Establishing an Unincorporated Partnership

The parties are conducting their fund management business in the form of an unincorporated Partnership. seeking business dissertation help. For an unincorporated Partnership, two or more people are required to set up and run a common business with the view to earn profit. It can be set up without a formal agreement, but it is typically established through an agreement to trade as a partnership. Such partnership agreement sets out matters as the capital contributed by each partner and the manner the parties will share the profits. In this current case, DOCUMENT A constitutes this agreement, which sets out individual capital contribution and the aim of earning profits by forming the business. The question is whether actions of the parties establish the carrying on of a business. The facts indicate that the parties have opened a joint bank account, purchased a lease of premises, bought some IT equipment, acquired all of the necessary licences and authorisations for fund management, and commenced business. In one case, Miah v Khan, the House of Lords held that similar actions by the parties of opening a joint account, obtaining bank loan, acquiring premises, purchasing furniture and equipment, would amount to the establishment of partnership even if the business had not started as yet.

The unincorporated Partnership does not have a separate legal personality and as such all the partners share the risks, costs and responsibilities. Partners bear the consequences of each other’s decisions. This is also provided under section 24(1) of the Partnership Act 1890. In the current case, the question arises whether all partners are bound by the contract entered into by Norman with Office Supplies Ltd for £2,500. Another question relates to the transaction of purchase of a puppy for £1,000 by Norman. The rules related to relationship with third parties or outsiders will be applicable here. Each partner is an agent of the other partners and also a principal (Partnership Act, Section 5). The agent can bind the other partners to contractual liability if he is acting within his authority. Authority may be actual or ostensible; in the latter case, the agent may not have actual authority but the third party may be reasonably perceive that the partner has the authority. If there are restrictions on the partner’s authority due to the terms of the partnership agreement, these will affect the third party only if the third party has notice of such restriction (Partnership Act, Section 8).

The agreement (DOCUMENT A), clause 3 clearly provides that no party can enter into any transaction involving expenditure in excess of £1,000 without a majority decision of the partners. It also provides in clause 2 that Norman will be responsible for finance and purchases. Based on the principles of agency, and authority discussed above, the firm is liable for the purchase of office supplies from OSL. However, the purchase of the puppy was not for the purpose of the business of the firm, which even

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1. J. Dennis Hynes and Mark J. Loewenstein, Agency, Partnership and the LLC: The Law of Unincorporated Business Enterprises: Cases, Materials, Problems (Lexis Nexis 2011).
2. Department for Business Innovation & Skills, ‘A GUIDE TO LEGAL FORMS FOR BUSINESS’ (2010) accessed 21 June 2020
3. Miah v Khan [2000] 1 WLR 1232 HL.
4. Department for Business Innovation & Skills, ‘A GUIDE TO LEGAL FORMS FOR BUSINESS’ (2010) accessed 21 June 2020
5. Geoffrey Morse, Partnership Law (Oxford University Press 2010) 104.
6. Re Agriculturist Cattle Insurance Co. {Baird's Case) (1870) 23 L.T. 424.
7. United Bank of Kuwait plc v Sahib [1997] Ch 107.

a third party would know is related to fund management. Applying Bank of Scotland v Butcher, the purchase of the puppy will not bind the firm or the partners because it does not relate to the business of the firm.

In a general partnership, each of the partner is entitled to participate in the management of the partnership and an ordinary business decision is decided by a majority of partners. Thus, a majority rule will decide the day-to-day business. This is supported by section 24(8) of the 1890 Act, which also provides that consent of all the partners are unanimously require in case of change in the nature of the partnership business.

In the current case, proposals one and two are related to starting a new service. In this case, proposal one shows that Norman was against the decision of buying the new computer system from Computer Co Ltd for the new proposed business. Proposal two shows that Lynn did not consent to expand the partnership business to include actuarial services. This new business constitutes a change in the nature of the partnership business. However, there was no unanimous approval of all the partners. Thus, the change in the business was not valid and Lynn’s right was breached as the firm went ahead with the actuarial services despite lack of the required consent of all the partners.

