PARTNERSHIPS Law of Business Associations KUSOL, 2013

2 PREPARED BY: MS. Rachel Eshiwani

Introduction: PARTNERSHIP • A partnership is a voluntary agreement entered into by two or more parties to engage in business and to share any attendant profits or losses • ‗‘Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.‘‘- s. 3 (1) Partnership Act, Cap 29. • Borrowed from the English Partnership Act of 1890 • The definition has exceptions (see: S. 3 of the Act) ▫ Companies ▫ Incorporations outside Kenya (in the UK) ▫ Since 2012, Limited Liability Partnerships formed under Cap 30

3 PREPARED BY: MS. Rachel Eshiwani

The Nature & Laws Governing Partnerships in Kenya • They [the partners] undertake a joint venture based on an express or implied agreement between them, a common purpose and interest, and an equal power of control. • There are two main types of partnerships recognized in Kenya law: ▫ General Partnership- Provided for by the Partnership Act, CAP 29 ▫ Limited Partnership- Provided for by the Limited Partnership Act, CAP 30. Previously governed the formation, management and regulation of limited partnerships ▫ Limited Liability Partnership Act, 2011- Repeals the Limited Partnership Act

4 PREPARED BY: MS. Rachel Eshiwani

Characteristics of a Partnership • Partnership is a relationship that is founded on Contract. • It is the contract establishing the partnership that defines the rights and duties oft the parties towards each other and towards the public at large. • A partnership is a relationship of Natural rather than Artificial persons with separate legal personality of owners therefore

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Cannot itself make contracts Employ people Commit wrongs Be sued

A Business Carried on in Common Business carried on with a view of Profit Has no Limited liability (for debts incurred in the course of business)

5 PREPARED BY: MS. Rachel Eshiwani

Limited Liability Partnerships • The Limited Partnership Act of 1944 has now been replaced by the Limited Liability Partnership Act. • The former provided the to the definition of a limited liability partnership as: ▫ ‗‘…partnership that must include limited partners (whose liability is limited to their individual contributions) and general partners (who are personally liable for all debts incurred by the partnership)‖

• In 2011Kenya Parliament commenced discussions on the possibility of a Limited Liability Partnership Act, that would replace the Limited Partnership Act, 1934. • Under the Act, a limited liability partnership is a body corporate capable of, among other things, suing and being sued in its name and all its partners have limited liability. • Further, the Limited Partnership Act limited the number of members to 20, while the Act leaves it open on how many partners may join the limited liability partnership. • The Act establishes procedures for ordinary partnerships as well as private companies to convert to limited partnerships.

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Assignment: • Study the 3 Acts to on handling of: ▫ ▫ ▫ ▫ ▫

Legal personality & continuity Establishment of a partnership Essentials of a partnership Legal controls offered by statute Partners & outsiders ( in relation to Contracts & Torts)

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1. General Partnerships

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Rules to Determine Existence of a Partnership • See S. 4-6, CAP 29. • For historical reasons (during the development of the law of merchants in Europe) partnerships generally have no legal personality. • They are viewed as RELATIONSHIPS. • However, Partners can be sued in the firm‘s name, in as much as the personality is lacking • Persons in partnerships are collectively known as a ‗‘firm‘‘, and the name under which the business is carried out is the ‗‘Firm Name‘‘. • The Act provides rules to determine a partnership: 1. Must share profits 2. Must have a common right/ interest in the object from which profits are derived 3. Receipt of profits- Prima facie proof of partnership. This can be rebutted (see s. 4 (c)). Excludes: Debtors & lenders, employees, spouses & others receiving annuity *ANNUITY- Right to receive/ duty to make payment of an allowance

