Company law legal organisations

IntroductionThomas, Charles and Sheila are governed by Partnership Act 1890 to operate a business titled ‘All-fit’ which is a fitness center. While Thomas works on full time basis as fitness trainer, Charles is assigned with administrative tasks on part-time basis. Sheila visits fitness center occasionally who has invested capital to float business.

Section 4(1) of Partnership Act provides meaning of a partnership firm as “Persons who have entered into partnership with one another are for the purposes of this Act called collectively a firm, and the name under which their business is carried on is called the firm name”.  Alternatively,  Section 1 of Partnership Act 1890 provides the definition of a partnership firm as “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”.

All-fit business is a partnership firm consisting three partners who are guided and governed by the rules of Partnership Act 1890.  In accordance with the rules and provisions, each partner of All-fit firm, must abide and comply with the partnership agreement and cannot violate any provisions of either partnership agreement or Partnership Act 1890.

Stating about the responsibility of a partner in abiding by the laws of firm,  Section 5 of Partnership Act 1890 provides that “Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner”.

All the partners of ‘All-fit’ business are responsible for the acts executed within the area of business premises which is clearly stated in Section 6 “An act or instrument relating to the business of the firm and done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorized, whether a partner or not, is binding on the firm and all the partners”.

Thomas, Charles and Sheila have a clear understanding about duties and responsibilities to carry on as partners in Partnership firm.  Each partner is an expert in respective field of operation of business such as, Thomas is a fitness expert who is resourcing business area, Charles is an expert in administration and Sheila has a capacity to invest capital.  Among the three partners, Thomas is in fitness center working on full-time basis apart from the fact that the liability of Thomas is limited not to exceed 300 pounds.

Section 9 of Partnership Act 1890 states about liability of partners as “every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied, but subject in England or Ireland to the prior payment of his separate debts”.

Further, the liability of Thomas is limited to the extent of 300 pounds only whereas the other partners liability is unlimited.  With this fact, it can be ascertained that ‘All-fit’ partnership is not covered under Section 1 of Limited Liability Partnerships Act 2000 which clearly defines limited liability partnership as “LLP is a legal person in its own right. It is a body corporate, formed on incorporation (see section 3). It has unlimited capacity and will, therefore, be able to undertake the full range of business activities which a partnership could undertake”.

Subsection (4) states “While in law an LLP is separate from its members, its members may be liable to contribute to its assets if it is wound up. The extent of that potential liability will be set out in regulations”.

Subsection (5) states “As an LLP will be a body corporate, partnership law will not in general apply to an LLP. Elements of partnership law may, however, be applied to LLPs by regulations made under section 15(c), and section 5(1)(b) provides that regulations under section 15(c) will apply in the absence of agreement as to any matter concerning the mutual obligations of LLP members, or LLP members and the LLP”.

Further Section 10 states that in a Partnership firm that is registered under Partnership Act 1890, when there is any mistake committed by any one of the partners, the entire number of partners are liable for the loss or damage that has occurred and must equally shoulder the responsibility in finding a relief from paying compensations for injuries or losses caused to any third party  in the due course of operation of business.

“Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act”.

All-fit was confronted with a situation wherein a thirty party Mr.Grant suffered severe injuries with the machinery that was installed in fitness center. In spite of the presence and help of Mr.Thomas to Mr.Grant,  a few minutes spent in answering a telephone call, caused an accident to Mr.Grant.  It is also important take note here, that whether Mr.Thomas had an understanding about the seriousness and concern about the position of Mr.Grant who was working with heavy weights in fitness center.

On the other side, Thomas was also attending an important customer over telephone which cannot either be neglected or ignored.   The overall analysis of accident reveals a fact that, Mr.Grant in all probability is entitled and eligible to receive compensation with a supporting fact that, accident took place within the business area of partnership firm and secondly, the accident occurred in the presence of one of the partners and also due to the fact no other person was available to stop the occurrence of accident.