Section 6 provides that partners are bound by acts on behalf of firm. In this case, transaction with Computer Co Ltd will bind all the partners. Section 10 further provides that a partnership firm is liable for “any wrongful act or omission of any partner acting in the ordinary course of the business”. In this case, the other three partners went ahead and bought the computer system despite lack of unanimous approval. This constitutes a wrongful act or omission on the part of the other partners and therefore the firm is liable to pay the amount claimed by Computer Co Ltd. In this light, Lynn can recover any payment made to Computer Co Ltd from other partners in relation to the letter of claim filed by Computer Co Ltd.

The Proceeds of Crime Act 2002 (POCA), s 328 makes a person criminally liable if he is a part of the arrangement that he has suspects or knows facilitates retention, acquisition, control or use of criminal property. Criminal property includes benefit of a person from any criminal conduct and includes benefits from conduct constituting an offence, which may include bribery. This also means it is money laundering where a person in possession of money that represents a contract benefit obtained by bribery. This criminal offence, thus, covers a person’s or another person’s proceeds

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9. Bank of Scotland v Henry Butcher & Co & Others [ 2003] EWCA Civ 67.
10. Clive Rich, Law for Small Business For Dummies – UK (John Wiley & Sons Ltd. 2016).
11. Andreas Cahn and David C. Donald, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA (Cambridge University Press 2018).
12. OECD, ‘REPORT ON THE APPLICATION OF THE CONVENTION ON COMBATING BRIBERY OF FOREIGN PUBLIC OFFICIALS IN INTERNATIONAL BUSINESS TRANSACTIONS AND THE 1997 RECOMMENDATION ON COMBATING BRIBERY IN INTERNATIONAL BUSINESS TRANSACTIONS’ (2005) accessed 7 July 2020

from crimes. Natural and legal persons can be made liable for this offence. He will not be liable for the offence if he makes the necessary authorised disclosure under POCA, s338. POCA requires anybody working in the regulated sector, such as banks, accounting firm, financial institutions, tax and insolvency advisors, lawyers, and similar firms. Also, in case a company is involved, a director will be personally liable for aiding and abetting the offence.

POCA attaches a risk of confiscation of any contracts and assets that are acquired directly or indirectly as a result of bribery. It is neither necessary to link proceeds or property to the predicate offence, nor to prove the person who committed the predicate offence that generated the criminal proceeds. The property has to be shown a criminal property, and that the offender had knowledge or suspicion that the property constituted the proceeds.

In the current case, Ledger Funds Limited is a private company falling under the regulated sector and as such POCA governs the particular offence. Whinney suspected the client to have use and control of criminal property. She was aware of the criminally liability under section 328. She should have made the authorised disclosure of her suspicion as required under Section 338. Instead, she accepted the “personal gift” and became part of the arrangement where the suspect was using and controlling a criminal property. The “personal gift” is a benefit taking the form of a criminal property itself obtained through bribery. The personal gift is bound to be confiscated. Her conduct of obtaining the gift amounts to money laundering. Considering the facts and the rules, Whinney has committed the offence under POCA and she will be personally liable for aiding and abetting the offence.

The Companies Act 2006, s176 imposes a duty on a director of a company to not accept benefits from any third parties. Section 178 provides for common law rule or equitable principle remedy for breach of a director’s general duties. The director, in breach of his duty, will be liable for damages or compensation. Also, the company can bring a derivative action against a director of a company. The Companies Act 2006, s260 provides that the derivative claim could be brought only in case a cause of action arises from an actual act or omission that involves default, negligence, breach of duty or trust by a director.

In the current case, Whinney as Director of the company, had a general duty provided under s176 to not accept “personal gift”. She breached this duty and she is subject to common law rule or equitable principle remedy for breach of a director’s general duties. The company can bring claim of damages

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13. OECD, ‘REPORT ON THE APPLICATION OF THE CONVENTION ON COMBATING BRIBERY OF FOREIGN PUBLIC OFFICIALS IN INTERNATIONAL BUSINESS TRANSACTIONS AND THE 1997 RECOMMENDATION ON COMBATING BRIBERY IN INTERNATIONAL BUSINESS TRANSACTIONS’ (2005) accessed 7 July 2020
14. David Lawler, Frequently Asked Questions on Anti-Bribery and Corruption (John Wiley & Sons Ltd 2012).
15. Ibid.
16. John De Lacy, Reform of UK Company Law (Cavendish Publishing Limited 2002).
17. Joan Loughrey, Directors' Duties and Shareholder Litigation in the Wake of the Financial Crisis (Edward Elgar Publishing Inc. 2013).

or compensation against her. Her breach of duty as a director gives the company a cause of action for derivative claim against her.

