default rule that a change in the nature of the partnership business

agreement of all the partners.

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EXPLANATORY NOTES

15. Under the existing law in England and Wales, the relationship between partners is one of mutual agency. In Scots law, a partner is the agent of the partnership. As mutual agency is not consistent with separate legal personality, the draft Bill provides that partners are agents of the partnership entity and not of each other. Principles of agency law will apply. T his is the effect of subsection (3). See the report, paragraphs 6.10 - 6.22(1).
16. Subsection (4) provides that the nature of the partnership business can (by default) be changed only with unanimous agreement. See the report, paragraphs 10.29 and 10.30(5).

Clause 7

17. Subsection (1) ensures that, generally, no-one can challenge the validity of an act of a partnership on the grounds that the act was not within its capacity. In other words, the introduction into the law of partnerships of separate legal personality will not bring with it the doctrine of ultra vires which once applied in the field of company law. See the report, paragraphs 4.41 - 4.42,9.23 - 9.49 and 9.51 (1) - (2).
18. Subsection (3) introduces two provisos to this statement of a partnership's unlimited capacity. First, a partnership is not capable of employing a partner (subsection (4)). This is to ensure that employment law does not apply to the relationship between the partnership and the partners. See the report, paragraphs 13.41-13.43. The second proviso relates to the application of the criminal law to partnerships (on which see clause 8).
19. Subsection (2) ensures that the partnership entity can be a party to litigation. The existing rules in England and Wales already adopt an approach to partnership litigation which is similar to an entity approach. However, in Scots law, there is a need to modernise the existing rules which, oddly, are less oriented towards an entity approach. See the report, paragraphs 7.4 - 7.9, 7.20 and 7.22(1).

Clause 8

20. This clause gives a clear rule in England and Wales that a partnership is not capable of committing an offence unless it is provided otherwise (expressly or by implication) in any enactment. The application of the criminal law to partnerships in England and Wales may need to be reviewed as an independent exercise in due course. See the report paragraphs 4.43 - 4.47.

21.

In Scotland, where partnership already has partnership is capable of committing certain therefore apply in Scotland.

a form of separate legal personality, a criminal offences. This clause does not

Good faith and disclosure Clause 9

22. This clause states the fundamental duty of good faith which partners owe to each other and adapts that to the introduction of separate personality of the partnership.
23. Subsection (1) states the fundamental duty and makes clear that a partner owes that duty both to the partnership and to each of the other partners. See the report, paragraphs 11.67 - 11.70.

24. Subsections (2), (4), (5) and (6) restate the specific fiduciary duties which were stated in sections 28 - 30 of the 1890 Act. The Bill does not attempt further to codify fiduciary duties of a partner but leaves it to the courts to develop this area of law.
25. Subsection (3) makes it clear that while partners are free to shape by agreement amongst themselves the precise duties which they undertake to each other and to the firm, they may not exclude the duty of good faith. Partners must show good faith in the performance of the duties which they undertake. See the report, paragraphs 11.29 - 11.32.

347

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EXPLANATORY NOTES

Clause 10

26. This clause imposes a duty of disclosure on those about to form a partnership. If a partnership already exists, it imposes a similar duty on the existing partners and on the prospective partner. Note that the duty of good faith in clause 9 (which applies only between current partners and the partnership) does not apply in these situations.

27. The duty in this clause is objective in two senses. First, the information which must be disclosed is that which a prudent hypothetical partner (or prospective partner) would reasonably expect to receive in the circumstances (subsections (1), (3) and (4)). Secondly, someone who unjustifiably fails to discover (and hence disclose) such a fact is as much in breach of the duty as the person who discovers and fails to disclose it (subsection (7)). Subsection (5) provides that, if parties are happy to enter into partnership without this safeguard, then they can waive it.

28. There is some doubt about the existence and nature of a duty of disclosure under the existing law. See the report, paragraphs 11.35 - 11.40. Subsection (6) refers forward to the remedies for breach of this duty.

Partners: share ofprofits, m anagem ent of the business etc.

Clause 11

29. When a partnership makes money, or loses it, how are the profits to be shared out, or the losses borne? This clause sets out a default rule that profits and losses of the partnership are to be shared equally. This reproduces the existing law. See the report, paragraphs 10.24, 10.25 and 10.30(1).

Clause 12

30. In what circumstances may a partner claim money from the partnership, or from fellow partners? This clause sets out some default rules to answer this question.

31. Subsection (2) provides that a partner is not entitled to claim remuneration unless the partners agree otherwise. T he default position is that a partner gets an equal share of the profits or bears an equal share of the losses of the partnership (see clause 11). See the report, paragraphs 10.29 and 10.30(5).

32. Subsection (3) sets out the circumstances in which a partner may obtain reimbursement from the partnership for money paid from personal funds. Paragraph (a) deals with expenses incurred for the benefit of the partnership. T his is the existing law. Paragraph (b) deals separately with payments which a partner makes to discharge his personal liability for debts, or other obligations, owed by the partnership. "Personal liability for a partnership obligation" is defined in subsection (8). It also clarifies that a partner is entitled to indemnity when, acting in good faith and reasonably, he pays a claim against the partnership which turns out not to be due. See the report, paragraphs 6.60 - 6.65(1)(a) and (t), 10.29 and 10.30(6).

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5

(4) The indemnity does not affect any claim which the partnership or another partner may have against the partner.

(5) If the partnership does not pay the indemnity (or part of it), the partner is entitled to contribution from any other liable partner on the same basis as if the

guarantors in the same proportions as they would be liable to bear any partnership losses.

(6) "Other liable partner" means a partner of his who-

(a) in the case of his liability (or alleged liability) for a partnership

with him for the obligation (or, in the case of settlement of an alleged liability, would have been liable if the alleged liability had been established), or

(b) otherwise, was a partner when the payment was made.

it is liable to account to him, he is entitled to contribution from the other partners in the same proportions as if the amount were a partnership loss.

(8) "Personal liability for a partnership obligation" includes-

(a) a liability under subsection (5) to make a contribution to a partner in

subsection (3),

(b) a liability under subsection (7) to make a contribution to a partner in respect of the partnership obligation to account to him for an amount,

(c) a personal liability under section 23(1) for a partnership obligation, and

a former partner in respect of the partnership obligation to indemnify him under section 34(2).

(1) This section contains default rules.

(a) contribute capital to the partnership, or

(b) vary the amount of his capital contribution to the partnership, unless he and all the other partners agree.

(3) If a partner contributes capital to the partnership, he is not entitled to interest

(4) If a partner makes an advance to the partnership beyond the amount (if any) of the capital he has agreed to contribute, he is entitled to receive interest from the partnership at the prescribed rate from the date of the advance.

(5) "The prescribed rate" has the meaning given by section 76(1).

14

Management etc. of partnership business and affairs

40

(1) This section contains default rules.

(2) A partner is entitled to take part in the management of the partnership business and affairs.

350

EXPLANATORY NOTES

33. Subsection (4) ensures that this right to reimbursement does not relieve a partner of liability for damages for any wrong committed to a partnership or other partner. See the report, paragraphs 6.60 and 6.65(1)(b).

34. A partnership may be obliged to account to a partner for an amount as a result of the operation of subsection (3) or otherwise (for example, under the partnership agreement). If the partnership does not pay, what rights does that partner have against other partners? The answer is provided by subsections (5)-(7). These give an unpaid partner personal rights to contribution from other partners. Subsection (7) deals with a partner's right to contribution in relation to, for example, a loan to a partnership or undrawn profits. See the report, paragraphs 10.30(6),6.60 - 6.64 and 6.65(1)(c)-(e).

35. Note that these subsections, like the clause as a whole, are default rules. Contrast the (mandatory) rules on secondary liability of partners for partnership obligations owed to third parties in clause 23. It is not impossible that a partner might have a claim against other partners under the mandatory rules in clause 23 rather than the default rules under this clause. This will be the case if the amount owed by the partnership to the partner is not an internal partnership matter but is owed to the person in a capacity other than as a partner, for example, a partner may be owed an amount due to damage to that partner's car caused by the driving of a partnership employee in the course of his employment.

36. T he rules in this clause broadly reflect the existing law as adapted for separate legal personality.

Clause 13

37. Suppose a partner puts money (or other assets) into the partnership. How is that to be treated, as between the partners? This clause provides some default rules to answer this question.

38. Subsection (2) provides that, in order for a contribution to be classified as capital or for a capital contribution to be varied, this must be agreed by all the partners. That agreement need not be express (see clause 76(2)). The following subsections set out some consequences of this classification. Subsection (3) provides that the partner is not entitled to interest on a con tribu tion classified as capital. Subsection (4) provides that a partner is, on the other hand, entitled to interest on other amounts he contributes. The amount of in terest is linked to the base rate. T his last point is a change in the law. 0 therwise, these rules reflect, with clarifications, the existing law. See the report, paragraphs 10.26, 10.28 and 10.30(2), (4) and (5).

39. Note that other consequences may flow from the classification of an amount as "capital".

For example, it may affect a partner's share of the profits (if the partnership departs from the default rule in clause 11 and shares profits in proportion to capital contributed). It may also affect a partner's share of the partnership's assets on a winding up (see the default rule in clause 44).

Clause 14

40. This clause provides default rules about management and how differences of opinion between partners are to be resolved.

41. Subsection (2) ensures that the views of each partner count. This reflects the existing law under the 1890 Act (section 24(5)).

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EXPLANATORY NOTES

42. The effect of subsections (3) and (4) is that the resolution of a difference of opinion will depend on whether the issue is an "ordinary matter". If it is, the majority can impose its will on the rest (subsection (3)). If not, unanimity is required (subsection (4)). This reflects the existing law under the 1890 Act (section 24(8)).
43. The question of whether an issue is an "ordinary matter" will depend on the facts of the case. What may be an ordinary matter for one partnership may not be for another. And what may be ordinary for a partnership at one time may not be so later. So, in general, the draft Bill, like the 1890 Act, does not give further guidance on this issue. An exception has been made to this general approach in subsection (5) which provides that a difference of opinion over whether a partnership should engage in legal proceedings (litigation or arbitration), whether as claimant/pursuer or defendant/defender, will (by default) be decided by majority. This is already the case in Scotland; in England and Wales there is doubt over the current position. See also clause 6(4) which provides that the nature of the partnership business can (by default) be changed only with unanimous agreement. See the report, paragraphs 10.27, 10.29, 10.30(3) and (5).
44. Note that the effect of a difference of opinion between partners over whether to admit someone to partnership is dealt with separately in clause 27 and variation of the partnership agreement is dealt with in clause 4.