9 PREPARED BY: MS. Rachel Eshiwani

Relationship of Partners to 3rd Parties • S.7 -22, CAP 29. • AGENCY RELATION- Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and their actions are binding on each other, save where authority is lacking with the knowledge of the 3 rd party. (Law of Agency) • FIRM DEBTS & CREDIT- The firm will not be bound for the debts incurred by any partner for purposes deemed outside of the partnership, unless this was with the authority of the other partners. • ULTRA VIRES ACT OF MEMBERS- Where partners agree that there will be restrictions on how they exercise their power, any act done ultra vires of this power cannot bind the other partners ONLY if the other party was aware of the restriction. • LIABILTY OF PARTNERS- They are liable for all debts & obligations jointly and severally while partners. • MINORS- Minors can join and be part of a partnership. HOWEVER, they enjoy all of the benefit BUT are excluded from the obligations/ liabilities of the firm UNTILL they attain the age of Majority. * Jointly => Where two or more persons are responsible for the same performance and default on their obligations **Jointly & Severally=> Designation of liability by which members of a group are either individually or mutually responsible too a party in whose favor an obligation is due or a judgment has been awarded

10 PREPARED BY: MS. Rachel Eshiwani

Relations to 3rd Parties Cont.d • OMMISSIONS & LOSSES- Any incurred in the course of the business with the authority of co-partners is binding on the firm. • CUSTODIAL OBLIGATIONS- in relation to money or property of 3rd Parties, the Firm is liable • TRUST MANAGEMENT- A partner that improperly applies trust money shall be singularly liable UNLESS the other partners had knowledge of the breach. • REPRENSENTATIONS & STATEMENTS- Any that is made by a partner concerning firm affairs is evidence against the firm • NOTICES- Notice to any partner is notice to the Partners EXCEPT in the case of fraud (committed by said partner or with their consent • COMMENCEMENT OF LIABILITY- Partners are only liable for debts incurred AFTER they joined the firm and those BEFORE they leave the firm

11 PREPARED BY: MS. Rachel Eshiwani

Relation of Partners to Each Other See S. 23- 35, CAP 29 • Rules as to interests & Duties of Partners- The conduct in the firm is generally as agreed by the partners. Where an issue is not provided for in the Partnership deed, then the provisions of the Act will apply (see: s. 28). • Variation of Terms- This must be done by express or implied consent of the partners. • Partnership Property-Refers to all property acquired on account of the firm. The Act holds that this must be applied exclusively for the use of the partnership, per their agreement. • Property bought with firm money is deemed to be firm property unless it can be proved otherwise. • In the absence of an agreement to the contrary, co-ownership of property does NOT constitute a partnership, even where there are profits involved. • Any property acquired by the firm will be treated as between the partners and their heirs / executors. • Execution of a decree will not issue against any partnership property except on a judgment against the firm. • Expulsion of members – No majority of partners can expel a partner unless this is expressly provided for in the Partnership deed

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Partnership Relations Cont’d • Retirement of Partners- Partners should agree on fixed terms/ tenure in the deed. Failure to which this can be determined at any time upon reasonable notice being given to the firm • For a partnership constituted by deed, then all notices must be provided in writing and signed by the partner so giving the notice • Partnerships with fixed terms – Partnerships can be created for fixed terms. • In the event the term expires and the partners proceed without any express agreement, the assumption is that the terms that were applicable prior to the term expiration will apply. This will be deemed a continuance of the partnership. • Duty to make full disclosure- This appertains to all accounts and matters affecting the partnership to partners/ legal representatives. • All partners must account any benefit they derived (without the consent of the other partners) by use of the partnership name, property or connection or transaction. • Includes any transaction undertaken during dissolution or upon the death of a partner • Duty not to compete with the firm- A partner cannot without the consent of the other partners undertake a venture that is of the same nature or in any way competes with the firm • In the event that this is discovered, the Partner will be obliged to make account of and pay over to the firm all profits made in this way. • Right to assign share in Partnership- The Act provides that a Partner may assign his share of the partnership either absolutely or by way of a redeemable charge. ** Assignment- The transfer of a claim, right, interest, or property from one to another OR the instrument by which this transfer is effected. • This Assignment DOES NOT entitle the assignee to interfere with the management of the Partnership as it continues. They cannot demand

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Essentials of a Partnership 1. • • •

