Law of Partnerships(Summary Notes)

It is preferred business model as it is flexible. It also permits importation of expertise in to the business.

Governed by 2 laws: Partnerships Act and the Limited Liability Partnerships Act, both of 2012.

Definition - A business where two or more people carry out business jointly with a view to profit.

Elements – a partnership must have at least two people. There is no sole/individual partnership.

Element – the partnership must be engaged in joint business

Element – the business must be with a view to profit.

READ: Why are all investment groups (chamas) not considered as partnerships?

Entities excluded from the operation of the Partnership Act:

- Body corporates

- Limited liability partnerships

- Forms of organizations where members are less than two eg sole traders

- Bodies established by other Acts of Parliament eg Statutory corporations.

Formation of partnerships

Express agreement – written or oral, or by inference.

Where partners decide to execute a partnership deed or sign a memorandum or some other document showing their intention to form a partnership.

Partnership by inference/implication arises where parties hold themselves out as having formed a partnership, the relationship will be inferred from their conduct.

The critical legal issues in partnership law include:

- Types of partnerships

- Mutual obligations and responsibilities between partners, as well as the collective obligations of partners to the partnerships?

- Management and control of partnerships

- Financial affairs of partnerships- accounts and financial records

- Partnership contracts and powers of partners to bind each other

- Partnership property – what amounts to partnership property, acquisition and disposal

- Membership – acquisition and cessation of membership

- Dissolution and winding up of partnerships.

- Powers of courts in respect of partnerships.

Types of partnerships

Include ordinary/general partnership and limited partnerships. Extends to the limited liability partnership.

Previously there were Commonwealth partnerships and the East African Community Partnerships. However, both were repealed. Currently those partnerships not registered in Kenya have a window under foreign partnerships.

Duties and obligations of partners

They are of three types:

a) Fiduciary duties

b) Disclosure duties

c) Diligence duties

Fiduciary duties

a) Duty of good faith

Acting in bad faith includes:

- keeping secret profits

- maintaining parallel business to that of the partnership

- taking septs to frustrate the business of the partnership

- not acting in the best interest of the partnership

- breaching confidentiality clauses

- bringing the partnership into disrepute – includes criminal conduct

READ: case law on good faith

b) duty of disclosure

- Apply at formation or joining a partnership, as well as continuing duties.

- The obligation is on material information, the standard being that the information must be likely to influence the partners at the time of forming the partnership or the continuance of the partnership.

- Prospective partners have an obligation to disclose any information to each other which will influence the formation of the partnership.

- Where a partnership exists, the partners must disclose any information to the prospective partners which may influence their decision to join the partnership.

- The prospective partner also has an obligation to disclose to existing partners any information he believes will influence their decision to admit him as a partner.

- Partners have an obligation to express any information which will impact the continuance of the partnership.

- The three obligations on disclosure are: the obligation is discharged only if the disclosure is complete in all material respects; the obligation is discharged if disclosure is made as soon as reasonable; and further that the disclosure must be made to all partners.

c) Duty of diligence

- All partners are required to be engaged equally in the business of the partnership, unless a contrary provision is made under the partnership agreement.

- Similarly, general partners in the limited partnership are required to engage in the management and control of the partnership.

- First, every partner must be aware of the partnership business.

- Second, the partner must show skills and expertise required of you, first as an ordinary partner objectively, and those required of a person of your skill and experience subjectively.

- A partner must dedicate the required time in the business of the partnership.

- A partner must not be negligent.

- The obligations are owed between partners, as well as between the partner and the partnership.

Partnership membership

Initial persons proposing to form a partnership become members by executing a partnership agreement.A person can also be admitted into an existing partnership, subject to the unanimous agreement of all existing partners.Partnership by implication – holding yourself out as a partner in the presence of the partners.

A person ceases to be a partner on death, when adjudged bankrupt and not discharged for three months, or on dissolution of a partnership. Other methods is by retirement or resignation of a partner. One can also be expelled by fellow partners. Incapacity such as mental infirmity can form a ground for expulsion. The court can also order the removal of a partner.

Capital of the partnership

Partners have an obligation to contribute to the capital for the partnership business. Where the agreement has not set the limits, the obligation is to contribute equally.

The Act requires approval for all partners where any additional contribution is required. A partner who has extra contribution must also get the consent of all other partners.

A partnership can also receive loans or additional funds from its parters. The decision on whether to borrow from partners is an ordinary business which can be approved by a simple majority. Any loan given to the partnership can only attract a 3% interest (hinders partners from taking advantage of the partnership or other partners to loan money at excessive rates).