Clause 15

45. It is part of the duty of good faith that partners should keep each other fully informed about partnership matters (clause 9(2)(a)). This clause provides a default rule in line with that duty on the retention of accounting information and the compilation of accounts.
46. The term "partnership records" in subsection (3) is used rather than the term "partnership books" which appears in section 24(9) of the 1890 Act. The new term is more appropriate in the era of electronic records. The clause does not, unlike section 24(9), require the records to be kept in a particular place. Otherwise, this default rule, read with clause 9(2)(a), is intended to reproduce, with clarifications, the law currently governed by section 24(9) and section 28 of the 1890 Act. See the report, paragraphs 11.33 - 11.34.

Power of partners to bind partnership

Clause 16

47. A partnership may confer express authority on a partner to do certain things on its behalf.

A partner who acts within the terms of such authority will bind the partnership by his acts. But what is the position if the partnership does not expressly confer authority on a partner? This clause gives the answer by providing that the ordinary authority of a partner to bind the firm extends to anything done for carrying on in the usual way business of the kind carried on by the partners.

48. Moreover, any limitation of that authority will not affect a person dealing with a partner unless he has notice of the partner's lack of authority or does not think he is a partner. This is the effect of subsection (2) and reflects the existing law (see the 1890 Act, section 5). For reasons which we discuss in the report we have not reproduced other provisions of the 1890 Act relating to the agency of a partner. See the report, paragraphs 6.10 - 6.22.

Partnership property

Clause 17

49. The introduction of separate legal personality into English law enables a partnership to own property in its own right. As a result, the definition of partnership property in this clause is shorter and simpler than that in section 20(1) of the 1890 Act. The definitions are different in EnglandfWales and Scotland because of differences in property and trust law; there is no difference in policy. See the report, paragraphs 9.81 - 9.83. Subsection (2) ensures that a partnership can be a joint tenant in English law. See the report, paragraphs 9.50 and 9.51(6).

353

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EXPLANATORY NOTES

Clause 18

50. In a particular case, there may be doubt over whether an asset is the private property of a partner (or group of partners) or of the partnership. Subsection (1) provides a rebuttable factual presumption about property bought with partnership money or acquired by barter with partnership property which will remove some such doubts. See the report, paragraphs 9.25 - 9.49, 9.51 (1),9.73 and 9.80(2).

51. T he purpose of subsection (2) is to clarify the legal analysis which applies to property held on behalf of the partnership (either as a result of the operation of the presumption in subsection (1) or otherwise). The effect of the subsection is that it is held on trust for the partnership. See the report, paragraphs 9.25,9.51(2),9.77 and 9.80(1).

52. The rules in this clause are designed to produce the same outcomes as in the existing law of partnerships.

Clause 19

53. This clause provides a different presumption from that in subsection (1) of the previous clause in a very narrow range of circumstances. It is likely to apply principally in agricultural partnerships. It reflects the existing law in section 20(3) of the 1890 Act. See the report, paragraphs 9.79 and 9.80(3).

Ex ecution of docum ents

Clause 20

54. This clause applies only to England and Wales and provides rules to govern the way in which the partnership may execu te a deed on its own behalf. Under the current law there are a number of legal and practical problems associated with the execution of partnership deeds. For example, all partners have to sign a deed, or be present when it is signed, for it to be binding on the whole partnership. The introduction of separate legal personality enables these to be removed. Under this clause, a partnership deed generally requires the signature of at least two partners (not agents of the partners or other agents of the partnership). See the report, paragraphs 9.94 - 9.96 and 9.98(1) - (5).

55. Clause 20 contains several exceptions to the basic rule that at least two partners must sign a deed for it to be executed on behalf of the partnership. If a partnership is being wound up and there is only one partner then that partner will be able to execute a deed (subsection (4)). In addition, where a limited partnership has only one general partner that partner will also be able to validly execute a deed (subsection (5)). Where there are no partners left during the winding up (for example, there were only 2 partners and both have died) a liquidator could be appointed and could execute a deed (Schedule 4, paragraph 24).

56.

Subsection (3) contains a rebuttable executed. An equivalent provision for Companies Act 1985.

presumption of delivery once a deed has been companies is contained in section 36A(5) of the

355

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EXPLANATORY NOTES

58. The authority of a partner to execute a deed does not fall within the ordinary authority conferred by clause 16(1). A partner must specifically have authority to execute a deed in order for that partner to enter into a deed that binds the partnership (clause 20(2)).

59. However, an exception to this rule has been made for the purchaser in good faith and for valuable consideration. The third party purchaser will have no way of knowing whether a partner has the authority required to execute a deed. Under subsections (7) and (8) such a purchaser will still be able to rely on the deed, even if the partners did not have the requisite authority to execute a deed. An equivalent provision for companies is contained in section 36A(6) of the Companies Act 1985.

Clause 21

60. In Scots law the rules for formal validity of documents are in the Requirements of Writing (Scotland) Act 1995. This clause clarifies the relationship between the 1995 Act and the rules as to the agency of a partner so that formal validity is not affected by a partner's lack of authority to sign the document, but the partnership or interested party will be able to seek the reduction of such a document if the partner had no authority to sign it on behalf of the partnership. See the report, paragraphs 9.97 and 9.98(7).

Vicarious liab ility of partn ership for wrongs

Clause 22

61. This clause sets out when a partnership is liable for the wrongful acts or omissions of its partners.

62. The partnership will be liable for resulting loss or injury caused to another if a partner's wrongful act or omission occurred in the ordinary course of the partnership business or was authorised by the partnership. A partnership may be vicariously liable under this clause to a partner, which is not the case under the equivalent provision of the 1890 Act (section 10). The expression "wrongful act or omission" is intended to have the same broad meaning as the House of Lords gave to the same phrase in section lOin Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 1 All ER 97, [2002] 3 WLR 1913 and [2003] 1 Lloyd's Rep 65. See the report, paragraphs 6.28 - 6.46.

Secondary liability of partners

Clause 23

63. Clause 3(1) introduced the concept of unlimited personal liability of partners for partnership obligations. This clause explains what that means.

64. Subsection (1) establishes which partners have unlimited personal liability for a partnership obligation: they are those who were partners when the partnership obligation was "incurred". Subsection (7) states when a partnership obligation is incurred in the case of a breach of duty in tort (delict), a breach of trust or a breach of fiduciary duty. Note that a partnership obligation which results from a breach of duty in contract will be taken to have arisen at the moment the contract was entered into; subsection (7) does not mention this because it is the effect of the general law. See the report, paragraphs 6.54 - 6.59(2), 6.73 ­ 6.80 and 6.88(2).

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(2) But a partner ("A") is not personally liable under subsection (1) for a partnership obligation owed to a partner or former partner ("B") if-

(a) the partnership agreement (including any default rules), or

(b) another agreement to which A and B are parties,

contribution from A in respect of the obligation.

(3) Subsection (1) does not affect the liability of the partnership for the partnership obligation.

(4) If a partner pays an amount to discharge the whole or a part of his personal

to the extent of the amount paid.

(5) If a partnership obligation is-

(a) discharged in whole or in part (whether or not as a result of subsection (4)), or

the personal liability of any partner for that partnership obligation is discharged or reduced or extinguished to the same extent.

(6) In this Act "partnership obligation" includes-

(a) any partnership debt, and

(7) For the purposes of this Act, a partnership obligation which results from­ (a) breach of a duty in tort or delict (including quasi-delict),

(b) breach of trust, or

(c) breach of a fiduciary duty,

gave rise to the breach.

24

Secondary nature of partner's liability

A partner may not in any proceedings be held personally liable under section 23(1) for a partnership obligation unless-

(a) there has been a judgment, decree or arbitral award against the partnership establishing the amount of the partnership obligation in the same or earlier proceedings,

(b) the court has ordered the partnership to make a payment (or interim payment) in respect of the partnership obligation, or

(c) in Scotland, the partnership obligation is constituted in a document registered for execution in the Books of Council and Session or the sheriff court books.

30

35

(1) Rules of court may make provision-

(b) restricting the extent to which, or the way in which, a partner may defend,

proceedings in respect of his personal liability for a partnership obligation if he has had an opportunity to participate in related proceedings.

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EXPLANATORY NOTES

65. Subsection (2) ensures that these rules do not interfere with the rules which partnerships are free to determine for themselves on the position as between partners and former partners. Default rules on these issues are in clause 12(5) and 12(7) (current partners) and clause 34(4) (former partners). See the report, paragraphs 6.62 and 6.65(2).

66. Subsections (3) - (5) establish the relationship between the partnership obligation (defined by subsection (6)) and the personal liability of the partners (as imposed by subsection (1)). The effect of these subsections is that the liabilities of the partners and the partnership are, so far as the third party is concerned, joint and several. See the report, paragraphs 6.58 and 6.59(2).

67. This clause is intended to replicate the effect of the existing law of partnerships on this issue, in the context of separate legal personality and in the absence of mutual agency, while making clear that the joint and several liability of the partners and partnership as against a third party leaves partners free to determine their liability amongst themselves by agreement.

Clause 24

68. This clause sets out an important procedural protection enjoyed by partners in relation to their personal liability for partnership obligations. A third party may proceed against a partner (on the basis of a personal liability for a partnership debt) only (i) in the same proceedings as he obtains or after he has obtained a judgment/decree or arbitral award against the partnership (paragraph (a)); (ii) where there is some other court order requiring it to pay (paragraph (b)); (iii) (in Scotland) when the partnership obligation has been constituted in a document registered for execution (paragraph (c)).

69. Note that it is not sufficient for the third party to establish liability only: the judgment/decree, or order, or registered document, must specify the amount payable by the partnership. Note, however, that the third party is not obliged to attempt to extract any payment from the partnership before doing so against the partner.

70. The purpose of the clause is to ensure that a partner is not required by the court to pay a partnership obligation until the amount of the partnership obligation has been established against the partnership. Normally, this will allow all those potentially liable for the claim to put their case. But note that the claimant/pursuer is not required to sue all or indeed any of the partners when establishing his claim against the partnership. T his position is similar to that achieved in England and Wales in the absence of separate legal personality under rules of court (Order 81 of the Rules of the Supreme Court). See the report, paragraphs 7.21 ­ 7.22(2),7.55 - 7.62 and 7.64(1) and (2).

