The Relations of Partners to One Another

The terms of any partnership agreement will determine the relationship between the partners in priority over any contradictory provision in the Partnership Act 1890. However, where the agreement is incomplete, the Act applies.

The terms of the partnership can be changed expressly or by implication; so that where a firm operates for a number of years in contradiction to the express provisions of the agreement, the agreement will be varied by the practice. In Pilling v. Pilling (1865), a father entered into partnership with his two sons. The articles provided inter alia that the father’s capital, a mill and machinery, should not be brought into the partnership and that he should receive 4 per cent interest per annum on his capital before profits were calculated. During ten years each partner was credited with interest on capital. The court held that this was evidence of a new agreement and the mill and machinery were partnership property to be shared between the partners on dissolution.

Partnership Property

Partnership property must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement and includes property original by brought in and property acquired on account of the firm or for the purposes and in the course of the partnership business.

Failing agreement, ownership is established by the Act which provides that there is no presumption that property was brought into the partnership, but all property bought with the firm’s money is deemed partnership property. In Miles v. Clarke [1953], the plaintiff, a freelance photographer, joined the defendant as a partner in an existing photography business. The agreement merely related to sharing the profits equally and for payment of a salary to the plaintiff. On winding up the business, the plaintiff claimed a share of the assets, including premises leased by the defendant and other equipment which he had installed. The court held that the lease and other equipment belonged to Clarke, and Miles retained the value of his personal goodwill. The stock-in-trade and other consumable items purchased by the firm constituted the partnership assets.

A writ of execution shall not issue against partnership property except on a judgement against the firm: Peake v. Carter [1916].

The rights of Partnership Inter Se

(1) All partners share equally in the capital and profits of the business and must contribute equally to the losses.

This does not mean where one partner only contributed capital while the other(s) contributed ‘know-how’, that on the dissolution of the partnership, this capital would then be divided among the partners. It does, however, mean that, even where the capital contribution is unequal, the partners will receive an equal share of the profits and be equally liable for any losses, including losses of capital. For example, A, B and C enter a partnership, with A contributing 10000 towards the capital, B 5000 and C ‘know-how’. If on dissolution the surplus assets after payment of debts is only 6000, in which case 9000 capital is lost, A, B and C will each be required to contribute 3000.

Where, however, one of the partners is insolvent and unable to contribute to lost capital, the other partners are not obliged to make up the deficiency, and the loss on capital will be divided between them in the ratio of their last agreed capital. Thus if C is insolvent, the capital loss of 3000 will be borne in the ratio of A and B’s capital contribution 2:1. Therefore A will lose 2000 and B will lose 1000. (A will lose a total of 5000 and B 4000.) This is the rule in Garner v. Murray [1904].

(2) The firm must indemnify partners in respect of payments made and personal liabilities incurred – in the ordinary and proper conduct of the business of the firm.

(3) A partner making an advance beyond the amount of capital which he has agreed to subscribe is entitled to interest at the rate of 5 per cent per annum.

(4) A partner is not entitled to interest on the capital subscribed by him.

(5) Every partner may take part in the management of the business.

(6) No partner is entitled to remuneration for acting in the partnership business.

It is normal for remuneration to be paid to partners who are actively involved in the running of the business, before the net profits are calculated. In this way working partners receive more than those who do not devote their whole time to the business.

(7) No person may be introduced as a partner without the consent of all existing partners.

(8) Differences as to ordinary matters of partnership business may be decided on by a majority of the partners, but no change made in the nature of the partnership business without the concent of all existing partners.

(9) the partnership books are to be kept at the place of business, and every partner may have access to and inspect and copy any of them.