Spencer Laymond is a company lawyer with Curwens Solicitors. He sets out here his seven reasons why you may not need a partnership agreement and save yourself the money.

This may seem an unusual headline.  Why would you not want or need a partnership agreement? After all, isn’t it common sense? If you are in business with someone, shouldn’t you have a written partnership agreement? Surely it would be bad practice not to have a partnership agreement, especially if cost was not an issue?

Well, without giving the game away early, yes, if you are in business with other people, then there really should be some agreement in place setting out the expectations and exit strategy.  Yes, there will be a cash investment, in order to prepare a suitable partnership agreement but it can be dull reading explanations of things we know we should be doing, especially if it is the same old information, said the same old way. So we have turned this subject on its head, to make it a little more interesting and persuade a few more people, not only to take notice but also to take action.

We make one assumption – that you are in fact in partnership.  So here they are – seven reasons why you may not think you need a partnership agreement…

Reason 1 – You and your business partners are immortal 

If you and your business partners believe you will never die, will never suffer a serious accident or illness, or will never find yourselves incapable of continuing your role in the business (whether through age, mental capacity or otherwise), then, as much as you do not need an agreement to breathe, you may not need a partnership agreement regulating what to do if one of you should die.

If you want to check the law for yourself – the Partnership Act 1890, section 33(1) provides that a partnership is automatically dissolved on the death of any partner. That’s it. Without an agreement, on death of a partner, the business comes to an abrupt end.

But, if the death of a partner is not enough grief and aggravation, the business coming to an end itself sets a process in motion. When a partnership is dissolved, the dissolution means the start of a process of winding up. The process of winding up then disposes of the business, settling accounts with creditors and returning any surplus assets to the partners. At the end of the winding up, what once was the partnership business will be confined to history. Winding up can also give rise to unexpected and adverse legal and tax consequences.

So if you and your business partners are not immortal, the takeaway point is that there can be fatal consequences to the business, if there is no partnership agreement in place.

Reason 2 – It is reasonable for any one partner, at any time, to put the business into dissolution

Staying with the same doom and gloom theme of dissolution, if it’s perfectly reasonable for all the partners to walk around as if they have full and unrestricted access to a “button” which can be pressed at any time, a button which if pressed will kill the partnership immediately, irrespective of the circumstances and consequences to the business and other partners, then you may not need a partnership agreement.

If you want to check the law for yourself – Under the Partnership Act 1890, there are not one, but two sections that enable a partnership to be brought to an end by any partner at any time. These are sections 26(1) and 32(c). So, without an agreement, any partner, at any time, for any reason, can immediately trigger the dissolution of the partnership, and its winding up.

However, even if you and your partners have all the trust and confidence in the world in each other, even if you are family or lifelong friends, to protect the business, to provide some assurance in the event of a change in circumstances, a partnership agreement will be required.

Reason 3 – You and your business partners are happy to divide profits and losses equally, even if you have contributed different amounts of capital

Say, for example, you are in a three person partnership. Partner 1 has invested £10,000, partner 2 has invested £20,000 and partner 3 has invested £30,000. We are treating the investments as genuine capital contributions, in the sense that once the money has been invested in the partnership, it becomes permanently endowed to the partnership. The total capital invested is £60,000, of which partner 1 has invested 16.67%, partner 2 has invested 33.33% and partner 3 has invested 50%.  Each partner does exactly the same work and contributes exactly the same amount of the time to the business. Each year the business makes profits of £100,000, and each year all partners are happy to share the profits equally so that each partner receives £33,333.33. Equally if each year the business makes losses of £100,000, then the partners are happy to share the losses equally. If all partners are happy for the profits and losses of the partnership to be shared evenly, then you may not need a partnership agreement.

If you want to check the law for yourself, it’s section 24(1) of the Partnership Act 1890.  However, if you and your partners wish to share profits (or losses) in a way which reflects the original investments and perhaps different on-going contributions, then a partnership agreement will be required.

Keep in mind also that capital contributions may not be solely cash, but other property such as land and equipment. Whilst partnership accounts may make clear what assets are owned by the partnership and what assets are retained personally by an individual owner, there have been occasions where the courts have not accepted the evidence of the accounts – my third reason for a written agreement.

Reason 4 – It is reasonable for a majority of partners to oppress a minority of partners

Here we are concerned with the day to day management of the partnership business as well as its longer term direction. If you are a partner, you will automatically have a right to participate in the management. However, if you have no issue with your voice and opinion effectively falling on deaf ears and counting for nothing; if you have no issue with the seniors steering the ship as they please; if you have no issue with how decisions, big or small, are resolved, then you may not need a partnership agreement.