Clause 25

71. This clause contains further provisions on a partner's personal liability under clause 23(1).

72. Subsections (1) and (2) give a power to make rules of court limiting a partner's right to defend a claim in respect of his personal liability for a partnership obligation. Such a rule might be introduced, for example, to prevent a partner from raising points which had already been fully aired and decided in the action against the partnership in which he had an opportunity to participate. See the report, paragraphs 7.25 - 7.26.

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(2) "Related proceedings" means earlier proceedings in which there has been a judgment or decree against the partnership establishing the existence or amount of the partnership obligation.

(3) Schedule 2 makes provision about the periods of limitation and prescription

(4) A judgment, decree or arbitral award against a partnership in respect of a partnership obligation is not enforceable, by way of execution, diligence or otherwise, against the property of a partner.

Liability of non-partners by holding out

(1) If-

(a) a person ("A") who is not a partner in a partnership represents himself, or knowingly allows himself to be represented, as one, and

(b) a person ("B") deals with the partnership in reliance on the

A is personally liable for the whole amount of any partnership obligation incurred to B as a result.

(2) Subsection (1) also applies if A-

(a) is a partner at the time the representation is made or communicated to

(b) is no longer a partner at the time B deals with the partnership in reliance on the representation.

(3) Subsection (1) applies-

(a) even if A does not know that the representation has been made or

(b) whether the representation is made or communicated in writing, by conduct or otherwise.

(4) Sections 23(2) to (5), 24 and 25 apply in relation to A's personal liability under subsection (1) as if it were a personal liability of a partner under section 23(1).

by him to discharge the whole or a part of his personal liability under subsection (1) for a partnership obligation or in reasonable settlement of an alleged personal liability of his under subsection (1).

(6) The indemnity does not affect any claim which the partnership or a partner

(7) This section is subject to section 35 (restrictions on liability of former partners or employees by "holding out").

Changes in partners

with the agreement of all the existing partners.

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EXPLANATORY NOTES

73. How long does a third party claimant who has obtained judgment against the partnership have to issue proceedings against an individual partner? The answer is provided by Schedule 2 (which is introduced by subsection (3)). The third party has two years from the date of judgment against the partnership, or until the limitation/prescriptive period against the partnership expires, whichever is longer. This rule has no counterpart in the existing law. See the report, paragraphs 7.65 - 7.72.

74. Subsection (4) abolishes the rule in Scotland which allows diligence against partners on a decree against the partnership by stating as a rule, throughout Great Britain, that a judgment against a partnership is not enforceable against the property of a partner. A creditor who wishes to enforce against the property of a partner must also obtain judgment against him. See the report, paragraphs 7.63 and 7.64(3).

Liability of non-partners by holding out

Clause 26

75. This clause deals with the situation where as a result of a representation a non-partner (A) appears to a third party (B) to be a partner and, in reliance on the representation, B deals with the partnership and ends up being owed some money which the partnership does not pay. The clause sets out the circumstances in which A is personally liable to B.

76. Subsection (4) ensures that, if A is personally liable in this way, that liability is treated like a secondary liability of a partner, governed by clause 23. See the report, paragraphs 6.99 and 6.106(1).

77. Subsection (5) gives A an indemnity from the partnership for any amount paid out to satisfy this personal liability. T he partners will be secondarily liable for that indemnity under clause 23. A will, in this way, often get his money back. A will not be able to do so only if (1) the partnership and the partners have inadequate funds; or (2) A is liable independently to the partnership or partners (for example in negligence). Subsection (6) ensures that the indemnity in subsection (5) is not taken to rule out the second possibility.

78. It may well be the case that A will have been a partner in the past. The draft Bill provides some rules, in clause 35, referred to in subsection (7), limiting the circumstances in which such a person may become liable under this clause. These rules enable someone who leaves a partnership to take steps to reduce the risk of personal liability arising under this clause. Clause 35 protects former salaried partners as well as former partners.

79. This clause is a statutory application of the law of estoppel/personal bar. It reproduces, with substantial clarifications, the existing law under the 1890 Act (section 14). See the report, paragraphs 6.96 - 6.106(1) - (3).

Changes in partners

Clause 27

80. Just as agreement is necessary between all the prospective partners before a partnership forms (clause 1), so agreement is necessary - between all the existing partners and the prospective partner - before a prospective partner can join a partnership. Subsection (1) ensures that this is the case. The rule is a default rule, so if a partnership agreement provides that the agreement of a smaller proportion of partners will suffice, then that will be effective.

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EXPLANATORY NOTES

81. All agreements in the draft Bill may be inferred from conduct (clause 76(2)). Subsection (2) indicates that an inference as to the existence of the agreement required under subsection (1) is appropriate if the purported partner starts to carryon business with the existing partners for profit; it is not necessary for any of the parties to have turned their mind to the question of partnership specifically. This reflects the existing law. See the report, paragraphs 10.27 and 10.30(5).

Clause 28

82. Subsection (1) provides an exhaustive list of ways in which someone can cease to be a partner. Subsection (2) provides more detail on the first of these by listing the relevant default rules.
83. Under the 1890 Act, if a person ceases to be a partner, the partnership is always "dissolved". Under the draft Bill, however, one of two things may happen. One possibility is that the partners continue in business as before. So, for example, one partner in a three partner firm might resign under the default rule (in clause 30) and the other two might decide to continue. The other possibility is that the partnership "breaks up" which is the first step in the process of winding up the partnership (see clause 38 and following). This would be the result if, for example, two partners in a three partner firm resigned under the default rule in clause 30.
84. If a partnership breaks up (whether as a result of a partner ceasing to be a partner or otherwise), the rules on ceasing to be a partner change, as specified in clause 40. This is referred to in subsection (3). The reasons for the change in the rules in this situation are set out in the explanatory note to that clause. See the report, paragraphs 8.82 - 8.136.

Clause 29

85. This clause provides a default rule under which a partner who becomes insolvent (as defined in subsections (2), (3) and (4)) ceases to be a partner. Under the 1890 Act (section 33) the rule was that the insolvency of a partner brought the partnership to an end. See the report, paragraphs 8.101 and 8.110(1).

Clause 30

86. This clause provides a default rule entitling partners to resign. Under the current law the default arrangement is the partnership at will. It is dissolved immediately when any partner gives notice. It is created where partners do not define the period during which they are to be in partnership and may also come about on the expiry of a period defined in a partnership agreement. Under the draft Bill, the new default position is that, whilst a partner has a right to resign (under this clause), resignation will leave the remaining partners in a continuing partnership.
87. A partner who leaves a continuing partnership will, by default, be paid by the partnership for his partnership share (see clause 32) and receive an indemnity from the partnership and remaining partners (see clause 34). In those circumstances, there is a danger that a partner might be tempted to leave a partnership which was experiencing difficulties before his colleagues in order to receive a larger payout and more valuable set of indemnities. Two aspects of the draft Bill are designed to prevent this. First, this clause enables partners who receive notice of a partner's resignation to resign with effect from the same date. Secondly, partners who have not issued notices of resignation may decide to wind the partnership up at any time.
88. Subsection (1) sets out the partnerships to which the default right to resign applies. The right does not, in general, apply in a "partnership of defined duration". (This phrase is defined in clause 76(1).) The reason is that, in such a partnership, the partners have agreed to be locked in: it would be inappropriate for a default rule to override that agreement. The exception to this is if a partner in such a partnership has died, or ceased to be a partner because of insolvency. In such circumstances, it would not be right to lock partners in unless they specifically contemplated this possibility.

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EXPLANATORY NOTES

89. Subsection (2) confers the right to resign. A partner must give 8 weeks' notice, or more, of his resignation to every other partner. There are no presumptions in the draft Bill about when notice is to be taken to have been given. So a partner must ensure that each other partner actually gets at least 8 weeks' notice. If a partner gives a valid notice then he will cease to be a partner on the expiry of the notice (unless the partnership breaks up on or before that date).

90. Subsection (3) gives a recipient of a resignation notice under subsection (2) the right to resign with effect from the same moment by giving not less than two weeks' notice. Subsection (7) refers to clause 38(2) - (4). Those subsections contain a default rule under which at least half of the partners who have not given notices of resignation may decide to wind up the partnership at any time. If they do so at the same time as, or before, the resignation notices take effect, then all the partners will be treated alike in the winding up (see clause 40). Subsection (3) and clause 38(2)-(4) will thus enable partners to prevent a partner from escaping his responsibility for partnership obligations at their expense by exercising his default right to resign from a continuing partnership. See the report, paragraphs 8.19 - 8.30, 8.82 - 8.100(1) and (2),8.103 - 8.104, and 8.110(3) and (4).

Clause 31

91. This clause provides a default power of expulsion. It is very narrow. The only circumstance (in England and Wales) in which a partner may be expelled under this default rule is if the benefit of the financial rights attaching to his status as partner are, by order of the court (under clause 46), transferred to a judgment creditor. The reason for this is that a partner who is financially embarrassed in this way, and is no longer interested financially in the partnership, may no longer have its best interests at heart. Similarly, in Scotland, a partner may be expelled where the whole or a part of his share in the partnership is arrested in execution in respect of a debt which is not a partnership debt. See the report, paragraphs 8.107 - 8.109 and 8.110(6).

92. Under the current law, there is no default power to expel. This clause replaces section 33(2) of the 1890 Act which gave an option to dissolve the partnership where a partner's share had been charged.

Clause 32

93. Under the draft Bill a partner may leave a continuing partnership. If that happens, what are the former partner's rights and obligations in relation to the partnership and the remaining partners? This clause, and clause 34, provide default rules to answer this question.

94. Subsection (2) converts the outgoing partner's share in the partnership into a debt owed to him by the partnership, or by him to the partnership (according to the financial position of the partnership and the status of his account with the partnership) when he leaves. Subsection (3) specifies how the valuation exercise is to be carried out. It is designed to give the outgoing partner the value of his share in the partnership based on the market value of the partnership if it could be sold as a going concern, or the market value of partnership property. This reflects the terms on which many retiring parties are bought out in current practice. See the report, paragraphs 8.62 - 8.68, 8.74 - 8.75(1) and (2), 8.77 ­ 8.78 and 8.110(2).

