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Partnership Law The Law Commission and The Scottish Law Commission (LAW COM No 283) (SCOT LAW COM No 192) PARTNERSHIP LAW Report on a Reference under Section 3(1)(e) of the Law Commissions Act 1965 Presented to the Parliament of the United Kingdom by the Lord High Chancellor by Command of Her Majesty Laid before the Scottish Parliament by the Scottish Ministers November 2003 Cm 6015 SE/2003/299 £xx.xx The Law Commission and the Scottish Law Commission were set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law. The Law Commissioners are: The Honourable Mr Justice Toulson, Chairman Professor Hugh Beale QC Mr Stuart Bridge Professor Martin Partington CBE Judge Alan Wilkie QC The Chief Executive of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ. The Scottish Law Commissioners are: The Honourable Lord Eassie, Chairman Professor Gerard Maher Professor Kenneth G C Reid Professor Joseph M Thomson Mr Colin J Tyre QC The Secretary of the Scottish Law Commission is Miss Jane L McLeod and its offices are at 140 Causewayside, Edinburgh EH9 1PR. The terms of this report were agreed on 10 October 2003. The text of this report is available on the Internet at: http://www.lawcom.gov.uk http://www.scotlawcom.gov.uk ii THE LAW COMMISSION THE SCOTTISH LAW COMMISSION PARTNERSHIP LAW CONTENTS Paragraph Page SECTION A: INTRODUCTORY (PARTS I – III) PART I: INTRODUCTION 1 Partnership law reform in its context 1.1 1 The role of partnerships in the business world 1.1 1 The relationship of the general partnership to the limited partnership 1.5 2 The relationship of the general partnership to the limited liability partnership 1.8 2 Terms of reference 1.11 3 The relationship of partnership law reform to the Company Law Review 1.12 3 “Think small first” 1.13 4 The structure of the report 1.14 4 The consultation exercise 1.16 4 Acknowledgements 1.20 5 PART II: A SUMMARY OF THE CURRENT LAW 6 Introduction 2.1 6 A contractual relationship 2.2 6 Partnership and legal personality 2.5 6 Agency 2.10 8 Fiduciary duties 2.14 9 Management and financial rights 2.18 10 Partnership property 2.20 10 Duration of partnership 2.26 11 The effect of changes in membership of the firm on third parties 2.34 13 Partners’ liability and a third party’s access to information 2.40 14 Insolvency 2.42 14 PART III: OVERVIEW OF PROPOSED REFORMS 16 The principal aims of partnership law reform 3.1 16 Flexibility and informality 3.3 16 Continuity and independent personality 3.7 17 Encouraging continuity 3.7 17 Notice period and financial rights 3.10 18 iii Paragraph Page Independent legal personality 3.12 18 Mutual trust and good faith 3.18 19 Clarity of concept 3.21 20 The 1890 Act as a “model” 3.21 20 Missing links 3.22 20 Partnership property 3.23 21 Contractual remedies 3.28 22 An accessible Code 3.30 23 Concepts in the draft Bill 3.32 23 Partnerships as a legal entity 3.32 23 The liability of partners 3.33 23 The partnership agreement 3.34 24 Default partnership rules 3.35 24 Other reforms 3.37 25 Solvent dissolution 3.37 25 Miscellaneous issues 3.39 25 Transitional provisions 3.40 25 Proposals which we are not taking forward 3.42 26 Limited partnerships 3.44 26 Special limited partnerships 3.46 27 Form and style of the draft Partnerships Bill 3.47 27 Matters not dealt with 3.49 28 Tax law 3.50 28 Insolvency 3.54 29 Consequential amendments 3.58 30 SECTION B: GENERAL PARTNERSHIPS (PARTS IV – XIV) PART IV: THE DEFINITION OF PARTNERSHIP 31 Introduction 4.1 31 Issues arising out of the existing definition 4.3 31 The use of the expression “relation” 4.3 31 The need for agreement 4.4 31 Carrying on business with a view of profit 4.5 31 Who carries on the business? 4.7 32 Our provisional proposals and consultation 4.8 32 Partnership as an “association” 4.9 33 The need for agreement 4.10 33 When a partnership is formed 4.11 33 Who carries on the business? 4.12 33 The division of profits 4.13 33 The rationale for reform 4.14 34 The reform proposals 4.15 34 Who may be partners? 4.15 34 Definition of partnership 4.16 34 The need for agreement to constitute a partnership 4.18 35 iv Paragraph Page The commencement of the partnership 4.21 35 Partners carrying on the business of the partnership 4.25 36 Partnership as a business vehicle 4.33 38 Division of profits 4.36 38 Who is a partner? 4.37 39 What are not partnerships? 