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FOR BUSINESS- Partnerships (unlike companies ) cannot be formed for benevolent/ artistic pursuits. Business includes: Trade, occupation or profession. Must be a commercial venture for which the relationship arises A business that is not implemented cannot be deemed to be a partnership a.k.a. CONTEMPLATED PARTNERSHIP. Partners should be conducting some activity for reward. Miah Vs. Khan [2002] Held: Mere preparation to start a business does not constitute a partnership- it has to be up and running RULE: Persons who agree to carry on a business venture as a business activity are not partners until they actually embark on the activity in question. Partners are by nature SELF EMPLOYED. However, an Employee is not a partner The Business can be for a single or multiple commercial venture Winsor vs. Schroeder [1979] HELD focus will be on whether or not (even a single venture) had a commercial benefit.

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Essentials of a Partnership • Carried out for business • Carried in common • With a view of profit

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Essentials of a Partnership • 2. CARRIED ON IN COMMON • Partnership requires the involvement of 2 or more persons, who have made a decision to carry on business together. • A Franchise agreement does not amount to a partnership. • There has to be a single business carried on in common • Thanes Cruises Ltd vs. George Wheeler Launches Ltd [2003]- Thames boat companies set up an association, where they synchronized their timetables and had a single ticketing system and shared net profits. HELD: The companies each maintained their own businesses and were even responsible for own costs. The association was a joint venture and not a partnership. • Parties must intend jointly participate in the common business. This was excepted in the case of Limited Partnerships, where the Limited partner was forbidden to take part in management of the firm. • Co-ownership or joint purchase of property does NOT constitute a partnership, whether or not they share property. There must be a business attached. • There must be joint participation in the common business for there to be a partnership • Despite the fact that there is a business and ‗‘sharing‘‘ of profits no partnership exists especially in the case of spouses that have not been formally integrated into the firm. • HOWEVER, the fact of co-ownership can be used to indicate the existence of a partnership • Partners must have control over the property or ultimate management of the business

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Essentials of a Partnership • 3 WITH A VIEW OF PROFIT • It is impossible to establish a partnership of there is no intended financial return from the business (it is not a business if there is no financial return contemplated anyway!) • At one time, a mere receipt of the share of profits established a partnership [Waugh vs. Carver (1793)], but this position was repudiated in Cox vs. Hickman (1860). • There must be a profit motive • The sharing of Gross profits does not in itself create a partnership, whether the persons sharing such returns have a joint or common interest on any property from which returns are derived. E.g. an author earning a royalty on published works is not a partner of his publsiher. • Implicit in sharing net profits is the idea of sharing expenses (and thus if necessary, net losses)

17 PREPARED BY: MS. Rachel Eshiwani

Dissolution of Partnership • Modes provided by the Cap 29 ▫ ▫ ▫ ▫ ▫

Dissolution by Expiration or Notice Dissolution by Bankruptcy, death or charge Dissolution by illegality of Partnership Dissolution by the Court Change in the Constitution of the Partnership

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Assignment • Study the History and development of Partnerships and the Law • Dissolution of Partnership and attendant consequences under CAP 29

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Limited Partnership Act, CAP 30 • Review of the Act for Comparative Analysis with Limited Liability Partnership Act, 2011 Required!!!!

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Limited Liability Partnership Act, 2011 • • •

The Limited Liability Partnership Act, 2011 was assented into law and commenced operation on 16th March, 2012. The Act repeals Limited Partnerships Act, Cap 30 that previously governed the formation, management and regulation of limited partnerships. LLPs have several advantages over other forms of vehicles for conduct of business. ▫ ▫ ▫

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LLPs are a cross between a partnership and company structure. They have principally been introduced to afford professional services firms which mostly trade as partnerships (accountants, lawyers, surveyors etc) the opportunity to benefit from limited liability. They provide partners in PSFs with the benefits of limited liability, and accordingly protecting their personal assets from any potential business creditors as is the case with limited liability companies.