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13

(i) the market value of the partnership property, and

(ii) the market value of the partnership business if sold as a going concern without him, and

(c) the partnership assets were then distributed under the default rules in

substitute provisions in the partnership agreement.

(1) A person who ceases to be a partner does not by doing so cease to be personally liable under section 23(1) for partnership obligations incurred while he was a

(2) Sections 23(2) to (5), 24 and 25 apply to a former partner as they apply to a partner.

(3) An agreement between a former partner, the partnership and a creditor to discharge the former partner from his personal liability for a partnership

(4) Subsection (3) extends to England and Wales only.

(1) This section contains default rules.

(2) A former partner is entitled to be indemnified by the partnership in respect of

liability for a partnership obligation or in reasonable settlement of an alleged personal liability for a partnership obligation.

(3) The indemnity does not affect any claim which the partnership or a partner may have against the former partner.

is entitled to-

(a) indemnity from any person who was a partner when he ceased to be a partner and who continued to be a partner after he ceased to be a partner, or

partnership obligation (or, in the case of settlement of an alleged liability, would have been liable if the alleged liability had been established) of such amount as is just and equitable.

(5) Subsection (4) does not apply if the former partner ceased to be a partner on or

are in section 44 (distribution of partnership's assets on winding up)).

(6) "Personal liability for a partnership obligation" includes-

(a) a personal liability under section 23(1) for a partnership obligation, and (b) a liability under subsection (4) to indemnify (or make a contribution to)

him under subsection (2).

(7) A former partner must, on request, transfer any partnership property which is held in his name to-

(a) the partnership, or

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EXPLANATORY NOTES

Clause 33

95. Subsections (1) and (2) ensure that a partner does not escape unlimited personal liability for partnership obligations already incurred (arising under clause 23) on leaving the partnership. This reflects the existing law. Of course, a former partner is likely to receive an indemnity from the partnership and remaining partners on departure (and does so under the default rules in clause 34). But this does not affect the position as between the former partner and a third party claimant.

96. Subsection (3) ensures that an agreement between a creditor and the former partner and the partnership that the former partner is no longer to be liable for the debt is enforceable. This clarifies an uncertainty in the existing English law. See the report, paragraphs 6.86 ­ 6.88(1) and (3).

Clause 34

97. What rights does a former partner have against the partnership and continuing partners if he has to make a payment from his personal assets for a partnership liability? This clause contains default rules answering this question (just as clause 12 contains default rules containing the answer to the same question in relation to current partners).

98. Subsection (2) enables a former partner who has made such payments to claim reimbursement from the partnership. The indemnity conferred by this provision is identical to that conferred on current partners who make such payments (in clause 12(3)(b)) and covers payments made reasonably and in good faith in settlement of an alleged liability. There is no need to indemnify a former partner for expenses incurred (as is provided for current partners in clause 12(3)(a)) as the former partner is no longer carrying on the business.

99. Subsection (3) makes it clear that, as for current partners, the indemnity does not prevent a partner or the partnership from making a claim against the former partner.

100. Subsection (4) provides for the situation where the partnership does not pay the indemnity to which the former partner is entitled. The former partner is entitled to look to two sets of partners. First (paragraph (a)) he is entitled to look to those who were partners at the moment the former partner left the partnership. They were the people who "bought out" his share under the default rule in clause 32. Secondly, he is entitled to look to the partners who were liable with him for the partnership obligation he paid (paragraph (b)) for a "just and equitable" contribution.

can decide not to pay a former partner under this rule by changing it. If the default rule applied when a former partner left the partnership then rights will have accrued under it. Note also that, if the former partner is owed money by the partnership for any reason other than the indemnity in clause (2) (for example if the partnership fails to pay an amount owing under the default rule in clause 32) he will be entitled to apply to court for an order under clause 53.

102. The purpose of subsection (5) is to ensure that, if the partnership is being wound up, the correct default rules governing the rights of the partners (as between each other) apply.

103. Subsection (7) ensures that a partnership can recover its property from former partners.

See the report, paragraphs 8.69 - 8.73, 8.75(3), 8.79 - 8.80 and 8.100(3).

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(b) a trustee for the partnership.

(1) This section limits the circumstances in which a person ("A") who has ceased to be a partner in a partnership may be held personally liable under section

partnership in reliance on a representation that A was a partner.

(2) A is not liable if the representation was made or communicated to B­ (a) while A was still a partner, but

(b) more than one year before B dealt with the partnership in reliance on it.

(a) the representation was made or communicated to B while A was still a partner, and

(b) before B dealt with the partnership in reliance on the representation, notice that A was ceasing, or had ceased, to be a partner was given to B

(4) A is not liable if the representation consists merely in-

(a) the partnership business continuing to be carried on in the same partnership name, or

(b) the partnership name continuing to include A's name,

(5) In this section, references to a partner in a partnership include an employee of the partnership.

(1) This section applies if the whole or a part of the share in a partnership of a

insolvency or otherwise) to another person ("B").

(2) B may not-

(a) take part in the management or administration of the partnership business or affairs, or

(3) But that does not affect any of B's rights to receive amounts in respect of the whole (or part) of-

(a) A's share in the partnership profits, or

(b) A's entitlement on ceasing to be a partner or on the winding up of the

(4) Nothing in this section prevents a person to whom a partner has assigned the whole of his share absolutely from becoming a partner in place of the assignor if-

(a) all the partners agree to the substitution, or

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EXPLANATORY NOTES

Clause 35

104. A non-partner may be liable to a third party, as if a partner, if he held himself out as a partner (under clause 26). This clause mitigates the severity of that rule for former partners, and for former salaried partners (who are employees who appear to the outside world as partners).

105. Subsections (2) and (3) limit the operation of clause 26 in cases in which the representation was true when made. Subsection (2) means that a former partner can be absolutely sure that no liability will arise on the basis of such a representation once a year has elapsed since the representation. Subsection (3) enables a former partner to remove all possibility that a liability will become due to particular third parties, by sending them notice of his departure. See clause 41 in relation to notices. Subsection (4) clarifies that the continued use of the partnership name, even if it includes the former partner's name, does not amount to a representation which could give rise to such a liability. Subsection (5) extends the protection in this clause to former salaried partners. It would not be right for them to be in a worse position than former partners.

106. The rules in this clause are different in some respects from those in the 1890 Act (sections 36 and 14). See the report, paragraphs 6.100 - 6.104 and 6.106(4) - (7).

Clause 36

107. In a limited company, the management of the business is under the control of the board of directors, but profits are owned by the shareholders. In a partnership, there is no such distinction. The partners fill both roles. If a partner purports to assign his rights in the partnership to another person (or if this happens by operation of law, for example on death or insolvency) the question arises: do the rights attaching to both of these roles transfer, or only some of them? This clause provides the answer: the assigning partner cannot transfer his rights to manage the business or to access internal information. That which he transfers is his share (whole or part) in the partnership profits or his entitlement on ceasing to be a partner or on the winding up of the partnership. Subsection (4) clarifies that this does not, however, prevent the assignee becoming a partner in the usual way (eg if the existing partners agree, or in accordance with the relevant term(s) of the partnership agreement).

108. This clause broadly reflects the existing law in the 1890 Act (section 31). See the report, paragraphs 13.13 - 13.17.

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15

(1) This section applies where the whole or a part of a partner's share in the partnership is subject to an arrestment in execution.

(2) The arresting creditor is not prevented from raising an action of furthcoming

decree in any such action, by reason only that, at the time the action is commenced or the decree granted, the share or part arrested is not yet payable to the partner.

(3) But any decree of furthcoming granted in pursuance of the arrestment cannot

the partner.

(4) The arresting creditor is not, by virtue only of the arrestment or any decree of furthcoming granted in pursuance of it, entitled to take part in the management or administration of the partnership business or affairs.

(1) A partnership breaks up only if-

(a) the number of partners falls below two,

(b) a term of the partnership agreement under which the partnership is to

agree, within a reasonable period, to continue the partnership), or

(c) an order under section 47(1) (c), 49 or 53(2) (d) has effect in relation to the partnership.

(2) Subsections (3) and (4) contain default rules which apply to-

(b) a partnership of defined duration in which one or more persons has at any time ceased to be a partner involuntarily.

(3) If at least half the partners decide that the partnership should end, it ends on the date agreed by the partners who so decided.

partnership agreement, he is to be treated as not being a partner for the purpose of subsection (3).

(5) If subsection (1)(b) applies, the partnership breaks up on the date provided for by the partnership agreement.

particular, from the fact that the partners have ceased (or continue) to carry on the partnership business together with the object of making a profit.

(7) "Involuntarily" means because of-

(a) his death or (if not an individual) dissolution, or

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EXPLANATORY NOTES

Clause 37

109. This clause applies to Scotland only. It clarifies and develops the existing law of arrestment and furthcoming in so far as it applies to the methods by which a creditor who has arrested in execution a partner's share in the partnership can realise that share. It also makes clear that the arrestment and furthcoming does not entitle the creditor to take part in the management of the partnership business. See the report, paragraphs 7.73 - 7.75.

Break up of partnerships Clause 38

110. One of the advantages of the introduction of separate legal personality for partnerships is that it enables the partnership to survive various events, such as a change in partners, or an illegality affecting a partner, which under the current law bring the partnership to an end. In some circumstances, of course, it is right that the partnership should come to an end. When is this to be the case under the draft Bill, and how will a partnership come to an "end" in the context of separate legal personality? This clause, and the ensuing clauses, provide answers to those questions, by setting out an exhaustive list of the circumstances in which a partnership breaks up and the effects of break up.
111. Subsection (1) introduces the concept of "break up". Break up is the first stage of the demise of a partnership. In that respect it is the equivalent of "dissolution" under the current law. (N ote that "dissolution" is used in a quite different sense in the draft Bill to signify the end, rather than the beginning, of the winding up process (see clause 45)). A partnership can break up only in one of the three sets of circumstances specified in this su b section.

112. Subsection (3) contains a default rule under which at least half the partners may at any time elect to break up the partnership. Thus, if a vote is tied, where all the partners have voted, the partnership will break up. As partnership is a consensual arrangement, it would not be right to require it to continue unless a majority of those involved agree. The exception to this (subsection (2)) is a partnership of defined duration (as defined in clause 76(1)) in which no-one has died or become insolvent. In such a partnership, the partners have committed themselves to staying together.
113. Su bsection (4) clarifies the way in which this default rule is to operate if a partner has tendered a resignation notice. We anticipate that in some partnerships the resignation of a certain 'key' partner or partners may cause all the other partners to consider whether the partnership should continue or should be broken up under (3). Under subsection (4) the partner who has given a resignation notice cannot vote under subsection (3). Neither does the partner who has resigned count as one of the total number of partners for the purposes of the vote. This is to allow the remaining partners to consider whether they wish to continue given the fact of the resignation under subsection (4).
114. All agreements referred to in the draft Bill may be inferred from conduct (clause 76(2)).

