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Legal Liability In Partnership:

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Question:

Discuss the Legal Liability of all three Partners of Partnership Business that is Ben, Ann and Mary in the Context of the loan taken from Shady Deals, the New Printing Press, and the Contract with XYZ Ltd.

 

Answer:

Legal Liability in Partnership:

In this we have to discuss the legal liability of all three partners of partnership business that is Ben, Ann and Mary in the context of the loan taken from Shady Deals, the new printing press, and the contract with XYZ Ltd.

Partnership Act 1890 regulates the partnership provisions in UK.

Provision 5 of Partnership Act 1890 states how partners can bind the firm and other partners from their actions. As per this Section every partner acts as an agent for both for firm as well for his other partners for regulating the business carried on by partnership. Any act done by partner related to business of the firm has power to bind the firm and partners of the firm.

There are some exceptions to this general rule which state that an act done by partner does not bind the firm and other partners if authority is not given to the partner to act on behalf of the firm for some specific case, and third person with whom such partner is dealing knows that partner has no authority, or that third person does not believe him to be a partner (Partnership Act, 1890).

Provision 6 of Partnership Act 1890 states that all partners of the firm are bound by the acts which are done to carry on the business of the firm. As per this provision any act or instrument which directly relates with the business carried on by the partnership and done or executed in the name of the firm or if any intention is showed by that action or instrument to bind the firm by any other person who is authorized and no matter whether he is partner of the firm or not, it is binding on all the partners of the firm as well as firm. It must be noted that this section does not affect any general rule of law which relates with the execution of deeds or any negotiable instrument (Partnership Act, 1890).

 


Provision 9 of Partnership Act 1890 states the liability of the partners. As per this provision every partner of the firm is jointly liable for all debts and obligations with other partners of the firm, and in case of Scotland partner is also severally liable for all debts and obligations of the firm which was incurred at that time when individual is partner of the firm.

In case of death of the partner his estates are also severally liable for those debts and obligations incurred at the time when he is the partner of the firm so far as they remain unsatisfied. In case of England or Ireland, to the prior payment of partner separate debts (Partnership Act, 1890).

Provision 17 of Partnership Act 1890, states the liabilities of incoming and outgoing partners of the firm. As per this provision any person who admits as a partner in an existing firm does not become liable towards the creditors of the firm for any ac which was done before he became a partner of the firm.

Any partner of the firm who retires from a firm does not hereby cease to be liable from the debts and obligations of the firm which are incurred before his retirement. Any retiring partner may be discharged from any existing liabilities or obligations by an agreement by himself or members of the firm or creditors, and this agreement can be treated as new constitution between the members of the firm and creditors.

We can understand this with the help of the case law HURST V BRYK AND OTHERS: HL 30 MAR 2000. In this case, Hob house L.J. pointed out [1999] Ch. 1, 26B stated that liability of Mr. Hurst for the purpose of rent is indirect, and like any other liability of the firm this liability is also the joint liability of the partners of the firm and every partner is liable to pay it. Court consider the Section 9 of the partnership Act 1890 in which partners are jointly liable for the debts of the firm and not severally. For the purpose of liability debt must be incurred when they are partners of the firm (UK parliament, n.d.).

Loan taken by Shady Deals:

In the present case, from 1st January 2016 Ben and Ann enter into partnership as printers, and as per the partnership agreement executed between the two, any loan taken for the purpose of carrying on the business of the firm or on the name of the firm must be agreed by both partners. On 1 February 2016, Ann has taken a loan from Shady Deals for amount £100,000 for the purpose of partnership at 50% rate of interest. She pays deposit to buy new printing press from this money without informing Ben.

 


In this case, Ben and Ann both are liable towards Shady Deals for the amount of £100,000 because as per section 6 of the Act states partners are bound by the acts which are done on behalf of the firm and section 9 of the Act defines that every partner of the firm is jointly liable for all debts and obligations with other partners of the firm.

In this case Ben gives notice on 1st May 2016 to Ann and Mary, and as per Section 17 any partner of the firm who retires from a firm does not hereby cease to be liable from the debts and obligations of the firm which are incurred before his retirement. Therefore Ben is liable towards the Shady deals.

Section 17 of the Act also states that any person who admits as a partner in an existing firm does not become liable towards the creditors of the firm for any ac which was done before he became a partner of the firm, and in this case Mary joined the firm on 1st March 2016. Therefore Mary is not liable towards the shady Deals because this loan is taken before the admission of Mary as a partner in the firm.

The new printing press:

In the present case, Ann purchase printing press on Credit without informing Ben and Section 5 states that Acts done by every partner for the purpose of carrying on the business of the firm has power to bind the firm and partners of the firm. There are some exceptions to this rule which state that an act done by partner does not bind the firm and partners of the firm if partner has no authority to act on behalf of the firm, and in this case Ann has no authority to done any act on behalf of the firm. In this case Ann act without the authority therefore her act does not bind the other partners of the firm as well as firm. Ben and Mary are not liable for new printing press.

