Partnerships And Director Duties In UK Essay.

Task 1:

Section 1 of the Partnership Act 1890 states that: “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”  With reference to relevant case law, critically discuss each of the four elements of  this definition.

Task 2:

With reference to relevant legislation and case law, critically discuss the following duties of a director of a company:

Duty to avoid conflicts of interest (section 175 Companies Act 2006)

Duty not to accept benefits from third parties (section 176 Companies Act 2006)

Duty to declare interest in proposed transactions or arrangements (section 177 Companies Act 2006)

Different Business Structures in UK

There are different modes in which a business can be run in UK and these include sole trader, partnership, company, LLPs, and limited partnerships. Each of these business structures have different features, and are marked with different merits and demerits (Rush and Ottley, 2006). When two or more people form a business and run it in a common manner, along with sharing the profits/ losses, a partnership is created. In UK, the partnerships are governed by the Partnership Act, 1890. Section 1 of this act provides the definition of partnership, where it is deemed as the relationship present between individuals who carry on a business for earning profits and this is done in a common way (McLaughlin, 2015). This discussion is focused on the four elements of the definition given in this section.

Under section 1 of the governing act, the very first element of partnership is that it is a relationship which exists between a set of people. A partnership is not like a company, where owing to the separate legal entity status given to the companies, the shareholders are treated differently from the company. In partnership, the partners are not different from partnership and due to these reasons, the partners can be made liable for the acts of other partners, and also the partnership can be held accountable for the actions of the partners of the firm (Morse, 2010). The partnership is created through a written contract which is known as a partnership deed; however, even in the absence of a partnership deed, a partnership can be created. A partnership differs from sole trader due to the requirement of having two or more people in partnership. A company does have the power of being a member of a partnership firm, but a company cannot be a partnership owing to the two being different business structure forms (Jones, 2015).

Partnership involves the business of the firm being carried on by two or a higher number of people. For the purpose of this point, reliance needs to be placed on Joyce v Morrissey [1998] TLR 707, which was a case related to the famous rock band of 1980s. In this case a dispute had taken place between the band members in context of profit sharing. The members of the band never knew that they were creating a partnership as they simply created a band for performing. However, the court stated that a partnership was present between them as they were working together in a common manner for the purpose of earning profits and satisfied the conditions laid down under the governing act (Cox, 2012). This is an important case in context of the definition of partnership as it shows that a partnership can be created by two or more people coming together for a common purpose. This case shows that a rock band is a partnership for the purpose of the quoted act as was seen in the case of Joyce v Morrissey. A key point which has to be noted in this regard is that the promoters of the company are not given the status of partners as was seen in Keith Spicer Ltd v Mansell [1970] 1 All ER 462, even when the objective of the promotes is to earn profits (Gibson and Fraser, 2014).

Key Elements of Partnership as per Partnership Act, 1890

As per the definition, the next element is that the business is to be carried out. Business in this sense covers trade, occupation and profession and is stemmed from section 45 of the Partnership Act. The act has to be undertaken in a constant and regular manner in order to be construed as a business. Thus, an isolated event is not deemed as business being carried on for the purpose of this section and Smith v Anderson (1880) 15 Ch D 247 is an example of this (Cassidy, 2006). Though, when based on the specific situations in a case, a single event can also be deemed as business being carried on, and Mann v D'Arcy [1968] 2 All ER 172 is an example of this (Morse, 2010).

To further explain the impact of elements given under section 1 of this act, reference needs to be made to Khan v Miah [2000] 1 WLR 2123. This case saw the House of Lords stating that a partnership had been present even when the partnership was broken up before opening up of the business (Monaghan, 2015). Hence in order for the business being carried on, the facts of the particular matter are taken into consideration by the courts to decide if the elements covered under section 1 have been satisfied. This opens the doors to a particular situation being deemed as presence of partnership, even when the same is not true, and vice versa, owing to the variances in the activity being deemed as a business, and as a result of this, the need for intervention of courts is raised.