Partnership Management and control

All partners are entitled to engage in the business of the partnership diligently at all times. Further, partners are deemed agents of the partnership, with powers to contract and give undertakings and enter into obligations binding the partnership.

Partners are at liberty to specify the manner and procedures of control in the agreement. For instance, the agreement can provide:

- Who is the managing partner and their appointment

- Role and powers of managing partner

- Role and powers of other partners.

In absence of agreement, every partner is entitled to participate in the management and control of the company.

A number of matters require unanimous decision of all partners. They are not limited to:

- Admission of a new partner

- Decision to expel a partner except an exiting partner

- Decision to change the business of the partnership

- Decision to change partnership name.

In default, the rest of decisions are taken by majority. There is no provision in the Act to differentiate the voting rights on the basis of capital contribution – the principle is one vote per partner.

Partners therefore have powers to bind the partnership and other partners under the following conditions:

a) They must have power to do so

b) In the absence of powers, the person with whom they are contracting must have no notice that they lack the power

c) The contract must be entered in the course of partnership business.

The partner who has entered into a contract without authority is personally liable. The third party is entitled to sue the partner who contracts without authority and recover the price and damages.

Limited liability partnerships

Is a hybrid between an ordinary partnership and a limited liability company.

Defined as any partnership registered under the LiimitedLiablity Partnership Act 2012.

Unique advantages of LLPs

1. Flexible management and control provisions in LLPs is highly attractive – management is exercised by person known as General partner who makes decisions on the business of the partnership. This is essential in matters requiring expeditious decision making without undue formalities. It is the most preferred structure for investment vehicles such as private equity funds.

2. The LLP has separate distinct legal personality with perpetual succession. It is fairly stable as a formal business structure.

3. Tax efficient – in theory, an LLP is a tax-passthrough vehicle (partners do not suffer multiple tax regimes). Companies pay tax on profit as corporate tax, and members are in turn charged taxes on dividends. LLP partners are in turn taxed only once at individual level and not at the firm level.

4. LLPs enable sophisticated investors to exploit unique investment opportunities through its structure.

5. LLPs have lower compliance requirements – no need to file annual returns, circulate statements, callAGMs like private companies.

6. It enables professional firms which require partnerships under their regulations to raise capital from outside sources(from silent partners).

Drawbacks to LLPs

1. Fear of loss of control to the general partner

2. Misconception that setting up an LLP is fairly complex

3. The purported tax advantages are not

4. Public bodies treat LLPs suspiciously – they tend to view the strength of the LLP based on the strength of the individual partners as opposed to as a separate legal entity.

5. Limited capital raising abilities of the LLP – if the partners take out loans, the liability of the LLPs may exceed the capital contribution hence the business is often restricted to trading within its capital contribution limit.

6. For certain professional firms, the government laws are hindrances, e.g. The legal profession has restriction of sharing profits with non-qualified persons under the Advocates Act.

Establishment and registration of LLPs

Can be established by an express agreement or an implied agreement (just like in ordinary partnerships). However, an LLP must be registered under the Act.

For registration, the partners or the persons involved with the registration must file with the Registrar a statement in the prescribed format. The statement must be accompanied by the required documentation as provided in the Act. Further, an LLP must be registerd by two or more persons.

Among the key requirements of the statements, the following details are required:

a) The proposed name of the LLP – the Registrar must satisfy himself that the name has not been registered or is similar to those under the Companies Act, Registration of Business Names Act or to those of public bodies, or is generally undesirable.

b) Proposed business of the LLP

c) Particulars of the partners – names, addresses of the partners, ID no/REg. No of partners or coporate persons.

d) Particulars of capital

e) Proposed registered office of the business.

Where the registrar is satisfied, he registers the LLP and issues a Certificate of Incorporation. The certificate is conclusive proof that the LLP has been duly registered having complied with requirements of the Act.

Such LLP must use in its name, the words ‘LLP’.

Refusal of registrar

The registrar may refuse to register the LLP on own motion when:

a) Proposed business is illegal

b) Proposed name is similar to some other registered entity

c) It is in the public interest that LLP be not registered

d) The statement has not been filled with required information

e) Required documentation not provided.

The Registrar may decline registration if given a notice my the Cabinet Secretary Interior that it is in the national interest that the LLP be not registered.

An appeal from the registrar’s decision lies to the High Court.

The registrar for LLPs is the Registrar of Companies, presently the Director of the Business Serivces Registration Agency (BSRA).

Nature of LLPs

LLPs are separate distinct legal personality from the partners. Liability of all partners is limited, unlike in Limited Partnerships under the Partnerships Act, where the liability of the general partner is unlimited.