If you want to check the law for yourself – the Partnership Act 1890, section 24(5) provides that every partner is entitled to take part in the management of the business. Section 24 (8) then provides that differences on “ordinary matters” connected with the partnership business may be decided by a majority of partners.

The law being the law, the rules are subject to two exceptions, a few provisos and a qualification.

The exceptions:   There are two matters where even a minority partner has a veto. First, changes to the nature of the business, for example, going from software development to fish farming. Second, whether to admit a new partner – but that is about the sum of it so far as the statutory veto rights go.

The provisos:   All partners have a right to be heard; have a right to be notified of meetings; owe a duty of good faith to all partners; nevertheless, when it comes to voting, the minority can still be outvoted.

The qualification:   The rule is the majority decide “ordinary matters“, but what may be regarded as an ordinary matter in one partnership, may not be regarded as an ordinary matter in another partnership. So it is not just the number of partners voting for or against a matter that may count, but what the matter itself relates to. Is it an ordinary matter or not?

The point to takeaway here is that the Partnership Act creates scant protection for partners who find they are being oppressed by the majority. If this is acceptable then a partnership agreement may not be required.

If certainty and fairness are important, then a partnership agreement will be required.

Reason 5 – It is reasonable for a partner leaving the business to (a) freely take with them existing partnership clients (b) work for a local competitor (c) poach existing partnership staff

If the loss of clients and customers, if the loss of staff and other partners, and if the expansion of a local competitor business at the expense of your own business is of no concern to the partnership, then you may not need a partnership agreement.

 If you want to check the law for yourself, it will be a quick exercise. With the exception of a very few very limited and case specific examples, there is no law by default that provides any of these or other restrictions on partners. On the contrary, the law that there is on the subject, is law which provides for the framework as to whether any restrictions in an agreement are in fact enforceable, and whether restrictions are fair and reasonable to protect a legitimate business interest.

So if protecting your clients and customers, your staff and partners and if you do not want your competitors to get richer at your expense, are important, then a partnership agreement will be required.

Reason 6 – Even if a partner’s conduct is akin to gross misconduct, they are disqualified from their profession, they have committed murder, it is reasonable not to have a right to expel them

The principle of the partnership is “partners until death do us part”, so no matter what behaviour or scenario affects another partner, once in the partnership they have guaranteed membership for life, then you may not need a partnership agreement.

If you want to check the law for yourself – the Partnership Act 1890, section 25 provides that no majority of the partners can expel any partner unless power to do so has been conferred by express agreement between the partners.

If on the other hand you may be concerned with not having an effective remedy if a partner breaches an agreement, suffers prolonged mental or physical ill health, becomes insolvent, gets disqualified, ceases to hold relevant qualifications, neglects to perform his or her duties, is found guilty of a serious criminal activity or otherwise brings the partnership into disrepute, then a partnership agreement will be required.

Reason 7 – It is reasonable for one partner to take full responsibility for paying the debts and liabilities of a bankrupt partner

If your business partners all become bankrupt and the partnership has liabilities to pay, if those liabilities are either not covered by insurance or there is no insurance at all and you are happy to meet all the liabilities yourself, as your partners do not have the means, then you may not need a partnership agreement.

If you want to check the law for yourself – the Partnership Act 1890, section 9 provides that every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm.

Whilst there are some finer distinctions to this rule, the joint liability rule is a sound principle on a statutory footing.   Furthermore, keep in mind another consequence of partnership is that all partners are jointly liable for (a) wrongful acts and omissions of the other partners – in other words all partners are jointly responsible for the negligence of another partner; and (b) the misapplication of property or money received from third parties by one partner – in other words all partners being jointly responsible for another partner “doing a bunk” with a client’s money.

So if you don’t fancy being the “fall guy” and having to risk losing your home and jeopardising the financial integrity of your family assets, then a partnership agreement will be required. Moreover, depending on the nature of the business and availability of insurance, it may even be necessary to incorporate your partnership into a limited liability partnership (LLP); the subject of which is a blog for another occasion.

Concluding thoughts…

In conclusion, you may not need a partnership agreement and you can save yourself the money in having one prepared, if (and only “IF”) :

  1. You and your business partners are immortal;
  2. It is reasonable for any one partner, at any time, to put the business into dissolution;
  3. You and your business partners are happy to divide profits and losses equally, even if you have contributed different amounts of capital;
  4. It is reasonable for a majority of partners to oppress the minority;
  5. It is reasonable for a partner leaving the business to (a) freely take with them existing partnership clients (b) work for local competitor (c) poach existing partnership staff;
  6. Even if a partner’s conduct is akin to gross misconduct, they are disqualified from their profession, they have committed murder, it is reasonable not to have a right to expel them; and
  7. It is reasonable for one partner to take full responsibility for paying the debts and liabilities of a bankrupt partner.

