Uganda

Management Institute

Master of Business Administration (MBA)



Partnerships

Definition:

Partnership has been defined by the Partnership Act 2010 under Section 2:

A partnership is the relationship which subsists between or among persons, not exceeding twenty
in number, who carry on a business in common with a view to making profit.

A partnership is, thus, based on a contract between its members and, since it can be created
informally and dissolved informally, it differs completely from a corporation.

You will remember that a corporation must be created either by charter or by statute and, once
formed, it has a continuous legal personality. Partnership, on the other hand, can be formed by means
of a deed, i.e. an agreement under seal signed by the persons who agree to become partners, or by
means of a simple agreement in writing, or even by an agreement made orally or simply implied from
the actions of the persons concerned.

Differences Between Partnership and Corporation

We can now note the following important differences between a partnership and a corporation:

§ A partnership has no legal personality; a corporation has a legal personality of its own.
§ All partners share in the management, unless it is agreed otherwise. The management of a
corporation is left to a selected body (directors, council, committee etc.).
§ Each partner, except a “limited partner”, is liable for all the debts of the partnership personally, to
the full extent of his private estate.
§ No more than 20 persons may usually associate in a partnership. Professional partnerships are
exempt from this prohibition by section 2(2) Partnership Act.
§ Each partner has implied authority to contract on behalf of the others in the ordinary scope of the
partnership business, and he thereby binds all the other partners, even if they are unaware of what
he has done. A corporation acts through appointed agents, and an ordinary member has no power
to bind the corporation.

Articles of Partnership

As a general rule, the partnership comes into being by means of an agreement in writing, the document
being known as the Articles of Partnership. This document, which will be signed by all the partners,
contains all the conditions, etc. under which the partners intend to carry out their business.

The Articles of Partnership usually include clauses dealing with the nature of the business, its capital and
property and the respective capitals of each partner, the method of sharing profits and losses and the rules
as to interest on capital and drawings.
Provision is also often made for the method of determining the value of goodwill on retirement or death,
and of computing the amount payable to an outgoing or deceased partner.

The partners are bound by the Articles and, if any point is not dealt with in these Articles, then the
Partnership Act applies.

The facts in Greenaway v. Greenaway (1939) were that under the Articles of Partnership a
partner was liable to be expelled if he acted in a manner contrary to the good faith required of
partners and prejudicial to the firm’s general interest. For a long time, there was considerable
acrimony between two of the partners, which eventually came to a head when one assaulted the
other. It was held that his expulsion was justified, since his assault was an act of disloyalty and
constituted conduct which was clearly contrary to the good faith required of partners.

Registration – the Firm Name

A partnership is not subject to registration, unless it is a limited partnership.

Legally, the firm’s name is merely a convenient way of alluding to existing partners. However, Section 4
Partnership Act makes firm name registration mandatory, where it does not allude to the existing partners
of the firm, such as by their surnames:

A firm carrying on business in Uganda under a business name which does not consist of the true
surnames of all partners who are individuals and the corporate names of all partners which are
corporations without any addition other than the true first names of individual partners or initials
of the first names; and the corporate names of all partners which are corporations, shall register
its name under the Business Names Registration Act.

Rights and Duties Between Partners

The relations of partners to one another are governed by the Articles of Partnership. In the absence of
express provision, the following rules apply, under the Partnership Act:

§ All partners are entitled to share equally in the capital and profits.
§ No partner is entitled to interest on capital before the ascertainment of profits.
§ No partner is entitled to remuneration for acting in the partnership, even if the partners have acted
unequally.
§ Every partner may participate in the management of the business.
§ No new partner may be introduced without the consent of all existing partners.
Differences arising as to ordinary matters connected with the partnership may be decided by a
majority of the partners, but changes in the nature of the partnership business require the consent
of all.
§ A majority of partners cannot expel one of their number.
§ Each partner is entitled to be indemnified by the partnership for liabilities incurred in the ordinary
and proper business of the firm or in doing anything necessary for the preservation of the firm’s
business or property.
§ Partners making advances of capital beyond the amount of capital which they have agreed to
contribute are entitled to interest at the rate of 5%.
§ The partnership books are to be kept at the place of business of the firm, and each partner must
have access to them.
Every partner is under a duty to his fellow partners:

(i) To tender true account and full information of all things affecting the partnership.
(ii) To account to the firm for any benefit derived by him from transactions concerning the
partnership or from his use of partnership property.
(iii) Not to compete with the firm.

