The Australian law firm Clayton Utz has published a short article on Commissioner of State Revenue v Rojoda Pty Ltd, in which the Australian High Court confirmed that a partner's interest in partnership property is unascertained. The article is at:
https://www.claytonutz.com/knowledge/2020/may/the-high-court-revisits-the-law-relating-to-partnerships
Partnership Law, Mark Blackett-Ord and Sarah Haren (6th edn, Bloomsbury Professional 2020), 1304pp., hardback, ISBN: 9781526508423. Also available as a PDF ebook 9781526508447 and as an EPUB ebook ISBN 9781526508430.
The latest edition of this book, co-authored by leading barristers in the area of partnership law, is available in hard copy or as an e-book. It updates what was already a well-respected and authoritative text, regularly cited in court judgments. Although the first edition (1997) predated the introduction of LLPs, and despite the title, this text contains a substantial chapter on LLPs. In this respect it offers an advantage over its main competitor, Lindley & Banks on Partnership, which covers LLPs only in passing. However, it does not deal with taxation, which Lindley deals with in some detail.
The chapter and section structure of the book remains almost the same as in the previous edition, although there is now a useful section on derivative actions in the LLP chapter, reflecting the judgment in Harris v Microfusion (2016). This continuity is unsurprising given that the book has been regularly updated throughout its life (six editions in little over 20 years) and one would not expect radical changes to the format at this stage. The book continues to provide an extensive analysis of the law relating to all aspects of a partnership’s life, from whether and when it exists and whether a person is a partner (including chapters on capacity to be partner, illegal firms and holding out), to dissolution (three chapters) and insolvency (two chapters).
Chapters 2-18 are largely concerned with the relationship of partners inter se (with the arguable exception of the chapter on holding out of persons as partners), and cover partnership structures (including corporate partnerships), the partnership agreement, partnership assets and liabilities, capital, the tricky issue of a partner’s share in the partnership, the duty of good faith, management, discrimination, internal disputes and remedies, and the enforcement of those remedies. Chapters 19-23 cover relations with third parties, including partner liability, litigation by or against third parties, and insolvency. The detailed treatment of insolvency is something which is sadly likely to become more relevant in the near future, as the economic effects of the current pandemic become clear.
The structure of the book thus differs significantly from Lindley, which includes one very lengthy chapter on partnership agreements dealing with a range of material on the internal relationship between partners, some of which is also discussed in separate chapters, and which thus requires extensive cross referencing. In contrast, the chapter on partnership agreements in this book takes the opposite approach, being less than 20 pages long and dealing only with the bare essentials, including minimum terms, construction, variation and clauses which may be void or unenforceable in certain circumstances.
As well as a chapter on LLPs, there is also a chapter on limited partnerships, which has been updated to reflect the introduction in 2017 of the private fund limited partnership (PFLP) (discussed in the review of Lindley on this website) and the extensive modification of the provisions of the Limited Partnerships Act 1907 for PFLPs (though not, regrettably, for common-or-garden limited partnerships).
There are substantial footnotes (albeit rather quirkily placed at the end of each section rather than each page) directing the reader to relevant primary sources although, as with Lindley, this reviewer would have preferred more references to supplementary secondary sources for an academic audience,. However, as with Lindley it is acknowledged that this is a text aimed at (and used extensively by) legal practitioners.
The Appendices contain the key pieces of partnership legislation (the Partnership Act 1890, the Limited Partnerships Act 1907, the Limited Partnerships (Forms) Rules 2009, the Partnerships (Accounts) Regulations 2008, and the Insolvent Partnerships Order 1994) and two of the three key pieces of LLP legislation (the LLP Act 2000 and the LLP Regulations 2001). The LLP Regulations 2009 are inevitably omitted given their length (which stems from the fact they are devoted to applying provisions of the unfortunately lengthy Companies Act 2006). The Appendices also include the Company, LLP and Business Names Regulations 2009, the joint BVCA and HMRC statement 1987 which did so much to encourage the use of limited partnerships as tax avoidance vehicles by confirming that a limited partnership used as a venture capital investment fund would be treated for tax purposes as tax transparent, and (purely for historical interest) the now repealed Law of Partnership Act 1865.