In context of section 1 of this act, the third element is “in common”. A key requirement of the quoted section is that the business needs to be operated in a common way with the partners of the firm. Thus, just because a person works for the partnership firm, he/she would not be deemed as a partner. The case of Saywell v Pope [1979] STC 824 (Ch) saw the court stating that in such cases where there was lack of participation in business, in such case the presence of intention of creating a partnership agreement and the discussions on this matter between the partners would not result in the creation of a partnership, owing to the lack of business being carried in common (Roach, 2014).

When the goods are supplied by an individual, or services are provided to the business, it would not mean that a partnership is present merely because the payment was taken as a share in the profits. This was established through the case of Strathearn Gordon Associates Ltd v Commissioners of Customs and Exise [1985] VATTR 79 where the plaintiff was consultant and he was paid share of profits and fees in some of the projects which had been undertaken with Gordon. It was argued for the purpose of taxation that he was a partner and he was not a provider of the service. However, the tax tribunal rejected this argument and stated that there was a lack of business being carried on in a together manner in between the parties in question (Morse, 2010). This particular aspect provides clarity in context of the previously criticized point on the role of courts being increased to find the presence of partnership. Then again, with this, the role of court is increased in context of whether the business is actually being run for a common purpose or not.

Duties Imposed on Directors under Companies Act, 2006

The very last element covered in the quoted section is to establish that the business in partnership is run in a common manner, particularly with the view of earning profits. As a result of this, the objective needs to be earning profits for partners of the partnership form where the business of the partnership is carried on in a common manner. What is not necessary is that the profits to be made in actuality for the existence of partnership; the need is for the presence of intention of earning profits. This means that in a business where there is a lack of anticipation of financial returns, partnership is not present. Along with this, a person is taken to be the partner in such cases also where the individual does not receive a share in the profits and M Young Legal Associates Ltd v Zahid (A Firm) [2006] EWCA Civ 613 is a leading example of this (Roach, 2014). The case of Britton v The Commissioners of Customs & Excise [1986] VATIR 204 saw the business profits being shared in between the married couple and the sum of profit being submitted in their joint account. Based on this, the couple claimed to be partners; but it was held by the court that simply sharing of profits does not result in partnership being created (Kelly, Hammer and Hendy, 2017).

Hence, it can be summarized from the different cases discussed here that the creation of partnership in the nation requires the four elements of section1 to be present in unison.

The business of the company is conducted for the shareholders of the company by the directors and this result in them being imposed with some duties to make certain that the interests of shareholders are given preference, in place of the business being conducted for the directors’ personal interests. The Companies Act, 2006 (CA) puts forth these duties in the nation (Sheikh, 2013). This discussion is focused on three of such duties imposed on the directors.

Under section 175 of CA, the directors have been imposed with the duty of avoiding conflict of interest, before the authorization for such conflicting interest has been attained and this has to take place before it takes place. This section provides a range of circumstances where the directors’ interest directly or indirectly could result in conflict of interest with that of the company. In cases where the directors can anticipate the chances of conflict happening, the director is required to obtain authorization from the other directors of the company or from its shareholders. The shareholder authorization is granted through ordinary resolution; whilst the directors’ authorization is granted through voting of the non-interested directors. Section 175(4) provides the relief in context of this section’s provisions. Based on this subsection, the director’s duty is not contravened when the circumstance in question is not considered as a conflict of interest being given rise to, reasonably, or in such cases where the directors give the relevant authorization to the issue at hand. The section is related to the directors exploiting the opportunities, information or the property of company; and this is done irrespective of the fact that the director would actually take such advantage or chose not to do so (Degenhardt, 2010).