Subsection (6) provides specifically that agreements to end or continue a partnership may be inferred simply from the fact that the business stops or continues; the partners need not consider the question of "break up" itself. This subsection is similar to clause 27(2) in indicating the way in which the provisions of the draft Bill are to be interpreted in cases in which the partners may not be aware of the legal effect of their actions, or indeed that they are in partnership at all. See the report, paragraphs 8.19 - 8.30, 8.89 - 8.99, 8.100(3), 8.101 - 8.106, 8.110(5) and 12.13 - 12.23(1).

115. Another important effect of this clause is that it excludes contractual doctrines such as acceptance of repudiatory breach of contract, frustration and rescission for fraud or misrepresentation. See the report, paragraphs 8.119 - 8.124 and 8.84.

371

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EXPLANATORY NOTES

Clause 39

116. This clause explains the effect of "break up" and introduces the two ways in which the winding up may be done under the draft Bill: by the partners under clause 43 (which is expected to be the norm, as under the existing law), or by a liquidator under clause 50 and Schedule 4. Subsection (1) also mentions the other possibility following break up which is that the court appoints a "provisional liquidator" (whose duties are set out in Schedule 5) to safeguard the partnership's assets pending a decision on whether a liquidator should be appointed. Subsection (2) ensures that the partnership will continue to exist as an entity after break up (see clause 45).

117. T he provisions in the draft Bill relating to the winding up of a partnership are not designed to deal with the partnership which is insolvent. In such cases, separate insolvency legislation is needed. Hence, subsection (3), which makes the draft Bill subject to the current partnership insolvency and partnership bankruptcy legislation (namely, the Insolvency Act 1986 in England and Wales and the Bankruptcy (Scotland) Act 1985 in Scotland). See the report, paragraphs 12.13 -12.23.

Clause 40

118. Clause 30 and clause 38(3) - (4) contain default rules under which a partnership may break up on a particular date, either because all or all but one of the partners have tendered resignation notices, or because at some point at least half of those who have not yet tendered resignation notices decide to break it up. If the partnership breaks up in such a way, then all the partners involved will (1) have equal rights to be involved in the winding up, whether that is conducted by themselves or by a liquidator; (2) be personally liable as partners for any partnership obligation incurred during the winding up. The purpose of this clause is to ensure that this is the case. Its effect is that, as a general rule, all those who were partners at the moment immediately before break up continue to be treated as partners until the partnership is dissolved.
119. T he exception to this rule is if a partner ceases to be a partner in volun tarily, as set out in subsection (4). Such people will no longer be involved in the winding up, or be personally liable for partnership obligations incurred after they ceased to be partners. T hey will, however, together with all the remaining partners (and people treated as partners by virtue of subsection (1)) be treated alike when gathering in and distributing partnership assets, under the default rule in clause 44. See the report, paragraphs 12.24 - 12.25.

Changes in partners and break up of partnerships: supplem entary

Clause 41

120. Those who leave a continuing partnership may, in limited circumstances, find themselves liable to third parties for partnership obligations incurred after they leave (see clause 26). They can limit their chance of incurring such liability by publicising their departure (see clause 35). This clause ensures that such people are entitled to take steps to protect themselves by publicising their departure. The clause reflects the existing law in the 1890 Act (section 37). See the report, paragraphs 13.18 - 13.20.

Clause 42

121. The legal analysis of property ownership under the existing law in England and Wales (in the absence of separate legal personality) is difficult. Particular problems include (1) the sui generis nature of the partners' property rights, and (2) the correct analysis of what happens to property rights when a partner joins or leaves. The introduction of separate legal personality removes the first problem: the entity itself can own property, or be the beneficiary of a trust. The second problem largely disappears also: the partnership under the draft Bill will usually continue to exist despite changes in membership. However, there may still be occasions on which it does not. T his clause is designed to ensure that, in such situations, property transfers subsequently made to third parties in good faith are not invalidated. See the report, paragraphs 9.52 - 9.65.

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EXPLANATORY NOTES

Winding up and dissolution of partnership

Clause 43

122. Typically, a partnership which has broken up will be wound up by the partners. This clause sets out the partners' rights and obligations in such a situation.

123. For the purpose of winding up there will usually be more than one partner (see clause 40 of the draft Bill, the note on it and the further notes on this clause.) In such a case, subsection (3) clarifies that the partners can agree to carryon the partnership business so far as is necessary for the beneficial winding up of the partnership. Such an agreement can confer authority on one or more of the partners for that purpose. See subsection (6). The partners will continue to have authority as agents of the partnership under the general law and under the draft Bill.

124. In the situation where there is only one remaining partner, he will have power to wind up the partnership entity and to complete any transactions begun but unfinished at the time of break up. See subsection (4). He will not be able to continue the partnership business by entering into new transactions. It would be open to him to continue as a sole trader while winding up the partnership, but, if he wanted to use any partnership assets for his own business, he would require to negotiate with interested parties such as the personal representative of a deceased former partner. Subsection (4) will also apply where there is more than one remaining partner but the remaining partners do not agree to carryon the partnership business under subsection (3).

125. It is possible that the partners might disagree about a decision which needs to be taken during the winding up. How is such a difference of opinion to be decided? Subsection (5) provides a default rule that a simple majority will bind all of the partners. In the absence of such a rule, it might appear that the standard default rules on decision-making in clause 14 would require unanimity. That would be likely to create stalemates. A partner disgruntled by the outcome of a vote under subsection (5) would be entitled to apply to court for the appointment of a liquidator; and he could try to protect existing assets by the immediate appointment of a provisional liquidator (see clauses 50 and 51). But until any order is made, he would be bound, under this default rule, by the majority. This is new: under the existing law, in the event of dispute, an application to court is required. See the report, paragraphs 12.20 - 12.21 and 12.23(2) - (4).

126. It is important to note that the expression "partners" in this clause includes those who are treated as partners by clause 40. See the note to that clause for the reasons for this. There may be other people who are interested in the winding up (i.e. have financial rights from and/or obligations to the partnership), in particular those who have left the partnership involuntarily since the break up. If such people object to a decision made in the winding up, including a decision to continue the business, they have a right to apply for the appointment of a liquidator or provisional liquidator under clauses 50 and 51. They may also apply for other orders under clause 53. See the note to that clause.

Clause 44

127. When a partnership is wound up (whether by the partners or a liquidator), it will be necessary to gather in and distribute the partnership's assets. This clause provides default rules about how this should be done. Partners may agree different rules for the distribution of partnership assets. Creditors are ultimately protected by the unlimited liability of the partners.

375

376

EXPLANATORY NOTES

128. Subsection (2) ensures that the default rules in this clause apply to all those who were partners immediately before break up (see clause 40) including those who ceased to be partners involuntarily on or after break up. So, for example, if a partner dies after break up, his estate is not entitled to be involved in the winding up and is not secondarily liable for partnership obligations incurred thereafter; but the estate is bound by the default rules in this clause, and entitled to be paid out under them.

129. Subsection (3) sets out the way in which the partners, or the liquidator, must, by default, deal with the partnership's assets. The rules largely reflect those which apply under the existing law (1890 Act, section 44) with the following difference: if a partner puts capital into a partnership and the partnership loses it, the other partners are not obliged, under this default rule, to contribute to that loss. Under the current law, the default position is that the loss is borne equally.

130. The purpose of subsections (4), (5) and (6) is to ensure that partners are not obliged to contribute amounts to the partnership during the winding up for which they could not be sued by a creditor (subsection (4)(a) and (6)), or in respect of which they could not be pursued by a partner under the relevant default rules (subsections (4)(b) and (4)(c)). For example, suppose a partner joined a partnership and the next day it was wound up under the default rules before new liabilities were incurred and the partnership did not have sufficient funds either to pay the creditors or to repay the partners' loans to the partnership. Such a partner would be relieved of the obligation to dip into his personal assets during the winding up by these subsections.

131. The purpose of subsection (6)(b) is to deal with a case in which the partnership has insufficient funds, at Step 2 of subsection (3), to pay a creditor who could not sue a particular partner (A) directly (because the obligation was incurred before A joined) but who could sue a former partner to whom A had given an indemnity (under the default rule in clause 34(4) or otherwise). The effect of subsection (6)(b) is that A, will, under these default rules, have to contribute to the partnership to make up a shortfall in respect of the partnership obligation. See the report, paragraphs 12.119 - 12.128.

377

378

EXPLANATORY NOTES

Clause 45

132. "Dissolution" in the draft Bill is used to refer to the end of the winding up process (in contrast with the current law in which, the term refers to the start of the winding up process). It marks the expiry of the life of the legal entity created by clause 1. When does dissolution occur? This clause provides the answer.
133. The effect of this clause is that a partnership will continue in existence until it is no longer needed for any of the purposes for which it was created. In particular, the effect of subsection (2) is that it will never be a defence to a claim by a partnership that the partnership has been dissolved; and the effect of subsection (5) is that it will never be a defence to a claim against a partnership that the partnership has been dissolved. As a result of these two features, it has not been necessary to provide in the draft Bill either a mechanism for reinstatement of a dissolved partnership, or for transfer of assets and liabilities from a dissolved partnership to the partners. See the report, paragraphs 12.13 - 12.22 and 12.23(1) and (5).

Court's powers in relation to partnerships Clause 46

134. A judgment against a partner for a debt (or liability) that is not a partnership debt cannot give rights against the partnership. But his share in the partnership may be a valuable asset. Under this clause the judgment creditor can obtain a charging order over it. The clause reflects the existing law under the 1890 Act, section 23. It does not apply in Scotland because it would be difficult to introduce such a right in the context of the existing law of diligence. See the report, paragraphs 13.10 - 13.12.
135. If a creditor obtains an order against a partner under this clause (or where, in Scotland, the whole or part of a partner's share in the partnership is subject to an arrestment in execution in respect of a debt which is not a partnership debt) this provides by default, grounds on which he may be expelled (clause 31).