Contract with Xyz ltd:

In this case, Ben cannot deny his liability towards XYZ as per section 17 which states that any partner of the firm who retires from a firm does not hereby cease to be liable from the debts and obligations of the firm which are incurred before his retirement. Therefore Ben is liable towards the XYZ Ltd. Ben gives notice on 1st May 2016 to Ann and Mary therefore he is liable on for the amount which was due from 1st February 2016 to 30th April 2016. Ann is liable for complete amount and Mary is liable for the debt which was incurred between 1st March 2016 to till date and not for any amount which was due before 1st March 2016.

 

Private Limited Company in UK & legal Liability of members in Private Limited Company:

In UK, private Limited Company is that company which is limited by shares, and this company cannot trade their shares in general public. This company is also known as Limited Company, and this company is most common type of company which is incorporated in UK (UK companies limited, n.d.).

Section 3 of the companies Act 2006 defines that any Company is a limited company if constitution of the company limit the member’s liability. Company can be of two types either limited by shares or guarantee and in case of Private Limited Company is limited by shares.

Company limited by shares means when member’s liability is limited to that much amount which is not paid by the members on the shares held by them. In case, if liability of the member’s is not limited then company is fall under the category of unlimited company (Companies Act, 2006).

Section 4 of the Companies Act 2006, states that a Private Company is any Company which is not a public company (Companies Act, 2006).

Section 59 of the Companies Act 2006 states, that any company which is Private Limited must use “limited” or “ltd.” in the end of their company name, and in case of Welsh Company its name may be end with “cyfyngedig” or “cyf” (Companies Act, 2006).

There are some specific companies which are exempt from this requirement, and these companies are stated in Section 60 of the Act (Companies Act, 2006).

Private limited Company is a more complex business structure as compared to sole trader and partnership. Any company which is limited by shares is mostly known as Private Limited Company. Company limited by shares states that liability of members is limited up to their capital investment. Members cannot offer shares of private limited companies to general public and these shares cannot be traded on stock exchange. Following are some characteristics of private limited company:

 

  • Private Limited Company can be incorporated with one member only.
  • Liability of members in this company is limited to the amount which I not paid on shares by members.
  • In private limited company there is facility to issue shares to the members of the company, but shares cannot be issued to public.
  • Private Limited Companies are separate from its members and it has legally distinct identity.
  • Company is managed by Board of Directors of the Company (UK Companies Limited, n.d.).

Following are the advantages of Private Limited Company in UK are:

  • By incorporating this company members can protect personal assets because in Private Limited Company personal assets of members and directors are not liable for the debts and obligations of the company.
  • In Private Limited Company Liability of members are limited to the total value of unpaid shares.
  • In Private Limited Company can open bank accounts, invest, purchase property etc. in the name of the company.
  • This structure of business is credible and trusted and with this form of structure international businesses are familiar.
  • Easy to access capital by offering shares but not to the public (Jordans, n.d.).

At last we can say that this form of company has very special status in the eyes of law because these companies have their own legal entity and they have right to sue other or they can have assets on their own name. The ownership of this company is divided into parts which are known as shares and person who holds these shares is known as shareholders of the company. These companies have their own legal entity therefore their owners are not liable personally for the debts of the company. Shareholders have limited liability and this is the biggest advantage of this company (BBC, n.d.; OCRA, n.d.).

In the present case, Ben can opt for the Private Limited Company because in this liability of the members are limited up to the amount their capital invested.

 

References:

BBC. Limited companies. Available at: https://www.bbc.co.uk/schools/gcsebitesize/business/aims/limitedcompaniesrev3.shtml. Accessed on 23rd February 2016.

Companies Act 2006- sect 3.

Companies Act 2006- sect 4.

Companies Act 2006- sect 59.

Companies Act 2006- sect 60.

Hurst V Bryk and Others: Hl 30 Mar 2000.

Jordans. Private Limited Company. Available at: https://www.jordans.co.uk/company-formations/private-limited-company. Accessed on 23rd February 2016.

Ocra. Corporate Information. Available at: https://www.ocra.com/jurisdictions/ukcompanies.asp. Accessed on 23rd February 2016.

Partnership Act 1890- sect 17.

Partnership Act 1890- sect 5.

Partnership Act 1890- sect 6.

Partnership Act 1890- sect 9.

UK Limited Companies. Limited Liability Companies. Available at: https://www.ltdcompany.co.uk/company-formation/limited-liability-company/. Accessed on 23rd February 2016.

UK Limited Companies. UK Private Limited Company. Available at: https://www.ltdcompany.co.uk/company-formation/private-limited-company/. Accessed on 23rd February 2016.

WWW. Parliament. UK. Judgments - Hurst v. Bryk and Others. Available at: https://www.publications.parliament.uk/pa/ld199900/ldjudgmt/jd000330/hurst-2.htm. Accessed on 23rd February 2016.

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