This new edition includes an explanation and analysis of relevant legislative and jurisprudential developments since the previous edition in 2015, including the PFLP legislation, the Insolvency Rules 2016 (repealing and replacing the 1986 Rules) which apply also to individuals and companies and which provide much of the detail of insolvency proceedings, and the important case of Flanagan v Liontrust (on the repudiation of an LLP agreement, discussed in the review of Palmer’s Limited Liability Partnership Law on this website)
This sixth edition of Blackett-Ord and Haren thus continues to provide a comprehensive and authoritative source of reference for academics, postgraduate students and practitioners in this area of law. It should not be regarded as an alternative to Lindley, but as complementary to it (and vice versa). First, there are the big differences in coverage; the inclusion of a particularly useful chapter in LLPs in Blackett-Ord but not in Lindley, and the extensive tax coverage in Lindley which is missing from Blackett-Ord. Second, there are inevitably small points (but nonetheless potentially important in the right context) which only one text covers; for example, the possible legislative error in the grounds for a partner to obtain leave of the court to petition for the winding up of a small partnership is mentioned in Blackett Ord but not Lindley. Finally, there is inevitably disagreement between the two texts on some issues; for example, on the application of the doctrine of repudiation to two-partner firms, or to multi-partner firms when the disputing partners fall into more than two camps.
The most recent issue of the journal Taxation contains a short article by Tim Parr, 'Partnership deferral of self-assessment payment' (2020) 4746 Taxation, on the usefulness of the new UK provisions allowing partners (or LLP members) to defer payment of their income tax. It is at:
https://www.taxation.co.uk/articles/partnership-deferral-of-self-assessment-payments
If you do not already have access to this journal you can register for two week's free access.
Deacon v Yaseen [2020] EWHC 465 (Ch)
The parties were medical practitioners and former partners in a doctor’s practice. The continuing partner sought to exercise her option under the terms of the partnership agreement to purchase the share of the outgoing partner in the partnership. However, a dispute arose as to how the lease of the partnership premises was to be valued.
That lease contained a rent review clause, but the rent had never actually been increased and the market rent would have been substantially greater. Under the contract between the partnership and the National Health Service (NHS) Commissioning Board for the partnership to supply general medical services, the cost of the lease for the premises from which those services were carried out was reimbursed by the Board to the partnership. The National Health Service (General Medical Services – Premises Costs) Directions 2013 provided that the payment should be either the current market rent or the actual rent, but for reasons which the court was unable to ascertain, the payments in this case had been for the market rent plus the actual rent
The continuing partner was particularly concerned not to overpay for the outgoing partner’s share of the premises, particularly if that overpayment was considered to include an element of goodwill, because the sale of goodwill of a medical practice would be unlawful under the National Health Service Act 2006. The court noted the definitions of goodwill provided in Trego v Hunt [1896] AC 7 and Commissioners of Inland Revenue v Miller and Co’s Margarine Ltd [1901] AC 217, but held that these definitions had to be considered in the context of the specific contractual and statutory provisions applicable in a particular case. Here, the payments made by the Board in respect of rent were clearly made in respect of premises costs, and were not referable to, or variable by reference to, the business success of the practice. They were therefore not goodwill for the purposes of the 2006 Act.
As to what interest the outgoing partner had in the premises, and whether he was entitled to be paid any sum additional to that provided for in the partnership agreement (which was the net value of his share shown in the dissolution accounts), the court concluded that the general position, subject to contrary agreement, was that an outgoing partner was entitled to the value of their share in the partnership, including partnership assets, at the date of departure. The usual remedy to ascertain this value was an inquiry, a valuation, and an account. Once ascertained, this amount became a debt due to the outgoing partner from the continuing partners.