Clause 47

136. Partners may disagree amongst themselves. If they do, the partnership agreement, the draft Bill and the general law should make clear how the dispute should be resolved. So, for example, in a partnership governed by the default rules in clause 14, a dispute about whether a particular business deal should be concluded should be decided by a simple majority. However, there may be allegations that a partner is in breach of a term of the partnership agreement, or the duty of good faith, or is acting illegally or contrary to the best interests of the partnership. If the partners are not be able to agree a way forward amongst themselves in such circumstances, what course of action is available to them? This clause provides that they may apply to court for relief.
137. Under the existing law there has until recently been some doubt about the application of contractual doctrines such as repudiatory breach or frustration in such cases. The recent decision of the House of Lords in Hurst v Bryk [2002] 1 AC 185 has given guidance on this question. The approach of the draft Bill is consistent with the approach of Lord Millett in that case as adapted for a law of partnerships with separate legal personality. Under the draft Bill, acceptance of a repudiatory breach of contract will not cause a partnership to break up (see clause 38).
138. A practical problem with the non-application of contractual doctrines under the current law is that the court is not at present empowered to make orders removing particular partners while allowing the partnership business to continue. It can only order that the partnership be wound up (1890 Act, section 35), although it can by a Syers v Syers order require the buyout of a partner in a winding up instead of the realisation of the partnership's assets. The draft Bill (under this clause and clause 48) changes this. Subsection (1) provides that, on application by a partner, the court may make three kinds of order: an order removing a partner other than an applicant; an order removing the applicant; or an order breaking up the partnership. Only the third kind of order results in the winding up of the partnership. A partner might apply for his own removal in a number of situations - for example, if he had been induced to enter into partnership on the basis of a misrepresentation; or if he profoundly disagrees with the course of action decided upon by the other partners.

379

380

EXPLANATORY NOTES

139. Subsections (2), (3) and (4) set out the grounds on which the three types of order may be made. These provisions draw on, modify and supplement those specified in the 1890 Act on which the court may make an order winding up the partnership. Two notable additions are the ground of illegality (which under the existing law automatically dissolves the partnership without the intervention of the court: 1890 Act, section 34) and the ground of fraud or misrepresentation (which under the existing law provides a ground for rescission of the partnership agreement: 1890 Act, section 41). See the report, paragraphs 8.119 ­ 8.127.

140. Subsection (5) introduces Schedule 3 which gives applicants and the court further powers and guidance on the orders available, and their effect. See the report, paragraphs 8.128 ­ 8.129 and 8.131(1) - (4).

Clause 48

141. An application to remove a partner (under the previous clause) may be urgent, for example if the partner is allegedly defrauding the partnership. This clause ensures that, in appropriate cases, the court has the power to prohibit the partner from doing specific things, or indeed from doing anything at all in relation to the partnership, pending resolution of the issues raised by the application. T his is not possible under the existing law except by interim injunction or interim interdict. See the report, paragraphs 8.130 and 8.131(5).

Clause 49

142. A partnership which becomes illegal will continue in existence, and all its partners will continue as partners, unless and until a court order alters the position. An application for an order, either to break up a partnership or to remove one or more of the partners, may be made by partners under clause 47. T his clause additionally enables the Secretary of State to apply for an order to break up an illegal partnership if that is in the public interest. An order under this clause is likely to be accompanied (as permitted by subsection (3)) by an order for the appointment of a provisional liquidator under clause 51 (and of a liquidator under clause 50 in due course). This is new law. See the report, paragraphs 8.140 - 8.146.

381

Partnerships Bill

Part 2 - General partnerships

21

(2) On an application under this section, the court may make an order for the partnership to be broken up if it thinks it just and equitable to do so.

(3) An application for an order under this section may include an application for an order under section 50 or 51.

(a) must specify the date on which the partnership breaks up,

(b) may be combined with an order under section 50 or 51 (whether or not such an order was applied for in accordance with subsection (3)), and (c) may include such directions as the court thinks fit for giving effect to

(5) Subsection (4)(c) authorises, in particular, a direction restricting the rights conferred on a specified partner by section 43 or Schedule 4.

(1) On an application in respect of a partnership which has broken up, the court

partnership and distributing its property.

(2) The application may be made by­ (a) a partner,

(b) a person interested in the winding up, or

(3) An order may require the liquidator to give security (or, in Scotland, caution) for the proper performance of his functions.

(4) Schedule 4 contains further provisions about winding up by a liquidator.

(5) In this section, sections 51 and 53 and Schedules 4 and 5 "person interested in

(a) a person ("A") who ceased to be a partner on or after the break up, (b) if A has died, his personal representative, or

(c) if A ceased to be a partner under the default rules in section 29 (insolvency) or any substitute provisions in the partnership agreement,

(1) This section applies if-

(a) an application has been made under section 50 for the appointment of a liquidator for a partnership, and

(2) On an application under this section in respect of the partnership, the court may make an order appointing a provisional liquidator.

(3) The application may be made by­ (a) a partner,

(c) a creditor of the partnership.

382

EXPLANATORY NOTES

Clause 50

143. Under the 1890 Act, the options available to partners, if the winding up of a solvent partnership proves contentious, are unsatisfactory. The draft Bill provides for a new procedure by which a solvent partnership may be wound up by a court-appointed official, a liquidator. The powers and duties of a liquidator are found in Schedule 4. An application for the appointment of a liquidator will be made under this clause.

144. Subsection (1) provides that the application may only be made after the partnership has broken up. Typically, the application will be made if a dispute arises during the winding up. Alternatively, a dispute may be foreseen or have arisen before the partnership breaks up. In that case, the appointment can be made at the same time as an order breaking the partnership up (Schedule 3, para 2).

145. An application for the appointment of a liquidator under this clause may be made by two categories of people other than current partners: first, other people "interested in the winding up" may apply. These are people who stand to receive a payout (or who may be obliged to contribute) in the winding up as if they were partners. Secondly, creditors may apply. The draft Bill does not specify the grounds on which an application may be granted. T he courts will be free to appoint a liquidator when it is expedient. As the creditor is, ultimately, protected by the secondary liability of partners, it is not expected that such an application will be granted in favour of a creditor unless he shows that the partners are unable or unwilling to wind the partnership up properly. See the report, paragraphs 12.50 ­ 12.53(1) and (2).

146. Subsection (3) enables, but does not require, the court to order a liquidator to provide security. See the report, paragraphs 12.58 - 12.59 and 12.60(2) and (3).

Clause 51

147. An application for the appoin tmen t of a liquidator may be urgent. For exam pIe, a partner may suspect that some other partners are on the point of making off with a major partnership asset. In such cases, this clause enables the court to appoint a "provisional liquidator" whose function is to safeguard the partnership assets pending resolution of the application to appoint the liquidator. The powers and duties of the provisional liquidator are in Schedule 5. This is new law. See the report, paragraphs 12.54 - 12.56.

383

Part 2 - General partnerships

(4) An order may require the provisional liquidator to give security (or, in Scotland, caution) for the proper performance of his functions.

(5) Schedule 5 contains further provisions concerning the functions of the provisional liquidator .

(1) This section applies if-

(a) a partner ("P") in a fixed term partnership has paid a joining premium to another partner, and

(b) the partnership breaks up before the end of the term.

to be repaid.

(3) In deciding whether to make an order, the court must have regard to­ (a) the terms of the partnership agreement, and

(b) the actual duration of the partnership.

(a) the court is satisfied that the break up is caused wholly or mainly by the misconduct of P, or

(b) it has been agreed that no part of the premium should be returned.

(5) "Joining premium" means a premium in respect of-

(b) becoming a partner after its formation.

(6) "Fixed term partnership" means a partnership where the partnership agreement provides that the partnership is to end on the expiry of a specified period.

53

Order for benefit of former partner

25

(1) The court may make an order under this section if-

(a) an application is made to it by a former partner, or other person interested in the winding up, who claims that the partnership business or affairs are being conducted, or wound up, in a way that is prejudicial

(b) it is satisfied that it is just and equitable to make the order.

(2) The order may make such provision as the court thinks fit for giving relief in respect of the claim and may, in particular-

(a) require accounts to be drawn up to establish the former partner's rights

share other than on winding up) or any substitute provisions in the partnership agreement;

(b) require interim payments to be made to the former partner in respect of

such rights;

(d) break up the partnership;

(e) if the partnership has already broken up, give directions as to the way in which it is to be wound up.

384

EXPLANATORY NOTES

Clause 52

148. Historically, prospective partners have on occasion paid other prospective partners, or (in the case of a partnership which already exists) the existing partners, money when they entered into partnership. Such amounts are known as "premiums". This clause reproduces the effect of the existing law in the 1890 Act (section 40). See the report, paragraphs 13.21 - 13.22.

Clause 53

149. The default position under the draft Bill is that a former partner's share in the partnership is converted into a debt (clause 32) and he is indemnified by the partnership and remaining partners against any payments thereafter made in respect of partnership obligations (clause 34). However, it may be that a former partner feels unhappy at his treatment. For example, he may be aggrieved that the continuing partners are delaying in calculating his entitlement or in paying him out, that the sum which he is offered is inadequate or that the partnership may not pay up on his indemnity. In such circumstances, this clause gives him a right to apply to court for relief. The clause also gives this right to a person interested in the winding up (as defined in clause 50(5)). Subsection (3) provides that an application for an order under this section may include an application for an order appointing a partnership liquidator or provisional liquidator. The court may make a wide range of orders to give relief, including those in subsections (2) (4) and (5). See the report, paragraphs 8.40 ­ 8.48.

385

386

EXPLANATORY NOTES

LIMITED PARTNERSHIPS

Introduction

Clause 54

150. The effect of subsections (1) and (2) is that whether an individual is a limited partner is determined by whether that person is registered as a limited partner or not. Subsection (3) introduces an exception to this rule, in relation to ceasing to be a limited partner involuntarily. The purpose of clause 54 is to provide maximum certainty to limited partners about when their status as a limited partner begins and ends. However, once persons are registered as limited partners they can be certain that they have limited liability unless they take part in management or withdraw their capital contribution (clauses 55 and 56). See the report, paragraphs 15.42 - 15.43.

151. Whether a person is a general partner in a limited partnership will not be determined by the register. This will depend upon whether that person is carrying on business together with another person in partnership (clause 1 and Schedule 1) and, if any, the relevant terms of the partnership agreement (about how general partners join the partnership). See the report, paragraphs 15.44 and 16.3 - 16.4.

