The law relating to partnership in Kenya is contained in the Partnership Act3 and the Limited Partnership Act4.
Definition: Under Section 3(1) of the Partnership Act, “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”
Elements of the Definition
1. A partnership is an association of persons.
2. There must be a business i.e. some trade, profession or occupation.
3. The business must be carried on in common. That means even the so called Dormant/ Sleeping Partners are deemed to real partner
4. The business must be profit motivated.
TYPES OF PARTNERSHIPS
Under Kenyan Law there are two types of partnerships, namely:-
CHARACTERISTICS OF PARTNERSHIP
1. Membership: It consists of 2 – 20 members
2. Personality: It is an unincorporated association
3. Utmost good faith: It is a contractuberimae fidei
4. Agency: Each partner is agent of every other and the firm.
5. Sue or be sued: It can sue or be sued in its registered name
6. Profit-Motivated: A partnership is a profit-motivated enterprise.
7. Liability: A partner‟s liability for debts and other obligations of the firm is generallyunlimited.
8. Death, bankrupt or insanity may lead to dissolution.
FORMATION OF PARTNERSHIP
The formation of a partnership is not subject to any legal formalities, the agreement between the parties may be:-
a) Oral or by word of mouth.
b) Written with or without seal
c) Implication from conduct of the parties.
However, the partners may on their own accord reduce the basis of their relationship into a formal document detailing the terms and the condition of the association. The document is the
Partnership Deed or Agreement or Articles of Partnership. It is not a legal requirement.
Contents of the Partnership Deed
1. Nature of business
2. Contribution of the partners. (capital)
3. Profit sharing ratio
4. Rules for determining interest on capital
5. Method of calculating goodwill
6. Power of partners
7. Accounts and audit
8. Expulsion of Partners
9. Arbitration etc.
In the absence of a Partnership Deed, the provisions of the Partnership Act apply.
RULES /PRINCIPLES APPLICABLE IN THE ABSENCE OF A PARTNERSHIP DEED
The rules applicable are contained in Section 28 and 29 of the Partnership Act.
1. Profit and loss are shared equally
2. If a partner incurs liability while discharging the firm‟s obligations he is entitled to indemnity.
3. If a partner lends money to the firm, he is entitled to interest on the principal at the rate of 6% per annum
4. A partnership can only change its business with consent of all partners
5. A person can only be admitted as partner with consent of all existing partners.
6. A partner is not entitled to interest on capital before the ascertainment of profit.
7. Every partner is entitled to take part in the management of the firm‟s business.
8. A partner is not entitled to remuneration for taking part in the management of the firms business.
9. The books of account of the firm must be accessible to all parties
10. Under section 29 of the Act, a partner can only be expelled from the firm if the power to do so is expressly vested another partners.
ADVANTAGES OF A PARTNERSHIP
1. Specialization and division of powers: Where the association is profession oriented.
2. Sharing of management: All partners are entitled to take part in the firm’s management.
3. Wide capital base: this will assist in pooling together working and investment capital.
4. Easy to form: Formation is not subject to many legal formalities.
5. Flexibility: Partners are free to change the nature of business, provided all agree.
6. Sharing of Losses: Losses and Liabilities are shared amongst the partners thereby cushioning the detriment.
DISADVANTAGES OF A PARTNERSHIP
1. Liabilities of partners for debts and obligations of the firm is unlimited i.e. partners are liable to use personal assets if the firm is insolvent.
2. Sharing of profits reduces the amount available to individual partners.
3. A single partner’s mistake affects all partners.
4. Disagreements between partners often delay decision-making.
5. Tends to rely on a single partners effort to manage.
6. Death, bankruptcy, or insanity of a partner may lead to dissolution.
COMPARISON AND CONTRAST BETWEEN COMPANIES AND PARTNERSHIPS
Certain partnerships are deemed illegal e.g.
1. A partnership formed for an illegal purpose
2. A professional firm with unqualified partners
3. A partnership with more than 20 persons. As was the case in Fort Hall Bakery Supply Co. V. Fredrick Muigai Wangoe (1959) where an association of 45 persons purported to carry on business as a partnership. It had purportedly sued the defendant, a former manager in its name. The action was struck off as the body was not a partnership or company.
In the formation of a partnership, partnership are free to give their firm any name which is registerable under the Registration of Business Names Act5, The name must not mislead the public or be intended to take advantage of an existing business.