A strict approach had been adopted by the Court of Appeal in the application of this section in the matter of Philip Towers v Premier Waste Management Ltd [2011] EWCA Civ 923. This case saw the previous director of Premier Waste Management, Mr. Towards entering into an arrangement with Mr. Ford, who was the customer of the company, for the purpose of borrowing the earth moving equipment, and this was done when he was still the director of the company. The equipment attained from the customer was used for renovation of the personal property of Mr. Towers and no mention of this taking place was made before the company’s board. Consequently, the company got involved unintentionally through the unapproved actions of company employees, who had made arrangements for setting up for the previous director. Once the company got to know of the entire thing, they started an investigation and also adopted the actions against the ex-director for contravention of his director duties, as Towers had failed in avoiding the conflict of interest. Upon the matter reaching the court, the ex-director failed to see the issue with the entire transaction and stated that he was not dishonest since the company had bore no loss and the undertaken loan was of a very less amount. The court adversely commented on Towers’ ability in appreciating trust and the confidence which had been put on him owing to the position he held. As a result, he was ordered to pay a sum of £5,200 to the company. Thus, this case is a timely reminder for the directors to present their undivided loyalty or would face grave consequences (FieldFisher, 2011).  

In case of a director resigning and obtaining the business opportunity which the company had for the purpose of his own benefit, the duty owed by the director would be taken to be contravened, even in such cases where it can be proved that this business opportunity would not have been used by the company, and a leading example of this is the case of Industrial Development Consultants Ltd v Cooley [1972] 1 W.l.R.443. However, in such cases where the director enters in a competition with the company, upon resigning from the company, it would not be constituted as a contravention of provisions covered under this section, as was seen in the matter of Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200 [2007] Bus LR (Neil Davies & Partners, 2018). In McKillen v Misland (Cyprus) Investments Ltd and others [2012] EWHC 1158 (Ch), the court stated that the duty provided under section 175 had been contravened due to the directors have the actual knowledge of the entire issue. This means that the duty of avoiding conflict of interest does not remain confined by the limitations of statute and the courts interpret this section in a wide manner. Thus, the directors need to declare any and all things in order to steer clear of a contravention being upheld in the eyes of law, despite the directors having no intention of doing such (Fox Williams, 2013).

Under section 176 of CA, the directors have been imposed with the duty of not accepting benefits from the third parties, which is put on them for the reasons of being the director of the company for doing or not doing something as a director of the company (Steinfeld and Ritchie, 2007). This is a crucial duty and is a part the general duty imposed on directors to avoid conflict of interest; though, the reason for bifurcating is to ensure that the benefit attained by the director from the third party could only be authorized by the company shareholders and not by the board of directors. This is aligned with the UK Bribery Act, 2010 in a side by side manner (Shepherd and Wedderburn, 2012). This section is not aimed at stopping the directors from getting the benefits but just to put the obligation of the directors disclosing it. The case of Tower v Premier Waste Management Ltd is an example of the secret profit being overlapped with no conflict rule and bringing forth strict liability for the director (Neil Davies & Partners, 2018).

Under this section of CA, the directors have been given the duty of declaring the interest in the proposed arrangements or transactions. The directors have to declare the nature and the extent of the interest which they have in such transaction or arrangement to the directors of the company. The case of Guinness plc v Saunders (1988) 4 BCC 37 saw the courts holding that for complying with this section, which was earlier section 317 of the Companies Act, 1985, the directors have to give the disclosure to all of the directors and not just to the committee directors. The case of Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 WLR 108 saw that in case of sole director companies, the sole director had to make the declaration under this section to himself and this had to be recorded in the minutes. In cases the meeting in which this declaration was made had presence of other people, the declaration had to be made loudly in order for the individuals in attendance to hear the same; followed by it being recorded again (Dignam and Lowry, 2014).

References 

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Neil Davies & Partners. (2018) Duties of Directors. [Online] Neil Davies & Partners. Available from: https://www.ndandp.co.uk/insolvency-claims/misfeasance-claims/duties-of-directors/ [Accessed on: 04/01/18]

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