Limited partners and Limited liability

Clause 55

152. Subsection (1) is the equivalent of the prohibition on taking part in management in section 6(1) of the 1907 Act. See the report, paragraphs 16.20 - 16.21. Subsection (2) introduces a list of 'safe' activities (listed in Schedule 6) that limited partners will be able to undertake without taking part in management. It is intended that the limited partner be excluded from day-to-day decisions and activities related to the partnership business and affairs. But a limited partner may take part in certain strategic decisions. Schedule 6 is not an exclusive list. It is there to provide the limited partner with greater certainty about the strategic decisions that a limited partner may want to be involved in. See the report, paragraphs 17.3 - 17.17.

Clause 56

153. The effect of subsection (1) is that a limited partner has no secondary liability unless he withdraws any part of his capital contribution. See the report, paragraphs 17 .22 - 17 .23(1) and 17.26 - 17.33. Subsection (2) is equivalent to the prohibition in section 4(3) of the 1907 Act on the limited partner withdrawing any part of their capital contribution. A limited partner is not required by the Bill to make a capital contribution (clause 13), see the report, paragraphs 17.34 - 17.36.

387

EXPLANATORY NOTES

Clause 57

154. Clause 57 describes the personal liability that arises where a limited partner takes part in management. See the report, paragraphs 17.21 and 17.23(2).

Other modifications of Part 2 for Limited partnerships

Clause 59

155. Limited partners are subject to the overarching duty of good faith in clause 9(1). However, the content of the duty will be narrower in scope than that applicable to general partners, in order to reflect the limited partner's more restricted role. As with the existing common law duty, the exact content will depend on the context in which it arises. See the report, paragraph 18.11.

156. Under subsection (1)(b), limited partners are not subject to the duties imposed by clause 15. But limited partners may still take advantage of the duty that the general partners are under to keep records and to make them available on request to any partner. Thus, a limited partner may inspect the partnership records upon request under clause 15. This replicates the right of limited partners to inspect the books contained in section 6(1) of the 1907 Act. See the report, paragraphs 18.8 - 18.12.

157. As with the 1907 Act a limited partner will have no inherent authority to carryon the partnership business, see the report, paragraphs 16.22 - 16.23. Under subsection (2) a partnership will be able expressly to grant a limited partner authority to bind the partnership (see subsection (6)). However, it will be up to the limited partner to ensure that by exercising that authority he does not take part in management and thereby lose the limitation on his liability.

158. As to subsections (4) and (5), see the report, paragraphs 16.15 - 16.16 and 16.19(1) and (2).

389

390

EXPLANATORY NOTES

Clause 60

160. The default rule in subsection (1) generally replicates the effect of section 6(5)(d) of the 1907 Act but modernises it by making the rule clearer, and also provides for a situation where a limited partnership has no general partners. See the report, paragraphs 18.5 - 18.6, 16.16 and 16.19(4). Subsection (2) adapts section 6(5)(c) of the 1907 Act to the regime where the option is expulsion rather than dissolution of the partnership. See the report, paragraphs 18.19 - 18.20. The effect of subsection (3) is that a partner who assigns his share in a limited partnership absolutely requires only the permission of the general partners and not the permission of all partners as required under clause 36(4)(a). (This does not affect an absolute assignment made in accordance with the partnership agreement - clause 60(3)(b).) See the report, paragraphs 18.16 - 18.18.

Clause 61

161. Subsection (1) provides that a limited partnership should break up if the general partner decides, or if there is more than one general partner at least half of them decide, or if there are no general partners at least half of the limited partners so decide. See the report, paragraphs 18.21 - 18.22.

162. Under subsection (2) it is the responsibility of the general partner(s) to wind up the partnership once it has broken up. See the report, paragraphs 16.17, 16.19(6), 18.23 and 18.27(1). If there are no general partners the limited partners may not want to wind up the partnership as to do so may risk involving them in the management of the partnership, exposing them to personal liability. In this case the limited partners should apply to the court under clause 50 for the appointment of a liquidator to wind up the partnership. See the report, paragraph 18.24.

163. Subsections (4) and (5) modify the solvent winding up regime to take account of the more limited role played by limited partners. See the report, paragraphs 18.25 - 18.27(2) and (3).

164. Subsections (4) and (5) have a further effect where a limited partner applies for the appointment of a liquidator. Under clause 50 a limited partner can apply for the appointment of a liquidator. The effect of subsection (5) is that the powers of a limited partner after making such an application are dependent upon whether the limited partnership has general partners or not. If the limited partnership has no general partners it is important that the remaining limited partners have the powers of general partners, for example to authorise use of the Part 2 powers in Schedule 4. So where there are no general partners in the partnership limited partners will be able to do all things that general partners could do in the context of the liquidation. However, this is not necessary where the limited partnership already has general partners, as the general partners will be able to make these decisions once a liquidator is appointed.

165. Apart from the exceptions set out in subsections (4) and (5) limited partners will be treated the same as general partners for the purposes of Schedules 4 and 5. A limited partner will be able to make an application to court under Schedule 4, paragraph 14 for example. This is because a limited partner is a 'partner' under paragraph 14(2)(a) and because nothing in clause 62 excludes the application of paragraph 14 to limited partners. See the report, paragraph 18.24.

391

26

Partnerships Bill Part 3 - Limited partnerships

Registered office and names

62

Registered office

A limited partnership must-

(a) at all times have a registered office in England or Wales, or (b) at all times have a registered office in Scotland,

to which communications may be addressed.

5

(1) The name of a limited partnership must end with­ (a) "limited partnership", or

(b) the abbreviation "lp" or "LP".

(2) But if the registered office of the limited partnership is in Wales, its name must end with-

(a) "limited partnership" or "partneriaeth cyfyngedig", or (b) the abbreviation "lp", "LP", "pc" or "PC".

10

(a) which is the same as a name appearing in the index kept under section 714(1) of the Companies Act 1985 (c. 6),

(b) the use of which as the name of the partnership would in the opinion of the Secretary of State constitute an offence, or

(4) Subsection (3)(a) does not apply if the person whose name appears in the index consents in writing to the registration of the partnership by the same name.

(5) In determining for the purposes of this section whether one name is the same as another there are to be disregarded-

(b) any of the following (or abbreviations of them) at the end of the name­ "limited partnership" or "partneriaeth cyfyngedig",

"limited liability partnership" or "partneriaeth atebolrwydd

cyfyngedig" ,

"and company" or "a'r cwmni",

"company limited" or "cwmni cyfyngedig",

"and company limited" or "a'r cwmni cyfyngedig", "limited" or "cyfyngedig",

"public limited company" or "cwmni cyfyngedig cyhoeddus", "investment company with variable capital" or "cwmni

buddsoddi a chyfalaf newidiol", and

"open-ended investment company" or "cwmni buddsoddiant

(c) type and case of letters, accents, spaces between letters and punctuation marks,

and "and" and "&" are to be taken as the same.

392

EXPLANATORY NOTES

Registered office and nam es

Clause 62

166. This is a departure from the existing requirement (1907 Act, section 8) of a principal place of business in the UK at the time of registration. This clause provides that it is sufficient that a limited partnership should have a registered office in England or Wales or in Scotland. See the report, paragraphs 15.30 - 15.34 and 15.38(1).

Clause 63

167. Subsections (1) and (2) introduce a mandatory LP (or PC in Welsh) suffix for all limited partnerships. See the report, paragraphs 15.67-15.71. Subsections (3) - (5) impose certain restrictions on the names that can be registered. These are similar to restrictions included in the Companies Act 1985 (section 26) and the Limited Liability Partnerships Act 2000 (Schedule, paragraph 3(1), paragraph 8). See the report, paragraphs 15.64 - 15.66.

393

394

EXPLANATORY NOTES

Clause 64

168. Clause 64 restricts and protects the use of the LP suffix. See the report, paragraphs 15.76­ 15.78. A similar provision exists in the Companies Act 1985 (section 34) and the Limited Liability Partnerships Act 2000 (Schedule, paragraph 7). The effect of the definition in subsection (4) is that if a business vehicle is registered in its home country as a limited partnership or the equivalent to a limited partnership, it will be an 'oversea limited partnership'. This will allow that partnership to use the LP name and suffix when trading in Great Britain. Recognition of an oversea limited partnership for the purposes of allowing use of the LP suffix and name 'limited partnership' does not constitute recognition of its status as a limited partnership for other purposes such as tax treatment.

Clause 65

169. This clause sets out the information to be provided on partnership documents. There is a distinction between limited partnerships that trade under their registered name and those limited partnerships that trade under a different name. If a limited partnership trades under its registered name clause 65 sets out the information that must be provided on 'partnership documents', and defines this term by specifying the documents which must contain this information.
170. If a limited partnership trades under a name that is different to its registered name, in addition to being subject to the draft Bill, it is also subject to the Business N ames Act 1985. This will mean that the limited partnership will have to comply with the requirements of clause 65, as well as with the additional requirements of the Business Names Act 1985 that relate to the provision of information.Thus, clause 65 applies to all limited partnerships, whether they trade under their registered name or not.
171. The definition of 'partnership document' in subsection (2) of clause 65 is the same as that contained in the Business Names Act 1985 (section 4(1)(a)). This is to simplify compliance for those limited partnerships that must comply with both the draft Bill and the Business Names Act 1985. See the report, paragraphs 15.69 - 15.70, 15.71(3), 16.17 and 16.19(5).

Registration

Clause 66

172. A partnership does not become a limited partnership until it is registered as such. Clause 66 sets out the information that must be provided in an application for registration. This clause is similar to section 8 of the 1907 Act. See the report, paragraphs 15.35 - 15.37 and 15.38(2). Limited partners are not required to sign the application for registration. See the report, paragraphs 16.9 and 16.14(1).
173. Under the Financial Services and Markets Act 2000 (FSMA) and article 51 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 only an authorised person may "establish, operate and wind up" a collective investment scheme. Many limited partnerships whose core business is investment constitute collective investment schemes under the FSMA. In most cases the general partner of the limited partnership is not an authorised person. In those cases the partnership appoints an authorised person to operate the partnership. See the report, paragraph 16.12. To accommodate limited partnerships that are being operated by an authorised person we have, in several provisions, provided for a person (other than the general partner) to be able to do things that the general partner is required to do, as long as that person has authority from the partnership, see for example Schedule 7, paragraphs 1(3), 2(3), 3(4), 4(4),5(2) and 6(1) and Schedule 8, paragraph 1(4).