In Bentley v. Craven (1853) one of the partners in a sugar-refining firm carried on a separate
business as a sugar merchant, with the consent of the other partners. He arranged for the sale to
the firm of a consignment of sugar, making a profit which he did not disclose to his co-partners. It
was held that he was under an obligation to share the profit with his partners.

Relationship of Partners to Third Parties

As third parties are not permitted to inspect the Articles of Partnership, the court does not presume
that third parties know the contents of the Articles. No matter what the Articles of Partnership may
state with regard to the relation of partners to one another, an act performed by a partner in the
ordinary course of business will bind the firm and all the other partners. This is known as joint and
several liability.

A distinction is sometimes drawn between the express (or actual) and implied (or ostensible) authority of
a partner. Express or actual authority is that conferred upon a partner by the terms of the Articles of
Partnership. Implied or ostensible authority is vested in a partner by virtue of his status as a partner, and is
determined entirely by what is necessary for the usual scope of the firm’s business. Whether the act of a
partner is necessary for the usual scope of the business is a question of fact to be determined by the nature
of the firm’s business and by the practice of the persons engaged in it.

It is usual for partnership articles to contain a clause imposing some agreed limitations on the authority of
certain or all partners, e.g. forbidding junior partners to negotiate loans on behalf of the firm, but
remember that such express restrictions have no effect on outsiders dealing with the firm, unless the
outsider knows, or should know, of the restriction.

In Mercantile Credit Co. Ltd v. Garrod (1962) P and G were partners in a car repair business
and garage. The Articles forbade any buying and selling of cars by way of trade. The business
was run by P, and G was a “sleeping” partner with no share in management. P sold a car to M by
way of trade, in defiance of the Articles and without G’s knowledge. M later found that the firm
did not own the car, and claimed compensation from G. It was held that G was liable, since M
was unaware of the restriction in the Articles and P had appeared to be acting within the usual
scope of a garage business.

A partner has no implied authority to bind the firm by deed or to give a guarantee in the name of the firm.
If a partner, without special authority, gives a guarantee or signs a bill of exchange, makes or endorses a
promissory note, borrows money, or pledges goods in the name of the firm, then the firm will not be
bound, as these acts are not in the usual course of the business of the firm. With a trading firm, however,
any partner may bind the firm on bills of exchange, promissory notes, or on a contract to borrow money
on behalf of the firm.

Remember that this applies to trading firms only, i.e. firms the business of which is the buying and
selling of goods.
 In Higgins v. Beauchamp (1914), Beauchamp and X carried on a partnership business as owners
and managers of cinemas. The Articles of Partnership forbade the partners to borrow money on
the firm’s behalf. X borrowed money from Higgins on the firm’s behalf. The firm was held not to
be liable, as it was not a trading firm; X had, therefore, no implied authority to borrow on the
firm’s behalf.

Termination of Partnership

A partnership can come to an end and, in certain circumstances, must be terminated. As a general
rule, the Articles of Partnership contain the regulations regarding the termination of the partnership.
Thus, a partnership may terminate at the end of the time fixed in the Articles or on the completion of
the purpose for which the partnership was formed, by one party giving notice to the remaining
partners of his intention to terminate the partnership, or by the common consent of all partners.

A partnership is automatically terminated on the bankruptcy or death of any partner, or if any event
occurs which makes the business of the partnership illegal.