While Limited Liability Companies (LLCs) can have multiple members (upto 50), they are not as good at attracting investors as LLPs. This is because, ▫ ▫

LLP structure isolates each partner when it comes to claims, for instance, of negligence. In a LLP, unlike an LLC, a claimant may only direct his negligence or malpractice claims toward the negligent partner, and thus protecting the partnership and the other partners.

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For tax advantage, LLPs are often used to save on tax obligations and therefor increase shareholder value.

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Currently, many PSFs are being registered as LLPs rather than business names under the Registration of Business Names Act (Cap 499 of the Laws of Kenya) or limited liability companies under the Companies Act (Cap 486 of the Laws of Kenya) through coversion to LLPs as envisaged under the LLP Act.

21 PREPARED BY: MS. Rachel Eshiwani

DEFINITIONS • LIMITED LIABILITY PARTNERSHIP- means a partnership registered under the Act • LIMITED LIABILITY PARTNERSHIP AGREEMENT- means an agreement (expressed or implied) that determines the mutual rights and duties of the partners and their rights and duties in relation to the partnership— ▫ between the partners of the partnership; or ▫ between the partnership and its partners,

• MANAGER- a person who (whether or not a partner of the partnership) is concerned in, or takes part in, the management of the partnership (whether or not the particulars or consent of that partner to act as such are lodged with Registrar as required- See S. 17 • PARTNER- a person who has been admitted as a partner in the partnership in accordance with the relevant limited liability partnership agreement

22 PREPARED BY: MS. Rachel Eshiwani

Parties & Power of Parties • Registrar – S.3-5. 16-23 • Parties in Limited Liability Partnerships – S. 615 • Private Companies- S. 24-25 • Managers of LLP- S. 1, 26- 33

23 PREPARED BY: MS. Rachel Eshiwani

Peculiarities- Registration Of LLP • An LLP may be registered reserving the proposed name. The name is reserved for a period of two months from the date on which the application for reservation was lodged with the registrar. • Thereafter, two or more persons desirous of conducting business for profit [therefore, LLPs cannot be registered with only one proprietor or be used for charitable purposes] under the reserved name may lodge the prescribed form with the registrar. The statement should contain: ▫ ▫ ▫ ▫ ▫ ▫

Name of that LLP (which name should not be: prohibited by any law, undesirable, identical to that of any other LLP corporation or business name, or identical to a name that is being reserved under the LLP Act, the Business Names Act or Companies Act) Nature of the proposed business; Proposed registered office; Name, identity document (if any), nationality, and usual place of residence of each person who will be a partner of the partnership; Requirements for the registration of a body corporate Name, identity document (if any), nationality and the usual place of residence of each person who will be a manager of the partnership and, if any such person is a body corporate

• The name of an LLP must end with the word ―LLP‖ or its long form. The Act also envisages change of name of the LLP as the partners may wish from time to time.

24 PREPARED BY: MS. Rachel Eshiwani

Peculiarities- Requirements for a Manager • An LLP must have a manager who must be a natural person, and whose particulars must be lodged with the registrar in the prescribed form. • The role of a manager is to ▫ ensure that the LLP lodges annual declaration of solvency or insolvency, ▫ file changes in registered office of the LLP and ▫ ensure that invoices or other document issued relating to the partnership business bears  The name and registration number of the partnership;  a statement that it is registered with limited liability.

25 PREPARED BY: MS. Rachel Eshiwani

Peculiarities- Legal Personality • The Act envisages that an LLP shall be a corporate entity with a legal personality separate and distinct from its owners. • The repealed Cap 30 envisaged partnerships as separate from its owners and therefore, under the former Act, the liability of the firm in the event of insolvency could be settled from personal property of the proprietors. • In LLPs registered under the Act, the liabilities of LLP are payable out of the property of the LLP.

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Peculiarities- Perpetual Succession • A limited liability company enjoys perpetual succession such that death or departure of a partner doesn‘t affect the existence of the firm. • This is advantageous especially for professional services firms because a change in the partners of the LLP does not affect the existence, rights or obligations of the LLP

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Peculiarities- Conversion of Other Business Associations to LLP • The Act is novel in Kenya as it allows conversion of partnerships and limited liability companies to LLPs. • Such conversion does not terminate rights and obligations which subsisted immediately before the conversion, which rights and obligations are transferred by operation of law to the new LLP.