395

396

EXPLANATORY NOTES

174. We have not, however, allowed the authorised person to sign the application for registration under clause 66(2). This is because in most cases there will be no partnership in existence prior to the application for registration under clause 66. Thus, in most cases, there will be no partnership in existence to authorise a person to act on its behalf for the purposes of the FSMA. In order to ensure that this does not lead to the general partner being liable under the FSMA for "establishing" a collective investment scheme we are recommending a consequential amendment to the FSMA to the effect that the act of registering a limited partnership does not constitute "establishing" a collective investment scheme. See the report, paragraph 16.12 (footnote 14).

Clause 67

175. A partnership will become a limited partnership on the date it is added to the register. See the report, paragraphs 15.16 - 15.17 and 15.21. If a pre-existing general partnership has applied to become a limited partnership, the partnership will be a limited partnership from this date. If no partnership existed prior to the application for registration a new limited partnership will be formed on this date. This is achieved by subsection (3). See the report, paragraphs 16.27 - 16.29.

Clause 69

176. The offence of providing false information will apply to any person making an application under clause 66 or paragraph 1 of Schedule 8 or delivering a notice under Schedule 7. This will encompass both general partners as well as authorised persons under the FSMA (see the notes above on clause 66) who are able to make applications or deliver notices on behalf of the partnership. The clause also covers a situation where an authorised person registers false information thinking it is correct, that information having been given to the authorised person by someone in the partnership who knew it was false. In this case the person providing the false information, knowing it was false, would be guilty of the offence. See the report, paragraphs 16.31 - 16.32.

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(3) A person guilty of an offence under subsection (1) is liable-

(a) on summary conviction, to imprisonment for a term not exceeding 6 months or a fine not exceeding the statutory maximum, or to both, or (b) on conviction on indictment, to imprisonment for a term not exceeding

(4) A person guilty of an offence under subsection (2) is liable on summary conviction to imprisonment for a term not exceeding 6 months or a fine not exceeding level 5 on the standard scale, or to both.

Supplementary

(1) If an offence under this Part committed by a body corporate is proved-

(a) to have been committed with the consent or connivance of an officer of the body corporate, or

(b) to be attributable to neglect on the part of an officer of the body

the officer as well as the body corporate is guilty of the offence and liable to be proceeded against and punished accordingly.

(2) If the affairs of a body corporate are managed by its members, subsection (1) applies in relation to the acts and defaults of a member in connection with his

(3) "Officer" includes-

(a) a director, manager or secretary, and

(b) a person purporting to act as a director, manager or secretary.

(a) the requirements of this Part relating to registration, and to matters precedent and incidental to it, have been complied with,

(b) the partnership was registered as a limited partnership on the date stated in the certificate, and

(2) A certificate of a change in the name of a partnership is conclusive evidence that-

(a) the partnership was registered as having a new name on the date specified in the certificate, and

(3) A copy of or extract from an original document sent to the registrar under this Part, if signed by the registrar, is in all legal proceedings admissible in evidence as of equal validity with the original document.

(1) In this Part-

"address", in relation to a partner in a partnership, means-

40

398

EXPLANATORY NOTES

Supplem entary

Clause 70

177. It is anticipated under the draft Bill that bodies corporate may be partners. For example, a company may be a partner in a general partnership, and a company is commonly the general partner in a limited partnership. Where a body corporate commits an offence (for example, a body corporate partner) this clause sets out the element of consent or neglect required for an officer of that body corporate to be prosecuted for the offence along with the body corporate itself. See the report, paragraphs 16.33 - 16.34.

Clause 71

178. This clause sets out the status of the certificate of registration. See the report, paragraphs 15.24 -15.25. Sub-paragraph (3) is similar in effect to section 16(2) of the 1907 Act.

Clause 72

179. This clause deals with interpretation. As it is possible that, in the future, individuals will be allowed to submit documents to the registrar electronically, subsection (2) has been included to allow for this. See the report, paragraph 15.56, footnote 38.

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Partnerships Bill Part 3 - Limited partnerships

(a) for an individual, his usual residential address,

(b) for a company or a limited partnership under this Part, its registered office, and

(c) for a partnership which is not a limited partnership under this

"the Gazette", in relation to the deregistration of a limited partnership, means -

(a) if the partnership is registered in Scotland, the Edinburgh Gazette;

"name", in relation to a partner in a partnership, means-

(a) for an individual, his forename and surname (or, in the case of a peer or other person usually known by a title, his title instead of or in addition to either or both of his forename and surname),

(b) for a corporation or a partnership having legal personality, its corporate or partnership name;

"the registrar" means-

(a) if the registered office is, or is to be, in England or Wales, the

1985 (c.6) the duty of registration of companies having registered offices in England or Wales, and

(b) if the registered office is, or is to be, in Scotland, the registrar or other officer performing under that Act the duty of registration

"relevant capital contribution" has the meaning given by section 56(4).

(2) For the purposes of this Part, the signing of a document by a person includes­ (a) in the case of a document required to be delivered to the registrar, ensuring that it is authenticated in a manner approved by the registrar,

(b) in the case of a document required to be signed by the registrar, authenticated by the registrar's official seal.

PART 4

SPECIAL LIMITED PARTNERSHIPS

73

Special limited partnerships (England and Wales)

35

(1) This Part provides for a kind of limited partnership to be known as a special limited partnership.

(2) A special limited partnership is not a legal person.

(3) This Act applies in relation to a special limited partnership as it applies in

provisions set out in Schedule 10.

400

EXPLANATORY NOTES

SPECIAL LIMITED PARTNERSHIPS

Clause 73

180. T his clause provides for a type of limited partnership without legal personality called a special limited partnership. It does not apply to Scotland. The special limited partnership is primarily directed at the venture capital investment industry which invests internationally, although there is no restriction on who can use the vehicle. See the report, paragraphs 19.2 - 19.10.

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PART 5

SUPPLEMENTARY

Disclosure of information about partners etc.

or a partner, to be informed of-

(a) the full name of each partner, and

(b) an address for service of each partner.

(2) A person who has a complaint against a partnership connected with dealings

partner or a former partner, to be given such information as the person requested is reasonably able to provide (or to obtain) as to-

(a) the full name of each person who was a partner at the time of the act or omission to which the complaint relates, and

(3) Rules of court may make provision enabling a person who is considering­ (a) making a claim against a partnership, or

(b) making a claim against a partner or former partner in respect of a partnership obligation,

order for the disclosure of the information mentioned in subsection (1) or (2).

Schedule 11 contains amendments of the Business Names Act 1985 (c. 7).

Interpretation

(1) In this Act-

"assignment", in relation to Scotland, means assignation; "business" has the meaning given by section 1(6);

"the court" means -

court and includes, in relation to the High Court, a judge of that court, and

(b) in relation to Scotland, the Court of Session or the sheriff; "default rule" has the meaning given by section 5(1);

an Act of the Scottish Parliament, any provision of, or of any instrument made under, Northern Ireland legislation and any provision of subordinate legislation (within the meaning of the Interpretation Act 1978 (c. 30));

"partnership" has the meaning given by section 1(2);

402

EXPLANATORY NOTES

SUPPLEMENTARY

Disclosure of inform ation about partners etc.

Clause 74

181. A third party may deal with a partnership without knowing the identity of its partners or their addresses. Unlike a limited company, a partnership is not required to file such information on a publicly accessible register. If a dispute arises, the third party will need to know such information. The Business Names Act 1985 requires partners to reveal some such information to third parties in various circumstances. There are also in England and Wales rules of court which enable litigants to obtain such information. In Scotland also there are procedures to obtain such information. What is lacking in the current law is a legally enforceable civil obligation owed by the partnership, its partners or former partners to persons who are dealing or have dealt with the partnership, to reveal the names of the partners and addresses at which they may be reached. This clause provides such a right. See the report, paragraphs 7.30 - 7.31.

Clause 75

182. This clause introduces Schedule 11 which contains amendments to the Business Names Act 1985. See the notes to that Schedule for an explanation of these changes.

Interpretation

Clause 76

183. Subsection (1) defines various expressions used in the draft Bill.

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Partnerships Bill Part 5 - Supplementary

"partnership agreement" has the meaning given by section 1(1); "partnership of defined duration" means a partnership where the partnership agreement provides that the partnership is to end-

(a) on the expiry of a specified period, or

formed to undertake;

"partnership obligation" has the meaning given by section 23(6); "partnership property" has the meaning given by section 17(1);

"person interested in the winding up" has the meaning given by section

"the prescribed rate" means-

(a) 3% above the base rate, or

(b) such other rate of interest as may be prescribed by an order made by the Secretary of State;

which is used as the basis for other banks' rates;

"principal place of business" means, in the case of a partnership with only one place of business, that place;

"profits" includes profits of a capital nature;

heritable or moveable, including things in action and other intangible or incorporeal property;

"trust property" means-

(a) in relation to England and Wales, property which is held in the

beneficially entitled, and

(b) in relation to Scotland, property held by the partnership in trust; "week" means any consecutive period of seven days.

(2) In this Act any reference to an agreement (or to the terms of an agreement)

(3) In this Act any reference to the time at which a partnership obligation is incurred is to be read in accordance with section 23(7).

Final provisions

77 Regulations and orders etc.

exercisable by statutory instrument.

(2) Any such instrument, apart from one made under section 78 or 80(2), is subject to annulment in pursuance of a resolution of either House of Parliament.

(3) No order may be made under section 78 unless a draft of the statutory

provisions) has been laid before, and approved by a resolution of, each House of Parliament.

404

EXPLANATORY NOTES

184. There are a number of references in the draft Bill to agreement between partners, or prospective partners. For example, clause 1 requires all the prospective partners to agree before a partnership is formed. The effect of subsection (2) of clause 76 is that such agreements need not be a result of a formal vote, or indeed be something which the parties expressly consider at all. Such agreements may instead be inferred from the parties' actions. See the report, paragraphs 4.18 - 4.20.

185. Subsection (3) highlights the generally applicable definition of when a partnership obligation arises in clause 23(7). For the reasons for that definition, see the note on that clause.

Final provisions

Clause 77

186. This clause governs the way in which secondary legislation will be made under the draft Bill and the level of Parliamentary scrutiny it will receive.

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