However, if none of the above applies to you and you are in a partnership, then you really should consider putting a partnership agreement in place.

If you have any questions relating to this blog then please contact Spencer Laymond, our company law specialist either by email at mailto: spencer.laymond@curwens.co.uk or by telephone on (020) 8363 4444.

Countdown to Black Friday: 10 top tips!

The recent phenomenon known as Black Friday is attracting a lot of attention again this year. Sadly, it’s all too easy to get caught up in the seasonal frenzy but then get caught out when things go wrong. I have a solicitor colleague, Patricia Wollington  who is an expert in this area and I’m grateful to her for her 10 top tips :

  1. Black Friday this year is Friday 25th November 2016 but many retailers have already started advertising deals in the run up to the big day.
  2. Black Friday is a day when many retailers slash their prices to tempt savvy savers to take advantage of the special discounts on offer.
  3. Recent research conducted by Consumer Group  Which?  revealed that not all Black Friday deals were actually the cheapest on the day. This means that it’s more important than ever to undertake your research before you part with your cash.
  4. Before committing to a purchase, check and compare the sale price with other retailers to make sure you really are making a saving.
  5. Check whether the pre-sale price was increased prior to the sale. Goods should have been sold at the previous higher price for at least 28 consecutive days prior to the reduction.
  6. If you purchased the goods online and when delivered you find they aren’t what you expected, you may have cancellation rights under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. Remember you must clearly notify the retailer within 14 days of delivery of the goods that you want to cancel the contract and seek a refund. Check the terms and conditions!
  7. If you buy digital content that is not of satisfactory quality or is unfit for purpose or not as described, the Consumer Rights Act 2015 now enables you to ask the retailer to provide either a repair or replacement. Digital content can be anything from apps, music, games to ebooks.
  8. If you buy goods online, it is the retailer’s responsibility to deliver the goods to you. So if your item turns up late and you no longer want it, contact the retailer immediately and refer it to the above legislation. You should not be out of pocket for the retailer’s mistake.
  9. If the goods you ordered are delivered damaged, do not accept delivery or if the delivery person refuses to take the goods away, write a note on the delivery company’s delivery note to say the box was damaged. Act promptly and notify the retailer as soon as possible.
  10. Remember that sale goods should still be of satisfactory quality; fit for the purpose intended and match the description. If the goods are faulty, you have rights of redress under the Consumer Rights Act 2015 which include a 30 day short-term right to a refund and therefore a right to repair, replacement or partial refund.

For further information or advice, contact Patricia Wollington at Curwens Solicitors on 0208 363 4444    patricia.wollington@curwens.co.uk

Bribery Act 2010

We outline here the offences introduced by the Bribery Act 2010, the penalties for committing them and practical steps you can take to avoid breaching the legislation.

What is bribery?

Transparency International (a non-governmental anti-corruption organisation) defines bribery as “the offering, promising, giving, accepting or soliciting of an advantage as an inducement for an action which is illegal or a breach of trust.”

What are the offences under the Bribery Act 2010?

Bribing another person

A person is guilty of this offence if they offer, promise or give a financial advantage or other advantage to another person:

o        to bring about improper performance of a relevant function or an activity; or

o        to reward a person for the improper performance of a relevant function or an activity.

The types of function or activity that can be improperly performed include:

o        all functions of a public nature;

o        all activities connected with a business;

o        any activity performed in the course of a person’s employment; and

o        any activity performed by or on behalf of a body of persons.

There must be an expectation that the functions are carried out in good faith or impartially, or the person performing them must be in a position of trust. It may not matter whether the person offered the bribe is the same person that actually performs or performed the function or activity concerned. The advantage can be offered, promised or given by the person themselves or by a third party.

Being bribed

The recipient or potential recipient of the bribe is guilty of this offence if they request, agree to receive, or accept a financial or other advantage to perform a relevant function or activity improperly.  It doesn’t matter whether it’s the recipient, or someone else through whom the recipient acts, who requests, agrees to receive or accepts the advantage. In addition, the advantage can be for the benefit of the recipient or another person.