On the facts, the court held that the outgoing partner had failed to demonstrate an agreement contrary to the general law position, and was therefore entitled to a debt rather than a particular asset. The difference between Clause 8 of the partnership agreement, which stated that the partnership property included the lease of the premises, and Clause 10, which stated that partners owned shares in the premises as set out in Schedule 3 to the agreement, which were different still to the shares in the partnership which were as set out in Schedule 2, did not mean that the premises were not a partnership asset. Nor did the fact that partners over the years had mortgaged their shares of the premises, since they retained the equity of redemption to contribute to the partnership, and this included the vital right to use the premises for business purposes.
OUP has just published the 9th edition of this established partnership and LLP law text, now co-authored with Thomas Braithwaite. It is available in hardbook or as an e-book. Further details at:
https://global.oup.com/academic/product/partnership-and-llp-law-9780198832799?q=morse&lang=en&cc=gb
A review will be published on this website in due course.
Law firm Baker McKenzie has published a short article on this new draft legislation at:
https://f.datasrvr.com/fr1/520/79229/Limited_Partnership_Fund_Bill_proposes_new_limited_partnership_regime_for_private_funds_in_Hong_Kong.pdf
Sophia Fadra of Veale Wasbrough Vizards LLP has provided an update on a new UK government payment which will be available to encourage doctors to join medical practitioner partnerships. It is available at:
https://www.vwv.co.uk/news-and-events/blog/healthcare-law-brief/new-to-partnership-payment
Trans-Oil International SA v Savoy Trading LP and Melnykov [2020] EWHC 57 (Comm)
Savoy Trading was a Scottish limited partnership with two partners, both of which were limited companies (Cadwell and Intech). After it notified the applicant that it could not fulfil its contractual obligations, and the applicant discovered that partnership had been subject to a sequestration award and a trustee appointed, it applied for and was granted a freezing order against the partnership. In these proceedings the applicant sought to add Melnykov to the freezing order or, in the alternative, to have him named personally in the penal notice of that order.
As Melnykov had no presence or assets in the jurisdiction, the applicant sought to found English jurisdiction on the basis that he was arguably personally liable on a contract which was governed by English law. The court noted that the opinion of the Scottish Advocate stated that even if an offence (in relation to obtaining credit without the trustee’s permission) had been committed, it would prima facie be committed by the partnership, and even if the general partner had committed the offence, that would not render Melnykov personally liable unless the court were to pierce the partner’s corporate veil which, on the facts, was unlikely. Although Cadwell acknowledged in a Norminee Declaration that its ownership of an interest in the partnership was as nominee and in trust for Melnykov, the beneficiary of a trust did not incur concurrent liability on a contract entered into by the trustee on behalf of the trust. The court concluded that the applicant had entered into a contract with the partnership, and neither the Nominee Declaration nor the fact that Melnykov signed the contract and had a power of attorney for the partnership was sufficient to make him personally liable. It therefore that it had no jurisdiction to make a freezing order against him.
The court held that even if it was wrong on the issue of jurisdiction, a freezing order should not be granted because there was no evidence of a real risk of dissipation of assets by Melnykov as there was little or no real evidence of dishonesty or low standards of commercial morality, beyond the use of the complex partnership structure which might be for good reasons. Surprisingly, the court held that there was no evidence of the strength of the trustee’s suspicions as to Melnykov’s conduct, even though the trustee had reported those suspicions to the police, and despite the background of the current inquiry by the UK’s Department of Business, Enterprise and Industrial Strategy into the misuse of partnership structures, and in particular the Scottish limited partnership structure.