In addition, the court may decree the dissolution of the partnership in such circumstances as wilful
breach of the partnership agreement by one partner, or action by one partner which is prejudicial to
the continuation of the firm’s business. In addition, if it can be shown that the firm’s business can be
carried on only at a loss, or any circumstances arise which render it fair and equitable that the
partnership be dissolved, the court may also act by dissolving the partnership.

Bankruptcy of Partnership

Since the liability of a general partner extends to the whole of the debts of the partnership, or he is
liable jointly with the other partners, a creditor in the bankruptcy of a partnership can pursue one of
two courses.

§ In the first place, he can proceed against the partners jointly, i.e. in the name of the firm. If he
obtains judgment against the firm, the debt must be satisfied out of the assets of the firm; if,
however, the assets of the firm are insufficient, then the creditor can look to the private assets of
the partners in order to satisfy his debt.
§ In the second place, the creditor can proceed against any individual partner. If he obtains
judgement against a certain partner and this judgement cannot be satisfied out of the private
property of that partner, then the creditor cannot proceed against the remaining partners. The
creditor must pursue one course or the other. If he pursues the second course described above, the
partner against whom the judgement is obtained will be liable to pay the full amount. He has a
right to call upon the other partners, however, to contribute the shares that they should bear.

Liability of New and Retiring Partners

Pay particular attention to the following points dealing with the liability of partners.

(a) Incoming Partner

Unless a new partner makes a special agreement to the effect that he will take over the liability
in respect of the firm’s debts at the time of his joining the firm, he cannot be held liable on
such debts. In the absence of such an agreement, the new partner can be held liable only in
respect of debts incurred after he became a partner in the firm.
(b) Retiring Partner

A retiring partner can be held liable only in respect of debts incurred before his retirement,
provided due notice of retirement is given. This notice takes the form of an advertisement in
the London Gazette, which is sufficient notice to those persons who have had no dealings with
the firm, and a letter or circular to those persons who have previously dealt with the firm. In
other words, if this notice is not given, a partner is liable for any debts incurred by the firm
after his retirement. An exception to this occurs where, by a special agreement, a partner
arranges to be liable for debts incurred by the firm after his retirement.

Note also that an agreement may be made between existing creditors and the firm, whereby the
former agree to discharge a retiring partner from all liability. However, there must be valuable
consideration to support such an agreement. The mere agreement of the remaining partners to
be held liable for all debts is not sufficient for this purpose, as they are already liable.

In Tower Cabinet Co. Ltd v. Ingram (1949) C and I dissolved their partnership but no notice
was given or advertisement published in the Gazette. After this dissolution, C ordered goods
from T, using the firm’s old notepaper which showed I as a partner. T did not know I was a
partner before the dissolution. It was held that I was not liable to T.

Rights of Partners on Dissolution

The rights of partners on a dissolution are usually contained in the Articles of Partnership. Where
they are not provided for in this way, the following are the more important provisions which apply:

§ The assets or property of the firm must be applied in paying off the creditors of the firm.
§ The assets remaining are to be applied in paying to the partners the amounts which are due to
them as partners.
§ The assets of the partnership, together with any amounts contributed by partners to make up a
deficiency, are to be distributed as follows:

(i) In paying off all creditors of the firm who are not partners.
(ii) In paying off pro rata any loans made by partners to the firm, such loans being
distinguished from capital, and carrying 5% interest per annum.
(iii) In paying to the partners the amounts due to them in respect of capital pro rata.
(iv) If any surplus remains, it is to be shared among the partners in the proportions in which
they share profits.

Where the assets are sufficient to pay the creditors and any loans made to the firm by the partners, but
insufficient to repay each partner his full capital, the rule in Garner v. Murray (1904) provides that
the deficiency in capital is to be borne by the partners in the ratio in which the profits are divisible.

In this case, G, M and W were partners on the terms that profits should be divided equally. The
capital was contributed unequally, G contributing more than M. On a dissolution, the assets,
though sufficient to pay the creditors, were insufficient to repay the capital in full. It was held that
the true principle of division was for each partner to be treated as liable to contribute a third of the
deficiency, and then to apply the assets in paying to each partner his share of capital pro rata.