Bribing a foreign public official

A person is guilty of this offence if they intend to influence an official in their capacity as a foreign public official. The offence does not cover accepting bribes, only offering, promising or giving bribes. It does not matter whether the offer, promise or gift is made directly to the official or by a third party.

Failing to prevent bribery

A commercial organisation is guilty of this offence if a person associated with it bribes another person, with the intention of obtaining or retaining business or a business advantage for the commercial organisation. The offence can be committed in the UK or overseas.  A business can avoid conviction if it can demonstrate that it had adequate procedures in place designed to prevent bribery.

What are the penalties for committing an offence?

The offences of bribing another person, being bribed and bribing a foreign public official are punishable on indictment either by an unlimited fine, imprisonment of up to ten years or both. Both a company and its directors could be subject to criminal penalties. The offence of failure to prevent bribery is punishable on indictment by an unlimited fine.  Businesses convicted of corruption could find themselves permanently debarred from tendering for public sector contracts.  A business may also be damaged by adverse publicity if it is prosecuted for an offence.

Practical steps to help avoid liability under the Bribery Act 2010

Top level commitment

All senior managers and directors must understand that they could be personally liable under the Bribery Act 2010 for offences committed by the business. It is important that senior management leads the anti-bribery culture of a business, especially if the business wants to take advantage of the “adequate procedures” defence to the offence of failing to prevent bribery.

Risk assessment

Consider all the potential risks the business may be exposed to. For example, certain industry sectors (such as construction, energy, oil and gas, defence and aerospace, mining and financial services) and countries are associated with a greater risk of bribery.

Think about the types of transactions the business engages in, who the transactions are with and how the transaction is conducted. High-risk transactions include:

o        procurement and supply chain management;

o        involvement with regulatory relationships (for example, licences or permits); and

o        charitable and political contributions.

Review how the business entertains potential customers, especially those from government agencies, state-owned enterprises or charitable organisations. Routine or inexpensive corporate hospitality is unlikely to be a problem, but clear guidelines should be put in place.  If the business operates in foreign jurisdictions, always check local laws.

Implementing and communicating an anti-corruption code of conduct

Implement a code of conduct setting out clear, practical and accessible policies and procedures that apply to the entire business. Make sure the code is communicated effectively to all parts of the organisation.

Carry out background checks when dealing with third parties

A business will be liable if a person associated with it commits an offence on its behalf. Businesses should therefore review all their relationships with any partners, suppliers and customers. For example, if an agent or distributor uses a bribe to win a contract for a business, that business could be liable. Ensure that background checks are carried out on any agents or distributors before they are engaged by the business.

Policies and procedures

Review any existing policies and procedures and decide whether they need to be updated. If the business does not have any policies or procedures in place, consider preparing them as a matter of urgency.

Effective implementation and monitoring

Consider introducing a compulsory training programme for all staff. If only a few employees operate in a high-risk area, consider targeting the training at those employees.  Ensure anti-corruption policies and procedures are continually monitored for compliance and effectiveness, both internally and externally.

www.curwens.co.uk

 

 

Want to get paid ?

Clients often come to our Debt Collection service (“Prompt Pay”) when they are owed money and want to “go legal”. They sometimes have problems, however, with our first question which is “can we have all your papers?”

They often are so focussed on doing a great job for their customers that they lose sight of the need to keep good records as the job goes on. They can’t imagine it might go horribly wrong further down the line and they will need to issue Court proceedings. This is often the case in the building trade – not so much in the very large contracts but more often than not in the smaller projects such as extensions, kitchens, conservatories etc.

I’ve heard it said before…. “we don’t have a contract, it was just verbal”. This is a popular mistake – a contract can certainly be formed verbally but the problem is that when it goes wrong, it’s much more difficult to get convincing evidence, which is why solicitors advise contract terms and conditions should be in writing.

We always advise starting as you mean to go on – with good paperwork from estimate onwards, with details of any extras (there are always extras!) signed off by the customer as you go along. One useful tip – if you have two customers, say joint householders, either get them both to sign off extras or if one is giving instructions and taking the lead on the project, get an authority from the other one – believe me, it will save a lot of grief further down the line.

One last note of caution – it’s so easy nowadays to slip into over-familiar language in emails and, as a contract goes wrong and perhaps tempers get frayed, it might be tempting to fire off a heated email without thinking it through. Remember, if the case goes to Court, all that documentation will at some time be seen by a Judge who will be reading it in the cold light of day. Wouldn’t you like to be the one who sounds the most reasonable in how you dealt with a dispute? Just count to 10 (twice!) and edit before hitting “send” !

http://www.curwens.co.uk