The court also dismissed the alternative claim for an order that Melnykov be named in the penal notice, on the grounds that he was a de facto partner, a de facto partner was analogous to a de facto director, and CPR 81.4(3) enabled the naming of directors personally in an order made against a company or other corporate body. The court held that there was no basis for extending the rule in CPR 81.4 to partners, and therefore no basis for extending it to de facto partners. Although Lindley & Banks on Partnership noted that the commercial view of a partnership was to treat it similarly to a company, the nature of a partnership was such that individual partners were personally liable for a breach of an order against the partnership without need for a provision such as CRP 81.4, other than where a partnership had separate legal personality. The latter caveat is another rather surprising feature of this judgment, as is the court’s statement that it was unclear whether a Scottish partnership had separate legal personality. In fact, s4(2) of the Partnership Act 1890 states clearly that it does and it is settled law, but it is also well established that Scottish partners do incur personal liability for the obligations of the partnerships (see further Stephen Chan, A Practical Guide to Partnership Law in Scotland, Ch 4).
Finally, the court held that even if CPR 81.4 applied, Melnykov was not a de facto partner. In HMRC v Holland [2010] UKSC 51 Lord noted that there was no single test for a de facto director but referred to factors such aswhether he was held out as a director or purported to act as a director. It was not clear whether such authorities applied to partners, but in any event Melnykov was not held out as a partner and did not act as such. The Advocate’s opinion was that Cadwell was the general partner and liable as such, and the court concluded that Melnykov did not act as a general partner but pursuant to a power of attorney.
Razaq v Baig [2019] EWHC 3490 (Ch)
The parties had been in partnership repairing tyres and servicing motor vehicles, Razaq carrying out the work and Baig contributing the use of his premises. They then formed a company which carried on the same business with the help of a third participant, until the company was dissolved in 2018. Razaq wished to continue the business and entered into negotiations with Baig for a new lease of the premises, but negotiations eventually broke down and Baig took possession of the property.
The court considered that there was no seriously arguable case that the partnership could continue beyond Razaq’s exclusion from the property, given that s32 of the Partnership Act 1890 allowed a partnership to be terminated by notice of intention to dissolve, and the exclusion implied the giving of such notice. However, this did not resolve the issue because, as established in Lie v Mohile [2014] EWHC 3709 (Ch), a partner who owned the premises from which the partnership business was carried out was taken, after a dissolution, to have granted a licence to the other partner to enter the premises for the purposes of the partnership business. Dissolution would not terminate the licence since the business itself was not thereby terminated but continued for the purpose of winding up. However, Lie did not mean that a former partner had the right to occupy the premises forever. The court therefore ordered that Razaq must be allowed a reasonable period to wind up the business and dispose of the assets.
Boyle v Burke and Cave [2019] EWHC 3364 (Ch)
Boyle was a retired partner entitled to a pension from the partnership. He claimed that the partnership had dissolved when the business was transferred to a company set up for the purpose, and that event triggered an entitlement under the partnership agreement to a lump sum to cover future pension benefits. The defendant partners argued that the partnership had continued despite the transfer of the business.
The court noted that in NatWest v Jones [2001] BCLC 98, in which a partnership business was transferred to a company set up for the purpose, and the only possible ongoing business was the collection of rent under a farm tenancy granted by the partners to the company, it had been held that the mere fact that the partners ceased trading did not end the partnership. Similarly, in Chahal v Mahal [2005] BCLC 655 it had been held that although it could be inferred from the transfer of all the assets and operational activities of the partnership to a company, that the partners had actually agreed to end the partnership, such an inference would not always be possible.
The court emphasised that the definition of a partnership in s1 of the Partnership Act 1890 – two or more persons carrying on a business in common with a view of profit – need only be satisfied in order for the partnership to be formed; it was not a continuing requirement and a partnership could only end through dissolution, and not through failure to satisfy the requirements of s1. It therefore concluded that mere cessation of the partnership’s business here was insufficient to establish that the partnership had dissolved, and there was no evidence of any agreement by the defendants to dissolve it. The provisions of the partnership agreement as to the provision of a lump sum pension entitlement on dissolution therefore did not come into force.