As per the Model Articles For Private Companies Limited By Shares (Regulation 26) transfer of shares can be effected in the form approved by the directors. The directors may refuse to register the transfer of shares (Regulation 26(5)). The Model Articles of Association for Private Companies Limited by Shares as set out in Schedule 1 to the Companies (Model Articles) Regulations 2008/3229 is applicable to LFL as per Document C. The Model Articles of Association for Private Companies Limited by Shares is applicable to PFL as per Document D. However, clause 1 of the Articles of Association (Document E) excludes the regulations that are inconsistent with the Articles of Association.As per the Articles of Association of PFL (Document E), clause 9.1 provides that of the holders of 75% or more of the shares in issue wish to transfer all (but not some) of their shares to a bona fide purchaser they may require all other shareholders to sell and transfer all their shares to the purchaser provides that as per clause 9.2, the minority shareholders are given two weeks’ written notice to that effect. Moreover, clause 9.3 provides that the Regulation 26 of the Model Articles of Association for Private Companies Limited by Shares is not applicable and the directors cannot refuse to transfer the shares regulated by Article 9. Therefore, as per the provisions of the Articles of Association read with Model Articles of Association for Private Companies Limited by Shares, the majority shareholders have the power to transfer shares. For this purpose, the following resolutions and steps will have to be followed.

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Steps for NFL

∙ Agreement to purchase the shares in PFL from its shareholders for a sum of £1,000,000: special resolution in the shareholders meeting as per the company articles (based on the earlier partnership agreement). All decisions are to be made by the members together.

Loan of £500,000 from Megabank PLC: resolution in the directors’ meeting. Decisions of the companies’ business management are to be taken by directors (Model Articles, Regulation 3). Decision is to be taken by majority (Regulation 7).

Steps for PFL

Approval of transfer of the shares from the selling shareholders to LFL: Ordinary resolution in the directors’ meeting (Articles of Association, clause 9.3).

Changing articles of association: special resolution in a shareholders meeting (Section 21 Companies Act 2006). A written resolution is required and the copy of the new articles are to be signed by the shareholders. The directors note that the special resolution has been passed. A certified copy of the special resolution is sent to the Companies House within 15 days of the general meeting.

Appointing Stewart Park, Whinney Banks and Lynn Thorpe as directors: ordinary resolution in the directors meeting (Model Articles, Regulation 17).

The Articles of Association create binding obligations and is the constitutional document of the company (Section 33 of the Companies Act 2006). As per clause 10 of the Articles of Association (Document E), the termination fee will have to be paid to Berwick Hills, the Company’s solicitor.

Continue your exploration of Choosing the Right Business Structure with our related content.

Authorities

Bank of Scotland v Henry Butcher & Co & Others [ 2003] EWCA Civ 67.

Miah v Khan [2000] 1 WLR 1232 HL.

Re Agriculturist Cattle Insurance Co. {Baird's Case) (1870) 23 L.T. 424.

United Bank of Kuwait plc v Sahib [1997] Ch 107.

Books

Cahn A and Donald DC, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA (Cambridge University Press 2018).

De Lacy J, Reform of UK Company Law (Cavendish Publishing Limited 2002).

Hynes JD and Loewenstein MJ, Agency, Partnership and the LLC: The Law of Unincorporated Business Enterprises: Cases, Materials, Problems (Lexis Nexis 2011).

Kochan N and Goodyear R, Corruption: The New Corporate Challenge (Palgrave Macmillan 2011).

Lawler D, Frequently Asked Questions on Anti-Bribery and Corruption (John Wiley & Sons Ltd 2012).

Loughrey J, Directors' Duties and Shareholder Litigation in the Wake of the Financial Crisis (Edward Elgar Publishing Inc. 2013).

Morse G, Partnership Law (Oxford University Press 2010).

Rich C, Law for Small Business For Dummies – UK (John Wiley & Sons Ltd. 2016).

Websites

Department for Business Innovation & Skills, ‘A GUIDE TO LEGAL FORMS FOR BUSINESS’ (2010) accessed 21 June 2020