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Peculiarities- Power of an LLP • As an incorporated body corporate, an LLP may in its own name and seal: sue and be sued, and hold and dispose of property. • Natural persons and body corporates (except trade unions) may form an LLP.

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Peculiarities- Liability in LLP • The liability of any partner in an LLP can only arise by contract or tort, and may not arise solely for the reason of one being a partner in an LLP. Accordingly, partners in an LLP will agree on the degree of their liability in respect of any matter. • The Act doesn‘t waive liability for tortuous acts arising from individual partner‘s action or omission. By extension, one partner in an LLP setup is not liable for wrongful acts/omissions of another partner within the LLP. • However, an LLP would be responsible for a wrongful act or omission committed by a partner to another person (other than a partner of the LLP) in the course of the business of the LLP or with its authority a person.

30 PREPARED BY: MS. Rachel Eshiwani

Peculiarities- Agency Relations in LLP • This is as between the Partners • Partners of an LLP exercised are agents of an LLP. Such agency is however repudiatable in circumstances where: ▫ The partner in question acted without authority of the LLP; or ▫ the person dealing with the partner knows that that partner has no authority but proceeds to transacts with such partner.

• The Act also obliges LLPs to formally notify the Registrar of any change in partnership of the LLP to avert adverse claims.

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Peculiarities- Regulation of Partners’ Relations • Under the LLP Act, the relationship of the partners themselves and the relationship between the partners and the LLP are governed by the Limited Liability Partnership Agreement. • In the absence of such an agreement, the First Schedule of Act which contains default provisions regarding governance/management of would apply. • Decisions of the LLP are to be through resolutions passed with the requisite quorum as may be stipulated in an LLP agreement

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Peculiarities- Assignment of Rights • The Act is novel in that a partner in an LLP may, unless otherwise provided under an LLP Agreement, assign his rights to receive distribution from the partnership. • Whereas the assignment terminate the assigning partner‘s rights in the Firm, it entitles the assignee the right to participate in the management of the Firm. • By reason of the assignment, anyone may become a member of the LLP and participating in its management affairs. • Accordingly, this is an area that ideally should be well considered when drafting an LLP Agreement. • There appears to be an inconsistency between section 15 (2) and Section 15 (3) (b), as the former limits assignee's rights to only receipt of distributions from the partnership which the assignor would otherwise have been entitled to receive, while the the latter entitles an assignee to participate in the management of the partnership. Accordingly, exclusion of right of assignment by way of a LLP Agreement as envisaged under Section 15 (1) will prove critical for most LLPs. • This peculiarity can make a good subject for a dissertion!!!!

33 PREPARED BY: MS. Rachel Eshiwani

Cessation of Partnership • Partners in an LLP have three options for exiting the Firm, namely: a) b) c) d)

In accordance with the provisions of an LLP agreement; Upon issuances of a 90 days‘ notice to the other partners of the LLP of the intention to resign; or upon death of that partner or On dissolution of the partnership

• Resignation or death terminates all management rights of such a partner. • The Act also protects the interest of resigning partner or his/her beneficiaries (on death). Upon resignation or death, that partner or his personal representatives/assigns is entitled to receive from the LLP an amount: ▫ equal to the person‘s capital contribution to the LLP and the person‘s right to share in the accumulated profits of the LLP after the deduction of losses of the limited liability partnership; an ▫ determined as at the date the person ceased to be a partner.

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Bankruptcy • An LLP Agreement may restrict the application of provision of the Act regarding management of bankruptcy of partners. • Generally, bankruptcy of a partner doesn‘t cause such a partner ceasing being a partner in the LLP, although such a partner may not participate in the management of the Firm. • The above notwithstanding, an official receiver or a trustee of the estate of the bankrupt partner is entitled to receive distributions of profits from the LLP that the bankrupt partner is entitled to receive under the LLP agreement.