LLPs have perpetual succession.

The LLP has capacity to own property in its own name.

LLPs can sue and be sued in own name.

In general partnership, the agency of the partnership is presumed unless the contrary is proved. However, in LLP, only the general partners have presumed agency as a matter of course (a partner cannot bind the partnership unless he proves he is a general partner or is authorized to bind the partnership). Any claim or defence of any right must be done in the name of the LLP.

Management and control of LLPs

All LLPs are required to have at least one General partner.

Further, every LLP must have at least one natural person among the general partners under the Act.

KEY: Trade unions cannot be partners in LLPs.

All general partners are to be engaged in the daily management of the LLP unless a contrary provision is made.

Management and control of LLPs are governed by the LLP agreement. In the absence of such LLP agreement, or in absence of provision of the specific act in management by the agreement, the provisions of the first Schedule of the LLP Act apply.

Provisions of the LLP agreement

The LLP must also be a party to the LLP agreement, alongside the other partners.

Other contents of the agreement include;

- Parties

- Business description clause

- Capital clause

- Dispute resolution clause and applicable governing law

- Identification of the general partners

- Duties and obligations clauses

- Dissolution and winding up clauses

Conversion of other entities into LLPs

The Act identifies two kinds – ordinary partnership to LLP, and private limited liability company into LLP.

This is because the LLP merges the best features of both regimes.

Ordinary partenrships to LLPs

- All partners must sign a resolution agreeing to the conversion (unanimously).

- All existing partners must agree to be partners in the new LLP. A partnership going though a breakup, winding up or dissolution cannot thus be converted.

Conversion is by filing the statement and accompanied documents with the registrar. Upon registration, the LLP takes up the assets and liabilities of the partnership.

Limited liability companies to LLPs

Public companies cannot convert to LLPs, only private limited liability companies can convert.

The conversion must be supported by special resolution of the members of the company.

Where the assets of the company have been attached under a debt instrument or other encumbrance, the registrar will not agree to the conversion without prior consent of the creditors or any receiver manager. The assets must be without encumberance.

READ: documentation in conversion.

Partnership property and LLPs

There is no presumption of ownership. The property only becomes the LLP’s when it is formally acquired or registered in the name of the LLP. Unlike ordinary partnership where property can become partnership property when used by a partner in the ordinary course of partnership business, there is no presumption of property under LLP.

KEY: The LLP Act states that the Partnership Act applies to LLPs unless excluded or modified by the LLP Act itself. Therefore, the right and obligations of ordinary partners apply also to LLPs.

KEY: there is no corporate veil in LLPs. There is also no cap on the number of partners in LLPs.

READ: the LLP is not the bastion of good corporate governance. It is celebrated as an efficient investment vehicle – it has fewer regulatory requirements with the protection of limited liability and quick decision making by the fewer/single general partner(s). It allows investors to take advantage of urgent business opportunities.

LLP Membership and termination of membership

Acquisition of membership is governed by the agreement, or by signing the agreement as an initial partner.

Unlike general partnerships, membership to the LLP does not terminate automatically e.g. in cases of insanity, bankruptcy or death. Your representatives can take over your rights and obligations, until other partners apply to court for an order of termination of membership.

One ceases to be a partner by:

- Resignation, subject to a 90-day notice (termination by notice).

- By order of court – court can terminate membership in many instances, e.g. when a receiving order in bankruptcy is made against a partner and is not discharged within 3 months.

- By agreement – the agreement may terminate membership under certain conditions, e.g. time, purpose and dissolution/winding up of the partnership.

General partner- obligations

a) Daily management of the business of the partnership.

READ: distinction between management of the partnership itself, and management of the business of the partnership.

b) Contract on behalf of the partnership

c) Institute and defend suits by the partnership.

d) Keep proper books of accounts of the partnership.

e) Prepare and file an annual solvency report (minimum period between two reports must not be more than 15 months) – this protects the non-general partners and the creditors.

f) File any returns in the changes of the particulars in the LLP within 14 days – e.g. where some partners enter and exit, change in the registered office, etc.

Winding up/dissolution of LLPs

Any partner/creditor can apply to court for winding up/dissolution.

Further, the partners may agree by resolution to wind up/dissolve the LLP.

The Registrar may apply for winding up where the LLP is insolvent or where he deems it desirable for the LLP to be dissolved.

Where an LLP is insolvent and faces liquidation, the Fifth Schedule apply.

KEY: Liquidation of an LLP must only be carried out by a licensed insolvency practitioner, licensed under the Insolvency Act 2015.