Therefore as per the provisions of Section 9 and 10 of Partnership Act 1890, Thomas, Charles and Sheila of All-fit Partnership firm are liable to pay compensation to Mr.Grant who received severe injuries within the premises of fitness center.  This liability cannot be withdrawn or evaded or ignored which in case would invite the penalties for non-compliance of rules provided under Partnership Act 1890.  In support of Section 9 and 10, Section 12 states that “Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the two last preceding sections”.

With regard to the Thomas purchase of water dispensing machine at a cost of 316 pounds from Halaways Ltd., it is important to consider whether this has been purchased to use it in the premises of fitness center or for personal use of Thomas.  If it is for personal use, Thomas is required to pay from personal account and if it is purchased for business, an intimation to that extent must be made to Charles and Sheila for considering the consent and permission to purchase the same.

Section 6 of Partnership Act 1890 states in this regard as “An act or instrument relating to the business of the firm and done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners.

Further, partners are not entitled to pledge or use the creditworthiness of business for private purposes as stated in Section 7 “Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorized by the other partners; but this section does not affect any personal liability incurred by an individual partner”.

Alternatively, Section 20 states about the property of partnership. Section 20(1) “All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement”.

The above section explains that Thomas, Charles and Sheila who are partners in ‘All-fit’ fitness center must use the premises of fitness center exclusively for the purpose of established business alone, and not for any other commercial purposes. As Thomas is interested in letting out two spare rooms in fitness center for office, for which, Sheila did not agree whereas Charles gave a positive consent and agreed for the same.

Further Section 20(2) states “Provided that the legal estate or interest in any land, or in Scotland the title to and interest in any heritable estate, which belongs to the partnership shall devolve according to the nature and tenure thereof, and the general rules of law thereto applicable, but in trust, so far as necessary, for the persons beneficially interested in the land under this section”.

Section 20(3)” Where co-owners of an estate or interest in any land, or in Scotland of any heritable estate, not being itself partnership property, are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase”.

In case there is a variation or different opinion of interest on any issue about partnership firm, such consent can be drawn in writing from all the partners, which is clearly stated in Section  19 as “The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing”.

The issue of letting out of space rooms for office purposes,  can be discussed by all the partners in the interest and development of business and not on personal account. After all the consensus of partners, a business matter is further implemented for action, which otherwise stays cancelled for the good cause of partnership.

The partners of All-fit partnership firm are governed by partnership rules that are framed in Section 2 of Partnership Act 1890.   Each of the subsection must have a close relevance for enabling a legally bind  Partnership firm.  Sub-section (1) states

“Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.

Sub-section (2) “The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived”.

Sub-section (3) “The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a share, or of a  payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business;”

After studying the above legal compliances of Partnership Act 1890 and the case study of All-fit partnership firm, the following results have been outlined which are in accordance with the provisions of the Act.

a.       There is no scope for free will in Partnership firm whereas all the partners as per the Partnership Agreement have to meet the clauses respectively stated therein.

b.      If the firm is registered under Limited Liability Partnership 2000, the liability of each partner is restricted to the portion of capital that is contributed in floating of firm.

c.       A Partnership firm that is registered either under Partnership Act 1890 or under LLP 2000 does not need to comply with the provisions of Companies Act, 2006.

ConclusionThe provisions of Partnership Act 1890 are clear in stating rules of Partnership business and it is important for the partners of All-fit firm to comply with the rules. In case, if Charles and Sheila still disagree with Thomas, an advice from a lawyer can be considered to resolve and  to hear grievances of each partner and to resume the business of partnership.


BIM72505 – Partnership Act 1890

Reviewed 6 December, 2007

Limited Liability Partnerships Act 2000, Explanatory Notes

Reviewed December 7, 2007

The Partnership Act, 1890, 53 & 54 Victoria, chapter 39

Reviewed December 7, 2007