4.40 40 A statement of a partnership’s capacity 4.41 40 Criminal capacity (England and Wales) 4.43 41 Rules for determining the existence of a partnership 4.48 41 Concepts in the draft Bill 4.54 43 Partnership agreements 4.54 43 Default partnership rules 4.56 43 PART V: SEPARATE LEGAL PERSONALITY 45 Introduction 5.1 45 Consultation 5.3 45 The reasons for recommending separate personality 5.5 46 Clarity and commercial perception 5.5 46 A solution to practical problems 5.10 47 Existing pragmatic solutions 5.11 47 Practical problems 5.14 48 (A) The approach of leading textbooks 5.14 48 (B) The approach of the courts 5.18 49 Enforcement of partnership debts 5.20 49 Transfer of partnership property 5.21 50 Partnership insolvency 5.24 51 Conceptual clarity 5.25 51 Consistency with other developments in partnership law 5.28 52 Scotland 5.28 52 Europe 5.30 52 The United States’ experience 5.31 53 Summary 5.37 54 Partnership – a sui generis entity 5.38 55 Certain consequences 5.41 55 The partnership as a partner 5.41 55 A statement of capacity 5.42 56 Transitional provisions 5.43 56 PART VI: THE AGENCY AND LIABILITY OF A PARTNER 57 Introduction 6.1 57 The agency of a partner 6.3 57 Existing law 6.3 57 Our provisional proposals 6.6 58 Consultation 6.7 58 Reform recommendations 6.10 59 v Paragraph Page The liability of the partnership for obligations incurred by a partner 6.23 63 Existing law 6.23 63 Our provisional proposals 6.25 63 Consultation 6.26 63 Reform recommendations 6.28 64 Vicarious liability of the partnership in tort or delict 6.29 64 Liability for loss to a partner 6.30 64 The provision of free or cut-price services 6.31 65 Liability for penalties 6.34 65 Vicarious liability of the partnership for misapplication of property by a partner 6.36 66 The liability of partners for the obligations of the partnership 6.47 69 Existing law 6.47 69 Our provisional proposals 6.49 70 Consultation 6.51 70 Reform recommendations 6.54 71 Partners’ liability 6.58 72 A partner’s right to indemnity from the partnership 6.60 72 A partner’s right to contribution from the other partners 6.61 73 The liability of the incoming partner 6.66 75 Existing law 6.66 75 Our provisional proposals 6.68 76 Consultation 6.70 76 Reform recommendations 6.73 76 The incoming partner’s capital 6.74 77 The date when an obligation is incurred 6.79 78 The liability of the outgoing partner 6.81 79 Existing law 6.81 79 Liability for pre-retirement debts 6.81 79 Liability for post-retirement debts 6.82 79 Liability through “holding out” 6.83 80 Our provisional proposals 6.84 80 Consultation 6.85 80 Reform recommendations 6.86 80 The liability of the apparent partner 6.89 81 Existing law 6.89 81 Our provisional proposals 6.93 82 Consultation 6.94 82 Reform recommendations 6.96 82 PART VII: LITIGATION AND ENFORCING JUDGMENTS 86 Introduction 7.1 86 Litigation 7.4 86 Existing law 7.4 86 English law 7.4 86 Scots law 7.7 87 vi Paragraph Page Our provisional proposals 7.10 87 A partnership can sue and be sued 7.11 87 Litigation after dissolution of a partnership 7.12 88 Disclosure of the identity of partners 7.13 88 Whether an account is needed 7.14 88 Consultation 7.15 88 A partnership can sue and be sued 7.15 88 Litigation after dissolution of a partnership 7.16 89 Disclosure of the identity of partners 7.17 89 Scots law 7.18 89 Whether an account is needed 7.19 89 Reform recommendations 7.20 89 A partnership can sue and be sued 7.20 89 Method of service on a partnership 7.23 91 Establishing the liability of a partner for a partnership obligation 7.25 91 Disclosure of the identity of partners 7.27 91 Litigation after a partnership is dissolved 7.32 94 Whether an account is needed 7.35 94 Enforcement 7.36 95 Existing law 7.36 95 English law 7.36 95 Scots law 7.41 96 Our provisional proposals 7.44 96 The need for a judgment against the partnership 7.44 96 Enforcement against a partner’s assets 7.45 96 No need to exhaust the partnership’s assets 7.46 97 English law 7.47 97 Scots law 7.48 97 Consultation 7.49 97 The need for a judgment against the partnership 7.49 97 Informing partners of claims and enforcement against a partner’s assets 7.50 97 Scots law: the effect of an arrestment 7.54 98 Reform recommendations 7.55 99 Limitation and prescription 7.65 101 England & Wales 7.67 102 Scotland 7.69 102 Scots law: the effect of arrestment in execution 7.73 104 PART VIII: CONTINUITY OF PARTNERSHIP AND THE OUTGOING PARTNER 106 Introduction 8.1 106 Terminology 8.5 106 vii Paragraph Page Continuity of partnership 8.6 107 Existing law 8.6 107 The partnership at will 8.8 107 The Syers v Syers order 8.9 108 Problems of discontinuity: a summary 8.13 109 Our provisional proposals 8.14 109 Consultation 8.17 110 Reform recommendations 8.19 111 More detailed rules 8.20 111 The inadvertent partnership 8.21 111 The loss of vested contractual rights 8.26 112 The incoming partner’s capital 8.27 112 Striking a balance: the rights of the outgoing partner 8.36 114 Our provisional proposals 8.36 114 Consultation 8.37 114 Reform recommendations 8.40 115 The financial rights of the outgoing partner 8.49 117 Our provisional proposals 8.49 117 The notional
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