PARTNERSHIPS: FINANCES UNDER THE ACT

Financial disputes are probably the most common type of conflict between partners. Specifically, what each partner is entitled to receive at various stages in the life of the partnership in terms of profits and other capital and property owned by the business. If they have not entered into a partnership agreement then the partners must rely on the Partnership Act (1890) and deal with the considerable difficulties which may arise as a result of this.

(A) DIVISION OF PROFITS AND LOSSES UNDER THE ACT s.24(1) of the Act states that “All of the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses, whether of capital or otherwise, (1) ..... by the firm.” This means that if the partners are forced to rely on the Act, they will receive an equal share of the profits (2) ..... of each partner’s capital contribution to the business. Therefore, during the life of the business, if partners wish to receive capital and profits in (3) ..... to their contribution they must have a partnership agreement drawn up which (4) ..... states what each partner’s entitlement will be. In terms of how the (5) ..... of loss will be shared between the partners, as stated, under s.24(1), losses of both capital and income are shared equally between the partners. So again, if the partners wish to divide losses unequally, which will usually be in the same proportions as profit sharing, there must be a clause in a partnership agreement to (6) ..... the partners to this arrangement.

(B) PARTNERSHIP CAPITAL AND DIVISION OF PARTNERSHIP CAPITAL Capital contribution can take the form of cash or various kinds of property, which may include real estate or the goodwill of an existing business. Capital can only normally be returned to a partner on his or her exit from the firm or the dissolution of the business. However, although an unequal distribution of capital results in an equal sharing of profits, that is not the case when contributed capital is returned to partners. In relation to capital contribution s24(1) is “subject to an implied agreement to the contrary”. The effect of this is that a partner, on leaving the firm or upon the dissolution of the business, is only entitled to receive the capital he or she has contributed, despite being entitled to an equal share of the profits. S.24(6) of the Act states that “no partner is entitled to remuneration for acting in the partnership business”, meaning that a share of the profits in the form of drawings or interest on capital is not an automatic right. This is wholly inappropriate for a modern business and demonstrates the importance of a written agreement providing clarity on drawings and other financial matters. One important aspect of this would be the right of a partner who makes a large contribution not only to receive a proportionate share of the profits as drawings but also to charge the partnership interest on contributed capital.

(C) PARTNERSHIP PROPERTY When a partnership is dissolved disputes often arise as to whether property is the personal property of an individual partner or whether it is partnership property. This is of vital importance because under the Act, partners are entitled to use partnership property to discharge any debts or other liabilities of the firm, but on the other hand, according to case law, personal property is retained by the relevant partner. S.21 of the Act gives some guidance for the courts as to what is presumed to be partnership property but the outcome of this kind of dispute will often depend on the express or implied intentions of the partners and what the court can infer from conduct. The fact that property is used by a firm does not necessarily mean that a court will see it as partnership property, and where no partnership agreement exists, the courts have had to determine the issue on the facts of each case. In the leading case of Miles v Clarke (1953) the court held that in the absence of an express agreement it would regard property to be partnership property “to the extent necessary to give business efficacy” to any agreement. Recently, in Goldup v Cobb (2017), the court found that a pension entitlement held by a partner was not a partnership asset. In this case, while the partner’s income as a coroner went to the partnership, the court decided that there had been no agreement to treat the pension derived from the position as belonging to the partnership and it did not automatically follow that this would be the case.