In a partnership, parties may be classified as:-
i. Real and Quasi
ii. Minor and Major
iii. Active and dormant / sleeping
iv. Limited and General
RULES FOR DETERMINING THE EXISTENCE OF A PARTNERSHIP
Under Section 4 of the Partnership Act, the following rules are applicable in determining whether a partnership exists;
1. Under Section 4 (a) of the Act, joint tenancy, tenancy in common property or part ownership does not of itself constitute a partnership in respect of the property owned or held.
2. Under Section 4 (b) of the Act, the sharing of gross returns of business not of itself constitutes the person’s partners in the business.
3. Under Section 4 (c) of the Act, the receipt by a person of a share of a profit of a business is prima facie evidence that he is partner in the business. However, the receipt of an amount which varies or is contingent upon the profit of a business does not constitute one a partner.
In Davis v. Davis, it was held that sec. 4 (c) of the Partnership Act is not contradictory. It means that, if the sharing of profit is the only circumstances to be considered and a person receives a share thereof, then he is a partner. However, if other circumstances are to be taken into consideration, the sharing of profit cannot of itself determine whether one is a partner or not.
Under sec. 4 (a) there are several circumstances where persons who are not partners receive an amount contingent upon the profit of the business E.g.
1. Payment of remuneration to servant or agent where the amount varies with the level of profit.
2. Payment of a liquidated debt where the amount payable varies with the profit of the business.
3. Payment for goodwill where the amount is contingent upon the firm profit.
4. Payment of annuity to a widow or child of a deceased partner where the amount varies with the level of profits.
RELATIONS BETWEEN PARTNERS AND THIRD PARTIES
(Liability of Partners)
Under sec. 7 of the Partnership Act, every partner is an agent of each other and the firm. The liability of the partners for debts of the firm is governed by the Law of Agency6. A partner exercises both real and ostensible authority, and the firm is generally liable for debts arising in the conduct of a partner.
However, for the firm or other partners to be held liable for the acts of a partner, it must be evident that:
1. The partner was acting in the business of the firm.
2. He was acting in the usual way.
3. He was acting in his capacity as a partner.
In other circumstances a partner would be held personally liable: E.g.
1. If he is prohibited from acting on behalf of the firm.
2. He signs a document without express authority
A 3rd party who has contracted with partnership may sue:-
i. The partner dealt with or
ii. All the partners
If a single partner is sued and his assets cannot make good the firms liability, the other partners cannot be sued. Suing all the partners enables the plaintiff to execute is judgment against all the partners since they are jointly liable.
Liability of a Retiring Partner
Unless otherwise agreed, a retiring partner is only liable for debts and other liabilities upon the date of retirement.
Liability of an Incoming Partner
Unless otherwise agreed, such a party is only liable for debts and other liabilities arising from the date he became a partner.
Liability of a Minor Partner
Under Section 12 of the Partnership Act, a minor partner is not personally liable for debts and other liabilities of the firm. However, his share in the property is liable. Under sec. 13 if a minor partner does not repudiate the partnership during infancy or within a reasonable time after attaining the age of majority, he is personally liable for debts and other liabilities from the date he became a partner.
Liability by Estoppel
A person, who is not a partner, may be held liable as a partner by the equitable doctrine of estoppel. Under Section 18 of the Act, if a person who is not a partner knowingly permits himself to be held out a partner or represents himself as a partner with the firms knowledge and third parties rely upon the representation, he is estopped from denying the apparent partnership and he is liable.
RELATIONS BETWEEN PARTNERS THEMSELVES (INTER SE)
The relationship between partners inter se is governed by the agreement between them. However, a partnership agreement is a contract uberrimae fidei (contract of the utmost good faith. Each partner is entitled to utmost fairness from the co-partners. The principal of utmost good faith in partnership is expressed the following ways:-
1. A partner with a personal interest in a transaction entered into by the firm is bound to disclose the same.
2. Any secret profit made by a partner must be accounted to the firm.
3. A partner may not compete with the business of the form.
4. A partner can only be expelled from the firm in good faith.
A partner may assign his interest in the firm either absolutely or as a security for a loan. The person to whom the interest is assigned (assignee) becomes entitled to the assigning partner’s share of profit. He however does not become a partner.
Incapacities of an Assignee Partner
1. He cannot demand an account from the partners
2. He cannot take part in the management of the firms business
3. He has no right of access to the limit books of accounts
This is the relationship between a business and its customer. In Crutwell V. Lye, it was held that the Goodwill is the probability of customer frequenting the old place of business after its ownership or management has damaged hands.
It is part of the assets of the firm.
DISSOLUTION OF PARTNERSHIP
A partnership may be dissolved with or without the courts intervention.
1. DISSOLUTION OR WINDING UP BY THE COURT
Under sec. 39 of the Partnership Act, a partnership may be wound up by the court on application if it satisfied that:
i) A partner has become a lunatic or is permanently of unsound mind
ii) A partner has become permanently incapable of discharging his functions as a partner.
iii) A party is continuously guilt of wilful breach of the partnership agreement.
iv) A partner has conducted himself on manner unfairly prejudicial to the firm and his continued association is likely to bring the firm‟s name into disrepute.
v) The firms businesses can only be carried on at a loss.
vi) Circumstances are such that it is just and equitable that the firm be wound up e.g.
2. DISSOLUTION WITHOUT THE COURTS INTERVENTION
1. Performance: A partnership dissolves on the accomplishment of the purpose for which it was formed.
2. Lapse of time: A partnership comes to an end on operational of the duration prescribed by the parties.
3. Mutual agreement: This is a situation where the parties agree to dissolve the firm. All partners must be party to the agreement
4. Death: Unless the partnership deed otherwise provides, the death of a partner leads to dissolution.
5. Bankruptcy: Unless the partnership deed otherwise provides a partnership dissolves if a partner is declared bankruptcy by a court of competent jurisdiction.
6. Termination at will or at notice: Where the duration of the partnership is not specified, it may be dissolved by notice i.e. a partners notice to the others of his intention to have the firm dissolved
7. Illegality: If the business of the partnership becomes illegal by reason of change of law or otherwise, the firm is dissolved.
8. Charging a partner’s interest: If a partner’s interest in the firm is charged by a court order for a private debt, the firm is dissolved.
DISTRIBUTION OF ASSETS
In the dissolution of a partnership, assets are distributed in the following order:
1. Creditors other than parties have priority
2. Creditors who are partners rank next.
3. The balance is distributed between the partners on the basis of their capital contribution
4. The surplus, if any, is distributed between the partners on the basis of the profit sharing ratio.
This is the rule in Garner v. Murray where, three partners, A, B and C contributed an equal amount of capital but agreed to share profit equally. In dissolution or realization, there was a deficit in C‟s capital account and C was insolvent and hence unable to make good the deficit.
It was held that before A and B could be paid what was due to them ratably, they had to make good the deficit in C‟s capital account on the basis of the last agreed balances in their capital accounts.
a. The law relating to Limited Partnership is contained in the Limited Partnership Act, This Act creates a hybrid partnership with characteristics of companies. However it is a partnership with the meaning of Section 3(1) of the Partnership Act. The Limited partnership Acts adopts the definition for partnership contained in sec. 3 (1) of the
b. It is an unincorporated association.
c. Membership consists of 2 – 20 persons.
d. It is profit motivated.
However Limited Partnership differs from a general partnership in certain aspects. The Limited
Partnership Act modifies the law of partnerships in the following respects:
1. Registration: Under Section 7 of the Limited Partnership Act a limited partnership must be registered with the Registrar of companies.
For this to be done there must be delivered to the Registrar a written memorandum setting out:-
a. The firm name
b. General nature of business
c. Principal place of business
d. Particulars of limited partners and their contribution
e. Date of commencement etc. failing which the partnership becomes General.
2. Composition of Members: A limited partnership must have at least one general partner and one limited partner.
3. Membership: A limited liability company may be admitted as a limited partner.
4. The Limited Partner: The liability of this partner is limited to the amount of capital contributed. He cannot therefore be sued for debts or other liabilities of the firm.
Under Sec. 5 of their Limited Partnership Agreement; the Limited Partner is subjected to the following incapacities:-
1. He cannot withdraw or receive back his share during the subsistence of the firm.
2. He does not bind the firm
3. He is not deemed to be an agent of the other partners
4. He may not take part in the management of the business and if he does, he becomes a general partner for the duration and may be sued for debts and other liabilities arising.
5. His death, bankruptcy or insanity does not lead to dissolution
6. He cannot dissolve the partnership by notice.
7. A person may be admitted as a partner without the consent of the limited partner.
8. Differences between partners are resolved by a majority of the general partners.
9. The discharging of his interest by a court order for a private debt does not lead to dissolution.
10. However, if a limited partner assigns his share, the assignee becomes a Limited Partner.